A massive transformation in the character of the American political economy is taking place right now, unlike anything since the New Deal. When all is said and done, the state is going to swallow up another 10 or 15 percent of the private sector, and profoundly change the strategy of what remains. Socialists are in the saddle, and ride America.
More worrisome even than that is the pall of cold antipathy toward private enterprise that the Great Usury Crisis of 2008 has ushered in. Among my own personal friends and relations it has been really remarkable and disheartening to observe the bitterness these past six months have engendered. Wall Street's terrible excess, its flight over this last decade into reckless and wanton usury, has discredited not only investment and commercial banking, but the free enterprise system itself.
Usury? you say, what is this antique word? Why, it is the process by which a home worth $100,000 rises in value to $250,000 almost wholly on the back of a series of securitizations by which dozens and perhaps hundreds or thousands of investors are able to chase down a few extra basis points of yield. It is the abstraction of property into engineered mathematical finance. A mortgage (already an abstraction of debt-for-ownership) gets bundled with a mass of other mortgages, some high-quality, some middling quality, some risky; it is then sold off to banks, hedge funds, etc. as an instrument called a collateralized debt obligation, which is a fancy word for the complex new mortgage-backed bond. This bond, with its three tranches of riskiness and three tranches of yield, may be traded as any other bond. It may also be short-sold via the mechanism of another exotic security: the credit default swap. We now know that credit default swaps, derivatives on the abstraction of property, became the foundation for whole new fields of speculation. Their revenue streams were converted into new piles of bonds, which mimicked the mortgage-backed security market to produce vast new paper assets with which to trade and speculate. They became the basis for a formula by which most investment risk was measured: Ten years of market activity with this exotic security (for the credit default swap was literally invented in 1997) -- this alone became the data-set for the world's primary financial risk model. To speak this truth is to realize the depth of our folly.
And all of this frenzied speculation operated upon the assumption that property values in the United States could never fall.
Then there was the so-called shadow banking system. (Note the past tense. This system is now gone -- unless, God help us, the Treasury and Federal Reserve manage to revive it with public capital.) Normal banking, of course, finds its foundation in the individual deposits (and other short-term, low-risk savings instruments) of individual customers: the banker holds the savings of individual citizens in trust, and uses that capital to loan out to other individuals and businesses. He borrows short-term and lends long-term, and makes his profit on the difference in interest rate. Shadow banking leaves the depositor out completely, operating in securitized debt alone. The difference is a crucial one: with standard banking, the source of the deposits is by and large income from productive activity; in shadow banking the source of the short-term borrowing is simply debt securities, commercial paper, for example.
Usury. It was a vast system of usury, value conjured from the fractional increment, skimmed off the top, and inflated by means of engineered abstraction. There was little productive enterprise behind all this usury; this was not legitimate interest on productive activity or innovation. It all depended on the conversion, or pretended conversion, of physical property into mathematical abstraction -- which, quite conveniently, proved much more susceptible to manipulation than the real thing.
It is hardly a mystery that when the consequences of the Great Usury Crisis detonated into public view last fall, it would produce anger and bitterness. The tragedy of it is that the crash of a false system of wealth-generation, a false capitalism if you will, is going to have destructive ramifications for what remains of our true capitalism. Truly productive enterprise, wherever it remains, is about to get squeezed, and squeezed hard. Innovation is going to grind to a halt, or flee for fairer climes. Innumerable good ideas, with the potential to truly create jobs and wealth, will suffer strangulation in the crib.
After the jump you will find a sample of the kind of emails I'm seeing on one of my email lists. This list includes several active businessmen. Not Wall Street usurers (one of these guys has stated, firmly and repeatedly, that Wall Street is basically a parasite), but men who have spent their lives building productive enterprises, funding great ideas, turning great ideas into businesses, expanding wealth and generating jobs: capitalists in the finer sense of the word. Their analysis is not for the faint of heart.
The productive class won't feel any less incentive from a 50% flat tax than from the 39.6% plus 50 different gotchas and surtaxes that we're going to have by the end of next year. We have precious little incentive to employ now. What we will have an incentive to do is to get super-efficient and find ways to employ many fewer people.
Now, getting back to my competitive analysis stuff, I know that I've tossed this around in here before, but . . . if you have some time, paddle around in here:
Ponder being a businessperson looking to choose a site to do something - say U.S. vs. Estonia - and compare what you see at that web site with particularly what's been wafting out of Washington of late. That's the kind of notion I'm getting at with this stuff.
I just read Krugman's take on the budget. Basically, he's ecstatic. He's a guy who's been saying for years that the Federal share of GDP should be 28% or more rather than the post-war norm of 20%. He just got his wish.
That gives me a sinking feeling in my gut. That's 8% more of the economy that the private sector will be unable to direct. It's actually a lot worse than that, because at the margin, ALL of that 8% comes out of the investments made by highly-productive people.
We're directly taking 8% of the economy out of the hands of people with an incentive to maximize its utility, and shifting it to people (the government, and less-affluent consumers) with the opposite incentive.
I just lowered my personal estimates of GDP growth for the next 10 years. And they were really bad to start with.
The bottom line is that our present tax policies (in a variety of ways) are now GROSSLY uncompetitive, and it's having horrid economic consequences. We need to build a narrative that basically is along the lines of side-by-side charts and graphs showing this. "You want your 401k to come back? Well, we have to fix this."
For ordinary people who work for a living, the next ten years are going to feel a lot leaner. That's because a lot of their consumption has come in the form of leveraging assets that are rising in value: their homes and their stock-market investments. None of that is available to them anymore. They won't get a tax increase out of Obama, but neither will they see any replacement of the spending they've done with borrowed money. And they will find that meeting the burden of their existing debts will consume a far larger share of their real income than they ever guessed. (They won't be aware that this is happening, but they will find themselves asking why ordinary necessities just seem to get a little harder to afford with each passing year.)
For people in business, things won't actually be that bad. We're going to continue to share in the big revenue streams. The only difference is that they'll be coming from government business as opposed to private business.
The unintended consequences of this Presidency will put Dickens to shame.
May God not strike me dead for saying this, but the future looks bright for those flexible enough to become the government's business partner. The free-market thing to do is to go where the revenue opportunities are. We're not giving up any kind of free-market orthodoxy as far as business is concerned. We are giving up on social freedom, self-reliance, and the prerogative of the people to direct their own spending. We're also giving up on maximizing economic utility in the aggregate sense. That's why I said that we're going to be emulating China.
No, we're not going to see China growth rates, because we're starting from a much higher base, but that wasn't my point. My point is that the economy will shift from being consumer-led to being investment-led, as China's is. And as with China (and with the US in past decades), the business cycles will get violent again, because that's the nature of investment spending, as opposed to consumer spending, which is much smoother. Watch consumer spending as a share of GDP. In the US it's now 72%. In China it's maybe 40%. Watch for it to drop here.
The fire that I fear these turkeys are playing with is indeed the assumption that a brain-drain could NEVER happen to US. It could, because I have to keep pondering (very unhappily) the choices I might soon face - basically, to stay here and get forced to work on some useless, watery, government-backed-and-approved waste of time, or basically burn down my life and go off to a more congenial jurisdiction (basically into professional exile). I hate the thought, but if that (shockingly and horridly) becomes the only way to keep working on real innovation, I will have to do it.