Can Trump End the Reign of ‘Bubble Finance’?

When we left you last week, 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.

Bubble finance

We remind readers that we are criticising 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 ‘financialisation’ 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 of 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.

That’s financialisation!

‘Politicising’ business

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 US 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 US economy was ‘financialised’ after 1980, what really happened is that it was ‘politicised’.

As politics became more pervasive, more of the nation’s output was up for grabs as spoils of politics.

An angel everywhere

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 favour of wealth distribution at home. But they didn’t like to see the US 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.

Stay tuned…


Bill Bonner,
For Markets and Money


From the Archives…

If China’s Economy Is So Strong, Why Is Capital Fleeing?
By Greg Canavan | 12 December, 2016

Welcome to the World of Stagnating Wages and Rising Unemployment
By Vern Gowdie | 10 December, 2016

The Blind Leading the Blind
By Vern Gowdie | 8 December, 2016

How the Deep State Cronies Steal from You…
By Bill Bonner | 7 December, 2016

Understanding the Crude Oil Short Squeeze
By Jason Stevenson | 6 December, 2016

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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