This is how real capitalism dies

Jan 27, 2015

- By Bill Bonner

Bill Bonner
Rancho Santana, Nicaragua

Dear Diary,

Today, we're going to tell you why the middle classes are getting poorer. Or, to put it another way, we're going to show you how capitalism dies.

Dow down 141 on Friday. Gold closed the week below $1,300, but not far below.

Two comedy acts appeared last week - Barack Obama's 'State of the Union' address and Mario Draghi's QE announcement.

Mr. Obama claimed credit for a 'recovery' that has left the typical American poorer than he was before. Not only are they poorer, they are also more dependent on the very people who engineered the phony recovery. (See below.) And then Mario Draghi followed up with a series of one-liners, the gist of which was that he now proposes to save Europe from the specter of inadequate inflation.

Who could take Draghi seriously? After all, what's wrong with stable prices? Nothing at all. The 19th century had fairly stable prices...as well as the fastest GDP and wage growth in human history. In fact, consumer price inflation really didn't begin in the US until the 1970s, when America's new, flexible, adaptable, expandable, super-duper money came into service. Since then the cost of living is up approximately 600%. Growth rates, however, have gone down.

Mr. Draghi did not mention these facts when he announced his program of euro-depreciation. But it hardly mattered. The real purpose of his QE program is the same as the real purpose of the US version - to prevent the cronies from getting what they deserve. They own hundreds of billions' worth of European bonds - now trading at the highest prices and lowest yields in recorded history. Many were purchased with negative yields.

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And now, with aging populations, rising debts, gummed up regulations, high costs, high taxes, and falling revenues, there is almost no way these bonds can be worth what speculators paid for them. How are the insiders going to get their money back? The ECB to the rescue! It promises to transfer $1.3 trillion to the financial elite over the next 21 months, buying sovereign bonds and other slippery obligations at the rate of 60 billion euros per month.

Not that we are complaining; we've got a sense of humor! Besides, we're card-carrying members of the 1% ourselves...and happy to get a share of the loot. If only we had bought those Italian bonds!

So, there you have it. In the new world, the American chief executive claims credit for something he didn't do. In the old world, the chief banker to the world's largest economy claims to be doing something not worth doing. Neither is doing what he should do.

We chuckle...and move on. We were supposed to tell you about how it was possible for the typical American to lose real wealth at a time that should have been the most productive and prosperous ever. We won't disappoint you.

Who actually makes people better off? Barack Obama? Mario Draghi? Can you think of a single thing a chief executive or central banker has contributed to the welfare of the world? We can't.

Did they invent hamburgers? Did they pave roads? Did they produce wheat or lay bricks?

Of course, we're exaggerating to make our point. They are, no doubt, amusing at dinner parties and they pet their dogs. But sticking to the material world, the world of getting and spending, has a president or central banker ever put in a decent day's work or added a single centime or farthing to the nation's real GDP?

Not that we know of.

Then who has?

If we had to put a title to this little discussion, we might call it "America's Disappearing Wealth Creators." Or if we wanted to be more lurid: "How the Zombies Ate America's Entrepreneurs."

Last week, we reported on how more and more people depend on the US federal government for their daily bread.

Here's the chart from Nicholas Eberstadt:


As the number of zombies increases, it leaves fewer people creating real jobs, building real businesses, and paying real taxes. In short, the people who actually create wealth are vanishing.

Jim Clifton, Chairman of Gallup, reports that, for the first time ever, there are more businesses closing than starting up:

    The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel and Italy all have higher startup rates than America does.

    We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.

    The U.S. Census Bureau reports that the total number of new business startups and business closures per year - the birth and death rates of American companies - have crossed for the first time since the measurement began. I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying.


In the early '70s, there were about 200,000 new businesses created each year - net of closures. Now, the number is negative.

Why are Americans getting poorer? Look no further. No new businesses (net). No new jobs, again net. No new wealth.

Under Obama and Draghi, crony capitalism flourishes. Real capitalism dies.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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