How Capitalism Dies

Today, we’re going to tell you why America’s middle class is getting poorer. Or put another way, we’re going to show you how capitalism dies.

The Dow fell 141 points, or 0.8%, on Friday. Gold closed the week below $1,300 an ounce…but not far below.

Two comedy acts appeared last week: President Obama’s State of the Union address and Mario Draghi’s QE announcement.

Mr Obama claimed credit for a ‘recovery’ that has left the typical American poorer than he was before. And not only is he poorer, but also he is more dependent on the very people who engineered the phony recovery. (See below.)

Mr Draghi followed up with a series of one-liners, the gist of which was that he now proposes to save Europe from the spectre of inadequate inflation.

ECB to the rescue

Who could take Draghi seriously?

After all, what’s wrong with stable prices?

Nothing at all!

The 19th century had fairly stable prices…as well as the fastest GDP and wage growth in human history.

Serious consumer price inflation didn’t begin in the US until the 1970s, when America’s new flexible, adaptable, expandable, super-duper fiat money came into service.

Since then, the cost of living in the US is up roughly 600%. And the rate of economic growth has fallen.

Mr Draghi did not mention these facts when he announced his euro-debasement program. But it hardly mattered. The real purpose of eurozone QE is the same as the real purpose of the US version — to prevent the cronies from getting what they deserve.

They own hundreds of billions of euro worth of European sovereign bonds — now trading at the highest prices and lowest yields in recorded history.

Many were bought with negative yields.

And now, with aging populations, rising debt levels, gummed-up regulations, rising living costs, rising taxes and falling revenues, there is almost no way these bonds can be worth what speculators paid for them.

How are the insiders going to get their money back?

The ECB to the rescue! It promises to transfer $1.3 trillion to the financial elite over the next 21 months — buying sovereign bonds and other slippery obligations at the rate of €60 billion ($67 billion) every month.

Not that we are complaining; we’ve got a sense of humour!

Besides, we’re card-carrying members of the 1%…and happy to get a share of the loot. If only we had bought those Italian sovereign bonds!

So, there you have it…

In the New World, the commander-in-chief claims credit for something he didn’t do. In the Old World, the central-banker-in-chief claims to be doing something not worth doing.

Neither is doing what he should do.

America’s disappearing wealth creators

We chuckle…and move on.

We were supposed to tell you about how it was possible for the average American to get poorer at a time that should have been the most productive and prosperous ever.

We won’t disappoint you.

Who makes people better off? President Obama? Mario Draghi?

Can you think of a single thing a politician or central banker has contributed to the welfare of the world?

We can’t.

Did they invent hamburgers? Did they pave roads? Did they produce wheat or lay bricks?

We’re exaggerating to make our point. They are, no doubt, amusing at dinner parties. And they pet their dogs.

But sticking to the material world, the world of getting and spending, has a president or central banker ever put in a decent day’s work or added a single centime or farthing to the nation’s GDP?

Not that we know of.

Then who has?

If we had to put a title on this little discussion, we might call it: ‘America’s Disappearing Wealth Creators’. Or if we wanted to be more lurid: ‘How the Zombies Ate America’s Entrepreneurs’.

Last week, we reported on how more and more people depend on the US federal government for their daily bread.

Here’s the chart from American Enterprise Institute’s Nicholas Eberstadt:

Entitlement Dependence in America
1983 vs. 2012
Recipiency Status & Program 3rd Quarter, 1983
Number in Millions
3rd Quarter, 2012
Number in Millions
Number in Millions
All People 224.3
( — )
Received Benefits from
≥I Programs
Social Security 31.7
Medicare 26.7
≥I Means-Tested Programs 42.1
Federal SSI 3.2
Food Stamps 18.7
AFDC 9.3
Women, Infants & Children 2.4
Medicaid 17.5

As the number of zombies increases, it leaves fewer people creating real jobs, building real businesses and paying real taxes.

In short, the people who create wealth are vanishing.

Jim Clifton, the chairman of Gallup, reports that, for the first time ever, there are more US businesses closing than starting up:

There continues to be a direct link between market cap (which measures the total value of all outstanding shares) and performance.

The US now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel and Italy all have higher startup rates than America does.

We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.

The US Census Bureau reports that the total number of new business startups and business closures per year – the birth and death rates of American companies – has crossed for the first time since the measurement began.

I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying.

In the early 1970s, there were about 200,000 new US businesses created each year (net of closures). Now, the number is negative.

Why are Americans getting poorer?

Look no further. No new businesses (net). No new jobs (again net). No new wealth.

Under Obama and Draghi, crony capitalism flourishes. Real capitalism dies.


Bill Bonner,
for Markets and Money

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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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