Setting the Financial Course – Crimes and Great Fortunes
BALTIMORE – “Behind every great fortune is a crime,” said French novelist Honoré de Balzac. Even our modest little pile owes much to a crime, though not our own. But what is behind Wilbur Ross’ billion-dollar fortune?
Today it’s Honoré de Balzac’s turn to provide us with a pithy quote. Balzac failed in his many attempts at getting a business off the ground. He tried various careers, from lawyer to publisher, to printer, to merchant… at one point he even tried his hand at becoming a professional politician. He mainly left small mountains of debt behind in these endeavors. He never could let go if this obsession: even though he had long made it as a writer, he still tried to import wood from Ukraine to France shortly before his death, in the hope of making a quick buck. These experiences contributed to making him a great writer though. His work has influenced quite a few famous writers, both contemporaries and later ones – and not only in France. He died just five months after getting married, so marriage apparently didn’t agree with him.
Photo credit: Louis Auguste Bisson
In this series, we are describing how crony capitalism works. The cronies don’t break the law; instead, they make the law. That is, they work with their elected representatives, government employees, regulators, and lobbyists to sculpt the field on which they do battle. Naturally and inevitably, they give themselves the high ground.
We got onto the ragged edge of that high ground by accident when we began working with Mark Hulbert in 1980 to find out which investment advisers really outperformed the market. The thinking at the time was that none could do it; the efficient market hypothesis suggested as much. We decided to find out.
That first wobbly step into the financial world set our course for the next 36 years. It also put us in debt to criminals. Mr. Wilbur Ross should be even more grateful. It was not our own genius or perspicacity that made a rising percentage of the public crave our investment advice; it was the feds’ counterfeit money.
This new post-1971 phony money began the process popularly known as “financialization.” What used to be Main Street business, providing goods and services, satisfying customers and building real wealth, became something different – tradable assets.
Richard Nixon and Milton Friedman – chief modern-day purveyors of phoney money. Initially the experiment with fiat money produced a decade of economic upheaval and galloping price inflation. Then central bankers appeared to get the hang of it. After some time of “Great Moderation” fantasies were taking hold, but the crises returned – and they were getting more intense from one iteration to the next. Given the obscene size the global debtberg has attained and the associated rampant money supply growth, the next one promises to be a real doozy.
Photo credit: nixonfoundation.org
Businesses “went public” so their owners could realize “liquidity events”… and their managers could earn big bonuses by “maximizing shareholder value.” Then, the wheeler-dealers – using the above-mentioned fake money and fake savings, made available to them at fake interest rates – could go to work. Soon, they were slicing and dicing, derivativatizing, privatizing… and mostly leveraging up.
Mom and pop wanted to get into the game, too. They were told that they should treat their own home as an “investment” and that they should “take out equity” and “put it to work” in the stock market.
After all, the government made sure that they all played on a level playing field; with the SEC watching over them, they believed they could compete even with the slick operators at Goldman, Rothschild, and J.P. Morgan.
Driven by Greed and Fear
Before the ’70s and ’80s, few ordinary Americans felt qualified to invest in stocks. They had neither the experience nor the time to research corporate records. Instead, they went about their business, earning, spending, saving, and getting wealthier.
But then, the message went out: “You don’t have to… you can just buy a mutual fund. Let an expert do the hard work.”
Soon there were more mutual funds than stocks and much of the middle class, or what was left of it, had a mortgage-backed line of credit and a stock market portfolio. These mom-and-pop investors were driven by greed and fear, both of which emanated from the feds.
Fake money, fake savings, and fake low interest rates created a fake boom on Wall Street. Stocks went from under 1,000 on the Dow in 1980 to over 19,000 today, up 19 times, far faster than consumer prices or GDP.
And after 1987, the Fed itself would make sure that if there were losses, they would quickly be made up in a rising market. Who wanted to be left out?
Financial asset returns (as represented by the Wilshire total market index, which includes returns from dividends) vs. economic output in the bubble era. Has the free lunch been discovered after all? We don’t think so – it seems to us that what has happened is rather that a certain system of wealth redistribution has been implemented, and the above chart is one of its symptoms – click to enlarge.
As for the fear, they’d also seen what the feds could do to their savings. Since abandoning honest money in 1971, the dollar quickly lost value. By 1980, the inflation rate was running above 10%.
But after that, it was more or less clear sailing. Interest rates came down. Asset prices went up. The rich got richer, while the middle classes of Flyover America soon discovered they were competing with 3 billion Asians willing to work for less than $5 a day.
The Crony Rules
Financing was cheap and easy. Almost unlimited. The action in the casino was hot. And if you got the feds to rig the game in your favor, you were almost guaranteed to make money.
That was what Wilbur Ross must have been thinking when he began buying steel companies in the early 2000s. The industry had been rolled and flattened by America’s fake money system. Foreign steelmakers already had cheap labor.
The fake money system gave them the two things they lacked: huge demand coming from credit-rich U.S. consumers and a huge supply of capital, from the same source.
That – along with the pensions, union contracts, and regulations – brought U.S. steelmakers to their knees. Wilbur Ross, now in line to be Donald Trump’s key man at the Department of Commerce, bought some of America’s greatest steel companies at bargain prices.
Steel-billionaire Wilbur Ross – he saw an opportunity and took it, but like so many others, he had the bubble-winds of the phoney money system at his back when they were at their strongest. On the side, he somehow also managed to get rid of billions in pension obligations, offloading them onto an unsuspecting J6P.
Photo credit: Daily Telegraph
Then, almost as if he knew what was coming down the pike, the feds slapped a 30% tariff on imported steel just weeks later. Bingo! He made his fortune three years later when he sold to a foreign operator, ArcelorMittal, for $4.5 billion.
Another part of the public/private partnership that Ross put together included offloading his employee obligations onto the taxpayer. Between this deal and another later, he is said to have dumped $17 billion worth of pension and healthcare costs from his steel operations.
We have no more complaints against Mr. Ross than we have against ourselves. He didn’t make the crony rules any more than we did – but it would be nice to at least hear him criticize them.
Chart by: St. Louis Federal Reserve Research
Chart and image captions by PT
The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.