BALTIMORE – When we left you Friday, we were in the middle of describing the crooked hind leg of crony capitalism.
We used billionaire businessman Wilbur Ross – Donald Trump’s pick for the Department of Commerce – for illustration purposes.
Not that there is anything wrong with Mr. Ross. He plays the game, just as everyone else does. He’s particularly good at it.
But today, we’ll look at another Olympian money man – the chairman of Trump’s new Strategic and Policy Forum and private equity magnate, Stephen Schwarzman.
We remind readers that we are criticizing neither Mr. Schwarzman nor Mr. Trump.
We’re just trying to understand how it works. Then we’ll take a guess about where it will lead.
Also on Mr. Trump’s new advisory board – which is supposed to help the president-elect bring jobs back to America – is former General Electric CEO Jack Welch.
Welch could provide an equally rich illustration of the “financialization” trend. He took a Main Street manufacturing and engineering firm – one of the most admired in the world – and turned it into a bubble-finance company.
After 600 acquisitions, GE was heavily in debt and deeply in the finance business. GE Capital – the company’s financial services unit and the tail that now wags this dog – has 35,000 employees and capital of half a trillion dollars.
GE shares sold for $60 at the beginning of this century. Now, after the biggest wash of free money the stock market has ever seen, shareholders have been soaked; the stock is worth only half what it was in 2000.
Meanwhile, Jack walked away, taking with him the largest severance package in history – valued at about $420 million.
As far as we know, Mr. Welch didn’t invent anything. He didn’t sing a hit song or star in a blockbuster movie.
He was a salaried employee of a well-established and profitable business… risking neither time nor money.
After Mr. Welch was finished with it, the business was in worse shape than it was when he took over at the helm. And yet, he ended up with a fortune estimated at more than $700 million.
The only real revolution in human affairs began thousands of years ago and continues to this day: the gradual replacement of brute force with market-based persuasion.
It is never all or nothing, of course. Politics will always be with us. So will markets.
A business that becomes “political” is a danger to its owners. Employees stab each other in the back, fight over choice offices, and scramble for a place in the corporate hierarchy.
More important, they take the company’s eye off the ball and its vital capital out of the business.
That’s what happened at GE.
Properly functioning free-market economies flush out these companies through the process of “creative destruction.”
“Political” businesses can’t compete with companies that are focused on satisfying their customers and investing for the future.
But sometimes, entire economies become more political… and the people and companies in them react by becoming more political, too.
That is really what happened to the U.S. economy over the last 40 years.
Smart hustlers teamed up with the government. And together they used the feds’ fake money, the feds’ fake savings, the feds’ fake interest rates, and the feds’ labyrinthine legislation and regulation to hijack wealth from the honest Main Street economy.
So, when we talk about how the U.S. economy was “financialized” after 1980, what really happened is that it was “politicized.”
As politics became more pervasive, more of the nation’s output was up for grabs as spoils of politics.
Curiously, even the political system itself becomes more political.
It used to be that the Democrats and the Republicans held each other’s ambitions in check. The Democrats were in favor of wealth distribution at home. But they didn’t like to see the U.S. government throwing its money around overseas.
Republicans, on the other hand, considered the federal government a devil at home but an angel overseas.
Now, both sides of the aisle have come together with high fives and bear hugs…
…the government is an angel everywhere, they’ve concluded.
So today, at home, 160 million Americans receive money from the feds… half of the nominal income gains in the last 16 years came from the feds’ “transfer payments”… and there are far more people getting money from “the government” than there are voters.
And overseas, according to the Watson Institute at Brown University, America’s hapless romp in the Middle East and the associated War on Terror has now cost $4.8 trillion.
The institute goes on to remark that the wars have been paid for “almost entirely by borrowing.” And that, by 2053, including interest charges, the total bill will reach almost $8 trillion.
Distributed among the voters, this would work out to about $61,538 apiece.
But wait… We’ve run out of time and space, and we haven’t even gotten to Mr. Schwarzman.
BY CHRIS LOWE, EDITOR AT LARGE
Oil is breaking out… big time.
Today’s chart shows the price of a barrel of Brent crude oil, the international benchmark.
Following news that Russia will join the OPEC nations in cutting back on production, Brent Crude has shot up to $56 a barrel.
It’s the highest price for a barrel of the black goo since July 2015.
Why the Trump Bubble Must Pop
The Trump bubble will disappear as fast as it inflated – and it will be all downside from there.
Don’t Bet on the “Trumpflation” Theme Lasting
Since Election Day, U.S. stocks have been rallying… bonds have been selling off… and the dollar has been climbing versus its rivals. But history says the post-election rallies tend to not last long…
Venezuela Joins the Global War on Cash
The Venezuelan government pulled its 100-bolivar bank note out of service. The government says the move is to combat crime. But the real reason is to try to stem the country’s 2,000% annual inflation rate.
On Friday, Bill kicked off his new series on how crony capitalism works. And it’s prompted a lot of great feedback from Diary readers…
Great shot at [Trump’s pick for Secretary of the Treasury] Steven Mnuchin. Even more interesting is that, if you follow your own Bonner Private Portfolio, [analyst] Chris Mayer recently picked up a boatload of Citibank shares for your Family Office stock portfolio… allegedly because Mnuchin is a financial genius. So, you can’t have it both ways… Throw me a bone here. P.S. I still love reading your stuff.
– Leland B.
Instead of building a wall along the 49th, we should build a prison camp up north. Most of our politicians belong there. We are not living in a time where you can be a proud Canadian!
– René S.
I love the Canadians who are so concerned about Donald Trump. They should be worried about the socialist idiot they elected. If you are going to complain about our electorate, you have to prove yours is smarter. Based on what I have seen, that might prove difficult. Enjoy the socialism.
– Hipolito C.
Like you, when we were first married, my wife and I bought most everything from Sears or the catalog. In fact, while in the army and stationed in Japan (1966 to 1969), I was the only one on a base of about 400 families that had a Sears charge card. I was a captain making about $600 a month, but my monthly Sears bill ran into the thousands. In fact, I spent so much that Sears started giving me a 10% discount on my entire account.
– John O.
Currency expert Jim Rickards is absolutely convinced that the U.S. dollar will begin to crash before the end of the month. And that it will send gold prices soaring. Before touching gold, Jim says you should read The New Case for Gold.
In it, he shares his top gold advice, including why storing it at home could be a huge mistake. Go here to learn how you can get your free copy of The New Case for Gold.