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May
03
2018
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Can We Please Try Capitalism? Just Once?
Stop! Enough is enough. I have had enough of people attacking capitalism as if they have the faintest clue what they are talking about. The latest example of total cluelessness comes from Mariana Mazzucato, Professor of the Economics of Innovation at the University of Sussex. Mazzucato asks, Is it time for the state to be entrepreneurial? As you might have expected, she answers that question, wrongly, inEconomic Myth: Private Sector Works Well and the Public Sector Just Gets in the Way. Academics do not live in the real word. They live in some fantasyland world where benevolent governments make wise choices on how to spend money. Amusingly, Mazzucato calls the US government investment of $465 million in Tesla S (through a guaranteed loan), as a "remarkable success". Is it? Even if Tesla survives, how the heck would one know? It's impossible to say because we do not know how many other business startups we may have had had government funding not been given to Tesla. The same applies to all subsidies. Keeping zombie corporations alive stifles competition and innovation. "Look at Concorde! Look at Solyndra!" mocks Mazzucato. Yes, precisely, and in context, ironically. The best thing government can do is get the hell out of the way. Invisible Hand I had Mazzucato's lame story on my screen for days trying to figure out the best way to reply. I now have it, thanks to Stanley F. Druckenmiller who wrote an op-ed for the Wall Street Journal called Where’s the Invisible Hand When You Need It? I traced the article back to the original source. It was a speech Druckenmiller gave at the 2018 Alexander Hamilton Awards Ceremony at the Manhattan Institute. Druckenmiller received the award. Kenneth Langone made the into. Langone noted, "He [Druckenmiller] believes in capitalism, he believes in free markets, free trade, limited government, and the rule of law. He almost sounds like Alexander Hamilton. Among other things, Stanley has an enormous heart. He is generous with his time, with his talent, and with his treasure. His commitment is total. He is also chairman and a founder of Blue Meridian, an organization committed to moving the needle in social problems in America. And he has made a major, major financial commitment to that cause." Stanley Druckenmiller on Capitalism What follows is most of the speech by Druckenmiller. It is a superset of the WSJ article but there is a even more in the awards link above. I will dispense with blockquotes, noting the end of his speech. Emphasis is mine. Stanley Druckenmiller: I am humbled to stand before you tonight and accept an award named after Hamilton, Alexander Hamilton. But seriously, amid all the vitriol and divisions in our countries, there can be no debate about one thing: Alexander Hamilton is the most important non-president to shape the contours and the character of what would become the greatest nation in the history of civilization. And let me say this: The institute’s promotion of free markets, free trade, limited government, and the rule of law have never been more important than today, never. Unfortunately, I am old enough to remember when the Soviets were building a strong economy with central planning and then it crumbled, and the wall came down. And then I remember when the Japanese were supposedly eclipsing the U.S. economy with their system of keiretsu and affiliate industrial companies partnering with the government and then the Japanese Lost Decade became two. And now there is China. And it is their turn, with their new leader for life, centralized decision-making on economic matters through 2025 and beyond. In each of these cases, illiberal statists in our own country are most impressed by the top-down designs of foreign powers than our own track record of free market capitalism here at home, sort of a Wizard of Oz trumps the invisible hand narrative. But I actually believe it is an unfair comparison.
For eight years I watched the Obama administration disparage the efficacy and fairness of capitalism, the influence of government increased in every aspect of our lives, the cost of regulation doubled, corporate America was attacked in the name of social equality, and our healthcare system, hard to believe, was made even more inefficient. Now, I did not support Donald Trump. But, after he was elected, I was at least hopeful that it would represent an inflection point in the trend away from capitalism. And while there has been some relief on the regulatory front, and of course we have gotten a corporate tax cut, some of the more egregious trends away from capitalism are continuing and, frankly, new elements that violate the principles of capitalism have been added. For starters, free trade is under assault, but I see no need to lecture the people in this room on the merits of comparative advantage. Next, Hamilton had a very deep respect for the rule of law as opposed to the rule of man. The best tech companies in the world are in the U.S. because of a mix of education, immigration, finance, and meritocracy. The central pillar that bolsters this mix and makes our economic system successful is a respect for the rule of law. Is there a better example of this than Amazon? Its founder is a Hamilton-inspired adopted son of an immigrant who is literally revolutionizing the way business is done. It is no coincidence that Amazon was built in America, no surprise that governments, foreign governments, envy its origin, and no question that legacy incumbents impugn its name but mimic its tactics. Capitalism is intolerant of high-cost providers, rent-seekers, middlemen, and those who extract more value than is their due.Amazon’s biggest backers are not people in elevated positions of power, it are their customers. Well, and a few investors too. The President’s personal view of Amazon should have no bearing on its future success. If intervention is enacted based on his feelings, we will be no better than other countries in the world where corruption and rent-seeking become the main reasons for stagnation and mediocrity. Regarding a continuing trend away from capitalism, Adam Smith would be distraught to know that we are expending an ever-increasing amount of our national resources on government transfer payments. I spent two years of my life going to liberal and conservative universities to try and get young people energized about the looming explosion entitlements as well as their looming decreasing share of the economic pie. I even asked Geoff Canada to go with me so the students would show up. I got incredibly enthusiastic responses from ultra-liberal Berkeley to conservative USC. I even did a TED talk, and I was so effective in terms of the national debate that the only thing that Donald Trump and Hillary Clinton agreed on was that entitlements shouldn’t be touched. Good going, Stan. But then we missed the golden opportunity to offset some revenue loss and address generational equity when Congress passed tax reform. Instead, government debt, which has doubled over the last decade, is set to increase to levels only reached during World War II over the next decade, so we will have sacrificed our future during a relatively peaceful economic period with no postwar reduction simply because politicians can’t say no. This does not exactly measure up to spending to defeat fascism and defend the world’s freedom. Finally, let me address a distortion that is one of the greatest threats to a properly functioning capitalist system. For years now a mix of central – sorry – for years now a mix of financial repression and central bank intervention has made long-term interest rates largely determined by government fiat. Bond-buying by central bankers, commonly referred to as QE, has become so engrained in current thinking that it is now in the Fed’s conventional toolkit, a tool once reserved for a depression or financial crisis is now to be used at the first inkling of the next recession. For those of us old enough to have seen the dangers of price controls, they led to shortages, wasted resources, and disincentives to invest in what consumers want. They inevitably led to an allocation of resources by political actors in another great afront to capitalism. So, it is most surprising that forty years after wage and price controls were sadly rejected by every economic textbook and policymakers, today we have settled to allowing the most important price of all, long-term interest rates, to be regularly distorted by public intervention. The excuse of this radical monetary policy has been the obsession with a fixed 2.0% inflation targeting rule. The decimal point shows the absurdity of the exercise. Anything below 2.0% was a failure and risked deflation, the boogeyman of the 1930s, to be avoided at all costs. This has meant that years after the Great Recession ended the Fed has not only kept interest rates below inflation but have accumulated an unprecedented $4.5 trillion on their balance sheet by doing QE. Global central banks, in part to keep their currencies from appreciating of these overabundant dollars, have followed with $10 trillion of their own. Now, the irony of this is over the last 700 years inflation has averaged barely over 1% and interest rates have averaged just under 6%. So, we are seeing an unprecedented, ultra-monetary, radical monetary expansion during a time of average, average inflation over the last number of centuries. Moreover, the three most pernicious deflationary periods of the past century did not start because inflation was too close to zero. They were preceded by asset bubbles. If I were trying to create a deflationary bust, I would do exact exactly what the world’s central bankers have been doing the last six years. I shudder to think that the malinvestment that occurred over this period. Corporate debt has soared, but most of it has been used for financial engineering. Bankruptcies have been minimal in the most disruptive economy since the Industrial Revolution. Who knows how many corporate zombies are out there because free money is keeping them alive? Individuals have plowed ever-increasing amounts of money into assets at ever-increasing prices, and it is not only the private sector that is getting the wrong message, but Congress as well. I have no doubt we would have not gotten such a big increase in fiscal deficits if policy had been normalized already. Of all the interventions by the not-so-invisible hand, not allowing the market to set the hurdle rate for investment is the one I see with the highest costs. Competition is a better tool than price control for protecting consumers. That applies to Amazon and the bond market. The government should get out of the business of manipulating long-term interest rates and canceling market signals. One final thought: During Obama’s tenure, I was disheartened by the lack of criticism from the Left. Frankly, I think it would have carried a lot more weight than criticism from the Right. Today I see a similar situation. I am discouraged by the timidity of the criticism of our present direction by many Conservatives. Now, there are many in this audience who have the power of the pen, and I also see a few who have the power of the purse. If you share the principles I have laid out tonight, I encourage you to articulate a better course for our country, a course for which Hamilton would be proud, and assure that America’s best days are ahead of us. Thank you for this wonderful award. Stanley Druckenmiller Mish Comments Wow. That is the best speech on capitalism I have ever seen. Unfortunately, those with vision are increasingly drowned out by charlatans who believe government can lead the way. And when does it stop? The answer is: it doesn't. "I am old enough to remember when the Soviets were building a strong economy with central planning and then it crumbled, and the wall came down," said Druckenmiller. More Government? No Thanks! How is it and why is it that "more government" is the answer? Compare France or the EU to the US. There is a reason Amazon, Google, Apple, and Microsoft are US companies. The reason is that socialists and big government advocates in Europe would have destroyed those companies before they even started. Capitalist charlatans like Mazzucato beg for more government. We desperately need less government. More Specifically
The problems Mazzucato and others point out are precisely because we don't have enough capitalism, not because we have too much of it. If you think capitalism is doomed, please see Idiocy of the Day: NY Times Opinion "Happy Birthday, Karl Marx. You Were Right!" Deflationary Outcome I want to finish with an important theme of mine: deflation. "If I were trying to create a deflationary bust, I would do exact exactly what the world’s central bankers have been doing the last six years," said Druckenmiller. That has been the primary theme of this blog since its inception in 2003. We had a bout of deflation in 2008 when the housing bubble collapsed, and it's coming again. Hardly anyone sees deflation coming because they do not know what it is. Inflation Scare Now, Deflation Coming It's pretty clear we are in the midst of an inflation scare right now. Given the amount of global financial leverage, I strongly suggest a deflationary bust is the most likely outcome looking ahead. Deflation? Really? Yes, really. This topic is always a hair-raising event for inflationistas who really do not know how inflation works in the real world. Definitions
That is how the real world works in a fiat credit-based system. In 2008, those with myopic views thought oil was going to $200, then $300. Instead, the price collapsed with the housing bust. Austrian economists with a focus on money supply alone also missed the boat. Asset Bubble Debt Deflation Coming Up Those who understood the importance of bank credit that could not be paid back were the ones who got the picture correct. For further discussion, please see: Mike “Mish” Shedlock
www.themaven.net/mishtalk/user/@Mish
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