Warren Buffet explained how to lose a few trillion, here and there.
Well managed companies, like Warren Buffet’s, don’t get government guarantees. Badly managed companies with good political connections get government guarantees. So naturally all the capital floods to companies with a track record of losing it.This is capitalism in reverse. For capitalism to work, the people who are good at managing stuff have to wind up in charge of stuff, and the people who are bad at managing stuff have to wind up out in the street.
In the nature of things, every bailout tends to be very quickly followed by an even bigger bailout – AIG has been bailed out more times than I am able to keep track of, each bailout bigger than the last – the next AIG bailout looks to be a hundred billion or so. General motors, having recently got a ten billion dollar bailout, tells us it can only last a few months unless it gets a twenty five billion dollar bailout.
People are calling this socialism, but perhaps a more informative description is reverse capitalism.
Reverse capitalism can make us all poor even faster than socialism. The budgeted deficit is 1750 trillion dollars, sufficient to do seventeen Iraq wars simultaneously, but this purported deficit is based on the rosy scenario that all the people who have been bailed out henceforth are productive and efficient and make lots of money, when reality is that each bailout digs the hole deeper. The bailouts inject more money into circulation, but they also reduce the production of goods.
Money is a medium of exchange, a measure of value, and a store of value. The problem is that when functioning as a store of value, it is in large part a claim against values that have not yet been produced. For it to work in this way, it must either represent things of value stuffed in warehouses, or treasure buried in the ground, such as gold, or represent investments in things that produce value – such as houses occupied by creditworthy people with adequate income to pay the mortgage, or profitable businesses. If, however, savings merely represent claims against taxpayers, taxpayers that have “invested” in all sorts of massive money losing boondoggles, big trouble will ensue, for we are close to the Laffer maximum. When people attempt to draw down their savings, perhaps frightened by disturbing levels of inflation, their stored value will not be there.
There is a lot of ruin in a nation. The US government can smash the capitalist economy and draw on debt for a while. At present it is doing so at near two trillion a year, which may well rise quite a lot. If, however, it runs up debt at two trillion a year or so, then in eight years or so, the debt to GDP ratio will increase by a hundred percent or so, which is a lot of ruin.
If things continue as they are going, expect the US to collapse around 2017 or so.
Obama promises to fix the deficit by taxing the rich (though past experience is that the more you tax the rich, the less money you get – taxes on the rich are already beyond the Laffer maximum) and by a carbon tax. A carbon tax could raise a lot of money – mostly from the working class, the one part of the population that is at present taxed well below the Laffer maximum. That will work – provided that the bailouts stop sucking up ever bigger quantities of money.
Tags: capitalism, financial crisis