Democracy And Free Markets: Is That All?

Recap and Refocus (June 8 – June 15)

I believe people voted for Bush because of a deep sense that he was more likely to protect the gains of the Clinton years (probably not realistically attributable to Clinton nor the democrats, and the gains were largely unsustainable "bubbles") by the use of force, taxes, and the national guard, if things get out of control, than would have Al Gore.

Looked at in the broad sweep of history I think that what is going on is the end phase of Western Empires. (starting with the discovery of American gold and silver – Portugal, Spain, Holland England and the US, each lasting 100 years or so and the center moves west, and now back to Asia, where is was in 1500). If we manage it well we could create a very interesting world grateful to a United States that balances humanity and technical/economic activity. If we fail to recognize that we are the tail-end of an imperialism of the gun and the sword that has cost 50 million lives, counting only since WWII, and one or two billion shattered life stories, our lack of sensitivity and compassion is just not realistic enough to prevent resentment that is a threat to our security – and absolutely devastating to our identity and sense of well being. We need to deal with the problems of resentment and blindness that the empires left behind in their creation and withdrawal. Like most empires in history some of our best will see the problem (like the Twentieth Century Fund [conveniently renamed Century Fund] and the Council on Foreign Relations, perhaps) but the majority of our talent is part of the problem and cannot lead our people in a path of graceful decline with compassion and understanding for the desperate situation of much of the world's population. At that point we no longer have a claim -- the claim that goes through our entire history -- of being privileged among nations. The loss is extreme, and we are in the middle of it, and it means downsizing the value of each of our lives.

I have tried to argue that there may be no alternative. The realities of declining major power are terrible, like the wolves pulling down the faltering old stag. Running an empire under such conditions, say the historians is not an attractive proposition. Do we have resources in our national background, the covenant with the people, that can work to our advantage? But the origin of our traditions – individualism and covenant are Puritan and the attempt to renew hose roots exacerbates the clash of civilizations.

"Democracy", in what I am calling "managed representative democracy" is failing our democratic instincts for the full development of every citizen, and the free market has become a mechanism of wealth transfer to a few of us rather than a really smart way of meeting real human needs and spreading opportunity. This feels to me like a failure of leadership that, while par for the historical course, does not live up to our hopes.

I probably sound a bit angry. I know myself well enough to recognize that it is a phase I go through the when I worry a problem I do not understand. I try to work myself into the feel of it, how the texture of the historical moment plays out in the lives of people I come in contact with.

So part of the problem we face is not unlike musical chairs. Thus the democratic process and the free market process are under great pressure, and for those playing either "winning" will be the most important consideration. Everyone is toughening up. There will be some apparently bright spots. "Productivity", a favorite of Wall Street, will go up -- simply because producing the same amount with fewer people is the definition of productivity increase. The applications of new technologies will show some real payoffs as companies (almost all corporations prefer to sell to corporations rather than the people) jockey for an advantage for the very real short term gains. Meanwhile unemployment goes up, and we face, with increasing probability, mortgage defaults, deflation, lower civic budgets, rising crime, and lowered morale. Have you talked to your Mayor recently, or your state representative?

We are in a fateful time calling for intelligence and grace but, as so often happens in history, a group of oligarchs, smelling defeat in the relatively short term (They like going to Italy and the dollar is down 30% against the Euro) are pulling out all stops to get as much value out of this economy as they can. Part of the fight over capital gains is so that appreciated stocks (much actual holding still shows appreciation) can be sold without taxes. Part of corporate strategy is to cut all costs that would build towards a future in order to get out maximum profit now.

When a team is winning, all the players and the staff look good, but when losing starts, all eyes look for weaknesses. So I think we have very real problems. But our managed representative democracy may not be able to hold it together. People who earn $500 a month with rising expectations are much happier than people who earn $5000 a month but have or anticipate diminishing expectations.

If the rising curve had continued past 2000 We might have kept a Democrat in the presidency, we would not have had the fall of Enron or the whole corporate scandal because they would have continued to show profit in selling their major commodity--stocks. Remember how they kept saying inflation was under control? Not stocks, which is where inflation was, big time. Smart money was anticipating problems, both through international competition and the narrowing of the American economy, losing its productive base overseas, and debt problems. It would be a long conversation to justify that conclusion, but I think we know enough to say at least it is plausible. Through it, the American morale has been suffering, and looking for scapegoats, and it costs us plenty. The rise of the right wing of the Republican party was in part due to the hollowing out of American rural culture. At one point, 1997, I was hired by the then high flying ABB to explore the cultures around 26 factories they had just purchased from Westinghouse. Those towns were a mess with all too obvious foreign companies with their alien logos on buildings, and a stressful climate for local business. Resentment was high. In one town I was taken to the "Somewhere Else Café".

We have been an emerging empire throughout this period. We currently spend 40% of the entire world's military budget. But the numbers are running against us. Declining percentage of total global output, for fifteen years we have been about tenth in our level of factory wages, Americans working one month more a year than counterparts in Europe and, I think, Japan.

What drove the movement of the American economy from say 1890 to 2000 [the real rising power in this time frame have been the US and Germany—look at the implications for helping to understand the century] was a rising wave of economic strength based on national resources, wars, immigrations and institutional flexibility. But rising debt of individual consumers and the nation, and the easy spread [by our business leaders and the Commerce Department] of American industrial technology to foreign production sites set the stage for internal decline and, at the same time, of rising competition from traditional societies with surprisingly vigorous discipline.

Given all this I think there are two worthy causes. First is renewal, and the second is modesty. I think we need to do both.

But we cannot let go of disciplined thinking. Here is a quote from a newsletter that became an Observer article.

"What the Protesters Got Wrong argues that the recent era of rapid globalization has improved the living standards of many of the poorest, not worsened it."

This is ideology, not logic.

1. Note that it does not say what happened to the people who were not improved, nor how many, or what percent that is.

2, And it equates money with living standards and living standards with the quality of lived life, even if the people have moved from a low cost community based village to a high rise surrounded by parking and your children are drawn into gangs. It is important that life liberty and the pursuit of happiness were words with powerful referents (see Gary Wills Inventing America for an analysis of the phrase I the Scottish Enlightenment of Adam Smith, Ferguson and Hume).

With logic as slippery as this (learned behavior) anything can be proved. The tools for good thinking are all around us, but the fog and conventionality are paralyzing.

So, end game, musical chairs, possible inevitability – and renewal and modesty.

Economic Strategy and Market Monopolization

Yes, inflation in stocks—but they are not a staple and we could spend a great deal of time discussing who owns stocks today with the huge investments by pension funds and mutual funds, funded by middle America and the number of new companies funded because of the speculative bubble. The excess was beneficial to many entrepreneurs. The madness of crowds feeds speculative bubbles and even the so called smart money bought into it and left a lot of money on the table.

To whom are these people in the know now going to sell their shares to realize capital gains? Who ever it is will then become the new owners of corporate America. Who then are the influential, the ones, with the capital gains, the new owners, or the managers who now run the risk of being taken over because of lower share prices and higher cost of capital?

Rather than debate the stock market because I think it is only relevant to the main discussion because of expectations created and how people react when those expectations are not met, let me get to my primary question. The situation today is similar to the late 1920’s with regard to debt levels, speculation in both stocks and real estate, the power and influence of major corporations, corruption in both government and corporations, and income disparity. Some significant differences are the size of the middle class today in relative terms and the effects of globalization. We all know about the "absolute disaster" that followed and the country’s move toward socialism, why fascism this time?

" .. Why fascism this time?" The US is a bigger part of the world, the numbers of people, dollars; technical military reach is much greater.

The temptation is greater because more realizable with 3CI and the need great for control, (suppression of dissent, external and internal).

The trend towards the state/business alignment has always been there, balanced by the sheer size of the country, and the independence of local politics. Note that some of the gun lobby is based on the need to retain that posture. But there never was anything like Ashcroft. J. Edgar Hoover was bad, and the country has always had its fascist elements.

And I am not sure it is this time. The election of '08 will be fairly critical - either we are doing much better, or the desperate control types will not allow transition.

But the 04 election is a race between the administration coming apart and the Democrats not being able to field a viable candidate. There is much uncertainty. The future will be different. Alternative views, other than just more of the same, would be useful. I did post the new GBN scenarios in another topic.

I do agree that we are perhaps facing a period of significant change. I think that it is more a result of the financial excesses of the past decade than some diabolical plot to rule the world by corporations. A recent example would be Japan where there is much more cooperation between business and government. The result of their excess has been a severe and long lasting recession with negative consequences for all constituents. No one is bigger than the market. Corporations do not benefit from a weak economy, which is the most likely result of the either intentional or inadvertent moves that we have seen recently. For the trends you see in government and business to be intentional would require the type of long-term planning that neither is very good at. The fact is both at times suspend disbelief and logic and join the madness of crowds rather than orchestrate it. I wouldn’t be surprised to see the two diverge when the economy weakens and the finger pointing begins.

Douglass Carmichael
1. I was intimately involved in several .com's that did go public in order to sell stock. There was always the "hope" that the market would catch up and the stock price would level off "later" and be supported by real but modest sales.

2. I have never suggested a diabolic plot, not even very conscious: just adaptation to experienced circumstances in the absence of countervailing cultural commitments.

3. I am not sure they were financial excesses if the curves of predicted business activity prevailing in 98-99 had been maintained.

But in fact that activity was in part fueled by crazy Y2K spending and congress allowing capital purchases to be written off in the year of purchase - as part of Y2K remediation. That was "successful" (never hardly to be heard of again is another wonderful story) and capital spending went into a rapid decline (system integration still needed to occur in 2000, so the fall off was not too obvious, but NASDAQ turned down before the end of January and the DOW not far behind.) The result was hat switching, fiber and support systems began the kind of decline that made people very nervous. Reasonable projections of logarithmic increases were dashed by circumstances that were not foreseen. The high PE ratio argument was not a good one, because, as I've said, the real driver was creating and selling stock, not product. PE was not considered too high, it was considered irrelevant until "later".

4. Japan of course fits because it is not very democratic (McArthur and then the cold war locked Japan into the kaibatsu system) and so is a proto fascist government, albeit fairly benign. Japan is hurting in some ways but not others. It still has I think the second highest (after China) balance of payments surplus with the US, and with the world. It bought heavily production facilities in se Asia during the financial crisis there. Japan holds an amazing amount of wealth. What it doesn't have is a US style welfare system, but it does have an Asian style one: very good education, infrastructure, health (though that has is craziness eastern style).

5. I agree that the current moves are anti-business - in part. The companies that are likely to go for the fascist solution (of course disguised and called many other things) are the staid old style companies that are heavy on traditional control oriented planning. The newer style companies that thrive on change and innovation ought to e aghast, especially when we add in the smearing of the US image - as if IBM had turned out to b racist and run gambling casinos. Not good for new style business. And that is why the new style (Silicon Valley prominently) has been Democratic rather than Republican.

Long term planning - I think they are fairly good. Shell, DOD... Morgan... And what about Carlyle?

I am always for disaggregating. When you say "Corporations do not benefit from a weak economy", here are certain kinds of companies - I am following a Seattle VC firm very closely that is doing this - depressed values have lots of opportunities. I am probably making the same kind of "all A's are B's" kind of logic, but I am cautious using the word trend the sailboats in the Saratoga passage tend north, but when the tide runs, the sum of the trend and the tide can be negative.

On divergence: Watch the Telco’s and their debt problems. And banks if mortgages start going, I think the degree of mutual support will be staggering.

Those days were every bit as excessive as past speculative bubbles. It was virtually impossible for business activity to meet predictions.

Y2K had less to do with the bubble than the "new economy" argument as an explanation of why the old rules no longer applied. Most dotcoms had nothing to do with Y2K as much as replacing "old economy" bricks and mortar.

The similarities between market psychology and the trend of the nation are interesting.

1. Rising market creates paper wealth.

2. Increased participation by larger segment of the population.

3. Suspension of disbelief and complacency as long as the good times roll.

4. Shouting down the few dissenters because they just don’t get it.

5. Reality far more devastating than anticipated.

6. Finger Pointing (Stock Analysts, Corrupt Managers, etc.)

7. Increased regulation and oversight.

8. Recovery? Not yet and look out for the next shoe to drop in 12 to 24 months. It will be a doozy.

Companies that are able to make money in weak economies such as Vulture Funds are a small segment of the over all economy and their assets do considerably better when recovery happens. They have little impact on the trend which is also why they are considered contrarians investors.

It is inconsistent to focus on next quarter’s earnings and plan long term. Yes there are exceptions. If our government was good at planning long term rather than reacting to current circumstances we wouldn’t have tax policies that exacerbate our current problems and other policies that are leading us into that which you fear.

We agree that the makings for a serious problem are there. The percentage of personal income required to service debt is staggeringly high. The off balance sheet exposure of banks through derivatives is frightening. We have allowed ourselves to get into this situation for many of the same reasons that drive the stock market rather than from some coordinated effort. When the economy finally does crack big business and the wealthy will take the blame.

Is it just human nature not to be proactive and make minor corrections along the way or must we always over correct to crisis swinging from pillar to post or right to left if you prefer?

Previous Page          Next Page

top