Let me start by saying that despite the suggestiveness of the heading of this posting, I am not announcing a Road To Damascus style conversion to Marxism, socialism, or even social democracy. I remain a cultural conservative with a commitment to politically and economically libertarian values (much as I dislike the word ‘libertarian’).
But I have always had a degree of sympathy for protesters. Aside from the fact that they are needed for the continuance of a healthy democracy (as is the tolerance of protesters – by tolerating them so heartily as I do, I am actively contributing to the health of our pluralistic society, no?), I admire the Quixotic idealism of protesters, even when I think they are way wrong or being just plain silly.
At the time the Occupy Movement were active several years ago, after the Global Financial Crisis, I thought that they were either way wrong, or almost crazy. But whilst I am still a believer in free market capitalism and the idea known as ‘democratic capitalism’, I cannot sit around unquestioningly accepting the current practices of reserve banks without thinking that there are a few things which are very wrong, and which require me to at least ponder whether the people in the Occupy Movement had a point (rather than feel inclined to call out at them something witty like “Hey you, get off the drugs and get a job!”).
Skepticism is not a bad thing, and it does not mean that you abandon the beliefs or values that you try to adhere to. I have been skeptical, to varying degrees, about religion and the existence of God since I was 15, yet I still tick the Roman Catholic box on the census form and self-describe as Catholic in the profile for this blog.
Similarly, I can and should be skeptical about some of the tenets of capitalism, in theory or in practice. Especially at the moment, when not only are we facing the most serious economic crisis since the Second World War but I have significantly more in savings than I did at the time of GFC or any of the other financial downturns since 1987.
‘Economic rationalism’ is a good starting point. This is the assumption that individuals are going to behave in a rational and self interested way, and that cumulatively, the synergy of enlightened, rational, self-interested individuals is going to result in the best economic outcomes for the whole.
On the whole, this still remains better (both from a moral and a utilitarian perspective) than what the main alternative is – central planning. After all, if you cannot trust individuals to make decisions which are the best for themselves, can you trust one person, or (even worse) a committee of people, to make better decisions for everyone else? What makes the central planner cleverer or more rational than each other individual?
But that is the fallacy both of Capitalism and Communism. Both doctrines place great weight on human rationalism. Capitalism, in that individuals through rational decision making, are going to make separate decisions which cumulatively are going to result in greater riches for all. Communism, in that all individuals will form some sort of collective consciousness that will result in a paradise.
As I have observed in a previous posting, I am skeptical about rational economic man. Markets are mostly driven by fear and greed, as I am finding out from my daily observations, and the greed is mostly just ‘fear of missing out’. The markets should be lower than a Chinese coal mine right now, but they are bouncing around the 5000 mark (I am talking the ASX 200 here, not the Dow Jones).
Let’s take another fallacy of the capitalist system (or of human nature) – ‘ethics‘ – ie that people are going to almost always behave ethically in their economic dealings with others. I am a very trusting person on the whole, and I do not want to change that aspect of myself. But when you look at the financial edifices that fell apart in 1987 (why were some instruments called ‘junk’ bonds?) and in 2008 (‘subprime’), not so close inspection reveals that many people put avarice in front of ethics, and that whilst Bernie Madoff went to gaol, so many others who did not behave well seem to have gotten off Scott free.
And nothing has been done to fix those sorts of ethical issues – we just allow more complex financial instruments to develop, which few people understand.
Even P.J. O’Rourke, great defender of free markets, conceded on a visit to Australia after the GFC that there were ethical problems.
Then there is the assumption of ‘free‘ markets. To quote Team America, albeit in a totally twisted context, ‘Freedom isn’t free’. Not only do governments pursue policies which regulate or manipulate markets and currencies, but reserve banks do so on a major scale.
Which goes a long way to explaining what is going on at the moment financially.
Let me qualify this by saying that whilst I am very good at managing my personal finances and share investments, I do not have an economics degree, or any training in finance or accounting. I have self-taught myself quite a lot from remaindered textbooks and from reading economists like Galbraith, Von Mises, Von Hayek, Friedman, Stieglitz and Levitt. But in the past few weeks, whilst trying to make sense of bond markets, currency moves, interest rate cuts, and commodity prices, all whilst trying to work out whether or not to put my money back into the share market and if so, when, I have been made starkly aware as to exactly how ignorant I am about finance.
[As Socrates would put it, true wisdom means realising that you know nothing. This makes me wise.]
Reserve bankers are very clever people. They understand all these levers which they can pull to manipulate markets, and how each decision will play out. It is the rest of us who get befuddled and who end up scratching our heads and wondering what is going on and what should we be doing.
What is going on is that governments and reserve banks worldwide, but particularly the US Federal Reserve, are pursuing policies which effectively mean that money is being printed. This is not physical money, as in the Zimbabwean or Weimar German variety. It is conceptual money, like what you have in the bank rather than under your mattress.
There will be several effects of this money printing. One is inflationary. The money you have, whether in the bank or under your mattress, is going to lose some of its value faster due to higher inflation. Low interest rates will mean that you cannot offset this inflationary movement through earning interest in the bank.
Another effect is to prop up asset prices. As money is going to be worth less due to inflation, shares and other assets (such as investment properties) will not decline in value.
A third effect is to potentially spur people into riskier asset classes. If bank deposits are getting eaten by inflation and low interest rates, but the share and property markets are being stabilised by money printing, then those becomes a safer place to leave your money – even though shares are a higher risk proposition for most people and property itself is a very cumbersome and sometimes even more risky investment.
Which leads to the question:
Who is it that benefits from those interventions in the market that inflate prices? Is it the average mug punter in the street who is struggling to pay off their mortgage or save for a house deposit? Is it the over-educated bum hipster barista who disdains capitalism and thinks Che Guevera was a good guy (he wasn’t, by the way, he was a murdering butcher) and who wants to hop on their fixie and go to a protest rally? Or is it someone with a large share portfolio, large salary, and a mansion in Toorak (who has been able to exploit tax loopholes to pack away a large amount of money into the family trust and their superannuation fund)?
It is more likely to be the Toorak mansion owner, although I would hazard a guess that a mere multi-millionaire has less to gain than a billionaire does.
Is it any wonder that the Occupy Movement have something to get angry about? Inflationary government interventions are constantly occurring that transfer wealth from the poor to the mega rich. This is not free market capitalism. It is not really any form of capitalism. This is plutocracy, the state sponsorship of the rich.