Why Has Classical Capitalism Devolved Into Crony Capitalism -- "A Ponzi Scheme Of Epic Proportions"?
We're in deep trouble...of the un-dig-out-able kind.
Charles Hugh Smith asks at California Policy Center, how "classical free-market capitalism become state-cartel crony-capitalism, a Ponzi scheme of epic proportions that is entirely dependent on ceaseless central bank perception management and interventions on a scale never before seen?"
He answers:
We can start with these six factors:1. Those who control most of the wealth are willing to risk systemic collapse to retain their privileges and wealth. Due to humanity's virtuosity with rationalization, those at the top always find ways to justify policies that maintain their dominance and downplay the distortions the policies generate. This as true in China as it is in the U.S.
2. Short-term thinking: if we fudge the numbers, lower interest rates, etc. today, we (politicians, policy-makers, money managers, etc.) will avoid being sacked tomorrow. The longer term consequences of these politically expedient policies are ignored.
3. Legitimate capital accumulation has become more difficult and risky than buying political favors. Global competition and the exhaustion of developed-world consumers has made it difficult to reap outsized profits from legitimate enterprise. In terms of return-on-investment (ROI), buying political favors is far lower risk and generates much higher returns than expanding production or risking investment in R&D.
4. The centralization of state/central bank power has increased the leverage of political contributions/lobbying. The greater the concentration of power, the more attractive it is to sociopaths and those seeking to buy state subsidies, sweetheart contracts, protection from competition, etc.
5. Any legitimate reform will require dismantling crony-capitalist/state-cartel arrangements. Since that would hurt those at the top of the wealth/power pyramid, reform is politically impossible.
6. Understood in this light, it's clear that central bank monetary policy--zero-interest rates, asset purchases, cheap credit to banks and financiers, QE, etc.--is designed to paper over the structural problems that require real reform.
We're pretty-well fucked. Anybody feel differently? Anyone seeing any light at the end of the sphincter?
via @MarcDanziger
We need politicians who will move toward limiting the power of the government to national defense, criminal justice/keeping the peace, and civil courts.
The only politicians I ever hear of willing to advocate such a thing are Libertarians, and we know it's not wise to vote for them because... I guess they're crazy or something... or it's wasting your vote because they can't win... because they want old people to live in poverty, or don't care if the children don't go to school, or don't care if hippies or housewives smoke pot, or if gays and lesbians get married... I'm not sure why.
The way I understand it, voting wisely is supposed to be sort of like choosing a pimp; like deciding which politician's words make you feel the most loved and cared for while he and his cronies take turns beating and fucking you.
I guess to vote wisely means voting for the lesser of two evils. But me, I prefer crazy over evil, being a psych nurse and a Christian and all; so I think I'll choose libertarians. I'm a little crazy like they are anyway. And if they end up fucking me like all the rest, well, at least I like their words better than the others. The others keep telling me they love me and will take care of me forever, whether I like it or not. The libertarians seem to be telling me that my life is none of their business and they'd prefer that we leave each other the hell alone.
Ken R at October 9, 2014 4:04 AM
Note this one injustice: while a corporation may accrue capital indefinitely, a family will be taxed on its inheritance upon the death of a titled family member.
Somehow, inheritance taxes were to "soak the rich". Of course, just like every other scheme to do that, it really makes it harder for the average Joe to be wealthy.
Radwaste at October 9, 2014 6:00 AM
Amy Alkon
http://www.advicegoddess.com/archives/2014/10/09/why_has_classic.html#comment-5212957">comment from RadwasteThese days, the average Joe is finding it hard just to be middle class.
Amy Alkon at October 9, 2014 6:07 AM
Quote from a local politician justifying this week's vote against food trucks in Horry County SC
“It's going to hurt brick and mortar folks who've borrowed money from banks. Now, you're going to allow someone set up shop 200-500 feet from them,” said Councilman Harold Worley.
tmitsss at October 9, 2014 6:16 AM
I have a rule of thumb of paying no mind to people who
1. Misuse the term "Ponzi Scheme"
2. Write for Zero Hedge
3. Write on financial subjects with no advertised history of academic study or professional experience.
Art Deco at October 9, 2014 7:37 AM
Well as far as I can tell Art, you've violated at least 2 of the 3 of your own rules
lujlp at October 9, 2014 7:44 AM
Anyone seeing any light at the end of the sphincter?
Light, you say? yes, yes I do.
Let it burn. Burn baby, burn.
I R A Darth Aggie at October 9, 2014 8:06 AM
“It's going to hurt brick and mortar folks who've borrowed money from banks. Now, you're going to allow someone set up shop 200-500 feet from them,”
That's not the most horrible quote.
Do food trucks pay property taxes? you know, to support the local government? I'm thinking that answer is a flat "no".
So I'm seeing food trucks as being rent-seekers.
I R A Darth Aggie at October 9, 2014 8:10 AM
Food trucks pay vehicle taxes, sales taxes, employment taxes, and more. They undergo licensing and health department inspections.
Food truck operators purchase supplies, foodstuffs, gasoline, and other materials from local suppliers - who also pay taxes.
Food trucks help to create and sustain a market which benefits all food sellers in the area.
The fallacy of "It's going to hurt brick and mortar folks...." is the assumption that the food truck customer would have gone to the brick and mortar establishment in the absence of the food truck.
Conan the Grammarian at October 9, 2014 8:55 AM
Amy Alkon
http://www.advicegoddess.com/archives/2014/10/09/why_has_classic.html#comment-5213571">comment from Art DecoI have a rule of thumb of paying no mind to people who 1. Misuse the term "Ponzi Scheme"
Feel free to explain how it was misused.
Amy Alkon at October 9, 2014 9:02 AM
I'd add in a short public memory. Few remember what a politician said a year ago let alone a few years ago. So few know or care if any promises or predictions were actually correct.
I always wish certain political/economic shows which mostly make end of the year predictions would show those predictions again at the end of the year to see how wrong they were.
Joe J at October 9, 2014 9:36 AM
Anyone seeing any light at the end of the sphincter?
Why yes, yes I do. That's the IRS' Probe of Transparent Inquiry. Take a firm grip on your ankles, serf.
(Batteries not included. 6 D cells required)
--
Lois Lerner as a sock
phunctor at October 9, 2014 10:20 AM
A Ponzi or pyramid scheme incorporates no investments. It incorporates false financial statements and paying 'investors' with the cash flow from new entrants. The original Ponzi scheme collapsed in a matter of months. Bernard Madoff managed to keep his going for a period of 16 years (his account) or 33 years (the trustees' account) or some intermediate length of time (testimony from his subordinates.
The term is commonly misused to describe Social Security, which is an ordinary income transfer program, not an investment scheme. That it's not an investment scheme or pension fund is obscured by the practice of parking payroll tax receipts in Treasury issues. There is no danger of the scheme collapsing as the proceeds are the issue of tax revenue; there are just some chinks in the actuarial soundness of the program which can be repaired by legislation (but which will likely not be until there is some sort of crisis). The repair would take the form of higher tax levies or putting the retirement age on a more rapid escalator or cutting the benefit stream or some combination of these.
He's not describing anything remotely resembling a Ponzi scheme. He's making a complaint about monetary policy which I'll wager he cribbed from David Goldman, who was peddling disaster scenarios several years ago which never came to pass. Goldman was at least making particular claims about mechanisms which could be crossed chacked against Federal Reserve data (and shown to be rubbish - he never checked).
Meeting the demand for real balances and acting as a lender of last resort are what central banks are supposed to do and that's what he's complaining about. While we're at it the banks paid back the bridge loans they received through TARP and from the Federal Reserve. The money pits proved to be the mortgage maws, the auto industry components, and AIG. The first two are Democratic Party clients.
Art Deco at October 9, 2014 11:27 AM
Well as far as I can tell Art, you've violated at least 2 of the 3 of your own rules
Which luljp? Do you have a coherent thought in your head?
Art Deco at October 9, 2014 11:28 AM
academic study or professional experience.
1. Misuse the term "Ponzi Scheme"
3. Write on financial subjects with no advertised history of academic study or professional experience.
1. Scheme in Ponzi scheme is not capitalized, therefore you missed used it, nor did it need to be put in quotation marks as you were referring to the thing itself and not another persons quote, therefore you misused it twice at the same time
3. You did not advertise your "history of academic study or professional experience" on financial subjects.
PS thats how you use quotes
lujlp at October 9, 2014 2:38 PM
3. You did not advertise your "history of academic study or professional experience" on financial subjects.
PS thats how you use quotes
Posted by: lujlp at October 9, 2014 2:38 PM
No one is impressed with *credentials* anymore. Too much of what the experts say is complete and utter bullshit.
Your attack on Art Deco is pedantic, and lacks substance.
He was right. Crony Capitalism is not a Ponzi scheme, in the classic sense of the meaning. It is an extortion racket instead.
Social Security is however, a Ponzi scheme, and will only be saved by the governments ability to print, and devalue the dollar.
Isab at October 9, 2014 3:47 PM
3. You did not advertise your "history of academic study or professional experience" on financial subjects.
I was not writing on financial subjects, I was commenting on how to filter information. Nor is failing to capitalize a 'misuse' of a term in a substantive sense.
Social Security is however, a Ponzi scheme,
No, it is not, and you need to stop misleading people in this manner.
Art Deco at October 9, 2014 3:50 PM
Isab and others are correct in calling Social Security a Ponzi scheme.
Social Security, while not an "individual retirement account," is nevertheless supposed to hold reserves for the payment of its future promises. It's more like an annuity insurance policy. Insurance companies that underwrite annuities have to invest some of those premium receipts as reserve for the payment of its estimated future benefit payouts. No insurance company is allowed to spend all the premiums from its policyholders on expenses and simply borrow the money when it's time to pay the policy benefits. They would end up in receivership.
The U.S. government does not include these unfunded liabilities in its already-staggering $17+ trillion debt number. It thinks it can simply borrow the money when it's time to pay the beneficiaries, at which time it will THEN add that borrowing to the national debt number.
I don't know how you can criticize someone who predicted disaster theories "several years ago" which never came to pass. "Several years?" We're not talking about decades, here. Granted, people who predict disasters discredit themselves when they give in to temptation to provide a date and time.
But Social Security and Medicare are ALREADY disasters. What would convince you? Do all the elderly need to be eating cat food before you would acknowledge it? Give it time. It is already a mess from the standpoint of those with foresight enough to want to do something about it before we reach that point.
Pirate Jo at October 9, 2014 4:51 PM
Here's a for-instance:
Let's say you know you need to replace your roof five years from now and it's going to cost $10,000. So you decide to start putting $2,000 a year into a savings account for the next five years so that you have the money when the time for the new roof comes.
But because you lack discipline, you simply spend the $2,000 each year and don't save it.
When the time comes for the new roof, you are going to have to put it on your credit card.
Or, to make it a closer comparison, let's say you faithfully put 10% of your pay into a 401K account for retirement. But you borrow your 401K contributions (from "yourself") to buy a new car. When retirement day comes, if you haven't paid the borrowed amount back, you simply don't have the money to retire.
Then you have to hope your kids will support you. If they can. If they want to. It's really a dumb idea.
Pirate Jo at October 9, 2014 5:07 PM
Art is right here. While SS was sold as an investment scheme it never has been one. SS has never had real reserves. The initial 'investors' were paid out with no real relation to their contributions. The supreme court has ruled quite clearly that SS benefits are not property and can be changed at will by congress. There is no limit to how congress can change them either. They can stop payment. They can increase payment. It is just another welfare program. All be it one with a clear beneficiary rule which minimizes perverse incentives. After all it is hard to fake being old.
Ben at October 9, 2014 5:27 PM
So, Ben, you don't think SS is a Ponzi scheme.
Yet you think it was sold fraudulently?
Doesn't this just boil down to semantics? A Ponzi scheme is a fraud. SS - whatever you may think of it as, aside from a Ponzi scheme - is a fraud, also.
You are right - a court case (Flemming v. Nestor - a deported member of the Communist party! - hard to feel sympathy for them!) determined that the U.S. government has no contractual obligation to pay out those benefits. It does put a dent in my insurance policy argument, since an insurance company does have that contractual obligation.
I believe the gist of your argument was that since the U.S. government was always able to legally break its promise, it was never really a promise to begin with.
Do we really need to agree on anything other than the ill-advisedness of trusting the U.S. government?
Pirate Jo at October 9, 2014 5:52 PM
I'm also a bit confused by the doom and gloom. The federal government for the most part can't gather more than 20% of GDP. Similarly the states can't gather more than 10% of GDP. That puts people at a 30% real tax rate. Few people pay much more than this. And that is usually due to unexpected situations. And few people pay much less than this too.
The one thing that has historically been able to break the 30% total tax barrier has been the VAT tax. As long as we keep that parasite out taxes are largely flat.
What the government has been able to do is change the growth rate of the economy. When you lower statutory taxes real taxes don't actually change but GDP growth goes up. This is due to people spending less time avoiding taxes and instead doing useful work. The inverse when you raise taxes. There is a similar relationship with government spending. The Keynesian multiplier attached to government spending is real. But it is not always larger than 1. The majority of government spending has an actual multiplier around 0.6. Military spending and welfare often have a multiplier under 0.5.
That doesn't mean that the military or welfare are bad things. But they are not money makers. And you can't spend yourself into being rich.
Ben at October 9, 2014 6:01 PM
I'm no Keynsian, but to be fair to them, I believe the assumption was that the government would increase spending when the economy was suffering and then would reduce spending when the economy recovered. The idea being that no specific individual would suffer unduly during times of overall economic woe. Sort of a welfare argument, but let's say I agreed with this on the premise that I don't want my neighbors knocking on my door asking for food.
But the reality is we haven't had a Keynsian OR an Austrian plan - we've just had more government spending, year after year.
I mean I never hear anyone in Congress saying that since unemployment is "officially" low and that inflation is "officially" low, we should cut welfare spending.
Pirate Jo at October 9, 2014 6:07 PM
Jo,
A Ponzi scheme is a specific type of fraud. Grand theft auto is a form of theft. But stealing a pen is not grand theft auto. Even if you steal a pen factory.
I am kinda ok with calling SS a Ponzi scheme. After all both are pyramid schemes. But the same is true of all welfare programs. SNAP is a pyramid scheme. So is medicare. It is the inherent nature of welfare to have many contributors but few beneficiaries.
But SS is nothing like a 401k. There are no personal accounts and there never were. SS was always a welfare program. Even from day one. While it was sold to the public as an investment the actual law was always welfare.
Ben at October 9, 2014 6:09 PM
If you actually read what Keynes wrote the government acts like a brake on the economy. When the economy slows down you can pull off the break. When the economy starts going too fast you push on the break.
Keynsians believe it can accelerate as well. But if you believe that then why not accelerate forever. If I spend $5 I get $10 back. If I then spend the $10 I get $20 back. Why stop when spending is a money machine. Hence the always spend more philosophy.
But you can't spend your way to riches.
Ben at October 9, 2014 6:14 PM
Ben,
I'm curious where your numbers come from. Also, how do you know that, "Few people pay much more than," the 30% figure you cited?
Do those numbers include things like sales tax, property tax, gasoline taxes, highway tolls, etc.? Does it include Social Security tax?
Shannon at October 9, 2014 6:39 PM
A basic problem with this whole picture is that some people, politicians in particular, tend to "confuse" (and in most politicians' cases, the "confusion" seems to be deliberate) corporatism with capitalism. Which are NOT the same animal.
Flynne at October 10, 2014 4:56 AM
Shannon,
I admit I would be hard pressed to duplicate those numbers again. I pulled them out of data Intuit released some years ago and federal data. A good place to start is something called Hauser's Law. This is an empirical observation that US federal income has been ~20% of GDP since WW2. You have a similar number of ~10% for the states.
Income tax and OASDI fall under federal taxes. Sales, property, ... fall under states/county/city. Since state taxes are deductible from federal taxes residents of high tax states pay more in local taxes and less in federal but close to the same percentage overall as those in low tax locations. There is a similar effect between SS and income taxes. At low income SS is the majority tax. As income rises SS becomes a smaller part as the income tax takes it's place. There is a bit of a bulge in the middle where the very high income and the very low income are taxed a lower percentage than the middle. The middle is around $60k per household. Last time I looked the peak was around 38% in the middle of the bulge.
It is possible to get past the 30% limit. The most common western way is a VAT tax. VAT taxes really lay waste to an economy but they are effective at pulling revenue out of it. The other popular method is dictatorship a la Russia, Cuba, ...
If the GOP was ruthless it could repeal the federal deduction for state taxes. Most red states are fairly low tax and there would be minimal disruption. Many blue states are much higher tax and they would have significant economic problems.
Ben at October 10, 2014 6:17 AM
"A good place to start is something called Hauser's Law. This is an empirical observation that US federal income has been ~20% of GDP since WW2. "
That's only including direct tax revenue, though. Our betters in Washington have since discovered that they can back-door it by racking up debt. When you include borrowing, current federal income is about 80% of GDP. If you add unfunded obligations and entitement promises to that, it's well over 100%.
Cousin Dave at October 10, 2014 1:22 PM
I didn't say spending Cousin Dave. I said taxing. You can spend quite a bit more than your income. But the chickens come home to roost eventually.
Rhode Island has actually been turning right over the last few years. They realized when they raise taxes people and businesses leave and they end up with less money. And right now pension obligations and debt are forcing cuts in other spending. They just can't borrow enough money to keep themselves afloat.
Ben at October 11, 2014 5:55 AM
Ben,
Here's my concern. You talk about federal income, but does that count SS tax? I thought they stuck that somewhere else and called it "savings" or something. Also, what about fees?
At the state level, I'm sure it varies by state what you get reported, but if you figure in things like licensing, etc. I can easily see it being higher.
Also, many people do NOT get to deduct their state tax from federal. That only works if you itemize. Many people (retired, renters, people w/o kids) do better with standard deduction... and I'm sure millions just don't want to (or can't) fill out 2 billion pages to itemize.
So, while I hear what you are saying, I am skeptical. After all, what the government says our household income is differs greatly from what our employers say it is (Fed does not include the money we pay for health premiums, etc... and as an aside, one could now argue THAT is a tax, but that's for another day).
:)
Shannon at October 12, 2014 7:47 PM
Governments like to rename things. It is not a tax. It is a non-voluntary donation...
So look at total revenue instead. And historically the federal government takes in ~20% of GDP. This include income tax, SS, phone taxes, ... Local effective tax rates vary quite a bit. Some states have high state taxes and low city and county taxes. Other states do it differently. But if you lump city, county, state, and misc (MUD, HOAs, ...) you come up with ~10% of GDP. These percentages have held steady (+/-3% if I recall correctly) since WW2.
As I said I can't remember all of the details, but I recall reading broken down data that put people into 5% effective tax rate bands and mapped out their revenue. And it was something like 75% of US families fell into 30%+/-5%.
Europe is different. As I said a VAT tax is frighteningly effective at pulling tax revenue out of an economy. Some of them have 40-50% effective tax rates.
Also, I am not puh-puhing high tax rates. I just find 'the end is nigh' rhetoric a bit overblown. Taxes are just one part of the puzzle. Regulations can be just as effective at shutting an economy down as high taxes. Obamacare and SarBox have been great drags on the US economy. Also, it is not like this is the first time the US has been here. The comparisons between Jimmy Carter's administration and Obama's are quite apt. Jimmy didn't wipe out the US and it is still possible for the US to recover.
A repeal of SarBox and a return to Glass-Steagall would be a great start.
Ben at October 14, 2014 2:11 PM
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