Last weekend, I traveled south to La Jolla for the 8th annual Strategic Investment conference, put on by John Mauldin. I’ve been to this event several times as it features many of the world’s most cogent minds. I find it crucial for me to attend so I can be the best steward of my client’s financial interests.
Paul McCulley
The stellar lineup of speakers included Paul McCulley, one of my favorites. For the last 11 years, McCulley was Central Bank Strategist and counterpart to Bill Gross at PIMCO the largest bond manager in the world. McCulley retired in December at age 53 to a think tank and on Saturday, he appeared before us like a crazy man as our lunchtime speaker, with a big Santa Claus beard and sun-burned skin from too much fishing.
McCulley is famous for posing philosophical questions to his pet rabbit, Morgen Le Fay, who in turn elucidates politico-economic reality. McCulley coined the term “Shadow Banking System”, which refers to credit creation system of hedge funds, pension funds and Wall Street that supported and profited from the housing bubble as well as “debt deflation, the beast of burden that capitalism cannot bear alone.”
Saturday’s lunchtime speech focused on the current unsustainable government finances and what’s going to happen.
The Social Contract: the Strange Marraige of Capitalism and Democracy
To McCulley the social contract of countries in which wealth is formed is the result of the truly odd marriage of capitalism and democracy. Democracy starts with the socialist notion of: One person = one vote. Democracy is a struggle for justice, and the distribution of our economic pie. It is not a struggle about the size of the pie. This predicament finds itself in direct conflict with capitalism a simple, cumulative voting system whereby: One Dollar = One Vote. It is a cumulative voting system: the more dollars you have, the more votes you get!
In order to flourish however, capitalism requires the Rule of Law, and its corollary, the sanctity of property rights. And that is precisely the one thing that capitalism is unable to give to itself.
If capitalism were in charge of enforcing the rule of law, how would that look? You guessed, it — the best justice money can buy. So, capitalism needs requires the rule of law, which it cannot render unto itself.
The one thing that the socialist idea of democracy cannot give to itself is an economy. Safeguarded by the rule of law, and the sanctity of property rights, greed (capitalist activity) provides the formation, accumulation and perpetuation of wealth, a phenomenon hereunto unknown before democracy and capitalism got hitched about 200 years ago with the successful French and American revolutions.
Capitalism’s gift to democracy is the pursuit of profit directing Adam Smith’s invisible hand with the time-proven result being the growth of our collective economic pie.
Wither Justice?
But the ethos of capitalism is at best agnostic, about whether the pie is distributed justly. Many would aptly point out, that it is antagonistic to the idea. McCulley says democracy and capitalism are “strange and necessary fellow travelers: visible socialist ideals dueling with the invisible enigma of greed” And this is whyeconomics without politics is an analysis of a world that does not exist. Why do I care? Why should you care about this uneasy marriage between democracy and capitalism? Because the marriage is in trouble.
Marriage Counseling
Democracy and capitalism must undergo intense, expensive, and extensive marriage counseling in the next years. This counseling will produce a rewriting of the social contract between the young and the old and the rich and the poor.
People of economic privilege must surrender some of their advantages in order to secure the viability of the fiscal corpus. That means testing for social security and Medicare and compromises between the old and the young regarding the safety net and when it starts paying.
While this marriage counseling will be ungodly expensive, it will also be successful. And the marriage between capitalism and democracy will survive this decade, and thrive in the roaring 2020s.
