The above caption was Chapter 27 of my year-ago book entitled “The Great Deformation: The Corruption of Capitalism In America”. So I was glad to see this illuminating metaphor given some traction last week by Seth Klarman. The latter is proprietor of the $27 billion Baupost Fund and can fairly be described as one of the greatest hedge fund managers ever. He is also so eminently sensible that he recently returned several billions to his investors—owing to a dearth of reasonable investment opportunities.
Seth pulled no punches explaining why he is not drinking the Kool-Aid:
All the Trumans – the economists, fund managers, traders, market pundits –know at some level that the environment in which they operate is not what it seems on the surface…. But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end.
Klarman is here referring to the waning days of this third and greatest financial bubble of this century. But my take is that the crack-up boom now nearing its dénouement marks not merely the season finale of still another Fed-induced cycle of financial asset inflation, but, in fact, portends the demise of an entire era of bubble finance.
The latter has had a long gestation—arguably reaching back 100 years. The Great War of 1914-1918 did supplant the stern financial discipline of the market-driven international gold standard with the backstops, bailouts and moral hazards of central bank managed money; the 1930s did install activist state management of national economies almost everywhere, with its systemic bias toward ever higher public and private debt ratios against current income; the “guns and butter” fiscal excesses of Lyndon Johnson did unhorse the William McChesney Martin style of sound money rectitude at the Fed and planted a torpedo in the side of the imperfect but serviceable Bretton Woods system of global monetary order; and Richard Nixon did finish it off with his perfidious doings at Camp David in August 1971.
Indeed, the days of honest capital markets were numbered by Tricky Dick’s proclamation that the richest nation on the planet would default on its obligation to pay its international debts in gold. On the surface, this body blow to global financial stability and discipline was done simply for the sake of avoiding a recession before November 1972—even if a decade-long boom of war spending and external borrowing had made a day of economic reckoning unavoidable.
But the real significance was that Nixon’s Camp David perfidy officially installed Milton Friedman’s Folly at the heart of the financial system. The presumption now was that a 12-member monetary politburo in the Eccles building could perfectly manage the money supply and thereby eliminate the business cycle, optimize the growth of GDP, jobs and living standards and enable market capitalism to prosper all the better.by