The subtitle is The Corruption of Capitalism in America and the author is David Stockman (2013).
For those who don’t remember its release earlier this year, the book was received with much criticism from economists, politicians and media members alike, of all stripes. Having read it, I think I get it now.
His 700-plus page tome is nothing if not a scathing criticism of the Federal Reserve, liberals, conservatives, and anyone else who has contributed to a deformation of the free market system. The tipping point in the book is August, 1971, when Nixon severed the dollar’s ties to gold; however, Stockman considers other impactful moments that came before and after.
From a conduct standpoint, the main villain is the Fed. Particularly under Greenspan, that institution has become too focused on, and got into the business of, propping up the stock market, creating a gambler’s paradise where the pricing of financial assets often has no correlation to the underlying earnings and fundamentals. It is all about the “wealth effect” sponsored by the carry trade, with big banks and hedge fund punters trying to front-run any Fed move, with the Fed always there to give away money at the first sign of distress. So, in the aftermath of the 2008/2009 downturn, the stock market has ramped up 150%, but other economic data points don’t seem nearly as compelling – whether it’s retail sales, income growth, employment, debt/GDP ratios, etc.
Stockman levies criticisms at both parties, starting with the Republicans under Reagan. As you’ll recall, he was the budget director during the first term of that administration, but left and wrote a book about his disappointments with politics and politicians. Mainly, he is critical of the meme that got started in that period that deficits don’t matter, even though that story actually began pretty innocently. The idea behind the tax cuts under Reagan was to bring receipts as a percent of GDP back in-line with the Carter administration. But, the other assumptions built in, which included the idea that the Volcker fight with inflation would not bring a recession, were naïve with hindsight. At that point, the tax cuts became budget busters, but a recovering economy masked that fact in many respects (i.e., Volcker nipped inflation in the bud so P/E multiples expanded, with a natural recovery in earnings taking place anyway). Moreover, it was during that decade that the warfare state really got ramped up. Stockman shows a lot of respect for the Eisenhower administration, the only recent Presidency where a true military man was in charge, as it understood that the defense budget should be reduced with money efficiently targeted towards the nuclear deterrent – ground troops do nothing in the face of a Soviet strike. Of course, that wasn’t sustained post-Ike, and the defense budget has only grown bigger and bigger, often in the face of enemies both real and imagined. And both the tax and defense distortions were only multiplied during the presidency of George W. Bush and roundly endorsed by the Romney ticket in 2012.
Stockman does not hold back with the Democrats either, and for them he starts with the New Deal. In that period, perhaps with the best of intentions, certain of the big safety net programs saw their genesis – without any attending appreciation that all such programs are invariably captured by the special interests, because politicians are politicians in the end. And in the aftermath of Ike, you saw a shift in the Central Bankers, under the Democrats, to those who believed in the notion of a New Economics and the Phillips Curve – that there could be some master fiddler able to calibrate inflation and employment through monetary policy. Really, what we saw more than anything in the 1960s and 1970s was surging inflation. “Guns and butter” deficits turned into more warfare and welfare, with low rates and easy debt to reinforce the equation.
Of course, the pivotal moment was in 1971 with the move to a floating exchange rate. An entire industry of hedging sprouted up – never before had there been a need for a futures market in interest rates and bonds. Everything became commoditized and anything could be speculated on, with volatility ramping up relative to the past. Even worse, every cycle since 1971 has only upticked the level of credit in the system. To put a Hyman Minsky twist on it, with a lender of last resort, the prior inflation never went away.
In a truly free market with sound money, such excesses could not be sustained. As borrowing climbs, rates would climb as well, thus the engines are cooled. Yes, it can be recessionary, but it also gives cover to politicians to take the necessary steps to correct imbalances. We are without that now. Add to it, we have mercantilist economies in the East prepared to buy up our debt to sustain their export-based agendas. Americans can buy on credit without the need to save, the Central Bank can print up dollars at will to keep assets prices high, and thus the credit cycle can continue and we can extend and pretend. Point of fact, a state with the reserve currency is not supposed to run huge trade deficits and suck the capital out of other countries, while at the same time hollowing out its own manufacturing capacity since it can buy anything it wants without building up the capital first. The U.S. has become a nation of consumers with unsustainable balance sheets and with a Fed always looking to gin up financial asset prices.
So, to end where we started, the book was widely-blasted when it came out. But, having read it, I kind of think a lot of those critics didn’t read it, and only cherry-picked a particular data point to help discredit the whole thing. There is simply too much evidence of crony capitalism and terrible central planning from the monetary politburo, with a healthy side dish of bought and paid for politicians, to conclude anything else but that we are on an unsustainable path. Of course, in this day and age, most people are programmed to accept what they are told by the political overlords. And that’s why there is trouble down the road, perhaps worse than the last time.
