Calamitous Consequences

Tyler Durden's picture

Via Scotiabank's Guy Haselmann,

Karl Marx died in March 1883, yet there has been a rebirth of the ideas he detailed on the inherent flaws of capitalism. Recently, Paul Tudor Jones gave a ‘Ted Talk’ about capitalism needing re-definition. My paper entitled ‘2014 and Beyond’ began with the sentence, “Modern day capitalism appears to need a different moniker”.  It is quite possible that future developments in capitalism will have profound and on-going influence on markets and valuations.

Let me first go on record and say that in the 135 years since Marx’ death, capitalism has been the single greatest engine for human advancement.  It has certainly been an outstanding way to organize the production and distribution of goods and services. Its free-market structure encouraged innovation, leading to new methods and products whose technological advancements allowed for globalization and the general shrinking of the world.  Entrepreneurship aided improvements to health and education, and was the cornerstone to economic progress. No other social construct in history has done more to advance the human condition, or lift more people out of poverty, than capitalism. 

A capitalist structure’s main quest is to ensure the real appreciation of capital.  Corporate leaders are incentivized to maximize shareholder value at almost any cost: the best means is to increase output per hour worked (productivity).   Can this be sustained forever?

The causes and responses of the 2008 crisis are the culmination of decades of intervention by lawmakers, central banks, and regulators trying to create a perception of prosperity.  Unfortunately, many of the actions by policy officials have been designed whereby current day benefits were trade-off against future economic prospects.  It is unfortunate that policy-makers’ well-intentioned attempts to build a stronger economic system may have added to future challenges and complexities.

Marx exposed the inherent contradictions where he believed that weak aggregate demand leads to workers not being hired in an endless loop causing capitalism to ultimately self-destruct. Is it possible that capitalism’s underlying focus on profits, and the necessity for endless purchases of goods and services, has a practical limit?

The necessity for growth has led to over-capacity, which has been a root cause of deflation, and one driver of the Fed’s futility.  QE and ZIRP (i.e., Zero Interest Rate Policy) have only served to turbo-charge this loop. Going forward, markets will have to contend with servicing the large amounts of debt created under ZIRP.   High levels of indebtedness require a minimum degree of economic growth just to ensure debt-servicing is possible.

Markets and the economy will also have to contend with troubling demographics.  On the horizon in upcoming years is a steep acceleration of retirements.  New retires will draw on retirement and medical benefits, but more importantly, they will withdraw their labor services from the economy.  Capital will have less labor to work with which will result in less business activity.   Moreover, older people are simply less innovative (maybe this is why productivity levels have fallen in the last few decades).

There are currently profound and complicated relationships between, capitalism and inequality, between labor and capital, and between governments and its citizenry.  Social tensions are swelling between: business owners and workers, voters and politicians, rich and poor, old and young, and amongst countries.   Tensions are spurring general resentment, nationalism, and religious vehemence.

The question becomes how will these tensions be resolved?  Feelings of inequality and injustice are constraints on economic growth that ultimately affect everyone negatively with the potential for calamitous consequences. Easy solutions do not exist.  Eradication of US inequality, for instance, will require more than redistribution and wealth transfer policies, especially since the US system is already progressive and steep in subsidies.  At an extreme, they risk making everyone worse off.

Furthermore, the conversation surrounding the issue has been counter-productive as some politicians infer that when the rich benefit it is at the expense of the poor.  Measurement errors distort the discussion; such as when reportable taxable income is used to measure income gaps but does not include subsidies.  Regardless, the divide is real and growing, but it is not a zero sum game where one’s benefit is at the expense the other.  Each side feels victimized.

The great challenges outlined in this note are of critical importance and should not be dismissed quickly.   As Paul Tudor Jones said during his ‘Ted Talk’, these conditions typically lead to “war, revolution, or higher taxes”.  Maybe the early warning signs before those occur are organized protests, police backlash, racial tensions, currency wars, protectionism, voter backlash, rise of fringe political parties, Sunni/Shia tensions, and ‘Arab Spring’ (etc.)

It might be useful to think about these high level concepts while applying them more granularly to markets. In this respect, maybe bonds are not in bubble territory as so many believe.

Maybe there is a deeper reason why central banks are hoarding such vast quantities of sovereign debt.


Maybe central banks simply cannot afford to have market interest rates rise too high due to the cost of debt servicing extreme levels or global indebtedness; and due to terrible demographics in developed world economies. 


Maybe corporate revenue growth will be challenged for decades to come.


Maybe the mindset of maximizing profits at all costs has a practical limit.


Maybe for capitalism to survive peacefully, the perceived divide - between wages and profits and labor and capital - needs to shrink and unite (hurting profit margins).

Since major central banks are at or near the lower bound (and many have ballooned balance sheets), and since most major governments (and corporations) have historically high levels of debt, effective future stimulus may not be available.  Central bank’s powering risk assets higher may no longer be possible.  Higher prices may only be achievable through elusive economic growth.  Maybe bonds just aren’t as bubble-like as pundits claim.  Maybe it is equities (and forward earnings estimates) that have greater bubble-like characteristics.

“If you drive a car, I’ll tax the street / If you try to sit, I’ll tax your seat / If you get too cold, I’ll tax the heat / If you take a walk, I’ll tax your feet” – The Beatles

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
davidalan1's picture

Its called, "the law of diminshing returns",

Mercury's picture



Thank God there are no inherent contradictions in government expansion.


Pinto Currency's picture



The issue is not market pricing of goods and services.

The problem is a debt-based paper money system run by central planners who are endlessly juicing additional consumption with additional debt.

As John Exter of the Federal Reserve predicted, this debt system will go parabolic and collapse under its debt burden sending sound money (gold) into the stratosphere.

Scotia-Mocatta has played a role in the LBMA gold fix rigging and it figures that they will find a problem with capitalism (not rigging gold and interest rates leading to collapse).

Mercury's picture

QE is not additive to debt, it effectively erases it.

jbvtme's picture

the problem isn't capitalism or socialism.  it is production. bespoke crafts replaced by factory workers in the 1800's.  factory workers replaced with robots in the 2000's.  there is no use for the average person anymore but to harvest their organs.  i'm long scalpels...

813kml's picture

If harvesting in the US you best use a machete to get through the layers of subcutaneous fat.

A Nanny Moose's picture

You will first need large cash payment with which to buy the rights to harvest the king's game.

daveO's picture

The US Treasury has added $4 Trillion of debt just since 2011. The FED, and other CB's, have bought much of it. Welcome to the 21st century's Tara plantation, debt slave. 

123dobryden's picture

it is a write off by savers' accounts

gwiss's picture

It's not that it's paper -- It's that it's not commodity based, which means it is not linked to reality.  Electronic fiat money is no better than paper fiat money, and that's what we actually have today.


This article conflates market design with money design, and those are two very different things. They certainly affect each other, but you can have a centralized market system based on commodity money, and you can have a free market based on fiat money, whether it is paper based or electronic based.  Of course, neither of those two will be good, but any market design based on commodity money will be better than any market design based on fiat currency, because any market design based on fiat currency will first accelerate until it reaches debt saturation, and then will collapse, either into hyperdeflation or hyperinflation.


Marx's concerns mostly apply to money supply design, not market design.  A fiat currency design will always accelerate away from the constraints of physical reality precisely because the fiat designation by default separates it from physical reality.  The very act of separating the money supply from physical reality thus contains within it the seeds of its own destruction -- it inevitably dies from the very same thing that temporarily seems to make it successful.  Fiat currency sends erroneous and false price signals to all market participants and more credit is extended as inflating commodity prices used as assets to back credit allows the extension of further credit, and the market thus deviates further and further away from a stable configuration until it collapses, precisely because the feedback loop of being tied to reality has been severed.


A truly free market with a free money supply will of course be subject to momentum swings as market participants jockey for position and profits, but as they are all tied to physical reality which remains stable, prices can't deviate too far away from reality before a collapse happens, and this collapse will happen long before it becomes large enough to sink the entire economy.


If leaders had any real desire to support and encourage a stable economy and stable economic growth, they would eliminate unbacked money altogether.  This would not mean the elimination of credit, but it would mean that the price for money would truly reflect supply, and thus the economy would not be allowed to deviate anywhere near as far as it is with a fiat system.  Of course, a system like this is much more difficult to game and certainly is less addictive to the masses, so it is understandable why no politician would ever support such a thing.

LawsofPhysics's picture

It's called moral hazard.  Capitalism requires a respect for capital asshat, capitalism has not existed for a long long time, and even then only in certain pockets/regions at a time.

Seasmoke's picture

If I cheat and you don't, I will beat you every time. The Achilles heel of Capitalism

Billy the Poet's picture

Bullshit. People want a good product at a good price. If I sell great pizza for a dollar a slice and you sell  a terrible pizza substitute which you advertise as pizza for ten dollars a slice you will go out of business and I will prosper.

LawsofPhysics's picture

Apparently you ave been under a fucking rock for 30+ years and never heard about bailouts or "too big to fail".

by "cheating" he means owning your "representation" and getting to pick himself as the winner.

this is what has been going on for quite some time now.

Billy the Poet's picture

How can you agree that capitalism has an Achilles heal when you admit that the problem is that we no longer live in a capitalist system but rather an oligarchy of Too Big To Fail entities?

How does a lack of free markets prove that free markets are flawed?

LawsofPhysics's picture

Where do I say that "free markets are flawed"?  You are a fucking idiot, we have not had free markets for more than 100 years.  That's the problem asshat.

Billy the Poet's picture



I disagreed with the poster who said


"If I cheat and you don't, I will beat you every time. The Achilles heel of Capitalism."


You then supported his position. It's foolish to say that the Achilles heel of capitalism is the lack of capitalism as that statement puts the onus on capitalism itself.

Wait What's picture

i agree with the LawofPhysics. by the time the Fed was created the last vestiges of 'free market capitalism' disappeared. that the welfare state was born and began its imperial ascent at that time only expedited its disappearance.

asshats nostalgic for 'the good ol' days of free market capitalism' are bufoons; they've never known 'free markets.'

Billy the Poet's picture



"i agree with the LawofPhysics. by the time the Fed was created the last vestiges of 'free market capitalism' disappeared."


I agree with that too. But how can you then fault capitalism itself? Do you agree that flaws within capitalism created the problem? Do you believe that capitalism favors those who cheat?


Because that's where this thing started:


Seasmoke If I cheat and you don't, I will beat you every time. The Achilles heel of Capitalism

Wait What's picture

it's not capitalism's fault 'only,' but every -ism that has been created. every system favors those who cheat by not integrating safeguards against regulatory capture & beneficiary exploitation. until that can be accomplished, all those -ism are doomed to fail. i have some ideas abt fixes, unfortunately they all require a degree of integrity and a centralized authority to execute the plan. those seem to be harder and harder to come by these days.

Billy the Poet's picture



"every system favors those who cheat by not integrating safeguards against regulatory capture & beneficiary exploitation"


Regulatory capture is a misnomer. All regulation is intended to benefit the status quo and not the little guy. Rothbard was right when he said that capitalism and anarchy are the same thing. Regulation is what destroys capitalism, it is not a safeguard.

stacking12321's picture

LoP, you're the one who's being an asshat.

your comments about bailouts and tbtf, have no bearing on the discussion of capitalism. if bailouts/tbtf are going on, then that's NOT capitalism.

try to understand what capitalism is, first.

LawsofPhysics's picture

"if bailouts/tbtf are going on, then that's NOT capitalism." --  Exactly my point douchebag, we haven't had capitalism for 100+ years.  Thanks for helping.

Billy the Poet's picture

The question remains, do you believe that in a capitalist system cheaters always win and that this is "the Achilles heel of capitalism?" Do you believe that this supposed advantage which cheaters receive in a capitalist system has led to the TBTF system?

daveO's picture

Thank good ol' FREE TRADE. Corporations send factories to Chinese(and others) slave factories. The US runs trade deficits of $500 Billion per year, which is financed by US Treasury debt issuance and it's called Capitalism, lol. It's a silent takeover of the economy by the communists in DC and Beijing. This ain't got nothin' to do with a pizza parlor.

williambanzai7's picture

Everyone loves competition when they are small and hungry and hates it when they become big and wealthy. 

williambanzai7's picture

And this is why Page and Brin have visited the Obama White House 230 times and have hired a monkey intern to down arrow everyone in this thread.

Ignatius's picture

Imagine playing Monopoly tm where each time you play anew you "pick up where you left off," and lets us know how that turns out.

Billy the Poet's picture

Monopoly is a zero sum game. In the real world capitalist synergy creates multiple winners.

Ignatius's picture

Not any more, not these days.

One either owns (extreme wealth) or works (if available).

Billy the Poet's picture

Correct. And that confirms rather than denies WB's statement:


"Everyone loves competition when they are small and hungry and hates it when they become big and wealthy."

Ignatius's picture

Yes, I was agreeing with WB7.

Billy the Poet's picture

Well then, let's have that drink.

Billy Sol Estes's picture

Pierre Proudhon's idea of competition was that competition was great until you were on top, then you would despise competition as it ate into your profits (Megacorps today). But it makes you wonder if 'legislating away competition' can be considered fair play in the realm of competition in the market (you aren't trying if you aren't cheating)?

I say no due to the monopoloy of force government has, aka , bribing the refereee.

Philosophy of Poverty is a good read.

williambanzai7's picture

You know the parable of the scorpion and the frog? It's in our nature.

"I sort of gave up on this whole human adventure a long time ago, divorced myself from it emotionally. It gives me an artistic detachment that I find valuable."--George Carlin

zilztrain's picture

Karl Marx, Tyler?  Say it aint so.

steelhead23's picture

Yes Mr. Train, it is so.  Karl Marx was one of the brightest economists this world has ever seen.  His observation of capitalism, Das Kapital is quite simply brilliant.  In fact, he predicted that productive capitalism would eventually lead to financial capitalism (M&A, derivatives, casino capitalism) and ultimately economic collapse.  People seem hung up on his later work - The Communist Manifesto and ignore his more important earlier work in Kapital.  I happen to believe that there are solutions to the problems inherent in free markets (like market power and misallocation of resources) well short of full-blown socialism, but lassiez faire leads to where we now are - the precipice.

Rather than Marxist ideas and capitalist ideas constantly clashing and their purveyors subject to ad hominem attacks, I encourage a Hegelian solution of taking bits from each - a synthesis - and constantly refining them based on public benefit.  That is, neither Adam Smith nor Karl Marx was entirely correct.  Economics ain't religion.

Oh, just to show my true ZH colors, let me say that the Fed has abandoned its mission (sound currency and full employment) in favor of protecting the financial system.  With that, it is the Fed that has abandoned us and it is high time we either abolish it or dramatically reform it.

Billy the Poet's picture

We're being treated to Mr. Marx on April Fool's not Mayday. That may be significant.

kowalli's picture

capitalism is worked well. In the world of money people's lives mean 0.


centerline's picture

Sorry dude.  The bubble is government.  And that means bonds.  Which will lead to another bubble in private assets (in turn) - of epic proportions.

fleur de lis's picture

Karl Marx coined the term "capitalism." The whole point of communism, socialism, marxism, whatever you want to call it, is control of labor and production of the masses by the few. And who might the "few" be? Every parasite in government. That's why they won't allow for transparancy. Marxists use the free market when it suits them until they bend it to their own needs. 

Notice how lazy Marxists are. Trotsky lived in NYC and complained the whole time about everything. He used to sit in a restaurant eating the cheapest thing on the menu and hogging the table all day so the waiters lost the revenue from other customers who needed to sit down. On top of that he never tipped the waiters because they already had a salary and didn't need a penny more. All that while he, his wife, and two sons were living high off the hog in a Bronx apartment and a paid chauffer courtesy of Bolshevik millionare Jacob Schiff. 

Of course that did not stop either one from misappropriating money for the purpose of funding a revolution in Russia. Like Nuland who used our money to fund a coup in Ukraine. All Marxists are smug cheapskates who feel entitled to other people's money.

Billy the Poet's picture

"Is it possible that capitalism’s underlying focus on profits,"


Having more and better things as a result of your labors is not a moral failing.


"and the necessity for endless purchases of goods and services, has a practical limit?"


As long as humans live, breath and interact they will procure necessary goods and services from others. The practical limit can only be reached when all of humanity (give or take one individual) is dead.

Humanity is hurting due to a lack of capitalism.  The communists have been in charge for a century.

tecno242's picture

Not a practical limit.

Only a point in which you've "borrowed" too much of the futures prosperity to make today better.

At that point, you must take your medicine and re-balance.

If you dont, you turn into Japan.  (who will eventually explode under their own weight)

Wait What's picture

"you turn into Japan"

or America, with its bloated, overweight population of well-sedated diabetics. "more and better" is great for the people who earn it, it's a deserved reward, but the challenge is finding the time to both earn it and enjoy it... otherwise all that hard work ends up in the free spending hands of hangers-on, future ex-wives, shiftless children, and of course, parasitic government.

the Gettys and Vanderbilts are perfect examples of how "more and better" quickly turns into "worthless and drug addicted"

rsnoble's picture

In reality, yes.  At a corportate board meeting, no.

MilwaukeeMark's picture

You can tinker around the edges of capitalism all you want (more government, less government) at the end of the day the Darwinian drive to achieve the most amount of energy for the least amount of expended effort is too deeply rooted into our primitive DNA to overcome. Greed and fear are forever destined to remain our own worst enemies.