Capital Shrugged

Feb 16, 2012 Mark Spitznagel

Capitalism’s greatest strength has been its resiliency – its ability to survive the throes and challenges of crises and business cycles to fuel innovation and economic growth. Today, however, more than four years into a credit crisis, this legacy is being called into question as never before.

LOS ANGELES – Capitalism’s greatest strength has been its resiliency – its ability to survive the throes and challenges of crises and business cycles to fuel innovation and economic growth. Today, however, more than four years into a credit crisis, a conspicuous enigma calls this legacy into question.

Despite recent hopes of recovery in the US, including an inventory catch-up in the fourth quarter of 2011, real US GDP growth has remained persistently below trend. Moreover, although seasonally adjusted January employment data have brought the unemployment rate down to 8.3% (while total jobs were actually lost in January), the more realistic rate of “underemployment” remains over 15% and the labor-force participation rate is at a record 30-year low. And the US is clearly not alone in its malaise, with the eurozone fighting a far more urgent sovereign-debt crisis.

So, why is this time different? The answer lies in Ayn Rand’s rhetorical invocation of despair in her 1957 epic Atlas Shrugged: “Who is John Galt?” Simply put, when the state seizes the incentives and drivers of capital investment, owners of capital go on strike.

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parthasarathy Shakkottai Feb 21, 2012

Economic ignorance has become universal in the USA and all politicians, congress and economists talk in terms of household budgets and austerity. MMT is unknown. Paul Myers is right and until USA makes an investment in infrastructure spending, the ridiculous ideology will prevail.
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Procyon Mukherjee Feb 17, 2012

“Oppressive manipulation of the free markets”, if it is meant for those segments where capital finds a profitable deployment in spite of absence of demand, then it is a pointer that low interest rates coupled with liquidity preference influences this spurt in demand of financial products that were non-existent even a few years’ back. This is sad that capital stock could be locked in unproductive assets that reduces the velocity of money, which otherwise could have goaded effective demand in productive areas of the economy.

Procyon Mukherjee
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Paul A. Myers Feb 17, 2012

The difficulties in the United States have nothing to do with the resiliency of capital, or capital being on strike (what a nonsensical assertion) and everything to do with poor public policy created by common sense being on strike in the Republican party.

The United States is way underinvested in public assets, principally infrastructure. If the United States embarked on a multi-trillion dollar, multi-year program of public infrastructure investment, such a program would lower system-wide costs and create fertile grounds for new private sector investment. Funds flowing into the real economy would provide an ongoing increase in the overall level of demand.

When one understands that profitable private investment stands on the broad shoulders of public investment, then one can see the road forward to a full-employment economy growing at maximum feasible speed.
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Zsolt Hermann Feb 17, 2012

This article offers an interesting view but it still only scratches the surface as most other assessments because we are still afraid to admit that we are in a system failure.

Superficial tinkering with regulations, or trying austerirty and then stimulus again like in Europe, asking for more or less government control will make no difference at all because the whole system is rotten.

And it was rotten from the beginning since the modern constant growth, expansive, excessive production and consumption, increasing credit based system started.

But up to this point there was still some "looseness" in the system allowing the expansion, and the public was dumb enough to take the constant brainwashing and thus keep buying and taking credit.

And the same happened with nations as well, in Europe for example the "smaller weaker" nations took the bait and swallowed all the products and credit until now their situation, eonomy and credit debt has become unmanagable.

All of us are in the same plight now, sitting in bubbles, full of fake capital without any proper foundation, we are running out of resources and we have become completely intermingled and interdependent in the global system.

Whatever we do this system is going to collapse, and actually this is a good thing.

We are all slaves right now. The tycoons are slaves to their zeros on their useless bank account and more they get the unhappier they are. The costumers are slaves to the brainwashing media and the banks lending them credits, and now they are losing their jobs, homes, health insurence, and most factory workers especially in the emerging market countries are slaves even in the classical meaning of the word.

Thus we cannot even imagine the freedom we will get when this is over, what we need to make sure is how to make the transition swift and relaitively orderly, and then what structure we build after.

For that we already have vast amount of information on the interconnected and interdependent nature of the world today, on the state of the natural resources, and our opposition to our environment.

Thus the new system needs to be necessity and resource based, with equal distribution, with a mutually responsible, considerate global public driven, single word wide governing system.

With all the talent and adaptability Humans have if we get it right our potential is unlimited.
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William Wallace Feb 16, 2012

As a businessman and entrepreneur in the real world, I can tell you flat out what determines investment: expectations of increases in demand. If expected ROI exceeds the interest rate, debt capital makes sense for the investment, otherwise it's cash on hand, stock and equivalents. End of story.

Gimme demand and I'll invest. The problem today is lack of aggregate demand, and the lack of resources to effectively combat the situation. Monies so poorly spent, and other monies so dearly given away, over King George II's reign in DC, with his "deficits don't matter" court jester laughing in the corner throughout, left the government with so dire a structural deficit that sound stimulus spending has not been available.

This article perpetuates the myth that most employment and innovation comes from large corporations. It does not; it comes from SMEs. Most new products and services in IT today, for example, result from larger players buying out the innovators, not from in-house R&D. And to further argue that even moderately taxing those who have great wealth would halt innovation and investment is a willful misdirect.

Didn't expect to find this sort of objectivist drivel on Project Syndicate. Shrug.
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Jake Lopata Feb 16, 2012

It's easy to see how someone, such as a hedge fund manager, can easily become shrouded in a single sector of the economy; but there is much more going on.

Simply put, employment is very low (especially the labor participation rate), as a result, wages are down. This reduces disposable income; money used to save, pay bills, and consume.

So why would businesses borrow if there is no demand? Why should firms lend if the economic outlook is bad and inflation expectations are high?

I understand that there is a belief that market signals are distorted, but how are you arriving at the conclusion that it is due to monetary policy?
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