The late months of the year bring a flurry of activity, and the stock market is no exception.
On September 22nd, the S&P 500 achieved a record high of 2,940, surpassing its previous peak of 2,847 set on January 26th by nearly 100 points. For a brief period, it seemed that the stock market was resuming its extended upward trajectory from the last decade.
Market analysts celebrated the surpassing of January’s high, declaring it a clear sign that the S&P 500 would continue to climb. They deemed it a textbook confirmation of the ongoing bull market. Yet, just two months later, we may be witnessing a significant downturn.
The truth of this situation will reveal itself in due time. However, it is important to acknowledge that one fact is unequivocal: the Federal Reserve is currently in a “rug yank” phase of its monetary policy. As the Fed simultaneously increases the federal funds rate and reduces its balance sheet, the credit markets are stumbling.
For instance, this week, seven-year investment-grade bonds from GE Capital International traded with a spread of 2.47 percent. To put this in perspective, this spread is on par with BB-rated junk bonds, indicating that the credit market does not regard GE bonds as investment-grade, despite what the credit rating agencies might claim.
This concern extends beyond just GE debt. According to a tweet from Scott Minerd, Global Chief Investment Officer at Guggenheim Partners:
“The selloff in GE is not an isolated event. More investment-grade credits are likely to follow. The decline in investment-grade debt has commenced.”
Currently, there are approximately $3 trillion in BBB-rated bonds, the lowest investment-grade category above junk. How much of this debt—like General Electric’s—should actually be classified as junk but remains rated otherwise? We suspect the next liquidity crisis will shed light on this concern.
However, the essential question remains: how did such a staggering amount of questionable debt accumulate in the first place? Here’s an exploration of that issue…
Understanding Fake Capitalism
A widespread misconception is that the U.S. operates under a genuine capitalist economic framework, where businesses thrive or fail based on their true economic viability. In reality, since the 19th century, the United States has not experienced true capitalism.
Furthermore, government interference in the economy has steadily increased over recent decades. The ratio of federal government spending to GDP rose from 33 percent in 1973 to around 40 percent today. An economy where government spending constitutes such a large percentage and where extreme central bank intervention is rampant cannot genuinely reflect private enterprise.
The fake capitalism of the 21st century functions as a harmful cycle of self-destruction. It relies on three key components: substantial deficits, aggressive monetary policies, and a centralized authority visibly steering the supply and demand of goods and services. Combined, these elements consume future productivity at an alarming rate.
The consequences are an endless series of significant distortions, misallocations, accumulation of debt, and vulnerabilities. Consider stocks, corporate bonds, real estate, General Electric, lobbying activities, student loans, defense contractors, healthcare costs, and more—this is how fake capitalism operates.
You may not be aware, but under this flawed system, someone—likely you—will ultimately bear the burden of these liabilities. You may not wish to pay for them or feel prepared to do so, but the reality is that you already are…
The Unbearable Impact of Fake Capitalism
If you own residential property in America today, the truth is you don’t truly own it; you are merely leasing it from local governments. Go ahead, try skipping a property tax payment and see what happens.
This scenario implies that your local government holds an option on your home. When necessary, they will increase your property taxes to meet pension obligations, often repeatedly. Many municipalities are already doing this.
If you have children in public schools, you may find their classrooms are more crowded now than in your own school days. Is this due to a lack of teachers? Not at all; rather, a surplus of retired educators—some who haven’t engaged in teaching for decades—still claim a portion of today’s taxes.
Moreover, your state may impose a progressive wealth exit tax if you decide to sell your house and leave. After a lifetime of paying off your mortgage, relocating to a low-tax state is no longer an option without incurring significant costs. Remember, you do not genuinely own your property; your local and state governments do.
This perpetual cycle of working and saving has turned life into an endless race. You cannot get ahead, but you can keep running faster and faster.
Of course, you, the taxpayer, will also be expected to foot the bill for the next round of “too big to fail” corporate bailouts. Mark my words. The Treasury Secretary, with a forced smile, will assure you it’s for your benefit… claiming they must dismantle capitalism to preserve it.
Yet, capitalism was dismantled long ago, and what remains—a facade of fake capitalism—stands as a serious threat to a fair and just society.
Sincerely,
MN Gordon
for Economic Prism
Return from The Intolerable Scourge of Fake Capitalism to Economic Prism
