Frankly, I don’t know about you but ever since I was young boy I tried my damnedest to understand the why things are the way they are in this world. After five decades, I have explained much of the world I live in to my satisfaction although not all.
When it comes to business it has always been very clear. Business people are property managers. I know. I know. It sounds reductive. Honestly, it is not. Businesses own and/or control certain key properties which are used in the products/services they make and sell to customers. And, customers seek to acquire those products/services because they take the struggle out of achieving a specific outcome. Depending on the legal framework of the jurisdiction the business operates in, the lion’s share of the value created through the process can go to the property owner, the customer, or the state (with the excuse it will be equitably redistributed). The decision about who gets what depends on the legitimacy the system gets from the community’s belief system. Its not much more complicated than this. And, I have successfully used this framework to conduct business on every continent.
But my challenge does not stop there. I also want to understand the world from a political point of view. Sure, the largest part of politics has to do with property and who and how it is used in business. However, there is – in my view – a higher level of politics that goes beyond the self-interest of one business segment, or industry, or the other to encompass the interests of the populous by which government maintains its legitimacy. This political sphere is much more interesting especially nowadays with this increasing talk of anti-establishment parties, political movements, and candidates.
For however much government and business are intertwined there is one fundamental difference: time. A business will operate within a generational timeline (25 years) or less because their property will become less competitive or even obsolete within that period. In other words, the business’s ability to make a return on that property will diminish over time to such a point that it can no longer cover the cost of capital let alone reinvest for the future. While government works on a timeline beyond the generation. Think of defense, for example. Is it in the interest of a government to invest in developing a new weapons system that is effective tomorrow or one that will be effective in a generation? A generation, of course.
Based on this understanding of the world, the governments of the most industrialized economies in the world saw the post World War II Baby Boomers are a fundamental threat to the legitimacy of the political system. A bigger threat than any other threat known at the time. Because of this perception, dealing with maintaining the well-being of Baby Boomers was deemed to be the cornerstone of most policymaking starting in the mid 20th century. Although each country followed different policies, I’d like to focus on the US and Europe because I know them best.
Although in the years after the WWII, certain inroads were made to deal with this threat to political legitimacy in Europe through the pursuit of “social” policies and in the US with creation of Social Security, it was not until the oil shocks of the 1970s that external threats amplified the internal threat. With the oil crises of the 1970s the manufacturing-based economies were deemed at risk. the US’s response came from the Reagan administration with what was called supply-side economics but which in reality was a concerted shift away from manufacturing to consumption. The UK followed suit under Thatcher but the rest of Europe was a mixed bag. Many countries wanted to partake in this brave new world but their status quo didn’t want to give up power, maintaining a strong manufacturing sector. For the US and the UK the shift to a consumption-based economy made perfect sense because as the population aged there would be less and less people to work in the factories which would have made the model and the government unsustainable. So these two dominant players were more than happy to start moving production offshore and investing in consumption. The first move offshore came in the 1980s with the rise of Japan Inc. and the creation of free trade zones, like NAFTA. As Japan’s economy matured, manufacturing went to South East Asia, in the 1990s, and then into China, at the start of the new century. Whereas, in the “West” first retailing became the big industry then finance, then the Internet. Interestingly, the Internet started out as the great leveler but was quickly highjacked by the consumption economy where it now resides.
Unfortunately, as with all well laid plans things don’t aways work out as planned. Once manufacturing was outsourced and free trade agreements were put in place wage growth stopped. Sure. As long as production and consumption are within your borders the rising time raises all boats. But when the contribution of an individual can be done in the economic center or the low cost periphery then competition dictates that it goes to the periphery. Likewise, with stagnant wages it is difficult or not impossible for asset prices to rise. The once proud notion of working and saving to buy a home, pay your kids’ education, and return comfortably was substituted by cheap loans that follow you to the grave.
But did it, does it, have to be this way? It does if you continue to work with an economic and political model that benefits the property owner. But in a consumption-based economy this – debt, debt, debt – is the result. And, if we go back to the Baby Boomer threat, the government has to maintain if not inflate those asset values in order to provide a soft landing for this ever larger segment of the population. So after the Financial Crisis of 2008 the Federal Reserve and the Treasury stepped in to put a stool under asset values. Today, this policy of asset support continues not only in the US but also in the EU and Japan with their negative rate policies. What is more desirable, paying a reserve back to maintain the corporate balance sheet or marking down those assets to reflect their real economic value? Having the reserve bank do it, of course.
So now that government has completely falsified the game by maintaining a system based on property but where citizens are asked to consume and cannot acquire property, and where policies artificially inflate asset prices for those who have assets but where those who don’t guarantee them, and where an education never gets paid off because wages are stagnant since the 1980s, and,…and,… we should not be surprised citizens perceive government as illegitimate. Yes, we can set the clock back to a time when everything was done within your borders but all that would do is oblige the government to increase taxes and redistribute to those who need help and are retired. On the surface, maybe a nice solution but in reality the US and Northern Europe would become like Southern Europe. And, I’m not referring to the weather and food! No, the only reasonable response to this quagmire is to allow asset values to deflate to levels economically sustainable based on income levels without needing to recur to enormous amounts of leverage before the biggest parts of the Baby Boomer generation retire.