Capitalism In Peril?

WASHINGTON – In a well crafted WSJ op-piece (The World-Wide Undermining of Free Markets, August 11, 2015), financial adviser Romain Hatchuel points out some worrisome truths. Western policy-makers, monetary authorities in the lead, have pursued policies that have undermined the foundations of capitalism.

Years of ZIRP 

This is what central bankers have done. Many years of zero per cent interest rates, (ZIRP, for Zero Interest Rate Policy), plus massive asset purchases and quantitative easing have created a dangerous new environment. As a result of easy money, the price of many assets has been inflated. Current high stock market valuations are false, in as much as they are largely the outcome of stimulative policies that made cheap money available to investors, while traditional savings vehicles are out, because of the prolonged zero per cent interest policies pursued by all major central banks.

China manipulates markets 

At one extreme, you have China. Obviously China is not a capitalist market economy. But, according to its apologists and many admirers it is well on its way to become one. Really?

Most recently the Chinese authorities prevented a stock market meltdown by suspending trades, distributing essentially free cash to stock brokers so that they would buy shares and forcing share holders to hold on to their stocks. All this, of course, with the noble objective of preventing major losses for millions of improvident investors.

Still, be that as it may, all of the above indicates that China does not have –and has no immediate plans to create– real capital markets in which buyers and sellers freely determine share prices. It is all manipulated.

Inflated stock prices 

But what about the rest of the world? We used to have real capital markets. Well, we do not have Chinese extremes, but we are getting there. Fed mandated ZIRP has created a bubble. So much so that every time a credible rumor of any type of Federal Reserve rate hike comes out, investors reflexively sell stocks.

Why is that?

Very simple. Because most of them know that they are holding stock portfolios whose value is artificially inflated by the Fed’s zero per cent interest policy that has been kept in place for 6 years, that is well after the end of the 2008 Financial Crisis. Therefore, it makes sense to believe that if and when rates go back to normal stock prices will go down because the artificial incentives to buy expensive stocks will vanish.

So, Wall Street may be not the Shanghai Stock Market, but in both of them transactions are heavily affected by non market factors that support or inflate share prices.

Unaffordable entitlements 

At a different level, what about large and growing fiscal imbalances? It is amazing to notice that by and large there is almost total indifference vis-a-vis large fiscal deficits that over time caused the additional growth of an already immense national debt in Japan, Europe and the US.

Large fiscal deficits are largely caused by unsustainable entitlement programs designed in a different era, with different cost structures and different demographic trends.

No reform 

To put it simply, these programs now cost too much. But instead of dealing squarely with the issues and devising sensible ways to reform the programs, this way making them sustainable, elected leaders prefer to side step the politically thorny decision to reduce benefits. They decided to finance the same, essentially unchanged, programs through more and more debt.

Japan’s debt 

Japan is leading the way. This once energetic economy now has a national debt equal to 240% of GDP. This is astonishing. What this means is that, even with a Japanese version of ZIRP currently in place, almost half the country’s total revenue has to be devoted to debt service. This means that Japan has to divert scarce capital from investments to paying interest on this monumental debt.

And yet, all seems normal in Tokyo. Nobody talks about this absurd level of debt as an emergency that requires drastic action.

Issue ignored in Washington 

Well, move to Washington and, while the numbers are less frightening, we have the same complacency. It is implicitly understood by almost all candidates for national office, (we have a presidential campaign underway), that even talking about entitlement reform is political suicide.

Social Security, Medicare and Medicaid (these are the big entitlements) are essentially untouchable. And this is folly. The costs of these entitlements will inevitably go up. The baby boomers are retiring. The active population that pays into the system is shrinking. This is like watching a train wreck in slow motion. We know exactly what is going to happen.

Much more can be said about the damage caused to business creation by heavy corporate taxes and absurd regulations. Taken altogether, the outcome of the policy mix is highly toxic. We have fake money that causes inflated asset prices. Unstoppable entitlement spending that is destroying public finances, and excessive regulations that are choking enterprise.

Messy capitalism 

Here is my conclusion. Markets are hardly perfect. Capitalism is a messy and often wasteful system. The 2008 Great Recession is illustrative of what can happen when investments turn into crazy speculation, while people keep buying over inflated assets (and fake securitized mortgages) with the certainty that prices will never go down.

Bad remedies

Yes, 2008 and its aftermath was a horrible show of human folly. And yet the cure may be even worse. Public policy has created a new false semi-prosperity, in the context of sluggish economic growth. Asset prices are once again inflated. Millions of people keep get unaffordable benefits financed through soon to be unsustainable debt.

And politicians keep offering more free goodies. There is a little bit for every one. Higher minimum wage. A policy that in practice amounts to debt forgiveness for student loans. More categories of workers entitled to over time compensation. More food stamps for low-income people. And subsidized heath services for millions through Obamacare. In all this, the Democrats propose redistributive tax measures so that more wealth will be transferred to the poor and to the lower middle class.

Drifting away from capitalism 

I fully concur with what Hatchuel wrote in his WSJ op-ed piece about America slowly drifting away from its capitalistic roots. Indeed, current policies largely focused on support and subsidies, while they  ignore the need to promote economic growth, have slowly eroded the fundamentals of free market capitalism.

The way it used to be 

It used to be the case that you would get ahead in America mostly because you were part of the productive, money-making sectors of the economy. You got rich because you produced wealth, and not because you were part of a protected class.

As I said, the capitalistic system is most imperfect. It is prone to excess and speculative frenzy, while even seasoned players make gigantic errors. But I have yet to see a better alternative.

The idea that savvy policy-makers can successfully manage markets, and grow the economy, so that we can all prosper within a fine-tuned system is a complete absurdity. Many failed experiments –from Fascism to Communism to Social-Democracy– amply demonstrate this assertion.

Central Banks Administer Monetary Morphine

WASHINGTON – The financial and fiscal “New Normal” across the countries touched or devastated by the Great Recession of 2008 triggered responses by Central Banks that resulted in massive injections of liquidity. Interest rates have been effectively suppressed. In search of gains, investors have bought stocks. In America this caused Wall Street to regain all lost territory, and then move on to new historic highs.

Quantitative Easing for everybody

Now, while the US Fed mercifully stopped a few months ago, all the other Central Banks are also doing QE, Quantitative Easing, hoping that more liquidity will encourage more borrowing to finance investments leading to growth.

The American example is not that good. Yes, the US economy is finally growing again. But not in any spectacular way, (2.4%). This has been the worst and slowest economic recovery on record. Even though unemployment is going down to semi-acceptable levels, (a bit above 5%), the total US labor force is now smaller than it used to be, while too many new jobs are part-time and low-paying. This translates in stagnating or declining standard of living for millions of Americans. If is the best that QE can do in America, in an economic context that at least is not below average, I would not hope in much better results elsewhere.

Good Luck!

All this notwithstanding, the European Central Bank is now launching its own QE and Japan already started. Good Luck!

Speaking of Japan, the most remarkable thing is that in this country (once believed to be the wave of the future) the absurd has become normal.

Prime Minister Shinzo Abe believes that he can re-energize the economy by printing money and devaluing the currency. The point is that this remedy never works, unless it is accompanied by new productive investments that increase competitiveness and overall productivity.

Absurd Japan

And we do not see much of this in Japan. On top of that, even with absurdly low interest rates, Japan’s national debt has become so huge that it will eventually crush the country. Think of this: Japan’s debt is 240% of GDP. Debt service now absorbs 43% of all revenue. Which is to say that when you add mandates and other fixed expenditures, the Japanese government has zero discretionary spending opportunities. No investments. No nothing. Given all this, buying more Japanese bonds is either an act of charity, or the expression of total stupidity.

And yet this absurdity does not get much coverage. Japan is still the third biggest economy in the world. “Yes, it is experiencing some problems due to sluggish growth, but the Government is working on this, and markets hope that things will get better.” Really?

Well, the fact is that many Japanese are taking their money elsewhere, to Singapore for instance. The smart people now know that the boat is sinking, and are looking for alternatives. But the rest of the world contemplates all this without any uneasiness.

Fixing Greece?

By the same token, markets look at Greece trying to renegotiate the terms of its bail-out as if this were a “normal” transaction. The reality is that Greece is sunk. It is bankrupt. It is high time we would recognize reality. High time to understand that the Euro is OK only for strong economies. Greece, Italy, Spain, Portugal and France do not belong. But we hear none of this.

US entitlement spending

As for America, the ticking bomb is the slow but continuous growth of entitlement spending. Because of political gridlock in Washington, nothing will be done until Obama is President. But the problem, while currently ignored, is still there. As the national debt keeps getting bigger, (now well above US $ 18 trillion), the solutions down the line will be more painful. But, for the moment, all is well.

Monetary drugs

Welcome to the “New Normal”. Instead of minding the store, now governments do nothing, while Central Banks administer a lovely cocktail of monetary morphine and cocaine. Therefore, no anxiety and no pain.


America’s Systemic Economic And Fiscal Problems Undermine US Foreign Policy

WASHINGTON – What’s the connection between President Obama not authorizing the construction of the Keystone XL oil pipeline linking Canadian oil fields to refineries in Texas and America’s ability to deal more effectively with a Middle East in constant turmoil? No direct connection today. But a major one tomorrow.

Creating options

Indeed, by deciding –today– to rely more on Canada, a trusted neighbor, for vital energy imports, America would diminish and eventually stop its reliance on OPEC oil. Improved US “energy security” would give Washington additional room to manoeuvre in the intrinsically messy Middle East.

Sound economic and fiscal policies are the foundation of strength

By the same token, there is no immediate connection between a (hoped for) Washington bipartisan pact aimed at reforming public spending and entitlements, and America’s current ability to deploy forces or help allies –today– in dangerous parts of the world.

However, a serious and credible political agreement that promises to place America on a path to fiscal soundness, (even though rebalancing our books after “bending the spending curve” would take years), would tell the world that America is not declining.

Beyond the huge domestic benefits, this political agreement would send the message that 10 or 20 years from now we will be still here, strong, well armed, and seriously engaged, because we are addressing and taking care –today– of the long-term issues that would otherwise weaken us tomorrow.

Long term issues need to be addressed –today

Smart leaders know how to balance the need to address immediate problems, while at the same time tackling issues that are not urgent, but really important in the long run.

The classic mistake is to get so engaged in reacting to too many small crises that you do not take care of larger, long-term, systemic problems that, if unaddressed, will undermine your future ability to take care of even little issues.

Many crises, limited options

And this is precisely America’s current predicament. Today, the country is confronted with significant but not catastrophic international crises. There is a bloody civil war in Syria, chaos in Iraq, anarchy in Libya, huge political and security problems in Afghanistan, more violence between Palestinians and Israelis, Putin fomenting civil war in Ukraine, China trying to extend its maritime sphere of influence. And then we have ISIS, (or Islamic State), a terror group that has graduated to becoming a political entity that controls territory in Syria and Iraq, while declaring hostility against America.

As David Brooks stated in a NYT piece, none of these ugly developments represents an immediate, existential threat to the US; but America has a responsibility to set the tone of international reaction, now and in the future. There is no doubt that with fewer means at our disposal we will be able to do less and less. We are already feeling the pinch, as the defense budget has been cut, with more cuts coming.

And here we have two problems unfortunately converging. The first one is that President Barack Obama projects an image of an over-cautious, timid America, uncertain about its proper role, and unwilling to do anything at all. And this is bad.

Without adequate means, no credible foreign policy

The second one is actually much more serious. The American economy is too weak, while the national fiscal picture is slowly but surely getting worse.

And it is obvious that, in the long run, there is a clear cause and effect relationship between actual economic resources and the ability to influence international economic relations, while continuing to have state of the art armed forces that can be used around the world without adding to an already severe (and now systemic) fiscal strain.

And this is precisely where we are headed now. (In fact, pessimists would argue that we are already there: no money, good-bye to serious Pentagon funding).

Dwindling resources

Indeed, even if we had a different, more pugnacious President, he or she would have to consider the objective fiscal limits to any assertive US policy.

Simply stated, a country with a $ 17 trillion national debt, (and rising), and a tired, slow-growing economy has far fewer options than a country in good fiscal health with a thriving economy.

And, if today’s options are more limited, without a major economic and fiscal course correction, tomorrow’s options will be even more constrained.

Deal with the issues

Having said that, it should be obvious that America, in order to preserve its own future viability, and for the sake of world stability, beyond the issues of the day would seriously focus on what it takes to restore fiscal stability and more sustained economic growth. These are the preconditions for having first class armed forces and for being a credible actor on the international stage.

No such thing as an “Impoverished Great Power”

Simply stated, if you have no new money, federal budget deficits year after year, a mounting national debt, and (as a result) a shrinking military, who is going to pay attention to what you have to say?

I do not know of any “Impoverished Great Power”. Those countries that lost their ability to create wealth ceased to be Great Powers. Period. America is headed that way.

All intelligent people know that our unresolved fiscal and global competitiveness issues soon enough will have an impact on our resources and therefore on our ability to project force and to be taken seriously by friends and foes alike.

Wasting time

But while each year’s federal budget deficit gets us closer to the moment of truth, we still have some slack. We are not about to fall into the abyss.

But sadly we use this borrowed time as an excuse to do nothing. And so we waste precious time that could be used to forge serious bipartisan agreements aimed at restoring our economy, the wealth of our people, and our fiscal soundness.

Unfortunately in our political world in which there are national congressional elections every two years, the “long-term” does not exist. Leaders are judged on what they have done today about today’s issue.


As I said above, smart leaders know how to balance handling the issues of the day while taking care of long-term problems well before they morph into major crises leading to terminal decline.

Smart leaders would also find ways to communicate the importance of spending time and resources, today, to address and solve major long-term problems.

However, as we can see, smart leaders are in short supply.



On Syria, Timid West Offers Embarrassing Spectacle

By Paolo von Schirach

Related story:


August 29, 2013

WASHINGTON – I recently argued that America is in no mood to get into another war in Syria. We did poorly in Afghanistan and Iraq, while spending fabulous sums of money, (see link to related story). Besides, right now the US Government is essentially broke. Indeed, the Pentagon, caught in the middle of the ill-advised “sequester”, (automatic, across the board spending cuts that target defense more than any other public spending), is trying to adjust to rapidly declining budgets. Probably the worst possible time to engage in a new conflict. And finally US public opinion does not believe that America must act in order to punish Syria for its use of chemical weapons against civilians. The American public does not want to hear about the Middle East, Muslim countries or any talk of another war, big or small.

Evident reluctance to do anything

I did say that America, acting with British and French support,  would “do something” in order to “punish” Syria. However the action would be limited, symbolic and in the end probably irrelevant. Well, it turns out that perhaps I was too optimistic.

Just a few days later, the political signs out of Washington, London and Paris are quite unclear. Certainly I do not detect any determination to act. French President  Francois Hollande talks about the need to find a “political solution” for the Syrian mess, while the British Parliament is divided. President Obama, supposedly in the lead, stated in a TV interview that he has not made up his mind, while adding that whatever action may be undertaken it would be limited and not aimed at regime change in Damascus. After this rather tepid statement by a President who is obviously most reluctant to act, we heard from US intelligence officials that it would be very difficult to obtain unequivocal, conclusive evidence that chemical weapons were actually used and that the Syrian Government ordered such action. In other words, we are not quite sure that a retaliation would be justified.

Assad should not be afraid

Well, after this impressive display of outrage and determination, may be President Assad will decide to take a break and go fishing in the next few days. Chances are that, in the end, nothing will be done. If the US and its junior European Allies can find a face-saving exit, possibly with Russian cooperation in the guise of some kind of UN Security Council Resolution promising some sort of (non military, of course) action against Syria, then Obama would be able to say that we have made our point, that Assad has been punished by the international community for his illegal actions, and that all is well. 

Well, if this compromise does not work out, then we are back to the symbolic military action. I am convinced that America has the military assets in place in the Eastern Mediterranean (mostly US Navy war ships armed with long-range missiles) to launch an attack against Syria. They can target military installations, command and control centers, critical infrastructure, and a lot more.

A limited attack is pointless

However, short of a prolonged engagement –I mean a real devastating blow that would destroy or seriously impair Syria’s war making capabilities and the ability of the Damascus Government to function– a limited US attack would change very little.

Let’s remember what Carl von Clausewitz wrote a couple of centuries ago. The only purpose of military action is coercion. You use military  means to obtain a political goal: i.e. force your adversary to do what it refuses to do. I do not believe that von Clausewitz would have approved of a limited military action aimed at sending a “signal”. And what if the other side does not get our “signal”, in this case a clear warning that any further use of chemical weapons would have devastating  consequences? Then what? We send another “signal”?

War is not about “sending signals”. War is about the complete destruction of the political will of the adversary. Through decisive military action we bend them to our will. Who knows, may be they stopped teaching von Clausewitz at the US military academies.

The West looks weak

In conclusion, there are two possible scenarios here, both of them indicating Western reluctance and timidity. In the first one, there is some kind of UN inspired “action” that gets Washington, London and Paris off the hook. In the second one, there will be a limited attack against Syrian targets. Such a limited attack will not change the course of the Syrian civil war, while it will be used by all  anti-Western Islamists as further evidence of America’s evil intentions against Arabs and Muslims.

You can bet that, hours after the US missile attacks,  Syrian TV will display the corpses of women and children killed by Americans Tomahawk cruise missiles. In the end, whatever Washington’s intentions, this is the only “signal” that the other side will get. Is this what we want?

Washington Now Dominated By Not So Great Scandals – Too Much Focus On Benghazi and The IRS Because There Is Nothing Interesting Coming Out Of The Obama White House – No Major Initiative, No Reform Plan

By Paolo von Schirach

May 17, 2013

WASHINGTON – The most telling evidence of Obama’s weakness is that B or C category “scandals” have monopolized the attention of most media and commentators. We have the resurfacing of the once dead Benghazi terror attack story. This is something that seemed to have legs during the political campaign last year. Then Romney failed to press it and the Republicans essentially let it go. Now there are new testimonies that have exposed at least one fact: the Obama administration was less than candid in telling the real story as it was unfolding.

Benghazi, IRS stories dominate

Still, all these embarrassing details do not amount to criminal acts. And yet the Obama administration is visibly on the defensive. Add to Benghazi the more recent story of the Internal Revenue Service denying tax free privileges to conservative organizations. We still do not know how bad this is; but the IRS story is dominating the news cycles. And then there is the story of the Justice Department using a very heavy hand against the Associated Press as it investigates a leak of classified information regarding terror activities in Yemen.

Nothing else to talk about

This stuff is serious. But these are not the mega scandals that can signal political death or worse for a sitting President. So why do they dominate the news cycle? Very simple. Because there is nothing else to report. President Obama has lost the initiative. There is absolutely nothing worth talking about coming from the White House. Of course, it is not Obama’s fault that Washington is now paralyzed due to divided government. And yet Obama is the incumbent President. There is only one President. And the President is supposed to lead, even when the going is tough. In fact, he is supposed to lead especially when the going is tough.

No Big Idea

And what could Obama do? Well, he could and should articulate a most compelling plan to reform public spending (yes, that would have to include Social Security, Medicare and Medicaid) and taxes. He could elaborate a national energy strategy. He could articulate a new vision of America’s role in world affairs in a multi-polar world. All this is tough, especially in this politically poisonous environment. Yet, who said that being President should be easy? We call “Great” the Presidents that accomplished difficult tasks. All the others get a foot note.

But, so far at least, the President has not even tried to be Great. He proposed nothing major. He has smallish ideas here and there. But, quite frankly, it looks as if the country tuned out. Hence the exaggerated space devoted to the “scandals”. There is excessive coverage because there is nothing else to cover.

Obama soon to become irrelevant

As things stand today, probably the only big new legislation coming out of  Washington in the next few months will be comprehensive immigration reform. And on this truly important issue President Obama is a follower rather than a leader. The whole idea was launched by a bipartisan group of Senators.

Of course, it is too early to call Obama an inconsequental President. Still, here he is, at the beginning of his second term, and it seems asd if he has already run out of gas. Unless he puts forward an ambitious, intelligently crafted agenda that will captivate and energize the Nation, as 2016 approaches, Obama will be less and less relevant.

America Stagnates – Global Competition And Lack Of Pro-Growth Tax Policies Stifle The Economy – Urgent Need Of Policy Changes; Will The President Lead?

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By Paolo von Schirach

February 7, 2013

WASHINGTON – The American economy has yet to recover from the spending binge that led to the 2008-2009 financial collapse. Simply stated, most American households are spending less as they are trying to pay back the debt they accumulated during the go-go years. And they are doing so while their homes (housing recovery notwithstanding) are worth much less.

Painful de-leveraging

As US GDP is driven mostly by consumer spending, thrifty consumers are bad news for the economy. Hard to say how long it will take for this painful de-leveraging process to lead to more acceptable levels of household debt, an essential precondition for higher level of consumer spending in the future.

Competition from low cost Asian workers

But this is not all. As the financial and housing debacle destroyed the value of real estate, while everybody got into debt, America was also hit badly by systemic global labor market changes whose net effect has been and will be to eliminate many jobs while hurting the earning power of the US middle class.

Whatever the at times grotesque demonization of “outsourcing” as a sinister plot hatched by evil US corporate leaders, the truth is that in the global market place there are now hundreds of million of new, able bodied Asians workers. Most of them are reasonably skilled and willing to do the very same jobs Americans do at a fraction of the cost. This is a fact. While cheap labor advantages are not for ever, (indeed we already see wages moving up in parts of China), for the moment they determine the location of many labor intensive economic activities.

Low labor costs, combined with ”hyper-connectivity” provided by inexpensive communications, plus reliable and lean supply chains made transferring manufacturing to Asia possible. As a result of this gigantic change, many US middle class jobs have disappeared, while there is no chance for wage increases for employed US workers who have to compete with cheaper Asians.

More US manufacturing

As for the hopes of a US manufacturing renaissance, they may actually be real, at least in energy intensive sectors. Some corporations want to relocate to the USA in order to take advantage of low electricity prices due to abundant and cheap American natural gas. However, a few more factories do not translate into more jobs. IT systems, automation and more robots are actually eliminating factory jobs at a fast pace.

No innovation, mediocre education

To add more misery to the picture, the American marvelous technology/innovation engine has stopped. At the moment, we have no great breakthroughs opening up entirely new fields, just as it happened with the IT revolution in the 1980s and 1990s.

And if you really want to be pessimistic, you have to add a mediocre to bad public education system that produces sub par high school graduates, many of whom end up getting a semi-worthless college degree.

Disappointing public policy

In order to reverse this economic stagnation, we need better education, more private and public resources devoted to R&D and a tax system that encourages business creation.

But instead we have a semi-broken Washington government machine that is not even capable of passing budgets, let alone frame new pro-growth policies. Due to bitter ideological feuds, the President and the Congress are able at the very best to pass short term stop gap measures, so that America will not go into default and so that we do not need to shut down the Federal Government. And these band aid deals last for just a few months.

Indeed, today’s “policy debate” is about the short term and long term consequences of the “sequester”, an emergency, across the board spending cut provision encompasing all discretionary spending (defense and non defense) that will soon kick in lacking broader agreements on spending and taxes between Democrats and Republicans. And we call this governing?

We know what needs to be done: tax and entitlement reform

And yet, all the centrists and all the smart economic and fiscal policies experts in Washington know exactly what needs to be done. There are Blue Ribbon Commissions Reports and plenty of studies generated by think tanks that provide the basis for substantive reforms.

In brief: America badly needs tax reform based on simplification and the closing of loopholes designed to protect special interests. A modern tax code will create incentives to create new enterprises and to invest in future technologies. At the same time, America needs a long term, bipartisan agreement on entitlement reform that will take into account the growing number of seniors (and therefore the cost of programs dedicated to them), while trying to reform health care, so that its costs will stop growing at a faster pace than the economy. Entitlement reform can and should be phased in gradually, without hurting current recipients. But it needs to be done.


A new, credible and sustainable tax and fiscal reform package that will encourage economic activities, while signaling the beginning of a real inflection in America’s public spending, over time would do wonders to re-inject confidence in the system.

Confidence, in turn, will stimulate investments and business growth. All this has been said by wise people many times. Remember Simpson-Bowles and their “Debt Commission” December 2010 Report? It’s all in there. It is time for Washington, starting with the White House, to lead and take action.

America’s Problem: Half The Country No Longer Believes In The Virtues Of Free Market Capitalism

WASHINGTON – America’s biggest problem –as the recent presidential elections have demonstrated– is that a bit more than half the country no longer believes in unfettered free enterprise as the main engine of both personal and national growth.

Government is better

Obama’s re-election (with 51% of the votes) as the defender of entitlement programs as they are, of state intervention and as proponent of income redistribution through taxation shows that a majority of American voters today believe that the benign hand of government helping them is a better and safer bet than the Republican promise to lower taxes and public spending, so that the spirit of can-do enterprise can be once more liberated and put to work. At least 51% of American voters are not so sure about free enterprise.

Capitalism as a model lost the battle of ideas

Let’s face it. The 2008 recession destroyed capitalism’s credibility and mystique. The system failed. And it failed big time. Most of the almost theological assumptions about the sanctity of markets were proven wrong by the Financial Catastrophe.

Nothing illustrates this failure more than Alan Greenspan’s contrite admission that he –The Flawless Maestro– had made a huge mistake. All his life he believed that financial markets would self-regulate in a fashion that would allow them to price risk appropriately and thus avoid excesses. Well, it wasn’t so. No self-regulation. On the contrary, even the most elementary rules dictating restraint were broken.

And it turned out that our Wall Street Captains were not just unwise, they were in fact complicit in a sinister orgy of speculation and greed in which they all succumbed to the zany idea that financial manipulation would make them super rich. In so doing, they almost sank America.

Romney successfully portrayed as the enemy of the common people

Right or wrong, this is the prevailing narrative. And this is what those who voted for Obama believe in. Poor Mitt Romney came along saying that he had the super manager credentials to really fix this mess.

The premise for his challenge was that Obama had done a poor job as economy’s steward during his first term. “Well –said a confident Romney– let the amateurs go back home and let me, the real pro, handle the economy. I know this stuff. I have done it all my life”.

Well, this impeccable resume became Romney’s main political liability. Precisely because of his close identification with venture capital, Romney was conveniently depicted by the Democrats as the arch-enemy, as the fox in disguise who wanted to run the chicken coop. Thanks to the clever character assassination dished out by the Obama campaign, Romney was doomed.

The audience does no longer believes the old story about capitalism

But Romney was doomed also because a bit more than half of the audience no longer believes the old American narrative of “self-help and individual effort”. People are tired and disoriented. Capitalism failed. Corporate leaders behaved like gangsters.

Therefore, now a liberal Government that promises help looks like a better bet.

And so it was. Obama won the political battle.

That said, the Obama policy medicine is a disaster. He may want to help out with more of this and that –and the people cheer. But he of all people should know that the cupboard is bare. There is no money, while public spending is still trending up.

America does not grow

Obama’s ideological blinders prevent him from understanding that the country needs first and foremost higher growth. From a post war average of about 3%, we are down to 2%. This trend will get us closer to stagnating Europe and all its problems. In order to get to higher growth, it is essential to have a new Grand Bargain that would place entitlement programs on a sustainable course, while reforming our incomprehensible tax system in order to provide a strong encouragement to business creation.

Public assistance for ever?

Of course we need to extend a helping hand to those in need. But only if this is a way to make people self-sufficient sooner rather than later. Unfortunately, the message now is that there are some perpetually weak constituencies that will need assistance in perpetuity.

If you are on the receiving end of these public goodies, this may sound great. Easy for the moment to ignore the combined consequences of low growth, high spending (that goes mostly to assistance and income support, as opposed to investments), and more debt. If we looked at where sorry-looking Southern Europe is today, after having followed exactly this course of action for a few decades, the end game should be obvious. But nobody within this new majority will point this out.

Who will make capitalism believable?

Until and unless somebody will come up with a credible message that will reignite enthusiasm for free market capitalism and sober governance, along with policies aimed at opening up real opportunity to all, America will continue to slowly slide into higher debt, mediocrity and eventually national decline.

Obama’s Social Justice Agenda Is Unaffordable – But The Republican Message Of Fiscal Responsibility Has No Traction

By Paolo von Schirach

Related story:


January 22, 2013

WASHINGTON – President Obama’s priorities, as outlined in his Inaugural Address, (see above link to related piece), are in line with the political Zeitgeist that his first term contributed to create. And here they are: more government, strong defense of existing entitlement programs, more support for the needy, pushing a green energy agenda. All this is popular in America, and Obama’s re-election attests to this.


The problem is that single mindedly pushing policies focused on these goals of social justice, equality and what not will lead America to fiscal disaster. We run out of money long ago. Irrespective of the noble goals, the notion that it is possible –indeed morally righteous– to defend an essentially unchanged (and unaffordable) system of costly entitlements in a country drowning in debt (mostly because of entitlement spending) is almost surreal.

More will than wallet

Does President Obama know that, in part thanks to his actions, America is running trillion dollar deficits every year? Does he know about the size of the national debt, ($ 16 trillion plus), a big chunk of it added during his first four years in office? I presume he does know. But I also think that the President, following I have no idea what kind of logic, believes that America’s deteriorating fiscal position is just a small detail that we shall attend to at a later date. Securing benefits is priority one. Paying for them is a secondary matter.

America believes we can afford anything

This is border line insane. And yet the President won re-election on his pledge of defending the welfare state as we know it against the vicious attacks of the mean spirited Republicans. Against all odds, President Obama managed to obfuscate his own mediocre record as steward of the US economy, while extolling his role as champion of the poor and disadvantaged. And he won.

Debt: termites in the basement

But how is it possible that America approves all this when you look at the fiscal disaster building up because of entitlement spending and debt trends? Well, it is quite possible. A mounting fiscal crisis is painless until it breaks out. And so it can be ignored. As someone said ”Debt is not the wolf at the door. It is more like termites in the basement”. If you do not know the termites are there, you see nothing and fear nothing. In the meantime, they are literally eating your home. When you find out, it is too late.

For the time being, ordinary people do not feel the pain of a mounting national debt. A mixed blessing in all this is that (thanks to the Fed) interest rates on US Government Bonds are ridiculously low and so Uncle Sam keeps borrowing, paying only a small price in terms of interest on these loans.

Wise people call for action

All the wise people, (think of the Simpson-Bowles duo, co-chairs of the “Debt Commission”), have said and repeated that this course is unsustainable and that we should act now in order to “bend the spending curve”.

We do not need to all of it at once. But we need to act now, so that public spending in the future will be substantially reduced, giving us a chance to regain fiscal balance.

Grow the economy

And the wise people also tell us that we should incentivize enterprise, business creation and innovation –-the proven drivers of wealth creation and more widespread prosperity. A major overhaul of our complicated and outdated tax system would help to secure these goals. Well, except for subsidies targeting his pet green tech/renewable energy projects, President Obama is essentially silent on this.

Does he really think that the current lackluster 2% growth is optimal, when the post war average was 3%? But there again, the public likes his social justice message, the media and most opinion makers nod, and few dare challenge his agenda in which more equality can and will be achieved via more debt and a mediocre economy.

Republicans in a pickle

And here is the immense challenge for a disoriented and fractured Republican Party, at times dominated by the voices of strident ideologues.

When Ronald Reagan run for office in 1980 his slogan of “Getting the Government off the backs of the people was a stirring cry for unleashing the power of American free enterprise. Big Government produced by the liberal left was the enemy. And most voters agreed with him. So, at that time, deep spending cuts and even slashing and burning were seen as smart, high minded, morally superior and liberating.

Well, not today. After the shock of the 2008 financial crisis, the private sector lost its lustre and indeed its respectability in America. Making no distinctions, the public dislikes business in general and not just the reckless Wall Street bankers and sub prime mortgage companies.

Private sector is bad

In the aftermath of the financial crisis we have established a new narrative. The private sector is made out of greedy people who couldn’t care less about the common folks who work for them.

And so the poor and the disadvantaged need the Government to protect them against the rich and ultra-privileged who –as we all know– long ago gamed the system so that it works only in their favor: they get all the money and pay essentially no taxes.

This is the narrative. The private sector is the villain. Mitt Romney, the country club vulture capitalist with horses, luxury cars, too many homes and off shore bank accounts is its personification.

Benign and thoughtful Big Government led by caring Obama is the defender of the oppressed. Thank God that we have this good man, (a former Chicago community organizer who learnt the ropes by helping the poor), in the White House to help us out.

Can the Republicans be fiscally responsible and popular?

Yes, this is an incredible and dangerous distortion of reality. But this is what most Americans believe today. It will take a heroic effort for the Republicans to build a new, credible and compelling image as the party of growth and fiscal sanity; but also as the party of fairness, inclusiveness and real opportunity for all Americans.

As of today, any Republican policy mix that includes any spending cuts will be not just unpopular; it will be portrayed as vicious and mean spirited.

That said, Obama’s agenda is good politics but terrible policy.

Leaving Aside The Details Of The Unfolding Political Battles, America Is Fundamentally In Denial About The Severity Of Its Fiscal/Economic Predicament – President Obama Has No Plan – He Does Not Lead

[the-subtitle ]

By Paolo von Schirach

January 4, 2013

WASHINGTON – Deep down all individuals engaged in self-destructive behavior know that they they should stop today and immediately embrace healthier life styles. The drug addict knows. The alcohol dependent person knows. The smoker knows. The obese knows. And yet in most cases knowledge alone is not enough. Bad habits are deeply rooted and resilient. And it is easy to invent reasons for making changes “later”.

I’ll make changes later

In large part this is because people are only vaguely aware of the long term, cumulative impact of their bad habits. As they do not fear them enough, they do not take action. Yes, if I keep smoking I may get cancer. But not necessarily. Yes, my obesity may lead to type two diabetes, but may be not in my case. And so on.

America just like a substance abuse patient

If we look at America, its conditions are pretty much the same: chronic self-destructive behavior and denial about its consequences. America is a country that for decades indulged in bad habits –over spending financed by more and more borrowing– while neglecting the good habits –investments in education, R&D and new enterprises.

As a result this indebted nation is now under performing. It is fiscally challenged –high annual deficits, enormous national debt– while its economy, even though not horrible, is mediocre. Growth at 2% is better than Europe’s; but lower than the historic 3% average. Unemployment at 7.8% is down from dramatic levels but still much higher than a historic norm around 4-5%.

We know what the problem is

All sane people knows that these conditions are bad and that they are trending down. More deficits mean larger debt; a tepid economy means erosion of our competitiveness in global markets. All experts know this. All reasonable policy-makers know this. All business leaders know this. And yet, just like the average Joe who knows he should stop drinking today, America looks at its conditions and says: “Yes, I should do something. But let me think about it”.

In essence, this is our predicament: bad behavior with no sense responsibility. Instead of taking action, denial and more denial. We know that the politics are horrible. But the politics are horrible because of denial; because different players developed their own rationalizations and favorite narratives as to the causes of this dangerous predicament. And so, lots of finger pointing and little serious action.

Obama missed a chance to lead

The Fiscal Cliff talks that just ended with a partial deal could have been an opportunity for a Grand Bargain. A freshly re-elected President Obama could have taken the lead and said to his Republican opponents in Congress:

“Let’s get together on this. This is about our Country’s future. Let’s set aside ideology and do the right thing. Yes, the rich should pay more into the system. This is fair. But we also recognize that long term entitlement spending is unsustainable. In order to make sure that the safety net will be there for those who really need it generations from now let’s reconfigure these programs. Yes, some people will pay more and get less. But the truly needy will be fine. We also have to find better ways to properly match our national security priorities and our sky high defense spending.

By the same token, let’s simplify our complicated and multi-layered tax system riddled with special treatments, exemptions and loopholes. Let’s make it simple, user friendly, fair and business friendly.

And finally let’s engage in a national all out effort to vastly improve public education standards in America. We all acknowledge that our future depends on how smart and innovative all our kids are going to be. Let’s give all of them the very best we can. This is a resourceful country. We do not lack intellectual capital. Let’s deploy it so the all children get the best education our collective brain power can provide”.

Petty quarrels about taxes

Imagine if President Obama had said this on the night of his re-election. He would be a hero and a real leader. But the President chose to turn this opportunity into a petty political battle about higher taxes for the rich. This easy populist remedy worked well with public opinion.

But the President knows better. It is totally disingenuous to say that our national predicament is mostly about the rich not paying their fair share of taxes. All experts and all policy-makers know that higher revenues, while not an insignificant contribution, would do very little to fix our fiscal problems, let alone our economy. Taxing the rich is all about political symbolism. It is not about serious policy-making.

More of the same

And now? Well, now expect more of the same. The President has not come out with a “Plan” about reforming taxes and spending while addressing American long term competitiveness. May be he thinks he does not need to. May be, just like the smoker who plans to quit but not just now, Obama is waiting for a better moment.

Slow moving crisis can be ignored

The tragedy in this situation is that we are not facing impending disaster. We are not about to go over another, bigger Cliff. We are just slowly sinking into feeble mediocrity of high debt and low growth. This deterioration is happening so slowly that most people can pretend it is not happening at all.

As a Nation, we are still in denial, and that is the real problem.

An Urgent Appeal By Elder Statesmen: Out Of Control US Federal Debt Will Undermine American National Security

[the-subtitle Put country first and fix fiscal policies]

U.S. national security in the 21st century rests on both economic and military strength, for our military might and diplomatic muscle ultimately depend on a vibrant economy. Unless we change course, our huge and growing debt will undermine our economic growth, our military strength, and our global leadership.

Our leaders should use the consensus against going over the fiscal cliff as an opportunity to agree now on a framework for significant fiscal reform in 2013. Another “kicking of the can” — the lowest common denominator of what both parties can currently accept, without any structural reforms that truly address the nation’s problems — is not acceptable. We must reassure our own citizens and businesses, the international financial markets, and the greater global community that America will address its fundamental challenges and maintain its leadership role in the world.

At a minimum, the resolution of the fiscal cliff by the end of the year should have the following components:

  • The Objective:Our fiscal goal must be to stabilize the debt as a share of the economy, and put it on a downward path for the longer term. We cannot continue to grow our national debt faster than our economy if we want to maintain our global leadership. Any solution which does not meet this simple test is insufficient.
  • The Framework:To achieve this objective, our leaders should decide on a fiscal framework that results in substantial deficit reduction over the next 10 years and structural changes to our fiscal policies that eventually balance the budget over the long term, including:

    ◊ Specific levels of revenue, spending and deficits over the next 10 years, and parameters for longer-term fiscal reform, including future levels of debt as a share of the economy, and a date by which the budget must balance.

    ◊ Tax reforms to raise more revenues, encourage growth and enhance progressivity — and it must be decided how much should be done through eliminating deductions, increasing rates and/or more fundamental changes to our tax code.

    ◊ Changes to entitlements to put them on a sustainable long-term path, as well as changes to defense and other discretionary spending, while protecting the most vulnerable and preserving sufficient resources to invest in the future.

    ♦ In our judgment, advances in technological capabilities and the changing nature of threats make it possible, if properly done, to spend less on a more intelligent, efficient and contemporary defense strategy that maintains our military superiority and national security.

  • The Process: Congress and the President should agree on an expedited process to enact legislation reflecting this framework in 2013, including appropriate default and enforcement mechanisms that ensure we will achieve the targeted result.

In a time of division and drift, the true test for America is neither military nor economic — it is political. We ask our elected officials from both parties to assert genuine leadership, communicate to the American people what needs to be done, and make pragmatic policy decisions to power our nation’s economy, democracy, and role in the world. It will require courage, shared sacrifice and a willingness to compromise and make the tough choices essential to setting a new course for our nation. It summons the truest form of patriotism — putting our country first.