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Here's What Really Happened to the US Economy the Past 40 Years

Dec 13, 2016

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BALTIMORE - When we left you Friday, we were in the middle of describing theĀ crooked hind leg of crony capitalism.

We used billionaire businessman Wilbur Ross - Donald Trump's pick for the Department of Commerce - for illustration purposes.

Not that there is anything wrong with Mr Ross. He plays the game, just as everyone else does. He's particularly good at it.

But today, we'll look at another Olympian money man - the chairman of Trump's new Strategic and Policy Forum and private equity magnate, Stephen Schwarzman.

Bubble Finance

We remind readers that we are criticising neither Mr Schwarzman nor Mr Trump.

We're just trying to understand how it works. Then we'll take a guess about where it will lead.

Also on Mr Trump's new advisory board - which is supposed to help the president-elect bring jobs back to America - is former General Electric CEO Jack Welch.

Welch could provide an equally rich illustration of the 'financialisation' trend. He took a Main Street manufacturing and engineering firm - one of the most admired in the world - and turned it into a bubble-finance company.

After 600 acquisitions, GE was heavily in debt and deeply in the finance business. GE Capital - the company's financial services unit and the tail that now wags this dog - has 35,000 employees and capital of half a trillion dollars.

GE shares sold for $60 at the beginning of this century. Now, after the biggest wash of free money the stock market has ever seen, shareholders have been soaked; the stock is worth only half what it was in 2000.

Meanwhile, Jack walked away, taking with him the largest severance package in history - valued at about $420 million.

As far as we know, Mr Welch didn't invent anything. He didn't sing a hit song or star in a blockbuster movie.

He was a salaried employee of a well-established and profitable business...risking neither time nor money.

After Mr Welch was finished with it, the business was in worse shape than it was when he took over at the helm. And yet, he ended up with a fortune estimated at more than $700 million.

That's financialisation!

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'Politicising' Business

The only real revolution in human affairs began thousands of years ago and continues to this day: the gradual replacement of brute force with market-based persuasion.

It is never all or nothing, of course. Politics will always be with us. So will markets.

A business that becomes 'political' is a danger to its owners. Employees stab each other in the back, fight over choice offices, and scramble for a place in the corporate hierarchy.

More important, they take the company's eye off the ball and its vital capital out of the business.

That's what happened at GE.

Properly functioning free-market economies flush out these companies through the process of 'creative destruction'.

'Political' businesses can't compete with companies that are focused on satisfying their customers and investing for the future.

But sometimes, entire economies become more political...and the people and companies in them react by becoming more political, too.

That is really what happened to the US economy over the last 40 years.

Smart hustlers teamed up with the government. And together they used the feds' fake money, the feds' fake savings, the feds' fake interest rates, and the feds' labyrinthine legislation and regulation to hijack wealth from the honest Main Street economy.

So, when we talk about how the US economy was 'financialised' after 1980, what really happened is that it was 'politicised'.

As politics became more pervasive, more of the nation's output was up for grabs as spoils of politics.

An Angel Everywhere

Curiously, even the political system itself becomes more political.

It used to be that the Democrats and the Republicans held each other's ambitions in check. The Democrats were in favor of wealth distribution at home. But they didn't like to see the US government throwing its money around overseas.

Republicans, on the other hand, considered the federal government a devil at home but an angel overseas.

Now, both sides of the aisle have come together with high fives and bear hugs...

...the government is an angel everywhere, they've concluded.

So today, at home, 160 million Americans receive money from the feds...half of the nominal income gains in the last 16 years came from the feds' 'transfer payments'...and there are far more people getting money from 'the government' than there are voters.

And overseas, according to the Watson Institute at Brown University, America's hapless romp in the Middle East and the associated War on Terror has now cost $4.8 trillion.

The institute goes on to remark that the wars have been paid for 'almost entirely by borrowing'. And that, by 2053, including interest charges, the total bill will reach almost $8 trillion.

Distributed among the voters, this would work out to about $61,538 apiece.

But wait... We've run out of time and space, and we haven't even gotten to Mr Schwarzman.

Stay tuned...

Regards,
BILL BONNER Founder, Agora Inc
Bill


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

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "Here's What Really Happened to the US Economy the Past 40 Years"

George Stanley

Dec 14, 2016

First and foremost why has the Modi Govt. not gone after the 1000+ names with Swiss accounts.....The privileged live lavishly while the common man stands in queue sometimes losing his life and running pillar to post to access his own hard earned money. Clean-up must start from your house and by this I mean the political parties clean up and expose from whom they get their campaign contributions. I do not think you understand the concept of a parallel cash based economy and the small percentage of black money in circulation much owing to the tax loopholes which can be plugged but nothing gets done.....We are a country run by incompetents and tenure politicians and things will never change, what news gets broadcasted becomes your views depending on which channel you stick with and life goes on.....food for thought....

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Girish Anant Patkar

Dec 13, 2016

What the PM has done is administered a SHOCK to all those who did not ever imagine that the Government can take action after several warnings to come clean and pay up. Surat needed a "Plague" to clean up the city. USA needed a 9/11 to take Homeland Security seriously and force international crack down on terror funding. Crudely, we use laxative once in a while to clean the system...demonetisation has the same effect.
The system is shaken and stirred and scamsters, defaulters,hoarders will take some years rethink their strategy.

Coming to slow down in economic activity, as soon as liquidity is restored, demand will pik up. Demand is postponed , not destroyed except in certain sectors !

Demonetisation has to be seen not in economic terms but from the point of view that the government is serious about chasing defaulters, hoarders, scamsters etc. General population is very happy with the action despite the difficulty they have to go thru....

Girish

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