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The Warren Buffett Economy, Part 5: Why Its Days Are Numbered
Submitted by David Stockman via Contra Corner blog,
If Warren Buffett and his ilk weren’t so hideously rich, main street America would be far more prosperous. I must hasten to add, of course, that this proposition has nothing to do with the zero-sum anti-capitalism of left-wing ideologues like Professors Piketty and Krugman.
Far from it. Real capitalism cannot thrive unless inventive and entreprenurial genius is rewarded with outsized fortunes.
But as I have demonstrated in Parts 1-4 (Part 1, Part 2, Part 3, Part 4), Warren Buffett’s $73 billion net worth, and numerous like and similar financial gambling fortunes that have arisen since 1987, are not due to genius; they are owing to adept surfing on the $50 trillion bubble that has been generated by the central bank Keynesianism of Alan Greenspan and his successors.
The resulting massive redistribution of wealth to the tiny slice of households which own most of the financial assets is not merely collateral damage. That is, it is not the unfortunate byproduct of continuous and extraordinary central bank “stimulus” policies that were otherwise necessary to keep the US economy off the shoals and the GDP and jobs on a steadily upward course.
Just the opposite. The entire regime of monetary central planning is a regrettable historical detour; it did not need to happen because massive central bank intervention is not necessary for capitalism to thrive. Contrary to the prevailing statist presumption, the free market does not have a death wish; it is not perennially slumping toward underperformance and depressionary collapse absent the deft ministrations of the fiscal and monetary authorities.
In fact, today’s style of heavy-handed monetary central planning destroys capitalist prosperity. It does so in a manner that is hidden at first—– because credit inflation and higher leverage temporarily gooses the reported GDP. But eventually it visibly and relentlessly devours the vital ingredients of growth in an orgy of debt and speculation.
To appreciate this we need to turn back the clock by 100 years—-to the early days of the Fed and ask a crucial question. Namely, what would have happened if its charter had not been changed by the exigencies of Woodrow Wilson’s foolish crusade to make the world safe for democracy?
The short answer is that we would have had a banker’s bank designed to provide standby liquidity to the commercial banking system. Moreover, that liquidity would have been generated not from fiat central bank credit conjured by a tiny posse of monetary bureaucrats, but from self-liquidating commercial collateral arising from the decentralized production of inventories and receivables on the main street economy.
That is to say, the 12 Federal Reserve Banks designed by the great Carter Glass in the 1913 Act were to operate through a discount window where good commercial paper would be discounted for cash at a penalty spread above the free market rate of interest. The job of the reserve banks was to don green eyeshades and assess collateral based on principles of banking safety and soundness——a function that would enable the banking system to remain liquid based on the working capital of private enterprise, not the artificial credit of the state.
Accordingly, there would have been no central bank macro-economic policy or aggregate targets for unemployment, inflation, GDP growth, housing starts, retail sales or any of the other litany of incoming economic metrics. The level and rate of change in national economic output and wealth would have been entirely the passive outcome of interaction on the free market of millions of producers, consumers, savers, investors, entrepreneurs, inventors and speculators.
Stated differently, Washington’s monetary authorities would have had no dog in the GDP hunt. Whether the macro-economy slumped or boomed and whether GDP grew by 4%, 2% or -2% would have been the collective verdict of the people, not the consequence of state action.
Likewise, honest price discovery would have driven the money and capital markets. That because there would be no FOMC at the Eccles Building pegging the overnight interest rate or manipulating the yield curve by purchasing longer term public debt and other securities. In fact, under the Fed’s original statutory charter it was not even allowed to own government debt or accept it as collateral against advances to its member banks.
That is a crucial distinction because it means that the Fed would not have ventured near the canyons of Wall Street nor have had any tools whatsoever to falsify financial market prices. Speculators wishing to ply the carry trades and arbitrage the yield curve—–that is, make money the way most of Wall Street does today—-would have done so at their own risk and peril. Indeed, the infamous “panics” of the pre-Fed period usually ended quickly when the call money rate——the overnight money rate of the day—–soared by hundreds of basis points a day and often deep into double digits.
Free market interest rates cured speculative excesses. The very prospect of a 27-year bubble which took finance (credit market debt outstanding plus the market value of non-financial corporate equities) from $7 trillion to $93 trillion, as occurred between 1987 and 2015, would not have been imaginable or possible. The great speculators of the day like Jay Cooke ended up broke after 10 years, not worth $73 billion after three decades.
Notwithstanding the inherent self-correcting, anti-bubble nature of the free market, defenders of the Fed argue the US economy would be forever parched for credit and liquidity without the constant injections of the Federal Reserve. But that is a hoary myth. In a healthy and honest free market, credit is supplied by savers who have already produced real goods and services, and have chosen to allocate a portion to future returns.
In Part 6, the difference between fiat credit and honest savings will be further explored. It is the fundamental dividing line between bubble finance and healthy capitalist prosperity.
Needless to say, the claim that the economy would be worse off if it was based on real savings rather than central bank credit conjured from thin air is the Big Lie on which the entire regime of monetary central planning is based. It is also the lynchpin of the Warren Buffett economy.
It is not surprising, therefore, that free market finance is an unknown concept in today’s world. All of the powers of Wall Street and Washington militate against it.
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Warren Buffet is a black woman trapped inside of the gentrified remains of an old white man. It's why he drinks coke all day and eats at Dairy Queen.
Reality will prevail eventually.
Warren Buffet...isn't he lodged in Becky Quick's cunt?
I habitually down vote anything that reads crony-capitalism. There is no difference between fascist-socialism and what is called "crony-capitalism" today.
None. Zero. Zilch. But do get yourself signed up for ObamaCare, its "the law of the land" and its patriotic!
Do it for da greater Fadderland and your neighbor! ;-)
Considering all laws are passed down to the puppets from the UK, which is a fascist totaltarian Matriarchy / monarchy.
http://www.newworldencyclopedia.org/entry/Matriarchy
Capitalism just hasn't been implemented correctly, if it was we would be living in a utopia.
./rant -on -vulgar -verbose
Fucking goddamed 0'Care stats are inflated by matriculation throught the Prison Industrial Complex.
http://www.msnbc.com/msnbc/jails-are-signing-inmates-obamacare
./rant -off
cd /pub
more | beer
I agree. It is the same as when people refer to the "Cloud" vs. on a server which is open to anyone who wants your information.
Berkshire Hathaway owns the utility company that has a monopoly that I pay bills to.
They also bought up a shit-ton of foreclosures and are renting them out or selling at high prices after holding for a couple years while the FED ginned up prices.
When you can get money free from the public treasury, have a monopoly, and greed is celebrated - well - I guess it's "Good to be King".
"Do not pass Go, do not collect $200, go directly to Jail" for us little people.
Fuck you Warren Buffet, and your Wall Street pals, and your Ponziconomy.
Well, I think when we are forced to play human chess for their amusement a few of us may snap.
http://youtu.be/57jOssjTbWw
Miffed
Something needs to snap, because the elite are entirely out of control with the whole Nuclear Holocaust plan... (And Fast)
https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF...
“Real capitalism cannot thrive unless inventive and entreprenurial genius is rewarded with outsized fortunes. “
Patents are a legal rent scheme, to allow the inventor to charge the market “more” than what price competition would allow. So, entrepreneurial genius being rewarded is reduced to law. We all benefit from creativity. I rate Stockman as true here.
“Warren Buffett’s $73 billion net worth, and numerous like and similar financial gambling fortunes that have arisen since 1987, are not due to genius; they are owing to adept surfing on the $50 trillion bubble that has been generated by the central bank Keynesianism of Alan Greenspan and his successors.”
Buffet benefited from asset inflation of QE injections; said QE was aimed like a rifle at various financial vehicles, like MBS and TBILLs. Somebody, please explain to me where Keynes advocates endogenous money creation of QE type. Keynes advocated exogenous money. I’ll happily stand corrected when somebody proves to me QE is Keynsian policy. Stockman gets a D here for obscurantism, not quite an untruth, but bending truth to make his position more palatable. It is not honest, or maybe he doesn’t understand modern monetary mechanics?
“.. entire regime of monetary central planning is a regrettable historical detour; it did not need to happen because massive central bank intervention is not necessary for capitalism to thrive.”
This is a laugher. Central Banks like the FED are corporations that money power bankers implemented with prior shark like planning and execution. Central Banks tied the reserve loops of all private banks together. This then allows credit creation formed in Midland Texas, to be spent in Peoria, Illinois. Debt instruments can now find their credit, or even be vectored into the stock market. The whole system then becomes beneficial to finance. Humans become dotted line connected to their debts, which are traded in markets, thus reducing people to chattel. Finance Capitalism is debt credit means, especially starting with Bank of England in 1694. Of course, finance capitalism attacked Germany for the temerity of having industrial capitalism, which allowed Germany to become a competitive threat to England and the U.S. (Pre WW1 Germany injected their credit into industry.) Oh wait, Finance Capital was already jerking American’s around by 1890 and preparing for Spanish American War. Rather than invest in America, it was invest in WAR.
“the free market does not have a death wish;”
There is no such thing as a free market. Markets are the inventions of man, and they have rules and laws. Additionally, there are three kinds of markets: Elastic, Inelastic, and Mixed. Each of these market types have unique rules related to their unique behavior. Free market advocates like using their right hand to advocate markets are God, and then using their left hand to fleece labor and producers with rents. Free markets cannot work well until money becomes volume controlled, and further, related to goods and services. Private bank credit only relates to debt instruments, and this type of money can push asset classes, witness the recent housing bubble. Also, this private credit is usurious as it continuously disappears, and hence extracts costs for new credit to come on-line, in order to have a transaction. Rents are buried in prices, and markets cannot discover these thefts. A modern example, is HFT algos, where prices are manipulated with front running, so innocent stock holders never have real price discovery. I guess if we had a free market, these sort of schemes would magickally go away? Free markets are only free for rentiers, while the innocent get mounted from behind by an invisible hand er member.
Stockman, below is a reading list for you, books and articles written by and about Richard F. Pettigrew. Especially read the book, “Triumphant Plutocracy.” This is a time period that you wax poetic about where markets were supposedly free, so maybe a real insider’s information may help sweep away some of your shibboleths. You have gone far down into the rabbit hole, maybe too far. You probably mean well.
Pettigrew was first Senator from South Dakota, and he cannot be dismissed as a crank.
http://onlinebooks.library.upenn.edu/webbin/book/lookupname?key=Pettigrew%2C%20Richard%20F.%20(Richard%20Franklin)%2C%201848-1926
https://archive.org/details/triumphantpluto00pettrich
Warren Buffet Economy :
"I am having a large Buffet,
While you all slave"
According to the International Monetary Fund:
http://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf
Causes and Consequences of Income Inequality: A Global Perspective
EXECUTIVE SUMMARY
We should measure the health of our society not at its apex, but at its base.” Andrew Jackson
Widening income inequality is the defining challenge of our time. In advanced economies, the gap between the rich and poor is at its highest level in decades. Inequality trends have been more mixed in emerging markets and developing countries (EMDCsf), with some countries experiencing declining inequality, but pervasive inequities in access to education, health care, and finance remain. Not surprisingly then, the extent of inequality, its drivers, and what to do about it have become some of the most hotly debated issues by policymakers and researchers alike. Against this background, the objective of this paper is two-fold.
First, we show why policymakers need to focus on the poor and the middle class. Earlier IMF work has shown that income inequality matters for growth and its sustainability. Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.
Second, we investigate what explains the divergent trends in inequality developments across advanced economies and EMDCs, with a particular focus on the poor and the middle class. While most existing studies have focused on advanced countries and looked at the drivers of the Gini coefficient and the income of the rich, this study explores a more diverse group of countries and pays particular attention to the income shares of the poor and the middle class—the main engines of growth. Our analysis suggests that
- Technological progress and the resulting rise in the skill premium (positives for growth and productivity) and the decline of some labor market institutions have contributed to inequality in both advanced economies and EMDCs. Globalization has played a smaller but reinforcing role. Interestingly, we find that rising skill premium is associated with widening income disparities in advanced countries, while financial deepening is associated with rising inequality in EMDCs, suggesting scope for policies that promote financial inclusion.
- Policies that focus on the poor and the middle class can mitigate inequality. Irrespective of the level of economic development, better access to education and health care and well-targeted social policies, while ensuring that labor market institutions do not excessively penalize the poor, can help raise the income share for the poor and the middle class.
- There is no one-size-fits-all approach to tackling inequality. The nature of appropriate policies depends on the underlying drivers and country-specific policy and institutional settings. In advanced economies, policies should focus on reforms to increase human capital and skills, coupled with making tax systems more progressive. In EMDCs, ensuring financial deepening is accompanied with greater financial inclusion and creating incentives for lowering informality would be important. More generally, complementarities between growth and income equality objectives suggest that policies aimed at raising average living standards can also influence the distribution of income and ensure a more inclusive prosperity.