Pushin’ A Rope:
Good Morning all of you active brain cells out there in the real world; your King of Simple News is on the air.
Will Rogers said, “An ignorant person is one who doesn’t know what you have just found out.”
One of the most difficult things that “I just found out,” was having to come grips with the very real fact that unbridled capitalism is a scam of sorts, and can only exist up to the point where it becomes impossible to create the illusion of real growth through the inflation of the money supply and the consequential rise in the cost of goods and services on which the justification of the expanding money supply is based. Now that’s a mouthful.
Let me try and explain that last statement in plain English with a few simple examples thrown in for effect. If homes, cars, groceries, education, etc., remained the same price, then wages could stay the same and we could live happily ever after without all the wild ups and downs that capitalists call “business cycles.” So why do prices on the same goods and services continually rise, causing wages to rise, which causes prices to rise, which casuses wages to rise….?
The short answer is that Capitalism is fatally flawed from a mathematical standpoint and requires the continual growth of the money supply due to the inclusion of compounding interest. Once slavery was abolished, the folks who were used to other people working and them getting the rewards, needed another legal way to continue the lifestyle that they had become so fondly accustomed to. And they found a dozy.
It’s rumored that after being asked what the most powerful force in the Universe was, Albert Einstein answered, “Compounding interest.” Whether Einstein did or did not actually make that statement is irrelevant…he should have!
Ya see, when a bank or an individual makes you a loan with interest compounding against the unpaid principal, and when the private Federal Reserve that creates that money out of thin air also includes interest compounding against the newly printed moolah, the money supply must grow to provide for the growing phantom interest. Throw in the fact that our government owes a few Trillion here and few Trillion there that is also subject to interest, and hello inflation.
The little inflation trick is artificially balanced by purposely assigning ever higher values to existing things like our homes so that we can borrow ever greater amounts of money against the same assets and pay more interest…and so goes the game.
Without inflation of the money supply, those who collect the interest would soon have all of the money in the world and would have to consider the nearly unthinkable and horrific prospect of seeking out viable employment. This little scam works so well that the largest banks on Wall Street are about to pass out record amount of bonuses for 2008; around $30 BILLION!
These folks are joined by legions of others who do little good and receive a lot in return. Think government. Consequently, the people who get something for nothing are also dependent on a growing money supply (if they never really earn the money where else does it come from)? Government at all levels is increasing at astounding rates as our leadership attempts to push the rope of unbridled capitalism up the ever steepening curve of exponential growth. Have you ever tried to push a rope?
What creates the real problem for anything that grows exponentially or geometrically like a snowball is that it violates several physical laws. In the case of the snowball, the total amount of snow available is being consumed and the snowball is using more and more snow with each revolution. In short, anything that can’t go on forever doesn’t. Compounding interest and unchecked capitalism have no exemptions from universal law.
As you could see from my above example, to forward the practice of unbridled capitalism it is necessary for homes, businesses, materials, groceries, fuel, and denim jeans to continually rise in price, no matter what. If all of these things don’t rise in price we have a recession. Hmmmm.
But perhaps more importantly, it is absolutely critical for wages to rise in concert with the rising prices of goods and services. Uh-oh.
If wages fail to rise, living standards decline for the class that is no longer keeping up. In a nation whose government imports workers and exports jobs, keeping up is impossible. As Paul Harvey would say, “And now you know…the rest of the story.”
For those who may have not read the article by Rick Martin differentiating between capitalism and free enterprise, follow this link.
http://mikefolkerth.com/2009/10/06/capitalism-vs-free-enterprise/
Subscribe to this blog
Hotrod said,
Good Morning All,
Saw signs posted all over the place yesterday at Farm and Fleet: “We are sorry but due to rapidly increasing prices, we cannot honor recent catalog pricing.” And so it continues, lackluster demand, but rising prices.
Thanks for that tidbit Rod, we have arrived at the stagflation part of the process. Next stop, hyper-stagflation. Specific actions create specific results.
Doctor Greg said,
“lackluster demand, but raising prices.”
Diagnosis: Stagflation. A nasty disease that presents in both acute and chronic forms. Difficult, if not impossible to treat. Long-term prognosis - poor.
I’m afraid I agree Greg.
Wall Street makes money the old fashion way, they steal it..
No better way to steal money than inflation.. Wall Street calls it “pricing power”.. Those with pricing power raise prices first.. They gain..
In case you haven’t suspected, wage earners do not have “pricing power”.. They lose..
There are no real labor unions any more.. None that I can think of anyway..
Tnx.. Wm A..
Compound interest and fractional reserve banking will be part of our undoing. However, at the top the list are greed and a flawed economic system.
The powers that be have been pushing that rope for so long, they know it’s about to run out. That explains why they are tying a knot and holding on so hard. If they let go, they know the fall will likely kill them.
Inflation is mandatory, as I explained in the article. Therefore, the markets must gain in order to pace inflation. What I’m saying is that wages, the stock markets, bank interest and so on must grow each year to remain even.
Inflation is not something that we can chose to have or not have; it’s built into our system. Attempting to stop inflation would be tantamount to pulling the bottom can out from under the stack that capitalism rests on.
I heard it said that you can’t shoot pool with a rope.
Let’s see, we’ve got inflation that is an integral part of the system. Debt which is also essential to the system. The debt concentrates wealth in the hands of a few. That wealth (Capital) needs to be invested in some type of market to create more growth.
So when consumers are maxed out on debt, new markets need to be created for the excess capital. When that can’t be done by expanding markets at home, you go overseas. Keep in mind, up to this point we are talking about debt creation for tangible products and legitimate services.
The real world is finite, so at some point, the actual bounty of the planet (soil, water, energy, raw materials) is no longer enough to support the need for growth. So what does a Capitalist do?
You need to create new vehicles for investment. Virtual markets work nicely since that have no physical limits. Now we get stock market bubbles - think Dot Com. The fact that a company has no assets, or income is no problem. A sucker is born every minute, just sell the worthless stuff before the bubble bursts. Pass the loss to someone else.
When investors (gamblers) are on to the stock market trick, try something new. Get really creative, NINJA loans for homes work well as an investment vehicle. When all the qualified buyers are gone, go after those who are not credit worthy.(No Income, No Job, No Assets) - no problem. Never mind the borrower just defaulted on a $25,000 car loan, give him a home loan for $250,000. Crazy, no. Just bundle a bunch of them together and give them a fancy name like CDO. Then you sell them to unsuspecting investors. But first get your buddies at Fitch or Moody’s to give them AAA rating, that makes the junk easier to pass off.
At some point, the value of the virtual markets dwarfs the underlying physical resource that supports it and it all comes tumbling down.
In past “business cycle” downturns; that is when the bubbles burst, we escaped because the physical system was still ready to go. There were plenty of tangible assets, lots of high quality natural resources, little pollution and not too many people using them. That isn’t the case now.
So how many more bubbles can the Capitalists blow to keep this mess afloat?
So how many more bubbles can the Capitalists blow to keep this mess afloat?
At least two.
If something worked before, why not try it again. Re-inflate stock market bubbles. It is called a suckers market and it is happening again.
Two, turn commodities into investment vehicles! Was a time when only the people who had to buy commodities for their business speculated in them. It was a hedge against big price swings, and that is legitimate.
However, now large numbers of wealthy investors who have more money than sense, use them for gambling, the same way poor people bet the horses.
The problem is that these commodities are used to produce goods we need to run our economy. Things like energy, rare earth metals, livestock, you name it. The speculators bid the cost sky-high, the bubble bursts and sends the price down to nothing. When the price goes up, businesses and consumers pay substantially more because of the game which hurts the economy. The ripple effect fuels unemployment and makes everyone hesitant to spend or invest. When the price collapses, suppliers and consumers can buy things cheap. Unfortunately, it doesn’t average out.
This is particularly damaging in the energy industry. When prices spike, demand tanks and prices drop to levels that are marginally profitable. First, the economy nose-dives on the price spike. Energy companies make big profits and distribute them, or sit on them for a rainy day (retained earnings).
Second, not knowing how long the price will stay depressed, those companies stop investing in exploration for oil, gas, and coal because the price is too low to make a profit. As soon as demand recovers, the price goes sky-high again because supply is inadequate. It is inadequate because no one dared to invest in exploration or infrastructure after the last price bust.
Energy exploration and infrastructure maintenance are very expensive, spend too much and the price stays low, you may go out of business. The same thing happens with many other commodities.
The problem is a lack of meaningful regulation to keep the tail from wagging the dog. However, the problem won’t go away when Capitalism dies, Free Enterprise and Market Economies suffer from the same disease. It can take many forms and is not limited to Capitalism. It always surfaces when the players aren’t regulated. Humans hate regulations, especially business people, and business interests always run the show. So don’t expect too much from the replacement system, by and large, greedy, corrupt humans will be running it.
Greg #7
You did a good job of chronicling the time line that raw capitalism follows on its journey to the end. Eventually, the only thing left unencumbered are the virtual, markets, that as suggested by the term “virtual,” have no real basis. Bubbles if you would; here now and POP, they are gone.
When the majority of investment companies suggest buying foreign stocks and keeping your savings in gold or a foreign denominated currency, it should run up a red flag the size of Texas. But, noooooo, only in America could this be spun as a good idea to “diversify ones portfolio.” Hogwash!
What really happened is that a whole bunch of economic terms collided in the same intersection …supply and demand, market saturation, thermodynamics, EROEI (energy returned on energy invested), net peak energy, maximum serviceable debt and most importantly, the exponential function.
Ya see, most of the terms mentioned above aren’t conversation terms, they are NATURAL LAWS that can’t be violated without experiencing severe consequences.
The most common consequence (and as certain as death and taxes) is a severe recession followed by a dandy depression of enduring quality.
Don’t look back now, but that light where we entered the tunnel ain’t sunshine.