Heaven Without Hell

January 18, 2016

Back when Cincinnati had a baseball team, my son and I drove to Pittsburgh to watch the Reds battle the Pirates. We lost the game. But won the series.
Road trips provide opportunities to get into the head of a ten year old boy. See what he's thinking. What interests him. And, hopefully, depart kernels of wisdom that may help him along his journey.
When conversation lulled, we listened to Jim Rogers' new book, Street Smarts: Adventures on the Road and in the Markets (here).

I don't typically force my sons to read or listen to the prognostications of traders, economists and financial professionals. Except for Jim Rogers, who is a different story. Equal parts analyst, economist, trader, swashbuckling adventurer and family man, Jim Rogers is a no-nonsense commentator on markets, geopolitics and life.
I have never met Mr. Rogers. Yet, I feel as though I know him. I've read each of his books. He is an intelligent, experienced, abjectly honest man. His newest book? Wonderful. And I have long admired the boots-on-the-ground intelligence Rogers brings to bear on the subjects of finance and economics. Unlike many of those running the U.S. economy, Rogers has no ideological axe to grind. He is an astute observer of systems and processes. He recognizes the disparity between effective and affective.
Rogers grew up in Demopolis, Alabama, then attended Yale before gaining admission to study Philosophy, Politics and Economics at Oxford.
Upon graduation, he went to Wall Street where he co-founded the Quantum Fund with George Soros. They ran the fun for years, enjoying immense success. Then, ethical differences brought Rogers to retire at age 37.
When one "retires" at 37, he still has a lot of living ahead. And Jim Rogers has lived to the fullest.
He continued trading, investing and commenting on everything transpiring within global markets. He taught at Columbia's business school. He hosted financial news programs. Circumnavigated the globe on a motorcycle, as well as in a custom made Mercedes. And later, when he had children, he moved his family to Singapore, believing that the growth and opportunities emanating from the Asian Pacific outweighed the offerings in the debt-laden, political quagmire of an empire in decline.
Don't misinterpret: Rogers is a patriot. He has forgotten more about American history than most history professors have known. Long an advocate of the American ideal, he feels that the current political hierarchy has strayed from that ideal, to the detriment of its citizens.
Chapter nine of Street Smarts is entitled, "Capitalism without Bankruptcy is like Christianity without Hell." Rogers begins the chapter by reciting an economic history of the nation following WW II.
The United States exited the war on sound fiscal footing. The largest creditor nation in the world, the U.S. exhibited a combination of military and economic might long unseen. The country's net savings rate enabled it to reinvest in a wide array of infrastructure projects, like roads, bridges, schools. The dollar was strong, and so the global economy pegged their fortunes to it. What little debt we possessed became treasured assets for nations looking for investment ballast.
Our post-war industrial boom can be attributed to fiscal propriety and sound money management. As a the world's largest net creditor, we financed our own growth, continuing to do so up until 1987, the last time the budget was balanced.
Then, the wheels fell off.
In 1988, the United States began to spend more than it made. Accordingly, we sought outside financing that would enable us to continue our profligate ways.
We sold massive amounts of debt to Europe, China, India, Russia, South American and the Middle East. Instead spending less, as an indebted business might, we increased entitlement programs, borrowing from the Chinese and Saudi Arabians in order to provide Social Security, Medicaid and welfare benefits to an ever increasing number of outstretched hands.
In 2008, the U.S. financial system collapsed. The belief, long propagated by politicians, that every American deserved to own a home, caused a credit crisis that nearly brought down the economy.
That financial catastrophe was catalyzed by the large banks and brokerages, like Lehman Brothers, Merrill Lynch and Citibank, that bought and sold financial derivatives modeled on the incorrect assumption that home values would rise in perpetuity. When their mistakes were revealed, these mismanaged, insolvent financial institutions careened toward bankruptcy, only to be saved by the U.S. government. Which, since it has no money of its own, provided tax-payer funded bailouts.
When a restaurant fails, it dies. Likewise, consider the average company located anywhere in the country. If management makes poor choices, they fail and go out of business. This serves to strengthen the system. Eradicates the chaff to make way for the wheat.
Yet, when Wall Street's financial castles were crumbling, politicians in the pocket of Wall Street, many of whom were one job removed from positions at Citibank and Goldman Sachs, stepped in and put these insolvent, mismanaged catastrophes on taxpayer life support. Even as their fiscal improprieties caused a recession that saw the real unemployment rate exceed 15 percent.
Meanwhile, Sweden was simultaneously experiencing a loathsome financial crisis of its own. Unemployment skyrocketed. Like those in the U.S., Sweden's big financial institutions were insolvent. Teetering on the brink of bankruptcy.
In the U.S., Paulson, Geithner and Bernanke shoveled money at failed banks, insurance and mortgage houses, only to see the rest of the nation take the hit. Sweden, however, took a different tact.
Sweden allowed its insolvent banks to fail. Then, Sweden's finance minister, Anders Borg, enacted permanent tax cuts. Cut welfare spending. And property taxes. The political opposition howled in fury. Yet, the results speaks volumes.
Entrepreneurs returned to Sweden in droves, creating jobs, prosperity and opportunity. Borg used economic and financial incentives to resuscitate the private sector, and so restructured the nation's labor market, which drastically lowered structural unemployment.
In order to pull Sweden from its economic crisis, Borg borrowed a page from a seemingly dead American playbook. He created a meritocracy. Incented companies and individuals to take action. And they did. In 2011, Sweden announced the eradication of its budget deficit. Three years after one of that nation's worst financial crises, they had balanced their budget. Today, Sweden is seen as a bastion of fiscal propriety and productivity.
Contrast that with what we experienced. With the path our "leadership" took.
As opposed to a meritocracy, we have a plutocracy. Instead of incentives, we give handouts. Instead of growth, we see decline.
Why is such a thoughtful, forward-looking strategy so far beyond the grasp of U.S. politicians?
In nature, failure strengthens ecosystems. Forest fires kill disease and pestilence, strengthening the remaining canopy, and preparing the soil for healthier future inhabitants.
Animals, insects, fish and birds. Each sicken and die. Such is nature's means of fortifying the system for current and future generations.
Yet, our government chose to bail out a bunch of ill-run financial institutions. The victims? Taxpayers. The bank executives and board members? Most were already wealthy. And most became even more so.
How do you temper a willingness to take reckless amounts of risk when the risk takers believe that there is always a tax-payer funded safety net to catch them when they fall?
The U.S. labor participation rate remains at 43-year lows. The United States owes more money to creditors than any organization has in the history of the world. More Americans require welfare in order to feed themselves than we have seen in generations. And more American businesses have failed than have been created for seven consecutive years. Which hasn't happened in more than four decades.
Today, seven years after The Great Recession, Washington D.C. ranks as the nation's wealthiest city. On Wall Street, Citibank, AIG and Merrill Lynch executives and board members, having recently led their banks into insolvency, fly private jets to vacations on the Amalfi Coast.
D.C. and Wall Street, both saved by tax payer bailouts, continue to enjoy heaven on earth.
Meanwhile, many of their creditors -- hardworking, taxpaying Americans -- have come to believe that the government's Lottery -- representing another regressive government tax on the nation's poor and middle class -- provides their best chance to get ahead. Struggling to escape what often feels like hell on earth.

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