from Gold And Liberty:
Behind every great fortune is a crime,” said French novelist Honoré de Balzac. Even our modest little pile owes much to a crime, though not our own. But what is behind Wilbur Ross’ billion-dollar fortune?
In this series, we are describing how crony capitalism works.
The cronies don’t break the law; instead, they make the law. That is, they work with their elected representatives, government employees, regulators, and lobbyists to sculpt the field on which they do battle. Naturally and inevitably, they give themselves the high ground.
SETTING THE FINANCIAL COURSE
We got onto the ragged edge of that high ground by accident when we began working with Mark Hulbert in 1980 to find out which investment advisers really outperformed the market. The thinking at the time was that none could do it; the efficient market hypothesis suggested as much. We decided to find out.
That first wobbly step into the financial world set our course for the next 36 years. It also put us in debt to criminals. Mr. Wilbur Ross should be even more grateful.
It was not our own genius or perspicacity that made a rising percentage of the public crave our investment advice; it was the feds’ counterfeit money.
This new post-1971 phony money began the process popularly known as “financialization.” What used to be Main Street business, providing goods and services… satisfying customers… and building real wealth, became something different – tradable assets. Businesses “went public” so their owners could realize “liquidity events”… and their managers could earn big bonuses by “maximizing shareholder value.”
Then, the wheeler-dealers – using the above-mentioned fake money and fake savings, made available to them at fake interest rates – could go to work. Soon, they were slicing and dicing, derivativatizing, privatizing… and mostly leveraging up.
Mom and pop wanted to get into the game, too. They were told that they should treat their own home as an “investment” and that they should “take out equity” and “put it to work” in the stock market.
After all, the government made sure that they all played on a level playing field; with the SEC watching over them, they believed they could compete even with the slick operators at Goldman, Rothschild, and J.P. Morgan.
DRIVEN BY GREED AND FEAR
Before the ’70s and ’80s, few ordinary Americans felt qualified to invest in stocks. They had neither the experience nor the time to research corporate records.
Instead, they went about their business, earning, spending, saving, and getting wealthier. But then, the message went out: “You don’t have to… You can just buy a mutual fund. Let an expert do the hard work.”
Soon there were more mutual funds than stocks… and much of the middle class, or what was left of it, had a mortgage-backed line of credit and a stock market portfolio.
These mom-and-pop investors were driven by greed and fear, both of which emanated from the feds.
Fake money, fake savings, and fake low interest rates created a fake boom on Wall Street. Stocks went from under 1,000 on the Dow in 1980 to over 19,000 today, up 19 times… far faster than consumer prices or GDP. And after 1987, the Fed itself would make sure that if there were losses, they would quickly be made up in a rising market. Who wanted to be left out?
As for the fear, they’d also seen what the feds could do to their savings. Since abandoning honest money in 1971, the dollar quickly lost value. By 1980, the inflation rate was running above 10%.
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