Opinion: Bernard Hickey argues hoarding of assets by the increasingly wealthy rich is strangling the global economic recovery

By Bernard Hickey

The last fortnight's dramas on financial markets is really just the sound of investors waking up to some fundamental problems in the global economy.

It is now dawning on the world's biggest fund managers that there is too much debt weighing on both households and governments in the developed world.

More importantly, they realise there will not be enough economic growth and income to repay those debts over the next 10-20 years.

That means governments might default or print money to repay the debt. Bank shareholders and bondholders may have to realise massive losses or face high inflation. Growth will be much slower and for longer than many expected. Slower economic grow might mean lower corporate profits and lower share prices.

After nearly four years of urgent fixes, emergency measures, bank bailouts, debt shuffles and government pump priming without any real improvement, there is a dawning realisation that something is broken at the heart of the global economy.

It's surprising to hear where some of these doubts about the future of capitalism are coming from.

Some of the world's biggest capitalists are now asking some fundamental questions about whether the type of globalised, free market-driven capitalism we have now is sustainable.

Bill Gross is the world's most important fund manager. He runs PIMCO, which is the world's biggest bond fund with US$1.3 trillion in assets. He commented this week that the hollowing out of America's free-spending middle classes was at the heart of the problem.

He pointed out that for several decades the engine room of America's consumer economy had been starved of income as high paid manufacturing jobs were exported to lower paid factories in China and as technological innovation replaced workers with machines. For 20 years the middle classes had made up the gap by borrowing more and governments had helped in recent years by also borrowing more to supplement their incomes.

Meanwhile, the extra profits made because of these lower labour costs were shuffled up to those on higher incomes and increasingly to an ageing group of capital owners who weren't able or willing to spend all those profits. Increasingly, wealth and income is being concentrated in the hands of those who can't or won't spend it. This is starving the consumer economy of the oxygen it needs to keep growing.

Hedge fund manager Jeremy Grantham has also picked up on this structural problem this week. He pointed to a doubling in the share of American income going to the top 1% of income earners to 20% in the last 30 years. That richest group are now hoarding that cash in the safest things they can get their hands on. Increasingly, that means gold and, ironically, US Treasury bonds, despite their credit rating downgrade this month.

Grantham has put his finger on the core problem with unfettered capitalism. It works to shift wealth to the richest, but can eventually topple over under the weight of itself when that wealth is hoarded and not reinvested or spent.

Grantham should know about how the rich work. His firm manages more than US$100 billion worth of funds and doesn't accept any amounts less than US$10 million.
Yet even he is saying it is now time to reset capitalism. He wants to see mortgage debt for America's overburdened middle classes forgiven. That means forcing bank shareholders and bondholders to take big losses. He wants to see tax rates on the wealthiest rise back to the levels seen in the 1950s and 1960s.

He is harking back to a time when America's middle classes powered the growth the world's biggest economy. They earned enough to buy the consumer goods their factories produced. Even Henry Ford, one of the most aggressive capitalists of the 20th century, decided to increase his workers' wages so they could buy his Model T cars.

These problems are not limited to America. The share of income going to the top 1% in New Zealand also more than doubled after the mid 1980s to almost 14% of income by the early 2000s. Last year's tax cuts will have worsened that.

The trickle down theory will not be enough to save capitalism. Even the biggest capitalists are realising that now.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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97 Comments

So close, Bernard.

You identify the angle of the deck, the colour of the deckchairs, the difference between first-class passengers and steerage. You even get - correctly - that it'll be a long time before things get onto an even keel.

You seem to ignore, though, the reasons for, and the inevitabilityy of, the sinking, and the fact that the 'even keel' will only be achieved on the bottom.

This is a simple case of exponential growth meets finite planet. There have always been extremely rich, and slave-level poor. Blaming one section (whom I neither like as people, nor approve of, nor am part of, by the way) of society for the more fundamental problem - particularly after the stuff we've posted here, is definitely in Emperor/clothed territory.

It has long been understood in my circles, that you can't do it with a handful of Beamers, that it is a case of microwaves for the masses - but that the lower end of the masses had to be the first to drop out, when we came up against the ceiling.

Thus the sub-prime wasn't the problem - it was their inability to generate income. Had to happen.

Now we have to get to a no-interest state - which is why I chose here to comment! Spending the existing 'wealth' doesn't underwite 'growth, more work does. Show me where that's coming from?

Sure, if you want a more equitable society under the lid, redistribute by all means, but please acknowledge the lid.

Yeah, seriously Bernie, when are you going to address the root cause of the mess we are in?

"After nearly four years of urgent fixes, emergency measures, bank bailouts, debt shuffles and government pump priming without any real improvement, there is a dawning realization that something is broken at the heart of the global economy."

I was getting excited reading this; I thought you were about address the obvious, that the monetary system itself is the problem.  Something half your subscribers know and understand but you avoid mentioning.

Our money is borrowed into existence, creating an inevitable exponentially compounding messy ending.  Overlay the baby-boomer problem, peak oil and over population and we have issues.

Why don't you write a piece titled "Are we nearing a collapse" or something and see how many comments you get?  Surely you agree a collapse of sorts is a mathematical certainty?  If you do then it is just a matter of timing right?

You are a smart guy, it’s frustrating to read your articles about the interior decorators on the Titanic without balancing it up a bit with pieces on where we are all heading and what we can do about it.

-bb 

 bb- one cannot turn a domestic Wellington pussycat into a wild African lion roaming the world overnight. Give him a little time.

Mr key calls this "the politics of envy" and is right in stating the NZ has a clear choice this November's election. Either a further step towards plutocracy, or, or, or what...?

A vote for the Greens?

I was thinking Winston Peters!

I hope he still has the winebox.

Winnie gets on the sauce does he ? ...... I'd be sculling from a wine-box too if I was in a split mind whether my ethnicity was Maori / European / or Chinese .

... No wonder he's drinks cheap Chateau Cardboard  !

I think hoarding is the result of the economy being killed, not the cause. The middle classes wealth is not coming back anytime soon, in fact our asset values still look artificial to me.  We are still not getting it, the damage was done years ago because of some very poor decision making and a lack of understanding of what the problem really was, from here its just down hill. 

The removal of WFF would be the death knell for the middle class here in Auckland. Yes, it is middle class welfare, but as you rightly point out, everybody just talks around the problem and those in power do not want to, or care to, talk about it.

Also we have never had true free markets in the western world so lets not just see this as a capitalist/free market thing, it is a Government/socialistic thing as well. The feed back loop makes them interdependent.

The debt backed monetary system we use is the problem, borrowing money into existence will always end in a collapse.

When are you going to talk to this point Bernie?

It's the excess banksterbasher...all that's needed is for people to stop borrowing and then in time the people will be wealthier and living in homes they can afford. Slap a tax on credit and hear the banks scream.

Wrong Wolly. 

If not one more cent of new loans were created, and the money supply wasn't increased deflation will occur.

Our monetary system requires new debt to be bought into existence to keep on going otherwise it all falls over.  Like a game of musical chairs, when the music stops there will always be those that lose out.

It is not enough to just stop borrowing, that brings the house of cards down just as too much borrowing will, we are walking along a knife edge that is getting ever sharper.

The credit impluse; the rate at which new loans are extended, has turned down, markedly, in most Western countries ( austerity and debt repayment is the new black....). That knife edge you talk of has been slipped off in The West, and has to be picked up in The East. Will it? Indeed, can it! - who knows. But almost certainly we have a debt saturation problem in The West; that's asset deflation and a shrinking money supply coming up, as you note; but mitigated by price inflation of staples/energy etc. Asset price inflation will ultimately return to 'save' The West, but not until after a nasty dose of 'the other', and from a much lower asset prices base.

I am in the other camp, I recon the endgame is hyperinflation.  

Whatever deflation occurs can be instantly made up with the stroke on a keyboard.  Centeral banksters have already demonstrated through their actions that is their answer to any crisis.

You rightly say things we have to have are going up in price, things we don't need cant afford are falling.

 

Wolly - there's NO difference between banks expecting to profit by extending credit, and folk expecting to profit by investment.

Nah...that's just silly PDK...of course there is a difference.

Right on Banksterbasher...

Yeh lets start talking about the root cause, not all the symtoms of. As they will merely continue as long as the root exists!

Lets start here:
http://www.iamthewitness.com/DarylBradfordSmith_Rothschild.htm

and follow up with: (get ya popcorn out or is it gummy bears?)
http://www.youtube.com/watch?feature=player_embedded&v=7qIhDdST27g

"Tomorrow is the 40th anniversary of the modern global economy....On 15 August 1971 ( seems like just yesterday!), with the US public finances straitened by the cost of the war in Vietnam, Richard Nixon finally cut the link between the US dollar and gold..., investors convinced themselves that the apparent economic growth fuelled by this debt was genuine rather than an artificial product of a binge. .". It's only taken us 40 years to get into this mess...and I'd guess another 40 to get out of it?.

Key and English seem to think it's appalling that a higher proportion of tax comes from the wealthy.

Most other people probably think it's appalling that such a small group of people are so much richer than the rest of the population, and would look into the reasons for that.

Key's and English's answer is to want to tax the rich less, something tried in the US, and has been proven to fail very miserably, with the mess we are now seeing the US is in.

I suppose that's what happens when you are governed by people who fall into that high tax bracket, they will just want look after themselves and people like them, and will follow the failed policies of other countries, with the same false arguments used by those countries.

The clear difference is wealthy in the US really are....while the majority providing the tax take here are far from wealthy but they are the so called high income earners.

Yeah all things are relative of course, their super rich would dwarf ours, but the trend in this country is the same, with an increasing pool of a few very very rich people. 

yeah, they're called the middle-class poor!!!!

Key is a currency speculator, he has very little to offer in the way of ideas. NZ used to lead the world in ideas, now we have Key who seems happy to follow failed ideas from Britain and the US. What a joke of a man.

 Bernard - congratulations again you make some good analyses lately, given good reasons, why the world is in trouble.

Negative worldwide events on many fronts are accumulating and accelerating in a staggering speed.

Looking into current developments on many fronts – the world will never recover again, simply because among the powerful in societies ethic and moral requirements and standards don’t prevail.

What analyses , Walter ? ...... Bernard has been getting worse than me  at creating a nonsense argument out of anecdotal evidence , and carefully selecting quotes from a small group of similarly minded malcontents .

..... his standards as a serious financial journalist have slipped so much of late , that he may not even be able to get a job back at Fairfax , when Amanda , Alex & Gareth oust him from interest.co.nz .

Worth reading Oram in today's Sunday star tImes

I don't always agree with what the guy says but think he's on the money today.

Today's theme is basically that Treasury's growth predictions were always way too optimistic, and they are looking even more silly since the global economic woes of the last 2 weeks have kicked in 

and Oram correctly takes issue with the notion that Aus and China will keep us strong - as he rightfully points out, the weakness in the US and Euope WILL impact on china, which WILL impact on Aus, which WILL impact on us

And Martin Hawes piece is pretty much spot on - (paraphrase) " There are some fabulous bargains coming up for those who have cash - this financial squeeze could take some time to wash through"

 Capitalists often cannot handle capitalism in a sustainable manner.

Someone I know who hangs out with the very rich tells me that in the banker belt of the lower Thames valley there are people who heat their outdoor swimming pools to bath temperature, all round the year.

http://www.guardian.co.uk/commentisfree/cif-green/2009/sep/28/population-growth-super-rich

 Rotten capitalism at it’s best !

 ….the only way the suppliers can accomplish this is to shut down production in the United States, and ship it to sweatshop facilities overseas, which has caused the exodus of 1.5 million U.S. manufacturing jobs. Wal-Mart pays its workers below subsistence wages, and destroys communities….

The Waltons are using their money to build up a banking empire, which apparently would give them one of the largest banks in the United States and the world.

 http://www.larouchepub.com/other/2004/3103waltons.html

 …and we see riots and physical assets of the super rich burning -

…and wonder why -

Hogwash , Bernard ... even by your standards , that is a poor effort . The article has no connection to it's title , that the " rich " are hoarding assets , thereby causing global financial imbalances ... . Where is that  argument ?

Over at the NZ Herald this same limp article has the title " Capitalism , top heavy - or toppling over " . And again , the title & the article are disconnected .

As Falafulu Fisi corrects you , socialism & crony-capitalism have got us into this mess , not the free market mechanism . Capitalism is not to blame . Not in the least . How could it be , no one in the world practises it !

Hate to be rude, but your article is pure drivel , Bernard . Fund managers Bill Gross & Jeremy Grantham have been quoted to back up your arguments of late , conveniently ignoring swathes of scribes who believe otherwise .

You need a holiday !

Bollocks GBH - and there's been enough posted here for you to know better.

Lets reiterate:

Money is a proxy for goods/services

Goods/services require work to produce.

Work requires energy, to be done.

Peak the energy supply, you peak the work that can  be done (efficiencies will slow, but not stay, the process). Meaning you peak what can be proxied-for.

At that point there's too much dosh, been faked into existence by the fiat system.

So - you get rising prices (relative to both incomes, and dollar-numbers held).

So - you will get inflation - bidding up via demand exceeding supply. Sure, the rich will out-bid the poor.

Also in trouble are those who thought their (fiat to begin with) investment dollar could make more proxy-value that it did. That's you.

At this stage, all the 'rich' in the world, spending all they have, won't do the trick. If you ran out on 'reserve', no amount of kick-starting will make your motorbike go. Bernard raises the valid quetion of whether we should share what there is - and London, Syria, Greece, Madrid, Libya, Egypt et al show you what happens when the out-bid get pissed.

Bollocks PDK : Bernard doesn't at all argue that " Hoarding of assets by the increasingly wealthy rich is strangling the glocal economic recovery " .....  The title of the piece and the contents of it do not connect at all .

.... how can someone " hoarding " something possibly affect global growth ?

 And what assets are being " hoarded " ?

If a rich guy buys an asset , then a seller has got the rich man's money for the asset ....  what the rich guy does with said asset is immaterial thereafter .

Bernard could run with the Greens in the coming election  for all the sense he's made of late , he's as daft a froot-loop as them , now .

But it must matter where a buyer  gets the money from to pay for the purchase, surely? If it's from debt, future earnings/spending power, then at some stage consumption will stop without more debt. If it's from savings (past hoarding?), then past consumption has been delayed to buy the  'today' assets, and merely transfered the asset that's hoarded. Either way, unless todays earnings are at a level that is comensurate with today's purchases ( we can live without borrowing to do it!), then only more debt; more future spending delayed, must eventually bring the whole economy to a stop as future earnings aren't enough to pay for today's debts. Only rising disposable income can provide the 'inflation' salvation, and is that with us today? , because it sure hasn't been for the last 20 odd year and debt has had to fill the gap.

One man's debt is another's credit . That's a zero sum game really , no problem at all ( within prudential limits ) .

......... the velocity of money is the key . And Bernard fails to identify that .

If the rich are sitting on piles of cash , then that cash is not literally in an Uncle Scrooge McDuck's money bin is it  ....It's in some market traded cash instruments . Which means , once again , there was a seller , whom now has the money is his control .

Bernard repeatedly slags off at Barack Obama , and yet his envy speeches , aimed at " the rich " , are straight out of Obama's manifesto .

... and in the egalitarian socialist Godzone nanny-state  , ripping into " the rich " , gets one alot of mileage .... Michael Cullen built his entire career upon it .

Its not a zero sum game....but the fact that you even thinking it means there are signs you are moving from voodoo economics to uh less voodoo economics...there might be hope for you yet.

Private Debt is what has been ignored GBH...growth for the last 20 years if not 30 has been fueled by ever increasing debt..which is a call on the future work, which is energy....That call is of two parts, money (today) and debt (oney tomorrow).  So that debt has to be paid for at some point....that point is approaching on our watch....congrats you get to see your "free market" implode, welcome to the test tube of want to be can kickers....

Velocity of money, it is indeed, this means spending....if the mass consumers dont have jobs, or have poorly paid ones they cant spend, think of them as mass and money as energy to move. Think of it as mass x energy = velocity (speed) and we are in a plane (the economy) which has a stall speed.....consumers are a huge mass and take away energy(money) and the plane slows.....the super rich in effect have huge energy but there are not enough of them to move the economy, so it slows and stagnates.....and at some point it stalls....then we nose dive into a depression....

aka the Great Depression of the 1930s....this is or was the second gilded age....for the lucky few....

regards

 Just for you Roger - and stop “cooking up” things for us.

 Business leaders are calling for more critical assessment of what kind of economic system we need for a fair and sustainable future.

 http://www.lifeworth.com/consult/2010/02/annualreview/

 As a supporter of free market mechanism,  I’m happy when societies find better, ethical solutions in doing business. The current economic system, called capitalism clearly doesn’t work.

Looking into current developments on many fronts – the world will never recover again, simply because among the powerful in societies ethic and moral requirements and standards don’t prevail.

We don't know if capitalism works , Walter , because it has not been given a trial run yet .

..... but the current system which is a cocktail of crony-capitalism & social-welfarism , that surely is a failure . One only has to look at the riots in London , and the parlous state of Greece to see where unfettered social-welfarism leads us . A George Orwellian horror story .

Pure capitalism , with simple , yet strong regulations ( i.e. the Glass Seagull banking laws , which Bill Clinton threw out ) , would usher in a new era of prosperity ...

..... but I'm not holding me Gummy breath waiting for that to be instituted . Too many vested interests in politics & business are creaming it , to allow their junket to be removed from them . ..... Where is the great egalitarian societal reformer Helen Clark , today ? .... nice well paid sinecure at the U.N. ... they all do it , both left & right . ... Al Gore ? Currently creaming it off the global warming hoax . Making himself corpulent & massively rich , off the poor & the middleclasses .

 David B. and you Roger are regularly “cooking up” things for us, mixing all sorts of ingredients to a "propagandistic soup of right wing politics", but without much depth and logic. You should rather run for Master Chef.

Did you read my link ?  http://www.lifeworth.com/consult/2010/02/annualreview/ So those people are all green, stupid and against free markets ?

Your beloved Eurozone is fraying at the edges , Walter , she's falling apart . The EU is giving us all a valuable lesson that " big is not better " . Those countrys were nimbler and more self responsible as stand-alone entities . And their unique and quirky currencies and cultures were a joy to all travellers , before the EU began to homogenise them into a bland grey pan-European soup .

.. the monstrous bureaucracy in Brussels has failed them , as we knew it would . An orderly break-down of the EU is required .

As sick as the USA economy currently looks , the EU appears to be a terminal case , no hope of recovery .

 Your beloved Eurozone is fraying at the edges , Walter , she's falling apart .

No - I don't like Eurozone Roger - cooking something up again.

Walter : You accuse DB & me of being " right-wingers " ... and yet I always advocate for people power . I want individuals to have more freedom ( and more responsibility ) to live their lives . And I want bullies like China to get the feck out of Tibet , Russia out of it's former satellites , and the USA to get out of any country who doesn't want them .

Smaller is better Walter ! ... Small businesses in aggregate employ more people than big ones . Small companies are nimble , and can innovate rapidly .

Lots of smaller countries with good governence is better than one big amorphous
Eurozone , with an incompetent and un-caring self-serving giant bureacracy in Brussels .

Right-winger am I , Walter ?

I don't think Swiss Cheese knows anything about you or I quite frankly Gummy.

I know many more "capitalistic swines" living on hill- tops, then you can imagen.

I’m glad for you, Kunst, since it means that there is hope for your lost socialist soul yet!

I will lift up mine eyes unto the hills, from whence cometh my help.

Psalms 121

David- It is a little late for dinner - but thank you anyway.

 10:26pm - now that’s a different statement I agree with - Roger – free of any unnecessary political colour.

In addition - the same applies for money/ power. http://www.larouchepub.com/other/2004/3103waltons.html

When money and power is distributed more widely, societies become more innovative and fairer - the opposit is the case. The reason why we should question capitalism in it’s current form.

Maybe they hoard assets by buying shares in good companys and bonds in good govenments and hoard the odd big house on the beachfront, massive farms that have cows/sheep they often have a uber large boat even a jet if they wish.

Is that called hoarding? 

No it's not , hoarding . Whatever you pay for , is your's ... how is that hoarding ? .. And someone on the other side of the transaction has the benefit of the money you paid for whatever , bonds , gold , stocks ,  17'th century French condoms made from sheeps' intestines , whatever .

 In fact , Bernard barely  even mentions hoarding in the article , but it's prominent in the title . And equally , but totally different title mis-leading title is on the exact same article the NZ Herald published .

He twitters on about lack of saving , and of debt levels around the world , but then has a crack at rich people who are bothering to be prudent and save . Their savings become someone else's investment funding . Daft , Bernard , truely daft .

... Hickey is supposedly a professional financial journalist .... this was not his finest career moment , was it !

I agree with you entirely, Gumy. In fact if this was Harry Potter’s world at Hogwart’s, Bernard would be known as Professor Fruitus Loopus, teacher of muggle economics and expert in all things up when they are down, and down when they are up! Whereas you and I would be the only ones having any fun in the joint, running around inflicting the expelianus spell on all the unsuspecting that we meet.

One grows weary of the economic stupidity of socialists, and the lettuce heads, and the poverty that they have wrought on this country. It is sad that the penny simply fails to drop for New Zealanders and their failure (refusal) to make the link between their socialist tendencies and the economic pooh and poverty that they find themselves in.

 Of course you agree David.

Any white dusting your way David - on the hills of Milford on the Hauraki Gulf ?

David just read on:

 Capitalism will change, there is no doubt, and it must change so that it delivers both private wealth and public good” explains Professor Malcolm McIntosh of the Asia Pacific Centre for Sustainable Enterprise. “As we enter a period of potential reconfiguration of economic governance, leaders of organisations will need to better understand the issues, actors and dynamics to be successful. Part of Griffith Business School in Australia, Professor McIntosh’s centre supported the free release of this review to promote creative thinking at a time of critical global challenges and because “the lead author Jem Bendell, is an important commentator on the world stage.”

 http://www.lifeworth.com/consult/2010/02/annualreview/

 

If you really knew New Zealand, Kunst, you wouldn't ask that question becuase you would know that there are no hills in Milford, and that it doesn't snow in the Hauraki Gulf. At 9.1C outside in Auckland as I type this, as a Swiss, you would well know what that means for the chance of snow.

 David, of course I don't know New Zealand as good as you do.

I’m sure the ones living behind the waterfront properties - called them selves overlooking the bay. So it must be slightly hilly - at least elevated.

David, any comment to my link ?

Interesting, yet the voodoo economics experiment of the last 30 years has been a right wing one, and its produced the second gilded age. The first one produced the Great Depression...and its looking like the secomd one will as well.

Poverty, seems you dont read history....far more ppl were in poverty pre-WW2 than post....

Congratulations on your right wing failure.

regards

DavidB - i've logged you under 'stupid'. (You're not alone in the list).

Calling people names doesn't change anything. All it does is suggest that the name-callers have a weak argument.

You're on a finite planet, you haven't decoupled economic activity from physical activity, and thus you can't grow economic activity exponentially.

You have to be very simple not to get that.

Then you have to ask how long any king of usury/profit can last in a finite system - and the answer is: not long.

Bernard - I think - doesn't get that the 'wealth' is mostly spun-into-existence fiat fakery, and that globally we're into run-on-the-bank=bank crash territory. The physical planet is the bank of last resort, and it can't underwrite.

Rhetoric and denigration won't change that. I feel sorry for you.

That drivel doesn't merit a response.

Crikey , DB , you're on PDK's stupid list . Thank God for that ... it was getting lonely here , on me own .

..... hey , I'd be more concerned if he valued your opinion , and considered you to be a kindred spirit ... Then I'd  crap me Gummy nappies big time !

Geez...your Redbaiter!

NeilD - colour is irrelevant.

 Things either is, or they isn't.

Don't get confused with blame-shifting - all political hues, with the partial exception of the Greens, aren't addressing what we have to do.

 NeilD – what about a valuable comment - do prove your point ?

Sorry Kunst, tryed to delete comment but had logged out so couldn't..I'm wrong..I apologize....2+2=22 eh!

You're OK there , NeilD  ....When it comes to stirring up the reds .... GBH  does  a more thorough job than even Resene Paints can .

This article by BH reminds me of a quote from the Bible:

"Now listen you rich people, weep & wail ........ your wealth has rotted, and moths have eaten your clothes.... You have hoarded wealth in the last days. Look! The wages you failed to pay your workmen are crying out against you....." [James 5:1-5]  

Need to read entire section for the overall effect!

(now someone recently here was lamenting the lack of religious underpinning of society/economy) - And there is nothing intrinsically wrong in building wealth and using it for good  -  it's the 'hoarding' that causes the harm.  Ironic the toxic mix now, given that the wealth of countries like NZ, UK & USA is/was in good part related to a good honest work ethic, and a moral underpinning based on Judeo-Christian principles.   

How do you know that wealth has only to do with money? It could also equally apply to those self-satisfied smug types who care and advance only themselves and their families and their self-interests (and I’m not talking economics here), and who have failed to be generous with their good fortune (health, happiness, etc.) to those less fortunate in spirit to themselves.

I always like Warren Buffet’s approach who says, I wouldn’t be a billionaire if I wasn’t fortunate enough to have been born in America. If I’d of been born in Africa or New Zealand, it just wouldn’t have happened. It is this country, this society, this people that have created this possibility, not me. I owe the American people a huge debt. And it is this thinking that is behind his desire to give his fortune back to the American people via various charities once he has died.

Isn't it the height of hypocrisy that the churches sermonise us on the evils of money & of greed , yet those churches pay no tax ..... whereas us sinners do pay tax , shit-loads of it .

... if the Gummster was in charge of the NZ Debtanic , no one would be exempt . Tax would apply to all , charities & otherwise . ... teach the frigging Jehovah's Witlesses to come knocking on my door !

You actually raise a very good point there, Gummy. Why shouldn't religious institutions have to pay tax on their income in this modern day and age? The State has taken over all most all charity, and the church (Mosques, and Temples too) provides bugger all of it now, even less the evangelical Baptist churches. Yet they lecture the government on raising taxes to pay more and more welfare without sharing the cost of paying it themselves. I agree this is highly questionable in this day and age.

It was decreed by the Great Godless One , Helen Clark , that New Zealand has no state religion . And as such , why are atheists & agnostics paying their whack of tax , but the churches don't . Brian Tamaki rakes in a cool $ 1 million for himself every year . He even has Eftpos machines within the church building  ........ Jesus  wept !

Warren Buffet statement - emoschunal, very emoschunal David - your's  too. 

It now appears that die-hard free-market capitalists and communists should receive the same standard response: It's a nice idea, and all very well in theory, but in practice all that happens is that a small minority at the top end up with all the money and power whilst the rest of the population can't even afford the basics (housing in our economy, freedom of expression in Soviet Russia).

Both systems deteriorate into totalitarian states, just the communist one does it very quickly and obviously...

regards

Great link, ta...

This is all interesting yap, but as a parent with young children, what is the message, financial values we should be instilling in them? Realistically how do you do that when everything around tells you to 'buy, buy, buy?' or if they get caught up with mob rule ( particulary on Wall St.) it's loot, loot, loot?

Is it not time for our political and media gurus to grow some balls and tell the truth and admit that the system as we know it is broken and not sustainable, and offer a tangible alternative?

There is much truth in what you have said, but you seem to be simply joining the PC punch Disappointed in the thrust BH. Why should someone who has worked hard and saved. be told to waste their money creating jobs, with labour rights and costs are the way they are. A lazy useless worker can hold an employer to ransom and screw them. OK it can work both ways but legally though, the employers I know arer frequently screwed by their staff and that is the reason why the opposite in China is wining on the productivity. Not to  mention the governemnt taking a big share of any profit to waste and it does, hugely. What happened to your thrust on productivity?  I agree with so much you point out but  what happenned to the thrust of making things real??? No its my right to have and somebody else pays/does the work to cover it, particularly future generations by borrowing it

Wealth concentration corrupts and absolute wealth concentration corrupts absolutely!

My issue isn’t with individual concentrations of wealth. To give some perspective the two riches Americans in history were JD Rockefeller and Cornelius Vanderbilt which amassed almost $700 Billion dollars in today’s money between them. JD Rockefeller had so much wealth that he controlled 1.5% of the US GDP.  Both of these men realized wealth concentration was very dangerous and they both went mad trying to redistribute their wealth before their deaths.  They both manufactured stuff and yet the Federal government still saw the inherent instability in that much wealth concentrated in so few hands. If you can control 1.5% of the US GDP you can control the world conversation. So in comparison today’s wealth concentrations are rather mild.

My issue is that wealth concentration is now in the hands of a select few individuals that do not build, manufacture, or invest in anything other than low interest, low risk stores of value. If you scan the list of riches people on the world it will take a while till you get to someone that actually manufactures or sells a necessity. And I’m not including computer software, telecom service providers, people who own stores, or other vapor necessities.

FYI from a reader via email:

Dear Bernard.

I suggest that the economic difficulties of the last 30 years have nothing to do with capitalism.  We must separate Government and personal debt.

Government debt is caused by a failure of democracy because governments borrow money to finance the buying of votes and popularity, by overspending.
Personal debt is also a government failure because the income tax system is slanted against saving and towards borrowing.

Until solutions to these issues are found and implemented the problems will not go away.  Any thoughtless restriction to "capitalism with rules" will only make things worse.

Regards

Murray

Murray
Many thanks. I think one of the reasons governments felt compelled to buy votes through middle class welfare such as Working For Families and Interest Free student loans was to subsidise low wages.
Governments in a sense enabled employers paying higher wages to subsidise higher (often foreign owned) corporate profits.

cheers
Bernard

Murray responds:

Bernard

Thanks for your reply.  The successful buying of votes shows the corruption of the voters.  Wages are not low compared to most of the world.  Wages won't go up until capital investment goes up.  We are back to the tax slant against savings .

 

We can postulate all sorts of motivations for the behaviour but that doesn't change the arithmetic.  The problem is that until the voters change their behaviour or we elect some politicians with backbone nothing will change.

 

The arithmetic is the reality, the reasons are secondary.

 

I had thought my glass is half full but it maybe half empty as far as NZ's future is concerned.  The debate needs to concentrate on the arithmetic and stop choosing heart warming excuses.  

 

Cheers?

Murray

FYI from a reader via email:

Hi Bernard

I read your article in the Herald regarding Capitalism.

There really is no viable substitute for a market economy, and generally speaking I see little point in encouraging the public to think their might be.  The problem with Western market economies is continual Government interference and their policy of running fiscal deficits to fund everything we want by way of services but cannot afford.

This is the modern equivalent of bread and circuses.

In a genuine market economy, there are failures, sometimes large ones.  There follows a time of short term pain, and then we recover and move on.

The problem with the USA, is that Obama prefers debt (never to be repaid) than pain now.  In other words, pain later rather than pain now.

The problem with Europe is that the Greeks are not Germans, and to pretend they might be is folly of the largest kind.

From my observation, there is no country in the world that has a true market economy.  In the Western world, with the possible exception of the USA, we are running socialist democracies with significant Welfare States, regardless of the 'brand' of party in power.  Here in NZ, we have 13% of our working age population on benefits for goodness sake.

But you are correct, in it's present form, it is all unsustainable.

It's not the market, it's debt, Government intervention, and entitlement welfare, be it in Europe or NZ that's the problem, not capitalism itself.

The problem we are experiencing is the weakness of democracy.  Once people realize they can vote for politicians who promise to sustain them in a lifestyle that will be largely funded by 'others' then the party is over.

As Margaret Thatcher said "eventually you run out of other people's money".

And that my friends, is where we are today.

Kind regards
Brendan

Brendan,
Many thanks.
There was a lot more government 'interference' in economies through higher income tax rates in the 1950s and 1960s.
Yet it was one of the most prosperous times...
cheers
Bernard

"Yet it was one of the most prosperous times"...

Bernard - I know you won't engage (the Emperor still has clothes) but would you care to say whether you think fiscal activity is coupled or irrespective-of, physical activity?

Note my comment to DavidB above..

 

Bernard says: it was one of the most prosperous times ...

How so? Please define "prosperous" and please substantiate.

To use a PDKism, start with the proposition the people of the 50's and 60's, must have been more productive, and produced more work/output per person per unit.

If they brought back the outdoor dunny, would give many people a "night cart" job as they did in the 1950's. Second thoughts, they'd have to bring in more Filipinos to do it.
 

Obama has actually tried to get taxation back on a level footing, it is the Republicans that will have nothing of it.

Capitalism itself, no that is a failure....it works / survives on not paying the true cost of what it produces....it is not sustainable/balanced, until

regards

 

On Bill Gross's claim: "he pointed out that for several decades the engine room of America's consumer economy had been starved of income as high paid manufacturing jobs were exported to lower paid factories in China and as technological innovation replaced workers with machines."

Here's some data from the world we actually live in, a breakdown of who earns what  in the making of an ipad:

In terms of headcount, we estimate that, in 2006, the iPod supported nearly twice as many jobs offshore as in the United States. Yet the total wages paid in the United States amounted to more than twice as much as those paid overseas. Driving this result is the fact that Apple keeps most of its research and development (R&D) and corporate support functions in the United States, providing thousands of high-paid professional and engineering jobs that can be attributed to the success of the iPod. This case provides evidence that innovation by a U.S. company at the head of a global value chain can benefit both the company and U.S. workers

 

So this is exactly the opposite of Bill's claim on what's happening. But facts don't matter.

 

The hoarding cash claim has been trotted out so many times in history, it's deja vu all over.

 

The ipad is a specific case, that does not prove the rule.

regards

Eagerly awaiting your link to peer-reviewed literature that backups your "rule".

Waiting...

Waiting...

Hmm, nothing steve?

I think there is enough info out there if ppl wish to look.

Ive already spent some time a while back looking at the effects of globalisation and whats its done to the developed world....and especially jobs for the middle class and skilled blue collar...so i could spend some time putting together a counter arguemnt which you would ignore anyway or I could move on but,

As an example my last job was outsourced to Malaysia, so reasonably well NZ paid job was lost to abroad....Now I was quite easily able to get another job....those less fortunate would end up on welfare or working at McD's.....so quite how you see this as a win for anyone but those in the financial sphere or property ponzi schemes Im not so sure, well I am actually...the usual idealogical right wing blinkers.

regards

 

So your own experience belies your beliefs. Really, who has the blinkers on?

Take them off steve, and you'll see a government that makes it impossible for certain people to get a job as their productivity doesn't match the amount an employer can pay them, so instead of earning $10 an hour they can go on the dole for $4. And secondly we have a government that taxes working. Just like it taxes beer drinking and cigarette smoking.

FYI from a reader via email:

Hi Bernard

I’m really enjoying your columns. Congratulations on some great stuff.  Thought you might enjoy this quote

Regards

Greg

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

--Henry Ford,
American industrialist

 

Bernard - 'bout time you did an article explaining why Henry Ford said that. No doubt Iain and Raf could lend a hand.

Cheers, from the winter-wondering land, Les.

In effect we did with the Great Depression, WW2 and the kicking out of Churchill when the war was ended...even if ppl didnt understand how the system worked they did understand the end result.

regards

Would love to hear your thoughts on the role cheap money and low interest rates played throughout the 90's and 2000's Bernard.

In my opinion the US Government and Federal Reserve have made very similar mistakes as they did in the 1920's and continue to so with 0.25% interest rates and huge deficit spending.

Have you read Austrian Business Cycle theory and if so what are your thoughts?

I think the best thing the little guys (99% of the worlds population) can do is hoard their money in something tangible. Gold, silver and anything else you can afford that won't disapear off someones hard drive. But for god sake do not do it on borrowed money unless you are 100% sure you can pay for it. Unless you wish to play into the one percents hands that is.

Thanks Bernard, I always find your articles insightful. This one confirms that Karl Marx was, again, right about certain aspects of capitalism - namely that in controlling the means of production capitalist control how the economy functions - though on a globalised level which I don't think Marx could imagine. And by more powerful and aggresive capitaist buying out or bankrupting their competition the means of production and its associated wealth is concentrated in fewer and fewer hands - Google buying Motorola Mobility to compete with Apple, Samsung, etc. Now the 1% are nervous and economies are stagnating. It seems that global capitalism, as it stands now, will fail eventually, just like Marx predicted it would. I think that soon, in the next fifty years or so, the Asian workers are going to demand better pay and access to the lifestyle that we already enjoy and this is going to cost everyone more money. Everything is going to increase in price and be made to last longer and be more durable, and our current materialsm, which capitalism makes possible, will simple become unsustainable. Societies will, I hope, become more equal, healther and better educated. But it is going to get worse before it gets better. 

What amazes me is that fund managers that you quote describe things that Marx already understood and expained in 1867 in Das Kapital.