Posted on 04/12/2016 7:27:17 AM PDT by No One Special
Why does Wall Street keep recovering after recessions but the economy seemingly never does?
The reason, as I document in my book, "The Scandal of Money: Why Wall Street Recovers but the Economy Never Does" is that Washington and the Federal Reserve together have created a closed loop economy where the Fed creates money for the government and the S&P 500 and Main Street is left out.
The Fed decides what money is worth and who receives it and how much. The Fed prices it at zero interest rates, allegedly to stimulate economic growth. But whenever something is free, it's distributed by queue, and only the privileged, connected people in the front of the line get any, not the innovators who create growth and opportunity for Main Street. Trump voters are wrong if they blame Mexico and China, but they are right about one big thing: The economy is rigged against them.
The Fed takeover of the economy has turned Main Street into Mean Street; it has gelded Silicon Valley, reducing our most creative entrepreneurs to climate cranks obsequiously petitioning in Washington.
Almost two-thirds of jobs created between 2002 and 2010 came from 23 million small businesses, according to the Small Business Administration. But venture capital investment in 2014 of $48 billion is just one-third of the 2000 total (in 2015 dollars), according to the National Venture Capital Association. There were half as many IPOs in 2015 as in 2000, and they were mostly focused on a few large deals. Back in 1999, there were seven times more IPOs than mergers and acquisitions for tech companies. Today merger and acquisitions outnumber IPOs by almost 36 to 1.
The Fed regulations and money manipulations have displaced an open market of IPOs by an exclusive game of horse trading among "qualified investors" who get rich and leave Main Street out, and fail to create new jobs.
And Wall Street? The once powerful engine of capitalism has been nationalized by the Obama bureaucracies feeding on fines and fees. We've had a covert socialist coup in Washington and it must be reversed or the free enterprise engine of growth and opportunity is in jeopardy.
The Fed began as a necessary "lender of last resort" during financial crises. But today, the Fed regulates the entire financial sector, from hedge funds to pawn shops. It issues and values the money by manipulating interest rates and manipulating money. Today the Fed serves the Washington bureaucracy and a few banks that are growing bigger. Through these banks, it effectively can regulate the entire economy.
What the Fed cannot do is becoming increasingly obvious: magically manipulate growth, which is the product of learning, into being. The Fed won its vast new powers because both Democrats and Republicans wanted an alibi. Rather than legislatively reform this administrative state that is smothering our economy, we prefer to have the Fed just issue money to paper it all over.
This process reached a pinnacle during the Obama Administration when the Fed balance sheet rose fivefold.
Like all command economies, the Fed is failing to spur growth. This failure has become so obvious that leading economists such as Ken Rogoff of Harvard and former Treasury Secretary Larry Summers now advocate the abolition of cash, so that interest rates can go below zero, meaning that through the Federal Reserve, the government can steal your savings without your representatives in Congress having to take political responsibility for levying a tax.
The first step to economic growth is recognizing the Federal Reserve is a god that has failed. Manipulating money cannot command growth and opportunity but it can suffocate innovation and entrepreneurship, which is always unexpected, and not well-connected in Washington.
What we are doing now is having money's value determined by international currency trading. Ten banks control 77 percent of all currency trading. When currency value is more varied and volatile than the economic activity that it measures, the horizons of economic activity shrink until today the famous "flash boys" trade by the second rather than investing for the future.
Currency trading is by far the biggest industry in the world economy. It is a runaway scandal of money. The banks make money off it. But the rest of us don't even get a measuring stick that's valid to gauge our savings, assure our retirements, or expand investment in business.
This is the first recovery in decades when small business jobs are actually shrinking. All the expansion is coming from the closed loop economy between the Fed, the bureaucracies and the big banks.
Declaring that the government monopoly on money is the source of all monetary evil, Friedrich Hayek, the great Austrian economist, predicted that capitalism would be saved by monetary competition from the private sector, which today can come from bitcoin and a new tie to gold. As the great British scholar Matt Ridley explained: "The government monopoly of money leads not just to the suppression of innovation and experiment, not just to inflation and debasement, not just to financial crises, but to inequality, too."
The first step to a new prosperity is to give up the god that failed and break the government monopoly on money.
We don't have to have a formal gold standard: A combination of bitcoin for the internet and treating gold in tax terms as currency, not an investment, would go a long way to restoring money as a measure of learning and growth, and jump-starting growth.
Commentary by George Gilder, a senior fellow at American Principles Project. His latest book is, "The Scandal of Money: Why Wall Street Recovers but the Economy Never Does." Follow him on Twitter @ScandalOfMoney.
Hyperbole, it’s the best thing ever!!!!
The political pressures to loot Wall Street and redistribute it all will become irresistible. We’ll look back and think that Bernie was a Conservative.
The Cantillon Effect, named after 18th century economist Richard Cantillon. Basically, in an easy money or fiat monetary regime, those who first handle the new (printed/created) dollars have a huge advantage and benefit greatly over those who hold "old" money (savers, workers, long-term investors).
So because of the Federal Reserve, insiders benefit, while the rest of us bear the ill effects of massive debt and debased currency. No surprise then that Wall Street and Gov't (and gov't cronies) have profited greatly while they economy has gone nowhere over the last 8 years.
What a rambling mess. Nothing but random factoids with no thread holding them together.
I’ve said that a million times myself.
Wall Street is now, as presently structured, NOT a free-market system for its largest players. The biggest banks enjoy unlimited support from the Federal Reserve, who centrally-plans, soviet-style, our monetary system. They also enjoy deep support from the US Federal Government and tax-payers of the USA in terms of monopolistic trading rights, over-regulation that benefits them, and of course, TBTF.
Bernie Sanders would never dismantle the present system. Its already socialistic and highly centralized. He will simply take control from the top, make it even more overtly political, and turn it to his own, even more Marxist, purposes.
We’ve had a covert socialist coup in Washington and it must be reversed or the free enterprise engine of growth and opportunity is in jeopardy.
^^ This
The fed banking system is about control. They give the ones the choose money and then they must stay in line. Like promote leftist ideas. Yes the system has always been corrupt. Since the fed reserve came into being.
A great read. Thank you.
The local paper’s headline yesterday was:
Battling Apathy
TPTB really don’t get it.
Thanks.
“The Cantillon Effect”. I will remember that
” Back in 1999, there were seven times more IPOs than mergers and acquisitions for tech companies. Today merger and acquisitions outnumber IPOs by almost 36 to 1. “
1999 was the high point of the NASDAQ tech bubble. The one that blew up in 2000, taking the stock market down with it. I guess George forgot that little detail.
JP Morgan’s bank performed the role of the Fed prior to 1913. So are you willing to return to having just one private bank do the functions of the Fed?
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