From Atlas To Capital - Everyone Is Shrugging

Tyler Durden's picture

From Mark Spitznagel, founder and chief investment officer of Universa Investments, a California-based hedge fund, first appearing in Project Syndicate

Capital Shrugged

Capitalism’s greatest strength has been its resiliency – its ability to survive the throes and challenges of crises and business cycles to fuel innovation and economic growth. Today, however, more than four years into a credit crisis, a conspicuous enigma calls this legacy into question.

Despite recent hopes of recovery in the US, including an inventory catch-up in the fourth quarter of 2011, real US GDP growth has remained persistently below trend. Moreover, although seasonally adjusted January employment data have brought the unemployment rate down to 8.3% (while total jobs were actually lost in January), the more realistic rate of “underemployment” remains over 15% and the labor-force participation rate is at a record 30-year low. And the US is clearly not alone in its malaise, with the eurozone fighting a far more urgent sovereign-debt crisis.

So, why is this time different? The answer lies in Ayn Rand’s rhetorical invocation of despair in her 1957 epic Atlas Shrugged: “Who is John Galt?” Simply put, when the state seizes the incentives and drivers of capital investment, owners of capital go on strike.

Rand portrays innovative industrialists as akin to Atlas in Greek mythology, carrying on his back a dystopian world of growing and overbearing collectivist government. The hero, John Galt, calls for them all to shrug, to “stop the motor of the world” by withdrawing from their productive pursuits, rather than promoting a world in which, under the guise of egalitarianism, incentives have been usurped in order to protect the politically connected from economic failure.

Today, Rand’s fictional world has seemingly become a reality – endless bailouts and economic stimulus for the unproductive at the expense of the most productive, and calls for additional taxation on capital investment. The shrug of Rand’s heroic entrepreneurs is to be found today within the tangled ciphers of corporate and government balance sheets.

The US Federal Reserve has added more than $2 trillion to the base money supply since 2008 – an incredible and unprecedented number that is basically a gift to banks intended to cover their deep losses and spur lending and investment. Instead, as banks continue their enormous deleveraging, almost all of their new money remains at the Fed in the form of excess reserves.

Corporations, moreover, are holding the largest amounts of cash, relative to assets and net worth, ever recorded. And yet, despite what pundits claim about strong balance sheets, firms’ debt levels, relative to assets and net worth, also remain near record-high levels.

Hoarded cash is king. The velocity of money (the frequency at which money is spent, or GDP relative to base money) continues to plunge to historic lows. No wonder monetary policy has had so little impact. Capital, the engine of economic growth, sits idle – shrugging everywhere.

Rand, perhaps better than any economic observer, underscored the central role of incentives in driving entrepreneurial innovation and risk-taking. Whittle away at incentives – and at the market’s ability to communicate them through price signals – and you starve the growth engine of its fuel. Alas, central bankers, with their manipulation of interest rates and use of quantitative easing, patently neglect this fact.

Interest rates are more than a mere economic input that determines levels of saving and investment. Rather, as the Austrian economist Ludwig von Mises emphasized, they are a reflection of people’s aggregate time preference – or desire for present versus future satisfaction – not a determinant of it.

Interest rates thus incentivize and convey to entrepreneurs how to allocate capital through time. For example, lower interest rates and cost of capital raise the relative attractiveness of cash flows further in the future, and capital investment increases – the system’s natural homeostatic response to higher savings and lower consumption.

State manipulation of interest rates, however, does not influence time preference, even though it signals such a change. The resulting inconsistency creates distortions: as with any price control, capital receives an incentive to flow to investment that is inconsistent with actual supply and demand.

The Fed is purposefully and insidiously distorting the incentive system – specifically, signals provided by the price of money – resulting in mal-investment (and, when public debt is monetized, inflation). This can continue for a time, rewarding unproductive investments and aspiring oligarch-speculators who presume that the Fed has eliminated risk. But, as Rand reminds us, at some point the jig is up.

Today, after the largest credit expansion in history, that point has clearly been reached. Impassive capital now ignores deceptive market signals, and the liquidation of untenable mal-investment percolates through the system as immutable time preferences prevail.

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Mr Lennon Hendrix's picture

Rand was a brilliant thinker.  Too bad her fiction was boring.

Junks away!!!!!

Irish66's picture

It was boring till I understood I'm scared to watch it unfold.

xcehn's picture

Yeah, ignorance is bliss on a diet of mainstream media propaganda, and happy days are here again.


Henry Chinaski's picture

Yo! Ayn Rand's Atlas Shrugged meets Trading Places.  "Who's puttin' out Kools on my carpet"

LetThemEatRand's picture

"Simply put, when the state seizes the incentives and drivers of capital investment, owners of capital go on strike."

This most fundamental premise of this author's take on Ayn Rand is demonstrably false.  The owners of capital have not gone on strike.  They have increased their wealth and they have increased their economic activity at the expense of the rest of society.    Pure self-interest rules the day, and society goes down the tubes while the Galts compete with their yachts and private jets.  What we are seeing today is not Rand's vision of what is wrong -- it is Rand's vision of what is right.  Oligarchs are living by no rules and no regulations while the little guy is plundered for their benefit.   Understand that, and you will understand why some of us believe Rand was horribly dangerous for a functioning and healthy capitalist system.

Pants McPants's picture

Good to see you out trolling again, LTER.

LetThemEatRand's picture

Seems to me that the guy who is making personal remarks about a poster who is directly responding to the subject of the article is the troll.  But I guess like most facts, this clearly objectively true one is of no interest to you.  

Tortfeasor's picture

There was more than one rich guy in Atlas. Oligarchs and producers are mutually exclusive.

LetThemEatRand's picture

"Oligarchs and producers are mutually exclusive"

Not in real life.  That is one of the many areas in which Rand had it wrong.  Theory is great.  Reality is a bitch. 

UP Forester's picture

True if you're talking about Rand Corp....

sitenine's picture

Also keep in mind that some of the greatest contributors to this phenomenon are mark to fantasy rules.  GAAP has rendered itself stupid imho.  Banks cannot sell a lot of the property they have on their books at "par".  To do so would mean a loss.  A loss they are neither willing to take nor able to sustain.  Built up inventory is becoming worthless, and cash almost impossible to get your hands on (I'm sure you can think of several other good examples).  Furthermore, banks aren't lending to each other because the low interest rates don't warrant the risk.  It is my opinion that the Federal Reserve will buy many more MBS sooner rather than later.  The Bernank was right all along about it all being about access to credit more so than liquidity, I'm just not sure he had any idea what-so-ever how bad the situation was really going to get.  The word 'insolvency' gets thrown around an awful lot these days.

CIABS's picture

Ayn Rand was a dimestore philosopher, and it's not surprising that she thrived in the USA.

redpill's picture

"producing" fiat money doesn't count, FYI

G-R-U-N-T's picture

Your terrified of Ayn Rand LTER, because you know she is completely and thoroughly accurate in her perception of looters, leeches and parasites whom feed off those of us that create, produce, and manufacture products that make us a profit.

Here is one of the simplest illustrations that typifies government largess at it's very core!

LetThemEatRand's picture

What do you produce, Grunt?  

G-R-U-N-T's picture

Ink on paper! What do you produce?

LetThemEatRand's picture

Bullshit answer.  I've said before what I do and what kind of business I own.  You can find it here on ZH.  Care to share or are you just full of shit?

sun tzu's picture

Look at the piece of shit calling someone full of shit. You're advocating more status quo of bailouts and allowing the looting to continue and you expect us to believe you're a hard working business owner who supports paying more taxes to fund this insanity? 

G-R-U-N-T's picture

Anyone with common sense and a brain to think could figure it out holmes.

I thought you would have grown up since the last time we debated Rand, but I see your head is still up your ass, whining, complaining and touting the message of parasitism, collectivism and other leech invested rantings.

One of these days you may hear that loud POP, and perhaps you can share your testimony of what it was like to recover from a fecal infested mindset. You may be able to help others with shit filled brains giving them an opportunity, through your experience, to recover from their own imaginary shit filled manufactured alternate reality.


4horse's picture

here seeing Your [sic] you're terrified of . . . Ink on paper!

and the horror. the horror every right to be

sun tzu's picture

Reading your tripe and bullshit is a real bitch. You're just a bitter loser who has never produced anything. Your job is shuffling papers. Am I right?

TrulyBelieving's picture

"The owners of capital have not gone on strike. They haave increased their wealth......Pure self interest rules the day."  No doubt that the well connected and all sorts of criminals invest their money for the reasons you suggest, but there are many who will not participate in this rape of mankind, this thievery.  No it is these that won't participate in this  crime that have very few options to invest respecting a fair and honest market. Thus they sit out and wait.                     

LetThemEatRand's picture

hahahah.  You just said the only word that really matters to Ayn Rand.  Nicely done. 

P.S.  Somehow, I don't think that you "sitting on the sidelines" is going to cause society to fail.  But I'm sure you think you are important.  I've said enough about you.  What do you think about you?

TrulyBelieving's picture

You are right, me sitting on the sidelines wont cause this criminal activity to fail, and anyone wishing for society to fail has their own issues. It is not a matter of self-importance, but one of character.

LetThemEatRand's picture

I've yet to meet anyone with good or decent "character" who worships Rand.  From what you've said so far, you are no exception.   But putting that aside, what exactly are you sitting on the sidelines about?  If your answer is that you are not investing in the Wallstreet casino, how exactly is that depriving anyone of anything of value?   I am a business owner.  I spend a lot of time with other business owners who are trying to build their businesses.  Not a single one is holding back a single thing because of some ridiculous ideology.  Some bitch and moan about the "socialist" in office, but it is all a lot of talk.  

TrulyBelieving's picture

I do what I do, and you can also do as you please. Perhaps this concept is foreign to you?

LetThemEatRand's picture

You are the one preaching to me, brother.

Banjo's picture

Hahaha you won't win. I would bet there are probably many Rand "believers" who are on government transfer payments and they think they are "shrugging" away.

What I find limits people is they read "one" viewpoint and fall in line, rarely venturing into uncomfortable territory. They are unable to think outside that one correct perspective.

I suggest people reading far and wide sure take in some Rand, read Marx, Hayek, Von Mises, Keynes, Stuart Mill, Henry George, Adam Smith, Hume, Law, Chomsky, Daniel Yergin, Milton Friedman, Irving Fischer, Steeve Keen, Menger and many many others. I believe that Jen's O Parson's Dying of money is the best exposition of money, interest, inflation it includes an introduction to left wing and right wing argument over the issue. J.W. Smiths, Economic Democracy is one of the most confronting books I ever read.

Incidentally I was arguing with an economist friend and he said the significance I placed on resources in that particular discussion was theoritacally Marxist, this lead me to read the communist manifesto. In that document it was talking about how wonderful and re-inventive capitalism was. I'm like what the?

I'm still learning and I'm open to all sorts of ideas. I don't belive that Rand is "the" solution her work might be part of a way to understanding.

I tell people very simply if Rand or x theory was the one solution as in "proved" humanity would have implemented this long ago. Look at the vehicle wheel we have today no one argues that it is round and has rubber, because quite simply it is the solution that works. The replacement to the wheel might be magnetic levitation or in a science fiction future teleportation.






sun tzu's picture

I have yet a meet a decent or sane person who hates Rand. Idiots like you are full of shit. You are nothing more than a parasite trying to keep the status quo or having the government bail out bankers and investing in scam green energy companies. 

ffart's picture

I started with Rand, but I prefer Rothbard. I thought a completely privatized police force was crazy until I started reading his work and realized that's effectively how it was done for hundreds of years. 

StychoKiller's picture

Criminals may (and do!) use Ayn Rand's ideas to justify their pillaging, but that does NOT invalidate the ideas.  After all, even Satan can quote scripture when it suits his purposes.  Check your premises.   As far as character is conerned, go forth and alleviate some suffering:

Then ask yourself, "How is it that someone can read "Atlas Shrugged" (and a lot of other Ayn Rand work!) AND STILL come to the conclusion that Charity is necessary?"  Again, check your premises.

piceridu's picture

Just had a meeting with my Chinese/Malasian friend and business associate I haven't seen in 10 years. Hugely succesful importer. He is a multi-millionaire. I was blown away by his stories of the present business climate. He has about 200mil in inventory and will no longer sell on credit. He has been burned by big companies that used him as a bank, strung him along and then went bankrupt. He said he's done. He will no longer participate in this farce. He along with many compatriots worth in the billions have and are starting the process of leaving to their own Galt's Gulch back in Asia.

LetThemEatRand's picture

So basically your friend is a multi-millionaire who made his fortune during this era and yet.... he thinks the system is broken and now that he made his millions in the system, he wants to go where he can pay less for labor.

Thank you for making my point.  He made millions but he wants more.  Greed.

TrulyBelieving's picture

Your point is useless as it implies when one has made money, perhaps millions, then he must be evil because he is greedy. Greedy is desiring more in a transaction than what is owed you. Now explain that if someone got exactly what is owed, even if it large amounts, how he has done some wrong that deserves the wrath that you and others of your ilk heap upon him?

LetThemEatRand's picture

Where did I complain about your buddy making millions?  I did not.  I complained that HE complained that somehow there is a problem with our system when he only made a few million, so he needs to go hire slave labor to make even more.  That is just plain old fashioned narcissistic evil greedy behavior.   It is also exactly what is wrong with our society.  Nothing is ever enough.   

fourchan's picture

rand was the greatist philosopher of the 20th century.

sun tzu's picture

Either you're stupid or you are a pathological liar. Where is the labor involved in importing/exporting?

Like I said, you're a typical Rand hater and one of the parasites

piceridu's picture

You must be a social worker or on the gov't teet. He busted his ass for 27 years building a business employing over the years thousands of people. He has been hit with so much shit i.e. regulations, government extortion, bullshit requirements and the loss of morals. Men and women like him have kept the very same government bureaucrats, that have extorted from his labor, fat and happy with high salaries, benefits and pensions that he could only dream about. You probably have no idea what it takes as an entrepreneur with a dream and dollar, to make a successful run inspite of all the barriers and hurdles guys like you have thrown his way. And by the way, he rather lose it all than continue with this farce.

aphlaque_duck's picture

Me too. Three successful businesses under my belt already but I will not play in this climate.

LetThemEatRand's picture

Good.  Less competition for us real business owners.

xela2200's picture

Alright chief! The US business environment is awesome. The IRS is not coercing countless business for money. They don't have every accountant in the country sending 1099s around like they are post cards. Obama is not making regulations that are unfriendly to business and his rhetoric is not outright hostile for those of us who want to risk capital. He is not playing class warfare. No laws are been passed that could cause you to loose your liberty or property for buying gold, asking for transactions to be paid in cash, complaining, or anything that prevents the government from having access to your money at will. Lawyers are not on wings just waiting for any lazy or dishonest employee that gets fired to call them to see how they can sue the employer.

Just peachy really. Where do I sign?

LetThemEatRand's picture

All rhetoric.  I don't believe for a second that you are not in business because of regulation.  Regulation and taxation are a bitch but you hire an accountant and you figure out the rules and you make it work.   Many companies have made record profits in the environment you decry.

What business did you close because of Obama?  

xela2200's picture

Good for you. You are the man. I hope it keeps on going strong for you.


LetThemEatRand's picture

So the answer is none.  You did not close a business because of Obama.  You are merely using Obama as an excuse for your own inability to succeed.  Very entitlement-minded of you.  Do you see the irony?  

aphlaque_duck's picture

Specifically one line of business that I am not in because of regulations: alternative currency/banking (especially anything bitcoin related). HUGE opportunies there for entrepreneurship but they will never let it happen.

I have many more ideas but I won't dignify your retarded comment with further explanation.

LetThemEatRand's picture

So how is it that others have succeeded in bitcoin land?  Are they in league with Obama?  I recall reading the opposite, but enlighten me.  No doubt we need more fiat currencies.

aphlaque_duck's picture

They aren't really succeeding, they have no choice but to operate in a legal grey area (to be generous) and are being shut down.

Also, bitcoin is not fiat. It is a commodity whose value is determined only by market participants, you fucking retard.

Raging Debate's picture

About sums it up Xela. I have four part time employees. I would make all four full time and add several more if the environment were not as described.

Hate Rand or whatever your name is, your opinion is yours to have but it doesn't seem to be the norm, at least on this site. I try and change it because I WANT to hire more people and put them back to work. But first things first.