A few weeks ago I penned a series of articles relating to the “cancerous” policies of the Federal Reserve and how said policies are killing the basic principles of Democratic Capitalism.
Of those basic principles, one stands out as being absolutely vital in order for business to thrive. That principle is the principle of trust.
Without trust, Democratic Capitalism cannot function. One’s clients remain one’s clients because of trust. Business partnerships are based on trust. Indeed, trust is the underlying principle of every capitalist action whether it be:
- Trust that a product is what it claims to be
- Trust that the business is legit
- Trust that the other party involved is not trying to take advantage of you
- Trust in quality control.
This trust is established by reputation and by the legal system. The former is earned by businesspeople through consistent work and repeated examples of being trustworthy and producing items of quality. The latter is in place to punish those individuals/ businesses who are fraudulent or breaking the law.
When the Financial Crisis hit in 2008, trust was damaged in a tremendous way. We found out in clear terms that many companies, mainly financials, were lying about their balance sheets. We also found out that many companies were actively engaged in fraud (as they themselves admitted in their Congressional testimony after the fact).
None of these companies or these individuals were punished or prosecuted. Instead, they were given taxpayer money. The argument for this was economic in nature: “if we do not save these businesses, the entire system will collapse.”
This argument completely underestimates both the strength of capitalism and the entrepreneurial spirit in the US. The entire system would collapse and we’d never recover? Really? Dust off your history books, even a brief review of US history shows that this country has been in a perpetual state of collapse and renewal ever since commerce began in this country.
There has never been a collapse from which the US did not recover nor has there ever been a boom that has not been followed by some sort of collapse. That is the nature of Democratic Capitalism: boom and bust.
Businesses collapse and new businesses take their place. This would have happened in 2008 had we let the fraudulent banks go under. Yes, we would have experienced severe short-term pain, but there were hundreds of smaller regional banks that didn’t commit fraud and which could have grown to replace those larger entities that should have failed.
We’ve just witnessed a process quite similar to this in Iceland, which did the following between when a Crisis hit it in 2008 and 2011:
- Had its banks default on $85 billion in debt (the country’s GDP is just $13 billion).
- Jailed the bankers responsible for committing fraud during the bubble.
- Gave Icelandic citizens debt forgiveness equal to 13% of GD.
Today, just a few years later, Iceland is posting GDP growth of 2.9%: above that of both the EU and the developed world in general. In plain terms, the short-term pain combined with moves that reestablished trust in the financial system (holding those who broke the law accountable) created a solid foundation for Iceland’s recovery.
In the US, we instead chose to undermine capitalism and the economic cycle. In the process we’ve undermined trust in the system. Until this is remedied there will be not REAL recovery.
PS. For more market commentary and economic analysis, swing by www.gainspainscapital.com. We offer several FREE Special Reports on how to navigate the market and preserve your wealth.