Hank Paulson, George W. Bush & Ben Bernanke killed Western capitalism. During the 2008 crash, when the banking system was failing (as is entirely predictable and natural in a hyper-levered house-of-cards economy) they decided to end market-led creative destruction, and institute a system of government-led bailouts, bailouts and bailouts — or, more accurately, uncreative stagnation.
Uncreative stagnation deserves its name for a number of reasons:
- As Steve Jobs put it: “Death is very likely the single best invention of Life. It is Life’s change agent. It clears out the old to make way for the new.” That is just as true for businesses, markets and governments as it is for organisms. When businesses, systems and markets fail, they open holes to be filled by new businesses, systems and markets. Without allowing for the natural death of failed systems and businesses, governments close the door to new — and often necessary — innovation.
- Without the market (i.e. the preferences of people in the economy spending their money) determining what businesses and systems work, those decisions are transferred to central planners and bureaucrats — in this case those who decide who gets bailed out (and who gets state subsidies) and who doesn’t. This means that capital will be allocated to things that people out in the market don’t want or need.
- The high debt-acquisition levels necessary to “save the system” necessitate higher taxation, which means that significant quantities of capital — instead of being reinvested into new businesses and ideas — go toward paying down interest on debt. Broadly, because American and Western debt is often owned by Eastern manufacturing nations, this means that productive capital that could be used by Western businesses is being siphoned eastward. So the capital will still get invested, but in businesses in the East.
- The money-printing necessary to “save the system” necessitates inflation, which discourages saving and investment and encourages spending on consumption, transferring more capital from Western consumers to Eastern producers.
Just how much debt and money-printing was necessary to “save the system”?
Here’s a chart Nomi Prins produced in 2009. The spending levels (and therefore debt levels) are truly staggering:
So not only did the bailouts disable creative destruction (the engine of innovation and social progress), they also created so much debt that they have already damaged the ability of future generations to save, invest and innovate.
Worse, they did nothing to address the fundamental fragility of the system. All of that interconnected debt means the system is still fragile to a default cascade, which means that if the system is to be “saved” again, it will require more bailouts and more debt-acquisition, further eroding the ability of taxpayers to save and invest, as governments tax and inflate the currency to pay down the debt.
I expect future generations to look back on this episode as a bizarre aberration. America — surely the greatest producer and innovator in the history of human civilisation — forgot how markets work and the notion of creative destruction, forgot that an empire dependent on hostile partners (i.e. China and the Arab world) is hugely fragile, and then forgot the fact that America emerged as a superpower as a direct result of its status as a great creditor and manufacturer, and that the old European empires lost their superpower status through loss of productivity and massive debt acquisition.