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This is not a Crisis of Capitalism image

This is not a Crisis of Capitalism

This month, The Financial Times has been running a series of articles entitled Capitalism In Crisis, written by a number of the world’s most renowned economists and policymakers. That series reveals just how far we are from resolving the enormous crisis confronting us – not because of the insights contained in the articles, but because the entire premise of the series is completely wrong. This is not a crisis of Capitalism.

Capitalism was an economic system in which the private sector drove production through a process of capital accumulation and investment; and in which the government played a very limited role. The United States has not had that kind of economic system for decades. Today, the federal government spends $25 out of every $100 spent in the economy and the central bank creates the money and manipulates its value. Moreover, the economic dynamic is no longer driven by capital accumulation and investment as it once was.

Instead, credit creation and consumption have become the dominant forces propelling economic expansion. This is not Capitalism. It is something completely new. That even The Financial Times (perhaps the world’s best newspaper) does not yet understand this fact is deeply disturbing.

Capitalism was a 19th Century phenomenon. It did not survive World War I. That war destroyed the classical gold standard upon which Capitalism had been built, and it forced the governments of the belligerent nations to take near-total control over economic production.

The unprecedented expansion of government debt required to fund the war created the credit bubble now known as the Roaring Twenties; and the boom of the 1920s caused the Great Depression of the 1930s when the credit that fueled the boom could not be repaid. World War II resulted in complete government control over the economy once again. During the decades that followed, government spending on social welfare programs surged and military expenditures accelerated. By the 1960s, the government employed both Keynesian and Monetary tools to control the rate of economic growth. Finally, in 1968, Congress removed the legal requirement that dollars be backed by gold. That change allowed an explosion of fiat money-denominated credit creation that completely transformed our world.

Total credit in the United States first topped $1 trillion in 1964. Over the following 43 years, it expanded 50 times to $50 trillion. That credit created unprecedented wealth, profits, jobs and tax revenues. It ushered in the age of Globalization. So long as credit expanded, prosperity increased. Credit replaced Capital as the key economic driver.

The economic system that went into crisis in 2008 had little in common with Capitalism. Creditism is a more appropriate name for it because it generated economic growth through a process of credit creation.

Why then is Creditism in Crisis? It is in crisis because credit, unlike capital, has to be repaid. Now, a great deal of the $50 trillion of credit that fuelled the prosperity of the last four decades cannot be repaid. Moreover, much of the private sector is no longer creditworthy, making further credit expansion impossible. Therefore this credit-driven economic paradigm appears incapable of generating any new growth.

That is not all. Over the past 40 years the proliferation of credit has wrought enormous changes on the structure of the global economy. The United States has been deindustrialized as the result of its ability to buy goods from low wage countries on credit. As Industry contracted, Finance grew to be the dominant sector of the economy. Now that Americans can bear no additional debt, Finance too has become a sunset industry. Deindustrialized and heavily in debt, the United States can no longer act as the driver of global economic growth. Consequently, not only is the U.S. economy no longer viable as it is currently structured, neither are the economies of all the countries, such as China, that have grown by pursuing a strategy of export led growth. None of these global imbalances have yet been corrected.

The reality is that to a very large extent, the government now manages the United States’ economy – and U.S. demand remains the most important factor generating economic growth throughout the rest of the world. The actions taken by other governments and government-related institutions must also be carefully monitored. For instance, the December announcement by the European Central Bank (ECB) that it would lend Euros 489 billion (approximately $630 billion) to European banks for up to three years at low interest rates is THE reason that global stock markets have rebound over the past six weeks.

By chance, two months ago, at the peak of the “Euro Crisis,” I was in Europe making a presentation to institutional investors in Geneva, Milan, Frankfurt, Edinburgh and London. The mood there was very grim. Last week, I made the same presentation to investors in New York, Kansas City, Chicago, San Francisco, L.A. and Austin. The change in sentiment was astonishing. Although the long-term prospects for the global economy remain very disturbing, the ECB’s intervention has staved off what many had feared would be a near term global economic breakdown originating out of a banking crisis in Europe. Global markets rebound sharply not only because of the success of that intervention itself, but also because of the growing realization that there would be more government-directed interventions as and when necessary to prevent other crises in the future.

While it is truly regrettable that the global economy now depends on government intervention to prevent economic collapse, given the sick state of the global economy, government intervention is far preferable to the horrors that would accompany such a breakdown.

“Market forces” still play an important role in the economy, but now, more often than not, government action has so much influence on market forces that it becomes unclear where the government influence stops and the market begins. Supply and Demand are still the ultimate arbitrators of value, but today, governments often have an extraordinary influence on both. It is crucial for investors, policymakers and the voting public to recognize this - and to understand that this is not Capitalism. At this stage, there is no point trying to fix the “crisis in Capitalism.” We must fix the crisis in the current economic system within which the global economy now operates. Administering the “right” cure to the wrong patient could prove fatal.

What do you think? Is it a crisis of Capitalism or is it a crisis of Creditism? Please provide your comments below. And for more information, click here to see our financial education resources.

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Andrew
2/2/2012 2:26:00 AM
Fantastic article Richard. Great to see that there is someone out there who can see the banking system for what it is.... My only question to you Richard is? When do you think the music will stop & when will this house of cards come crashing down? Also what do you think will be the next stage of economic manipulation by these privately owned central banks? I look forward to your future articles that my help answer that question.
Andrew Craucamp
Friday, February 17, 2012
Thanks for this Andy, it was very enlightening and I am starting to see your point. In my own little way I have practiced this all my life, hence never had a financial crisis. Credit was something I used very sparingly and only to finance worth while investments - like property and only one project at the time. I might be very much reacher if I had not been so conservative, but therfore I never had financial problems. Love you lots.
Martin
2/2/2012 9:55:20 AM
Having read both of your books I can easily recognize that it is a crisis of creditism, which has lead to the "statism" you have referred in the past. While it is obvious for me now, I am really confused as why it is so difficult for friends, family and relatives to understand. They think it´s a capitalism crisis!!! For sure my poor teaching skills may ccontribute in not understanding - that´s why I´ve changed my approach to give them as a gift your kindle edition books! I just hope they take the time and read them... Thanks for all your insights, It´s great to have you here in this blog.
Scott
Thursday, February 02, 2012
Martin, I empathise with you reguarding trying to explain this to others. They just look at me like I have three heads. "The process by which money is created is so simple that the mind is repelled". There is a good youtube video "money as debt" which provides a simple explaination. I had not realized that congress removed the legal requirement that dollars be backed by gold in 1968. I had always read the Nixion took us off the gold standard in 1972. Was the act of congress a domestic change and the act of Nixion an international change? Does any one have a good source that explains this removal of the gold standard better ? Thanks Scott
Paul
2/2/2012 11:02:22 AM
Thanks, Richard. I enjoyed your book, The Dollar Crisis also. I appreciate the ongoing insights.
chuanjun
2/3/2012 7:31:49 AM
thanks rechard for your ideas,my question is :can we back to the capitalism when the creditism bubble is broken? or there would be another condition after the two?
Fabrizio
2/4/2012 1:51:23 PM
Great article....when you will go in Italy?
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Jesse
2/1/2012 8:25:39 PM
Spot on, Richard. So thriller your writings are now being posted on the Rich Dad site, for many to see. Getting financial education to the masses is key in solving our world's problems.
Jesse
2/1/2012 8:26:06 PM
Thrilled*
Monica
2/2/2012 11:57:44 AM
I do believe that the Supply and Demand, as arbitrators of value are not functioninig properly, or better said are pressured by external forces. How can you know for sure what it is the real balance?
Arthur
2/2/2012 12:14:37 PM
right on Richard. Any chance u could be appointed treasury sec or lets kick Ben out and make u head of the fed.
Jonatan
2/2/2012 3:31:37 PM
I think it's crisis of both, the lack of Capitalism and too much Creditism. I believe it is like James Rickards says "A currency war" and the music won't stop until either the dollar collapses fully (more likely) or the dollar comes out king again. It's a game to them, they just want to see how far they can push it and once they realize their limits they just push more because people are to stupid to realize what they're doing.
kenan
2/3/2012 2:29:44 AM
Възхищавам ти се Ричард,харесвам всичко което пишеш и информираш хората,като и отваряш очите ни,благодаря ти.
LUIS MANUEL
Wednesday, February 08, 2012
English, please
BONGIWE
Sunday, February 19, 2012
on chapter 112 increase your financial IQ three types of of investors 1. those who invest only for capital gains in the world of stocks people called traders. my question is does that mean Warren Baffet is in the S quadrant not the I quadrant?
Miguel
2/4/2012 8:30:27 PM
muy interesante el articulo y permite conocer y ver como se maneja la economia mundial y el problema es como se para todo esto.
Karen
2/16/2012 8:24:13 PM
I understand what you're saying Richard, definitely a crisis in Creditism designed by the evil empire at play here. But most are blind to there being a crisis at all. In Asia where i live, people are largely ignorant & continuing what they have been doing without knowing what's coming... the global economic collapse. What is the evil empire's "cure" to this crisis & when will that take place, Richard?
Ali
2/25/2012 10:30:58 PM
Thanks
Chris
Wednesday, March 07, 2012
Richard- your assessment is spot-on accurate, but one area seems glossed over. The current governmental interventions are preferble to the carnage of collapse. OK, but do you believe that all people on earth will continue to accept increasing quantities of worthless paper for their goods and services forever? Does each intervention not guarantee the necessity of a greater future intervention? Will we create a challenge of such size and scope that govt can not forestall it at some point?
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