Not Capitalism

For years, income and wealth inequality worsened and frequently capitalism shouldered the blame. What we have today, not just in the United States but worldwide, is a perversion of capitalism. This perversion is facilitated by our flawed monetary system and institutions, which I refer to as the Wizards. The consequences of faux capitalism are manifesting via social disorder and economic dislocation. Such conditions provide fertile ground for antagonistic forces to seep into our political milieu, setting the stage for governmental transformation. The social, political and economic angst you see today is a byproduct of this interventionist form of capitalism — this is not capitalism.

Iowa Caucuses

With the U.S. presidential election nine months away, the focus will be on the Democratic party nominee that squares off against the incumbent GOP president. This morning, political pundits from a major news network were lamenting the delayed Iowa caucus results and how it would imperil most, if not all, the Democratic party candidates. The larger issue is the philosophical shift in among voters, more are rejecting capitalist tenets in favor of socialism.

During the caucus coverage on February 3rd, one of the major networks offered the following factoids from Iowa Democratic voters:

• Around 87% were in favor of a single-payer, government-run healthcare system (Medicare for All)
• About 60% of voters 45 years of age or younger favored Senator Sanders
• Voters viewed healthcare as a bigger issue than the economy

Regardless of who becomes the Democratic party nominee, they will focus on capitalism's shortcomings and the social programs necessary to right the wrongs.

Toto Pulls Back the Curtain

Three years ago, I penned Escaping Oz: An Observer's Reflections, the third in a series whose goal is to pull back the curtain, like Toto in the Wizard of Oz, to allow the reader to see the ordinary men and women who I refer to as the Wizards. While these Wizards are in the halls of government and central banks, the last book in the series pulls back the curtain on ourselves. Since the founding of the Republic, our nation has drifted away from the freedom and liberties espoused by the Founding Fathers towards greater imposition of authority and the "isms" about which we've read in our social studies texts.Regardless of party occupying the White House or Congress, we've drifted. While there have been points in American history where the drift was more apparent, it's become markedly so in the last half-century. We've lost an understanding of freedom OF versus freedom FROM.  

The national debt and unfunded liabilities (social programs) offer a quantitative measure of this drift. These figures define how much we've asked government to do over and above their capabilities. We asked government to provide freedom FROM something. While we were able to do so financially, it's placed trillions of dollars of burdens on our children and grandchildren and set up a generational clash that is certain to become more political. 

It's difficult to visualize $1 trillion. Consider the following. If a person spent $1 million per day from the day they were born and lived to the age of 80, they would be less than three percent of the way towards spending a trillion. Now consider our national liabilities are many multiples of a trillion dollars. These liabilities exist because We The People allowed it. We allowed it through a flawed understanding of the intentions of the Founding Fathers. The mechanism allowing these liabilities is the King Dollar.

King Dollar

After the end of WWII, the U.S. Dollar (USD) became a monetary king. Through an international agreement, a USD was exchangeable for certain amount of gold. Moreover, all currencies were fixed to the USD. Thus, a USD was as good as gold! The system worked well as long as USD creation stayed within its lanes — keep USD creation, stable relative, to the gold supply. For the first twenty or so years, the agreement worked as advertised.

The social programs and war effort of the 1960s were manifestations of asking government to do more than it was capable. Foreign governments noted the excess USD creation and asked for their gold, per agreement. Nixon had other ideas. In the most impactful decision of Nixon’s presidency — seems strange saying that given the recent impeachment of the 45th president — he reneged on the agreement. This decision began the current half-century period of leaving the capitalist rails. The USD remained king yet bore no fixed relationship to the very thing that made the international agreement possible.

Our national liabilities began their inexorable climb, income and wealth inequality widened and it set the stage for today's political acrimony.

Omnibubble

A consequence of Nixon's actions was the formation of an Omnibubble⁽¹⁾. In the late 1990s, a fund named Long Term Capital Management imploded and the banks came to the rescue. A decade later, banks wobbled and the Fed rescued them. The Fed Wizards then injected themselves into the financial markets to the tune of over $4 trillion.In the last quarter of 2019, the Fed rescued, and continues to rescue in the repurchase agreement market.It's hard to understate the impact of financial wizardry. Imagine being able to create $4 trillion with a few keystrokes. 

That newly created money flows into financial cones like stocks, bonds, real estate, and other financial instruments and benefits small segments of society.Since the beginning of the 21st century, the net worth of the top 1% increased by 193%. For the bottom 50% the comparable figure is 17%. The economy grew by 106% during that time. This disparity is unsustainable. Moreover, most don't realize wealth can disappear quickly, even for the Elite.

Government has increasingly funded larger expenditures at the behest of its politicians. Main Street is wondering about their bailout.If Wall Street and the 1% received assistance and grew their financial wealth as a result, John Q. Public wants to know where he signs up for his — enter the Progressives. 

2016 Election

But let's take a step back.Political acrimony started during the Clinton administration with impeachment, continued with the hanging chads in Florida and further cemented during the Tea Party demonstrations and Occupy Wall Street. The stage was set for 2016 when it was a wide-open field for the election of the 45th president. 

I remember the energy during Senator Sanders' rallies. More importantly, I remember the message. He appealed to flyover country, to the economically disadvantaged. He stood firmly against special interests and Wall St. He espoused nationalism in the sense that he wanted America's resources directed inward and less towards foreign interests. His solution was to involve government even further by using its fiscal tools to effect social change. 

Senator Sander's gritted teeth when he watched his opponent accept the Democratic nomination could have cracked walnuts. Later revelations by the former DNC chair demonstrated how the party worked against the Sanders campaign. Given the slim margin of victory in a few key states for the GOP presidential candidate, I wondered how many Sanders supporters stayed home and did not vote. Karl Rove, a GOP strategist who worked for Bush 43 suggested as much. The 2016 election's two strongest candidates were the current president and Senator Sanders. Who would have won the 2016 election with those candidates? Though neither party would admit to it, the 45th president and Senator Sanders have similar appeal.

Party Infighting

After the 2016 election, I told whoever would listen that the Bernie "movement" was not going to die. Whether he ran again in 2020 was immaterial to my analysis. The word "progressive" would become part of our lexicon and the public would embrace its ideology. When I say "the public" I refer to those who've seen the economic recovery disproportionately benefit others. The ideological battle for the Democratic party started the day after the 2016 election. This battle pitted the old guard against the Progressives. Anyone doubting the Progressives' influence needs only to refer to the meeting Speaker Pelosi arranged with the newly elected Alexandria Ocasio-Cortez after a very public Twitter spat. 

The tug-of-war continues during this election season. The old Democratic party guard no doubt would rather see Joe Biden carry the baton in November.It's clear to me he does not have the people's attention. When I see poll numbers, I add Sanders' and Warren's numbers to arrive at the Progressive wing's weight. One could argue that positions espoused by Mayor Pete and Andrew Yang are progressive as well. I penned an article on what I thought the next president would sound like and he/she sounded progressive. The formidable Clinton name carries very little respect these days within Democratic party circles as witnessed by a booing session inspired by a member of The Squad, Representative Tlaib.  

The party infighting is not exclusive to the Democrats. Remember the "Never Trump" movement in 2016?Some of those Never Trumpers left the party.Even those who stuck with the GOP are finding life difficult. Senator Mitt Romney, an avowed conservative and 2012 presidential candidate will not receive his invitation to attend the Conservative Political Action Conference (CPAC), a conference where he's been featured as a speaker. His crime? He voted to allow witnesses during the Senate impeachment trial.  

I've theorized for years about a third party materializing and becoming a force in politics. I don't mean a one and done, but a political party with staying power that populates elected seats at the local, state and national level. Could the recent infighting serve as a catalyst? The next economic recession will have a louder electorate than in 2008. They won't care what you call the economic system, they'll want results. The intersection of politics and economics will be on full display (capitalism vs. socialism) ⁽²⁾.

Elite Guilt

The Elite of the Elite are cognizant of capitalism's riches showered upon them. The recent World Economic Forum conference called on companies to pay their fair share of taxes, uphold human rights, promote a level playing field and of course, be proactive about climate change. Doesn't this sound like political positions of someone running for office?

The Forum's pronouncement came on the heels of an Oxfam report suggesting the world's billionaires are wealthier than 4.6 billion people. Oxfam further criticized the U.S. for worsening inequality through tax cuts for the wealthy. 

The Elites are shifting towards practicing responsible capitalism or stakeholder capitalism. In other words, there are social outcomes just as important as satisfying shareholders and making profits. The Elites witness the distrust from both the left and right and want to get ahead of the issue before being told what to do.

What to Expect

During this time of record stock markets, near historic low-interest rates, economic growth and low unemployment, why did the federal debt go up $1.2 trillion between Q3 2018 and Q3 2019? Why are the Wizards at the Fed pumping billions of dollars monthly into the repo market? These conditions do not reflect economic health. These are two of the most under-reported stories in recent memory.  

If the Wizards lose control, or more accurately, if the market loses faith in them, the ensuing crisis will be labeled as capitalism's failure. It should be labeled as crony capitalism's failure yet few will identify as such. The prescription will be fiscal intervention or a Main Street bailout, aka Quantitative Easing For The People. Get ready for Modern Monetary Theory (MMT) which says that deficits have no meaning when a government can print its own currency. Remember what I said earlier regarding capitalism's progression to this point.

In the early stages of the Main Street bailout, I suspect it will be successful. The ensuing danger will be after the policy's been in place for awhile. King Dollar will be no longer. That will bring a host of problems and perhaps a new international monetary order and continued political reformation. It will be interesting to see if that crisis returns the world to real capitalism — true monetary and economic freedom — or just more of the same.

(1) I coined this term on 9/3/2018, unaware that someone had used it previously.I've been consistent with the term's usage and probably have the most references.  

(2) The use of the term, socialism, describes the level of government involvement seen in Nordic countries and some European countries and does not imply socialism as practiced in Venezuela, Cuba, the former USSR and the like.

Image by Gerd Altmann