Saturday, October 11, 2008

Capitalism/financial crisis tutorial Part 13

Here I will teach you to understand that the definition of "capitalism" is not the stock market.

As I listen to commentators and their analyses and opinions, even the ones I respect make a very fundamental flaw. They mistake one tool of capitalism-the stock market-as actually "being" capitalism. That is not only false but it is dangerous and exactly why the world is in this mess. The stock market is not capitalism. In fact, capitalism can flourish in a country where "stocks" and the 'stock market' were never even invented.

Let me repeat the true definition of genuine capitalism. Capitalism is the selling of surplus goods and services in order to obtain cash. By surplus I mean goods and services that are beyond what an individual or family needs for its own survival (subsistence). Thus a farmer who sells corn beyond what he needs to feed his own family, in order to obtain cash, which he can use ("invest") to buy more goods and services for his family is a capitalist. Thus, if you had a country that was comprised only of people who grew their own food, made their own clothes and built their own homes, and then sold "extra" of whatever they made in order to raise cash by which to obtain other goods and services would be a totally capitalist country.

That simplistic and pure form of capitalist country would be, therefore, a genuinely capitalist country without banks, loans, interest earned or paid, corporations, financial instruments (such as stocks) or the market in which they are bought and sold (the stock market). You can have a totally pure and successful capitalism without a single bank, stock or interest payment in the entire country.

This is one reason that Communists used to call western countries and their people and allies "capitalist tools." They actually correctly saw that the tools that people invented to support their theoretical (but warped) capitalism have taken over, becoming the "definition" of capitalism and smothering the flourishing of genuine, traditional capitalism. In other words, westerners actually think that capitalism is defined by one and only one of its tools, the stock market. Communists were able to laugh at capitalists and make insults based on that truth, without even realizing how right they were, LOL. See, Communists (not to go too far astray on a political tutorial, but bear with this diversion for a second, because it is constructive) actually in their heart of hearts remained in touch with a truth of genuine capitalism that the western capitalists themselves actually forgot and abandoned once they surrendered themselves to "make a killing" capitalism rather than "make a good living" capitalism. The original Communists actually held onto one of the foundational necessities and "ideals" of pure capitalism long after actual capitalists forgot and abandoned it. That is the idea that there is an individually worked but collectively shared mechanism for elevating all people to a good subsistence level, and then creating surplus to raise everyone equally to greater and greater standards of living. Of course Communism is such a disaster that it did the exact opposite of what they "aspired to." But this is why Communism had such a charm for many people, because it correctly observed a fundamental flaw in the advanced forms of "capitalism" that had replaced true fundamental capitalism. Maybe some day I'll blog about where Communism went all wrong, but all you need to do is observe how Russia and China are self correcting the misassumptions and abuses of Communism to understand its flaws.

That's one reason I always had a real giggle over some of the standard insults by Communists. No one, either the insulter or the insulted, realized some awesome insights contained in the insults. Forbes used to tout their motto as "Capitalist Tool," derived from that insult, thinking they were being really clever. The laugh is on them, though, because Forbes, like all westerners, are subservient to "capitalist tools," just like robots who have taken over their makers. So even the great champions of "capitalism" do not realize that they have genuinely and honestly forgotten what true capitalism really is and how to both achieve and maintain it. Everyone, wealthy, middle class or poor, educated or uneducated, thinks that capitalism=stock market. That is totally an error.

The stock market, if one truly understands capitalism and applies the definition that I have provided, is simply one place and one method where "cash is obtained for surplus." Thus, westerners have taken one method and one place where the subsistence guy sells his surplus to obtain cash and now declared that this one market place is capitalism. They no longer even acknowledge the existence of subsistence and surplus nuance (or reality) in the economy, which is the actual definition of capitalism. All they call "capitalism" is the raising (or losing) of cash in the stock market. Ye gads, it is no wonder that both the average person and the so called experts have messed up this economy so badly. Yes, the average person must share blame with the masters of the universe, though I'm not trying to be mean, but if everyone "buys into" a false and greed oriented definition of capitalism, everyone must share the blame when it doesn't work the way it should, and it eventually, like a snake, recoils and bites both the handlers and the supportive bystanders.

Thinking that capitalism equals the stock market is like a person who believes in a fad diet that is comprised of eating one and only one food, every meal, every day. Not only is that in error, but the person who eats only one food forever will suffer illness, breakdown of the body, and death. Likewise, "capitalism" that is comprised of only the "stock market" causes the entire concept and reality of capitalism to become ill, have breakdowns, and, indeed, die.

Whether you own stock or not, each and every American is enabling this "single food" perception that the stock market "is" capitalism in total. Why? Because all of selling, buying, marketing, and operations of every man, woman and child and their life necessities and pleasures are run by the "robots" of "how much stock dividends pay." I know, I've seen it from the inside. No one makes sane decisions about job creation, hiring, firing and product development anymore. Virtually ALL decisions in the USA and much of the Western world is made by total consideration of how much people will make on the stock market as a result. It used to be that all the average person had to worry about is whether people will make a wise investment or a foolish one based on having enough information and the good will of people who are the decision makers. However, some years ago companies went into actually provoking foolish seeming decisions in order to manipulate stock movements and thus either gain after losses or in collusion with "competitors."

Here is an example. Many of you have heard about "derivatives." I first met developers of derivatives when I worked for a certain bank, JP Morgan. At the time, less developed countries (LDC's) were in a debt crisis. Western countries had lent far more to the poor countries than the poor countries could ever pay back. There was a great pressure in the world for "debt forgiveness" (something we still hear about as an issue today). So I learned that a group of derivatives developers found a way to be helpful and well meaning in this regard. They developed a financial "instrument" that packaged debts that could not be repaid and sold them for a fraction of their face value. In other words, they invented the means by which debt could be forgiven and the remaining debt transferred into a capital raising tool that was discounted to levels that the LDC's could handle. So "derivatives" actually came about as a method for handling certain risks and where "special handling" is needed, and thus they have a good purpose and a place in the market.

But not too long after that an "invent a new game at the casino" mentality took over those in charge of derivatives. They not only invented new derivatives for bizarre reasons, but they "created" the "need" for the derivatives in the first place. For example, imagine if the LDCs became poor because some banker envisioned making money by inventing a derivative for that reason. That's not what happened in the LDC case, but I want to use that so you can envision more easily what happened next. Developers of "new sources" of profit in financial institutions started looking at ways to if not cause a crisis, imagine or invent one, and then sell those derivatives to investors just as if they were inventing a new game of risk at the casino. So "good" derivatives became polluted by derivatives that were invented to create and then "manage" "risk" that was often unconscionable to take in the first place. This will help you to understand the frenzy in "mortgages based" derivatives that have imploded and tanked the economy. People invented ways to "make money" by taking both deliberately and sometimes accidentally and stupidly stupendous "risks." Some purely looted, knowing full well that someday the derivatives market in their area would collapse. They don't care because they took the money and ran several years ago.

Depressing, no? Yes.

So you see, whether you are an auto company, a fast food company, electronics manufacturer, software developer, or what have you, you rarely make a decision based on true capitalism anymore, the capitalism that allows the poor to join in everyone to raise their standards of living and their family prosperity. You rarely think about what jobs our country needs, what products we need, and how to keep prices low, and what is for the greater good, and how, in return, you and the rest of the company executives "make a good living." You look at how to make a killing and what is for the best of the holy and sacred "share price," "dividend," or your "off the book profits" (such as derivatives). And if you are the average person, you bought into that mentality and enable it, some of you willingly, but many of you have been coerced into a corner, because that's the reality in which we operate. You try to be good and have a savings account, but almost like magic someone makes a decision somewhere that raises prices and you have to drain your savings and live on charge card. Trust me, I know, and it ain't an accident. Like I explained in a previous tutorial, if this were true capitalism you should be able to buy a good house for $17,000 just as you could forty years ago. After all, doesn't "progress" bring about new inventions and techniques to do faster and better what used to be expensive and laborious years ago? Of course. For example, when my family flew to Germany in the 1960's economy tickets cost over $3,000. What would you think if over forty years the plane ticket prices went up to $12,000? Well, why have you accepted that regarding housing, food and fuel? True capitalism is the enemy of inflation and serves only to elevate the numbers of people who share in "making a good living," not elevating the prices of making that good living from year to year, decade to decade. True capitalism creates jobs, and does not export them (they may very well create additional jobs that are in other countries, but those are net additions, not subtractions from the domestic job force). The "Harvard Business Review" might as well have been "Satan's Journal," starting in their 1980's with their "capitalism on crack" ideas like "re-engineering" and other devices to eliminate domestic jobs.

I hope you find this helpful. Autopsies are often very instructive, though not very timely.