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Regulation and Market Fixes Will Not Cut the National Debt Lombardi Letter 2018-04-20 13:15:04 anglo-saxon culture anglo-american individualism charles darwin debt U.S. national debt anglo american capitalism glass-steagall globalization The U.S. national debt will continue to grow unabated because the underlying nature of the financial system has not changed. Only a cultural shift in how finance operates can reverse it. Analysis & Predictions,International Markets,Stock Market,Stock Market Crash,U.S. Economy,U.S. Politics,World Politics https://www.lombardiletter.com/wp-content/uploads/2018/04/iStock-923881152-150x150.jpg

Regulation and Market Fixes Will Not Cut the National Debt

The National Debt

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National Debt Is Bloating; Only a Cultural Shift Can Prevent Disaster

What is the relationship between the Anglo-Saxon culture and the ballooning national debt in the United States? The world? It turns out that it has almost everything to do with it. It also suggests that another national debt crisis will occur, because the underlying nature of the financial system has not changed.

The problem of national debt perseveres. The International Monetary Fund (IMF) has issued a veritable debt alert. It noted that the world has achieved a record level of debt that topped some $164.0 trillion in 2016, or 225% of global gross domestic product (GDP).

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IMF Managing Director Christine Lagarde warned that the world has added 12% to debt as a percentage of GDP compared to the previous peak reached in 2009. China leads in this dubious achievement. (Source: “Global debt has reached a record high, IMF says, and three countries are to blame,” MarketWatch, April 18, 2018.)

But U.S. debt is also running out of control. The IMF estimates that U.S. debt could top Italy in a mere five years. Italy has among the highest debt-to-GDP ratios in the industrialized world. Lagarde warned that at the current pace, the U.S. could rival some African countries in indebtedness.

The IMF said that in the 2018-2020 period, the U.S would add annual deficits of over $1.0 trillion, or more than five percent of GDP. By 2023, it warned U.S. national debt would be 117% of GDP. (Source: “US debt load ballooning, set to outpace some African countries in 5yrs – IMF,” RT, April 19, 2018.)

The Trump tax cuts don’t help. Indeed, they will more than likely perpetuate the same patterns that cracked the world economy in 2008. Thus, the global economy remains vulnerable to the financial instability that derives from excessive debt.

The Causes of National Debt Are Rooted in Anglo-American Capitalism

The 2007/2008 financial crisis exposed the major weakness in the economic model that Great Britain and America promoted—or, rather, enforced—in the aftermath of World War II. Britain and the United States have a symbiotic relationship. If the U.S. was once Britain’s colony, after it lost its empire, it found it necessary to become a U.S. “poodle” in order to preserve a fraction of its former imperial influence.

The nature of the relationship has been for Britain to buttress the United States’ own quest for global economic and geopolitical hegemony.

Arguably, France—which also lost her empire in the 1950s and 1960s—competed with Britain in the loyalty-to-the-U.S. games. But the fairer or less extreme French “capitalism” kept it from falling fully in the Anglo-American camp.

Capitalism, Individualism, and Darwinism

The Anglo-American model of capitalism differs from all others because, more than any other, it stresses egoism. Or, less pejoratively, it rewards and encourages individualism above all other characteristics. Individualism is a virtue. Charles Darwin’s theory of natural evolution had immediate effects on the organization of society and economics.

Not only were animals and plants selected according to the “survival of the fittest” concept, but nations and individuals as well. Such a system necessarily creates inequalities. It’s no exaggeration to suggest that inequality has become one of the very pillars, a virtue, of Anglo-American society.

The collapse of the Soviet Union, however, dealt a death blow to the distributive, or socialistic, variant of the free market system. The Anglo-American model won and swept aside all others under the guise of “globalization.” The champions of individualism could find nothing more reassuring about the validity of their model than the fact that communism—which is at the other extreme—had collapsed. It was nothing short of the natural order.

Globalization is a form of Anglo-American capitalism, unshackled from national borders. Since the mid-1990s, it has become the basis for economic growth worldwide. It has also contributed to the culture of financial liability that has increased national debt.

How Has Individualism Contributed to the National Debt?

The Anglo-Saxon or Anglo-American model, which encourages self-reliance, runs on confidence. That is, the confidence that an unregulated market will function within a set of parameters without going over the edge. We might consider, as the ultimate expression of that overflowing confidence, President Bill Clinton’s repeal of the Glass-Steagall Act of 1933.

The Act was introduced in 1933 precisely to keep what Federal Reserve Chair Alan Greenspan, upon noting the emergence of a tech stock bubble in the mid-1990s, would many years later describe as “irrational exuberance.”

The repeal of Glass-Steagall, which meant that commercial banks could take the same financial risks as investment banks, encouraged the “stock market is a casino” syndrome. The system’s inbuilt trust in the idea that markets regulate themselves had encouraged risk propensity.

Banks became huge, “too big to fail,” as it were. Both personal and national debt would eventually become the main products of this over-confidence in the market mechanism.

The Invisible Hand Caters to the Ego and Lacks Vision

The market’s so-called invisible hand (it’s invisible precisely because no such hand exists), left free to touch everything it wanted, pushed the banks and the financial institutions to the brink. But, the system had by then become so dependent on “finance,” rather than the “real economy,” that when they failed, the government had no choice but to bail out the banks responsible for the sub-prime debt disaster and the 2008 crisis.

The father of modern capitalism, Adam Smith, must have spun in his grave. Yet, the government had to make up for the invisible hand’s failure. The Obama administration in the United States and eventually just about every country in its geopolitical orbit (the EU and Japan) were forced to pile on the national debt to help compensate for the errors of the unregulated market.

The U.S. government bailed out Wall Street. In Great Britain, no less, the government actually nationalized the major banks to save them—and their customers—from demise. In other words, the good old government, the much maligned and inefficient State, had to save the day.

It saved the champions of the ultimate self-regulating, unfettered market (the essence of the Anglo-American model of capitalism). Did this work?

Judging from the eventual records of the Dow Jones, the FTSE, and other major indices, many bankers would answer a resounding “yes.” Nevertheless, on closer analysis, the bailouts and nationalizations were “Band-Aid” solutions that did nothing to address the structural and philosophical causes of the 2008 crisis. Therefore, the risks of excessive national debt persist.

The West’s governments gave in too easily to the banks and financiers in September 2008. Admittedly, so convincing were the bankers’ arguments that many on the Left—that is, the traditional Left—thought it best to fix the system by covering for the system’s own mistakes. In turn, the bailed-out banks showed utter disdain for the suckers who took them off life support.

Banks Are Stubborn

By early 2009, the banks were back at their game. Executives patted themselves on the back with incentives and bonuses. In other words, those who had recklessly tested the limits of the system felt free to test the limits of debt again.

After all, whatever risks they took would be transferred to the ballooning national debt in case of another failure. The motto for current finance, born out of unfettered Anglo-American capitalism, is not merely the classic “another day, another dollar.” It’s “another crash, another bailout.”

If debt was the name of the game, governments should have used it not to help the banks. Rather, they should have focused on stimulating the real economy. The banks were reluctant to lend to small and medium businesses or individuals to help them recover, despite the fact that that was exactly the treatment they secured from taxpayers.

That’s why, in the nine years that have passed—at the time of writing—since the collapse of Lehman Brothers and the sub-prime mortgage derivatives, the fantasy economy of the financial markets has thrived. The Dow has set records.

Yet, the real economy, for all of the alleged employment gains, continues to struggle. The phenomenon in the “globalized” world, running on the Anglo-American model, is hardly unique to Wall Street or London’s financial district (The City).

In continental Europe, where many Americans believe “socialism” rules, those who could secure loans, enjoying the low interest rates that quantitative easing made possible, preferred to buy securities than to fund struggling businesses operating in the real economy.

The better solution might have borrowed more from looking further back to the origins of the modern banking system. That is, the banks that the Medici and others like them set up in the Italian Renaissance in Florence and Siena. These focused, in the absence of financial “instruments,” as tools to stimulate the real economy.

They provided credit to advance trade and promote development. Until “globalization,” in fact, and in the more regulated banking system of the Keynesian period of the West (1933-1975), that’s what banks did.

And, for all of the related problems, there existed a more supportive, even more ethical, financial system. It used debt to better effect than the extreme financial approach that persists to this day. It avoided speculative binges and encouraged socio-economic welfare.

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