Election fever is gathering momentum in America and the rhetoric among the contenders is beginning to get heated. In the melee that accompanies the skirmishes, a subject that remained dormant for decades is now rearing its head. It is the subject of wealth distribution which everywhere in the world means to discuss the social contract but not in America where it means to force a socialist contract on the nation. Thus, if someone questions the way that wealth is distributed in America, they open themselves to the charge that they seek to start a class warfare in the style of the European socialists.
The reason why this subject has gained importance these days is that the business cycle is now going through a nasty downturn having come close to a collapse. Thus, at a time when the rich were getting richer and the poor poorer, the financial near meltdown that hit America and the world widened the gap still further between the two classes. What could have been an ordinary business cycle turned out to be an exaggerated one and the people who got hurt the most began to feel that the system was manipulated by those who benefited from the difficulties. The poor people were the first to develop this feeling but the sense that foul play was involved spread to the middle class where unemployment shot up to a high level and refused to come down. As a result, the subject of how the wealth of America is distributed among its people came up in the discussions, and all the related subjects were dragged into the debate.
Because perspective is often lost in America during the presidential campaigns, it is a good thing to keep bringing things back into perspective lest the debate drift into the proverbial “Twilight Zone” of absurdity. To this end, we should all begin by admitting that the part of the business cycle we do not like is the downturn because it is a time when we stand to lose our job and stand to experience a disruption in our life. And if the misfortune does not happen to us, we know it can happen to someone close to us. This is not to say that we dislike taking time off from work; we do so every time we take a vacation to relax and to savor the leisure and the fun. The difference between losing a job and taking a vacation, however, is that the first is forced on us while the second is planned by us. Moreover, losing a job opens the door to uncertainty as to what the future may hold while taking a vacation happens in the knowledge that we have a job to return to, a means to earn the money we used to and a way to resume the life we are accustomed to. What this says in the final analysis is that financial security is what determines our attitude toward the business cycle.
These considerations lead us to pose the question as to whether or not some people view the business cycle not as a disruptor of life but an opportunity to enhance their own financial security. The answer to this question is yes, there are such people; and this makes it so that the matter can be summarized this way: The misery of one is the good luck of the other. The fact is that there are people who not only take full advantage of this reality; they live exclusively by it. To see this, we take a look at one of the markets upon which the economy rests. A good example would be the stock market because it is one that is familiar to most people. This market goes through up and down cycles more frequently than any other; and it is a place where the people who know how to make things work for them can buy low and sell high in the same day thus make a quick profit.
It can be said that such people buy cheaply the wretched misery of one then turn around and sell it as the object of exuberance to someone else at an inflated price. And this phenomenon has its consequence; it opens the door for other people to exploit the situation further still and thus start the slide on a slippery slope that can take a single stock down the abyss or take the entire market down there. These people are the regular short-sellers and their more redoubtable buddies, the naked short-sellers. Add to this the fact that technology has made it possible to do in micro-seconds what used to take days to complete and you have what is called the high frequency traders. And these people -- together with their machines and the financial instruments called derivatives -- are the plague that has mortally infested the marketplaces of today.
To get an idea what the short-sellers do, imagine the analogy of a block of buildings. These would be 5 buildings each containing 200 condominium apartments for a total of 1000 apartments. In a block this size you will find that at least 2 apartments are put up for sale every month. This is what happens in our fictitious example until an outfit that specializes at making a quick profit appears on the scene. The outfit “borrows” a handful of apartments from their owners and puts up a cash collateral equal to the going price. The owners do not vacate the apartments but stay in them and get back full ownership after a while plus a commission to compensate them for their troubles. In the meantime, the borrowing outfit puts the apartments for sale at a lower price than the going rate.
This has the effect of forcing the other dwellers of the block who need to sell now to do so at the lower price. Seeing the prices drop and not knowing why, other dwellers who had no intention of selling at this time get scared and sell at the lower price. More people follow suit and sell at prices that keep going lower and lower with each new transaction. A full blown panic develops; it triggers a domino effect and accelerates the race to the bottom. The panic continues until most of the apartments are sold at a fire sale price where the ultimate buyer would be the quick buck outfit that started the whole thing. Eventually, the selling stops when there are no more apartments to sell. After a pause, the prices start to rise again until they reach their old levels. This is when the outfit sells the apartments and generates a fantastic profit for the quick buck artists that own it. It then repeats the cycle using the same block of buildings or using another block. The net effect of this sort of business is that wealth is transferred from the people who spent a lifetime earning it to the people who learned to play a dirty game and play it with a level of callousness that can only be described as savage.
And get this, dear reader, we have not even descended far down the slippery slope yet. So let us go there and see what the naked short-sellers do. These people wear clothes alright -- even a three-piece suit and a tie -- but they do not bother to borrow an apartment or two. Instead, they start the ball rolling by advertising that they have apartments for sale at prices lower than the going rate. This is how they start the race to the bottom where the same scenario unfolds. And they manage to make enough dough to paper over their moral nakedness as they laugh their way to the bank. So much for the activities of the short-sellers -- naked and otherwise. Below these people on the ladder of the slippery slope of morality sit the rumor mongers whose trick of the trade is to start the selling panic by putting out false stories. For example, they may say: It has just been discovered that the block of buildings was erected on top of an old chemical site and that it will soon be condemned. In fact, the peddling of rumors is something that happens all the time on the “street” of the stock markets where the mongers make a huge profit at the expense of those who listen to them and sell in a panic.
Worse than the rumor mongers and lower on the slope of morality sit the people who would set fire to one of the apartments. The equivalent of this act among the stock market traders would be to short the stock of say, a pharmaceutical company then take a walk to a nearby pharmacy where they inject a poison into one of the company's products as it sits on the shelf. In fact, something like this happened a few times before where the discovery of the poison triggered a panic selling of the company's stock. It is at this point that the perpetrators buy back at a cheap price the stock they did not have a while ago but sold at a high price. And these people make a huge profit at the expense of everyone else.
Let us now consider the following. A fundamental principle of capitalism is that every participant in the marketplace should have access to accurate information. Therefore it stands to reason that the people who violate this principle by putting out false information and take advantage of the resulting situation as well as the people in politics and the media who defend them are the ones who exhibit anti-capitalist tendencies. They are the people who not only advocate class warfare with words but do it with their deeds. Whether or not they mean it, these people are the ones who slowly transform North America into a welfare nanny state. By contrast, the people who complain about such practices and seek to have them wrung out of the system are the authentic law and order advocates of true capitalism. And yet, if you follow the debates, you find that the perpetrators are the ones who accuse the innocent of what they themselves perpetrate. It is an upside down world if you can imagine one in the Twilight Zone of politics and the media where Karl Marx is calling Milton Friedman a socialist nanny.
Still, we should not despair when we see all that mischief. The fact is that the world continues to function because while some people live and prosper by the bad cycles, most people and most businesses prefer to see an economy that grows at a steady and predictable pace. These people can live with the normal business cycle because it is usually of mild volatility and they have adapted to it. What they dread is the cycle that is triggered artificially because it is often violent and they have no means to defend against it. These are the entrepreneurs who know how to create wealth and thus lead the good life by the work they do. Opposed to them are the speculators who possess no skill to create wealth but know how to amass the wealth that is created by others. They have the right to make a buck and feed their families but not the right to go on a rampage and create the sort of chaos that allows them to amass more than their fair share. And yet, when you question these people about the methods by which they get rich, they cry foul and object at being questioned at all. What they like to do instead is pretend to be members of the enterprising class entitled to the respect that is accorded to the true entrepreneurs when in reality they are nothing but opportunistic scavengers.
Thus, when we speak of a war between two classes of people we should not mean the class of the deserving rich versus the class of the undeserving poor, we should mean the class of the rich and the poor on one side versus the class of the undeserving hungry-to-get-rich-quick characters on the other side. And the perspective we should keep in mind at all time is that of the class of the true entrepreneurs who are motivated by the thrill and the adventure that accompany the act of creating something new. These people start their own ventures or they invest in the venture of someone else by buying equity in their start-ups. For this to work, the entrepreneurs need a steady economy that will give them certainty. The thing they dread is the volatile situation that creates uncertainty and gets in the way of developing what they start.
But creating volatility and the uncertainty that goes with it are the things that the class of speculators lives by. These people realize that their activities may put some entrepreneurs out of business but they do not worry about killing the goose that lays the golden egg because they know that more geese will come along and lay more eggs which they will collect and enjoy till they get their hands on the geese that laid them and kill them too. And while it may be argued that the speculators work to gain financial security like everyone else – a legitimate pursuit in itself -- it cannot be shown that the excessive greed that accompanies some of their transactions is legitimate business. Such activities must be curtailed with tough regulations armed with powerful teeth.
The first thing we do, therefore, is acknowledge that no human enterprise is ever going to be perfect. Thus, no economic system that we can devise will be immune from the weaknesses that will cause it to go bad at times. What this means is that there will always be deficiencies in the system, and the speculators will try to take advantage of them. The trouble is that these people and their apologists in politics and the media tend to blame the government for giving them the opportunity to do so. This may be true at times, and a constructive criticism is in order when such thing happens. But the apologists cannot tell the difference between the creative entrepreneurs who create the wealth of the nation and the hungry speculators who amass some of it by devious means. And so they view everyone as being a legitimate capitalist which is their big mistake. On top of that you have the confused politicians who repeat the mistake while running for office and if elected, find themselves compelled to turn the mistakes into the laws of the land.
What can be said about the habit of blaming the activities of the speculators on a government that failed to create the perfect economic system is that it sounds like the little hooligans and their parents who blame you for the crash that the little ones caused when they stole your car because you did not equip the car with anti-theft features above the ability of the little ones to defeat. This, my friend, is when you wish you could jail the little ones and their parents too.
And if during an election campaign a politician speaks of class warfare, he or she better realize which class makes the car and which steals it. Otherwise the electorate will see them not as the responsible legislators that should be elected to office but the trivial parents of the speculating little hooligans, all of whom deserving to be thrown in jail.