Beware the Swinging Pendulum: Understanding Inflection Points
Politiconomy
As global speculators and investors looking to grow and protect our wealth, we are constantly on the look out for shifts in the social, geopolitical and economic landscape. As members of the Without Borders community understand, we have recently entered a period of change that will prove as significant as the end of the Cold War. This seismic shift is one of four central themes we expect to influence every aspect of your and our lives over the next decade or more. We call this shift the rise of the Politiconomy: the hostile merger of politics and economics.
In the western world, there was once a clear distinction between politics and economics. During the cold war if politicians were to even hint at state intervention in the economy they were branded ¨pinko¨ and their career ended shortly thereafter. Then after the Berlin Wall fell ¨American Style Free Market Capitalism¨ was adopted by most of the world either by choice of by edict attached to loans and aid from the IMF and the World Bank. But what most still fail to realize is the so called ¨American Style Free Market Capitalism¨ that prevailed was neither Free Market nor Capitalism. It was a system where very large regulated industries dominated the economy under the protection of an ever growing government. With each passing year, the US and Europe increased regulation and were it not for the ingenuity of entrepreneurs in new industries not yet encumbered by regulation and state protection, it is conceivable the western economies could have capitulated before their communist counterparts. The western economies of the early 80s could have gone in the opposite direction had the policies of the previous decade continued. The results would have been catastrophic.
The idea that the west won the Cold War is false. A heroic leap in logic is required to conclude it was the efforts of the west that caused the collapse of the Soviet Bloc. It wasn´t the US free market system that caused the collapse of communism. It was the inherent flaws in communist economic theory and the wasteful and brutal implementation of that theory that caused the collapse of communism. Communism simply won the race to the bottom as it was better at stifling individual creativity, productivity, innovation and ambition than any other system But the US and Western European systems were only twenty some odd years behind it and they seem destined to end up in the same place for the same reasons.
We know this may be blasphemy to many of our readers. You might find the idea down right offensive. I once did too. There was a time when this red white and blue graduate of West Point and former Cold Warrior would have eagerly engaged in fisticuffs over less. America stands for freedom and we believe in the Free Market. Our government doesn´t involve itself in the private business matters of it´s citizens. Free enterprise is what America is all about. That´s what I thought and that´s what I had been taught in school. No doubt it was once true. But it has not been true for a long time.
So if this is the way it has been for a long time then why are we talking about pendulums and inflection points? If nothing is new about this system of government protectionism then where is this change we are supposed to be keenly monitoring? Good question.
The change we speak of is that there is no longer any credible way to pretend that we have a free market system. The public has now lifted any pretense. The pendulum has finally reached terminal velocity. Richard Cantillon and Adam Smith were the first moral philosophers to use the term Political Economy. In 1805, Thomas Malthus became England’s first professor of political economy, at the East India Company College. Ironically, the term was coined at a time when the state dominated economics through its mercantilist policies. Smith´s espousing the efficiency of less central planing and less government involvement in the economy was borderline radical. Even more ironic was the subject was first taught at a university created to train officers of the East India Company which owed its very existence to a monopolistic charter granted by the Government of Britain. It is no less ironic that the United States, with its bailouts of politically influential banks and unionized auto manufacturers, will be the country that ushers in the next period of state controlled global economies. The universal belief in America amongst the political classes that the government needed to bail out the economy is a major turning point. We are not suggesting that the US has gone socialist or communist and this is not a politically motivated position. We are merely pointing out that the world we live in is no longer one of free enterprise. By definition free enterprise and free markets require both the opportunity to succeed and the responsibilities of failure. We now live in a world where the risks are socialized and the benefits are privatized or at least allocated towards favored institutions. Governments from around the world have made the conscious and now open decision to play a defining role in their economies.
Again it is necessary to point out that this is not an over night phenomenon. Much of the global wealth and production is presently in state hands and has been for years. Sovereign Wealth Funds control enough wealth to buy the entire Dow Jones Industrial Average several times over. State owned oil companies control well over half of the oil in production today. Both are considered strategic national assets by their governments. This trend has been growing rapidly even as most considered the recent era of globalization to be the pinnacle of free market capitalism. The amount of wealth now controlled by governments is much higher today than it was before the dissolution of the Soviet Union. Any fairly well informed investor has long known of the Gulf States´ oil companies and massive investment funds. After all they were there when we needed them. When oil prices shot up we could count on the Saudis to open the spigot. When our banks desperately needed capital it was the Chinese and Emirates that wrote the big checks.
Then there are the nutters. The despots and the kooks. We know that Chavez has his hand in the oil till and uses it to fund inefficient and counter productive but politically popular social programs. But that is Chavez. And Mexico´s massive oil reserves have been plundered by a succession of socialists. But the trend is much larger than these well known and thus far benevolent state owned oil and investment companies. We need not even mention Iran which from both a security and economic standpoint is nothing short of a weapon of mass distraction. Let´s talk about countries that we really should care about.
In China, a place we have made a lot of money in stocks, the PRC government is the final arbiter of economic success. We conduct very careful analysis of the political relationships of any company in which we allocate capital. We have made money in other countries where the government plays a significant role in the economy. Indonesia, Serbia, Albania and Lebanon have all been very good to us over the years. However, what very few notice is that the line between private sector and state controlled enterprise has now completely blurred in so called stable democratic countries where very few investors even consider political risk in their analysis.
Here are two companies that are right now being touted by the popular financial press as titans of the global recovery. These companies hail from Brazil. The B in the BRIC (Brazil Russia India China) countries that are supposed to be powering us on to economic recovery. These companies have seen their stocks soar this year on the New York Stock Exchange (NYSE) They are the massive mining company Vale (NYSE: VALE) and the national oil company Petrobras (NYSE:PBR). What most investors piling into the shares of these companies fail to understand is that they operate at the behest of the ruling party, ominously named the Worker´s Party, now headed by the progressive and worldly Lula da Silva. But it may not be that way for long. While traded on the NYSE neither company controls its own destiny and they are certainly not operated to benefit their shareholders. The Brazilian government is a controlling shareholder in PBR and in addition to being a large shareholder in VALE, they control the life blood of any resource concern: the permits to explore, develop and extract mineral deposits and the right to export. It would only take a small nudge of the political needle for both companies to become a publicly traded social welfare program. Investors and speculators alike need to pay close attention. It´s election time again in Brazil and if the global economy stumbles again as we suspect it will Lula´s successor will pull out all the stops to placate the masses.
The shares of Vale and Petrobras are well known to even the average investor. In our trading service FLASH CABLE we have several exciting short positions that are designed to take full advantage of what we call the social welfare put. Once the market realizes how vulnerable these shares we are shorting are to political whim we expect some spectacular profits. In our monthly service Without Borders we are recommending two companies that between them are operating in seventeen countries. Even though we are already up significantly on both positions they remain well positioned to grow if the global economy continues to muddle through as expected by most pundits. However, if the state sponsored economies of the world falter and need to raid their piggy banks then these two companies will surge to new levels. We hate to wait for disaster to profit but we sleep better knowing we are positioned for the worst case scenario. If you are interested in learning more about what we do to prepare for calamity as well as how we maximize our personal and economic freedom around the globe then CLICK HERE to try a risk free trial subscription complete with a no questions asked money back guarantee.
Yes well, this is all very interesting but the bottom line here is that this is nothing more than an advert for an expensive monthly newsletter and should be listed as such.
I am sorry to say that you are factually incorrect in your initial premise. The Cold War was about 2 particular conflicts in ideology, but not along the lines you think. We have not had Laissez-Faire markets in this world since the Romans figured out how to tax people, and probably much earlier than that. The government *always* intervenes in the market, and has for over two thousand years. Only in places without any government or governmental services (anarchy) would you be able to avoid such intervention. Then again other external forces (banditry as an example) could easily come into play.
Now as far as direct intervention we can jump back to the recent “Too Big to Fail” bailout, the S&L bailout, the intervention on behalf of various defense contractors, the intervention on behalf of various areas hit by natural disasters, subsidies on fuel and food, et al. We can go back even further to the halcyon days of 1950′s and see various companies that had government intervention save their bacon, and so on back to even before the dreaded (by the freshwater economists) days of F.D.R. and the formation of the Federal Reserve.
Finally, the dreaded regulation you cite has managed to keep the Cuyahoga river from starting on fire, yet again. Nothing is perfect, government or business. Government can interfere “too much” and businesses can easily play the numbers game of figuring out the average payout for a lawsuit vs. the cost of a recall.
Still you seem to think that economics was the only motivator in the fall of the USSR, when culture (among other things) had it’s role to play as well. Stalin, and his successors, kept turning the screws tighter and tighter. Unfortunately for the USSR (and fortunately for us) freedom seems to have a greater inducement. That and the fact that none of the leaders in the so-called communist country (one could realistically only call it a command economy dictatorship really) never practiced what they preached.
Don’t get me wrong, I don’t think Communism is viable. Then again I find Absolute Free Market theory (e.g. Rand’s “Galt’s Gulch”) just as ridiculously childish an idea, and for the exact same reason. People are not perfect, a fact which Marx and Rand mysteriously gloss over in their theories. Theories, I might add, that *require* people to be perfect or they fall apart like a pair of suit pants with poor-stitching.
This is why if we ever went to the other extreme (polar opposite of the former USSR) we would eventually have to capitulate as well.
Jesse D said –
“I am sorry to say that you are factually incorrect in your initial premise.”
Well might I say, as are you in some of yours – to wit:
“We have not had Laissez-Faire markets in this world since the Romans figured out how to tax people . . .”
Dominance or even a preponderance of “Laissez-Faire markets” was not even alluded to in the article – in fact the author said, “. . . ¨American Style Free Market Capitalism¨ was adopted by most . . . But what most still fail to realize is the so called ¨American Style Free Market Capitalism¨ that prevailed was neither Free Market nor Capitalism. It was a system where very large regulated industries dominated the economy under the protection of an ever growing government.”
Nothing even close to Laissez-Faire economics mentioned here – the comparators were ones of stilted central economic planning, as found in, by way of example, the former Soviet Union, versus the type(s) of market(s) found in the “West” during the period in question. Although differences were significant at the time, the author’s argument that the gap between our much-touted free-market system and state-controlled was not so wide as assumed and that gap continues to narrow for us – the argument is valid (res ipsa loquitur).
Further -
“The government *always* intervenes in the market, and has for over two thousand years”.
Yes, well, a la Lorenz, butterfly wings beating in the Amazon give rise to tornados in Texas etc, etc, ad infinitum. Clearly, as the author points out, and rather well I’d suggest, it is the degree to which this occurs that determines the ultimate effect. In that regard, nota bene, the Romans, as you say (although certainly NOT the first to do so) taxed and Justinian codified but the degree to which the Consuls insinuated themselves into the average person’s life was infinitesimally small versus that extant today. Viz, eg, no one from the “guvment” told the peasant farmers that they couldn’t plant beans because it would disrupt the market or, perhaps more a’ propos, paid them not to plant beans (with similar rationalization), or told the ass breeders that they should include safety belts on all their asses or told the carpenter to place warning labels advising parents to “Remove Infant Before Folding” on the baby cribs he made . . . tol de rol and etc (as the Greeks say) – if you get my drift. It is obviously a question of degree.
Industries, small enterprises and individuals are rather too easily kicked to the curb by governments (especially those characterized by high ‘emotional’ content eg, socialist or nationalist and even national socialist governments), whether their actions be reasonable or not, but the reverse is rarely so. Governments are almost never “sorted out” by individuals, groups or even industries within their jurisdiction – it usually takes another “government” (or the occasional but, in the overall scheme of things rather rare, revolution (overt or otherwise)) to do this job with any degree of pace or effectiveness.
Cutting to the chase, perhaps the most interesting and certainly my favorite aspect of governments – the self-same well-intentioned bunch who bring us parens patriae also bring us more, much more indeed – more human lives have been snuffed out prematurely and more lives have been wasted rotting away in fetid hell-holes due to unreasonable (not to mention unjust) actions by governments than any other single social institution – BTW the Vatican falls beneath that institutional umbrella (see, for example, (and for your entertainment) the scintillating history of the Crusades and, of course, The Tribunal of the Holy Office of the Inquisition can make for some great light reading). I could go on but I trust I’ve made the point – governments (especially big ones) are almost never self-limiting nor introspective (despite even the best of designs or intentions) – the opposite is true – and too often they exceed not only the authority granted to them by their governed but, ipso facto, and almost invariably, become more akin to “rulers” than we should be comfortable with. It seems reasonable that we should question their actions, if not their legitimate roles, more often and more forcefully and reign them in more regularly than we do – but when that doesn’t work, we should have no hesitation to leave them behind (en masse) and take our belongings with us . . . with no guilt when tempted to utter the occasional slur . . . and take measurable comfort in warning others of their peril.
Suggested reading – de Tocquiville (Democracy in America) and Crier (The Case Against Lawyers).