Is Capitalism To Blame For Income Disparity And The Current Economy?

One of the current top economic news stories in 2016 once again involves disproportionate income distribution.  To be more precise, it has been reported recently that the top percentile of the socio-economic ladder has seen their wealth and income go up by about 5 percent, while the middle class once again stagnates economically or has seen a decline in some cases.  Interestingly enough, it has also been claimed that the very bottom tier on the income scale (the poor or working poor) has also seen some very most gains as well (albeit not in the same percentage as the wealthy).  Regarding this last indicator we would have to believe that the world's emerging markets were included because there indeed we see the local respective economies still growing and some additional disposable income available among the middle and working classes in these markets specifically.  But of course the gains are not always evenly distributed and some people want to blame capitalism itself as the problem.  However is a capitalistic economic system and free markets really at fault for what is going on?  Or, is the real villain the western world's central banks?

A few years ago when US Federal Reserve chairman Alan Greenspan was ready to leave that position, quite a few clients asked me: who do you think they will pick to replace him?  My very quick and direct answer was Ben Bernanke.  Why him they asked?  My reply was because they know they are facing an economic situation somewhat as serious as the great economic depression of the 1930's and Bernanke has spent his entire academic career studying that very topic and era.  They were looking for someone they thought was qualified to handle such an economic scenario because they knew this was coming (remember there is nothing new about how markets work, how asset bubbles are formed or any other basic economics).  However, Bernanke stuck to the Keynesian script of artificial government stimulus rather than allowing the dead wood to be cleared away to make way for readjustment and growth of stronger and solvent businesses.  Too big to fail was the catchphrase of the day, but perhaps also too much in financial trouble to bother throwing good money after bad was something left unsaid as well.  Regardless, the government and economic artificial priming of the pump has been going on for 8 years to date, only to make matters worse – and that is NOT capitalism.

Right now in June 2016, this is still clear and the failed results quite clear as well.  The OECD commenting on Italy's financial sector specifically and the Euro Zone in general opines that the area's financial crisis issues are unresolved and major NEW PROBLEMS have emerged.  Very recently Optima Bank in Belgium was in essence taken into receivership by the banking supervision authority in that country and Spain's banking system still remains on precarious ground.  Banco Popular in Spain especially has been signaled out as still having some very serious non performing loans, specifically relating to the real estate sector.  And let us not forget a banking institution in Austria that reportedly had a mysterious disappearance of assets from it's balance sheet after being in so-called receivership and reorganization for some time.  But do not think it is only some of the European banks that are still facing insolvency issues.  Some of the major US banks are no better off either.      

Even though the claim by politicians is that the economy has been growing (although I would not call less than 1 percent growth), the truth of the matter is that much of those GDP numbers are fake.  Low or zero interest rates and quantitative easing has to be discounted out of the GDP in order to get a real view of the real health of the economy.  So, what does all this have to do with the topic at hand?  Basically to say that we do not have truly free markets or a truly independent and free functioning capitalistic economic system.  Rather we have something else.  We have market manipulation and government intervention on a scale that would make the communists and socialists of old blush.

If economic growth could really be achieved by government interventions and Central Bank money printing (and capital infusions) then by rights Zimbabwe should have become the economic power house of Africa.  Likewise, going back in history, the actions of politicians and central bankers in the Weimer Republic era of Germany should have produced something other than what it did.  Alas, history seems doomed to repeat itself as now in June of 2016 Super Mario (Draghi), head of the European Central bank, now wants to buy up junk bonds.  The name itself denotes the problem (they call it junk for a reason).  Why would any central bank think it a good idea to intervene in the private markets and load up it's own balance sheet with these kind of low quality investments?  How will this help the overall economy exactly or is the purpose really something else?  It would seem they are so desperate that all common sense has gone out the window and anything goes, foolish or not.

As Mr. John Williams of the Shadowstats service has indicated in some recent public interviews,  2008 was the year of the financial meltdown that is essentially still with us.  Interviewers often ask when will the coming economic blowup that some people in the investment and financial world are now predicting to happen in the coming future?  The reply from Mr. Williams is that it already happened in 2008, anything that comes next is just an extension of that.  However, in order to hide or salve the economic pain and dislocations, both governments and central banks have been trying to extend and pretend since 2008.  Extend the false prosperity that came about from too much cheap credit, which resulted in a real estate asset bubble and pretend all is well.  In fact, there have been a number of recent asset bubbles created prior to 2008.  The so-called dot.com crisis from the year 2000 and the prior stock market crash of 1987 are just two more examples.  Now in 2016, former US Federal Reserve Chairman Alan Greenspan admits publicly there is another asset bubble they have created in the bond markets (as a result of pumping money into the system to re-inflate the real estate sector, only to find out the money has ended up elsewhere).  Interestingly enough, Mr. Greenspan testified to the US Congress (while he was the US central bank chairman) that asset bubbles are almost impossible to see and predict.  Yet now that he is back in private practice advising clients, he seems to have crystal clear vision in this regard.  Perhaps Mr. Draghi sees the bond market bubble quite clearly himself and is now trying to extend (and pretend) that asset bubble as well using European Central Bank funds to do so?

To use the US as a case study in terms of such central bank machinations, the US GDP was shy of US$15 Trillion on December 31, 2007.  The March 2016 US GDP numbers are reported to be US$18.2 Trillion.  So, what we glean from this is that since 2008, over the course of 8 years, the US economy has grown by about US$3.2 Trillion Dollars, or so says the GDP statistics.  However, the US Federal Reserve via it's Quantitative Easing policies during that very same time period, has injected US$3.5 Trillion Dollars directly into the system (and we should specify banks and broker dealers) via the purchase of bond instruments (half of that US Treasury Securities and half Mortgage Backed Securities) expanding it's own balance sheet to over US$4 Trillion.  And where did they get the money to do this?  By expanding the money supply, albeit electronically and not necessarily by printing paper money.  So, what we see is a direct cash infusion into the bond markets of US$3.5 Trillion Dollars and GDP growth of just about the same amount.  Has the reported increase in US GDP from 2008 until now in 2016 really been due to central bank money printing as opposed to real tangible economic activity?  It is a bit more complicated than that, but the numbers are very coincidently close.  Regardless, this is NOT how true pure capitalism works.  And injecting money like this into the economy is like letting loose a bunch of cats into the woods and then returning to the same spot two weeks later to try and round them up (you never know where they might end up).  An article appearing in the November 16, 2015 edition of Forbes (Quantitative Easing In Focus: The U.S. Experience) concludes with the assessment: Only time will tell if QE in the U.S. has been instrumental in pulling the U.S. economy out of a crisis, or whether it has just set the stage for the next crisis.

The latest spin on this economic experimentation is a suggestion to bypass the banks and financial firms and instead give it directly to the people.  Negative Income Tax, Social Dividend, Quantitative Easing for the people and Government Guaranteed Income are all terms associated with this idea.  And the criticism of the QE policies of the last 8 years has been such purchases have injected funds directly into the banking and financially sector and not main street.  As such, the new improved line of thinking is just give everyone with a pulse a monthly check to spend it on x-boxes, lunch at Alfredo's Restaurant or whatever else people want to spend their money on.  But again, we opine and insist, this is NOT capitalism either.  Money is earned through some productive capacity or exchange, be it salary from work or be it dividends or gains from investments.  In either case, something productive is being done to earn that money and the economy is helped accordingly.  A government check for doing nothing is NOT a productive participation in the economy and someone else doing the productive work has to earn that money first and pay taxes in order for the government to dole it out to someone else.  If that is not occurring then they are merely running the printing presses to pay for it all which is not the way capitalism works, or is supposed to work. 

The various factions that lean towards the left politically and economically all point to the various economic crises and failures as their presented proof that capitalism is the problem (and that we should resort to something else, even more government interventions into the various private markets perhaps).  However, as we have already opined, we do not have capitalism at work right now and have not had it for quite some time.  So, what has failed really has been refusal to allow the capitalistic free market system to do it's job of correcting excesses.  In other words, to purge itself of weak links, asset bubbles, price extremes and imbalances.  Ironically enough, the argument in favor of the creation of central banks has been such a creation was  needed as a mechanism to correct the natural ebb and flow or ups and downs that are inherent in free capitalistic markets.  To be sure, such periodic out of balances and regressions to the mean have been unpleasant.  The purging or re-balancing process indeed involves the possible bankruptcy of private businesses, unemployment and financial losses for investors.  But then again, the other result of such natural cleansing or  re-balancing also results in new healthy businesses being created, prior solvent healthy competitors surviving (because they can and are or were healthier to begin with) that gain new market share, and investors that learn some valuable lessons the hard way so they can hopefully be better and more cautious investors the next time.

What is needed Ladies and Gentlemen is a return to true free markets and a capitalistic system free from government manipulations and interventions.  A return to sound money, sound and just accounting practices, sound and responsible central banking functions, real market interest rates not artificially tinkered with by central banks and balanced government budgets as well.  The politicians and central bankers continue experimenting with what we call Voodoo Economic theorems to try and pull back from the 2008 economic situation.  Eight years later and where are we?  Central bank balance sheets loaded up with debt instruments purchased in the private market, unemployment rates of over 20 percent still in Spain, Italy and the US (take a look at what John Williams has come up with regarding the REAL unemployment rate in the US and not the fake statistics the US government is reporting), plus zero interest rates and now the lunacy of negative interest rates so savers cannot even hope for a return on savings deposits (and negative interest rates are nothing more than a bank bail-in scheme, albeit one that takes a small percentage away from depositors on a recurring basis each month rather than a one time bite of a larger amount). 

The increasing income and wealth disparities we are seeing has been directly caused by central banks attempting to re-inflate asset values, which have primarily benefited the upper tiers of income earners as they hold a larger proportion of their own wealth in these kinds of assets.  It may come as a shock to the socialist minded but capitalism as an economic system does not favor any particular social class.  Rather it favors the solvent (those without excessive and unmanageable debt), the innovative and the financially disciplined.  In this regard it offers the poorer segments of any economy the opportunity to advance themselves.  That is the promise and premise of capitalism (how the heck do you think China was able to grow economically the way it has the passed 30 years once they took communism out of the economic equation?).  Just like the charlatans advertising magic pills to learn another language, loose weight without effort or the promise of free riches without work, the politicians and central bankers are peddling the same kind of snake oil to the public.  Pain, hard work and self discipline is the only way to achieve the desired goal regardless if the topic is weight loss or the economy.  Many people do not like this idea, but magic pills and voodoo incantations are only found in fantasy films, not real life.