On the year 1944, the Austrian economist Friedrich A. Hayek released its magnum opus, The Road to Serfdom. In this book, he argued that the capitalist model of the US and the UK was morphing into its antagonistic form, socialism. As a reminder, socialism comes in various forms, which are similar in kind, like nazism and communism.
In addition, he demonstrated that every step away from the free market and toward government planning represented a compromise of human freedom and a step toward a form of dictatorship, despite the claims that government control was really only a means of increasing social well-being. Hayek said that government planning would make society less liveable, more brutal and more despotic. Therefore, socialism in all its forms is contrary to freedom. Although this book came out 76 years ago, it remains as relevant or more so than ever. In that era, Hayek noticed that considering America and England were fighting a war against the nazis, it made the apparent acceptance of increasing government intervention very peculiar. Moreover, I may add this shift towards interventionism continued during the Cold War period, which again is interesting when bearing in mind that the American and British ideological position was diametrically opposed to the Soviet Union. Looking at the current state of affairs, one may think that in spite of the nazis and the Soviets losing WWII and the Cold War, respectively, they won the ideologic war, with socialism having conquered the world, including the "capitalist" western bloc. Once you read the section Economic History, you recognise that because of the innovative insights made in the Scottish Enlightment age by David Hume and Adam Smith, the anglo-saxons, i.e. British and Americans, unshackled themselves from the outdated and perverse mercantilistic regime, giving rise to the liberal era. Likewise, liberalism unleashed the greatest period of prosperity the world has ever seen, with the US leading the way. Unfortunately, this experiment came to an end by the turn of the twentienth century, when progressive ideals, such as direct (income) taxation, antitrust laws and central banking, began rising in popularity, kicking off the slow march towards socialism. Additionally, this has been the case for North America, Western Europe and some other regions around the globe. These places have had varying degrees of interventionism and central planning among them and through time as well, having several of them tried out fascism, though this was decades ago. Nevertheless, government planning never disappeared. Since the fall of the Berlin Wall and the breakdown of the USSR, the world became pretty homogeneous, in economic and political terms. As of now, the entire world, minus a few communist countries and tax havens, is ruled under a mix of fascism and democratic socialism, where the government is conducted, not by the rule of law, but by special interest groups. Accordingly, the United States of America is no exception. Firstly, since the Progressive Era, the welfare state, business regulations and central banking have been, in general, growing. These being interdependent, they can only balloon ultimately due to the central bank, the Fed. In addition, most sectors of the economy function in the corporatistic system, which means that those sectors are mostly controlled by businesses setting out with the policy makers the rules and regulations for their industries. Moreover, on other sectors deemed of public interest, like education, public transport and public utilities, it is the workers' unions who prevail when negotiating the laws, rendering these sectors aproximate to syndicalism, which is a movement that advocates establishing a social order based on workers organised in production units. Secondly, during the 2008 GFC, the last remnant of the capitalist regime was thrown away: letting losers lose. In capitalism, when the risk of one's endeavour pays off, he profits. However, when it does not pay off, he has to deal with the losses, even if it means bankruptcy. Throughout the GFC, several businesses and banks, as well as individuals, became insolvent. Yet, the Fed and the government bailed everybody out, due to operating under corporatism. Obviously, the moral hazard that this generated is outrageous. Thus, a system of pernecious incentives became embedded in Wall Street culture and in the management of corporations. Finally, in this financial meltdown, because of the excessive risk taking and extreme leveraging pursued by financial institutions and corporations, as well as the ever expanding deficit spending by the government since the GFC, the Fed is requiring far bigger and faster money printing presses. Likewise, the Fed is widening its scope of measures and facilities. Comparing to the GFC, the Fed is using every facility it did in 2008, though this time it has cranked up every single one of them: the repo operations, the Primary Dealer Credit Facility, the Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, Term Asset-Backed Securities Loan Facility (TALF), Central Bank Liquidity Swap Lines and of course, everyone's favourite, Quantitative Easing. Just to have an idea of the size of these operations, in QE3, which was the biggest of all, the commitment was $85 billion a month of mortage-backed securities (MBS) and Treasuries. The commitment for this week's QE is $125 billion each day, $75 billion being of Treasuries and the remainder of MBS, including commercial MBS which was not covered in 2008. Additionally, the Fed announced that QE was open-ended. Consequently, the amounts are certainly going to keep on soaring. Furthermore, the Fed has introduced some new measures. To begin with, the Secondary Market Corporate Credit Facility has been established to purchase investment grade corporate bonds and also ETFs that track the American IG corporate bond market. I knew it was only a matter of time for the Fed to implement a facility of this sort, as I mentioned in the previous post. Moreover, the discount rate on the primary credit - to the primary dealers - narrowed its spread relative to the general level of overnight interest rates "to help encourage more active use of the [discount] window by depository institutions to meet unexpected funding needs". More noteworthy, the Fed is now accepting equity as collateral via the Primary Dealer Credit Facility: "Collateral eligible for pledge under the PDCF includes all collateral eligible for pledge in open market operations (OMO); plus investment grade corporate debt securities, international agency securities, commercial paper, municipal securities, mortgage-backed securities, and asset-backed securities; plus equity securities." The pledged collateral will be valued by Bank of New York Mellon, according to a schedule designed to be similar to the margin schedule for lending by the discount window, to the extent possible. This means that dealers can now buy stocks at what are still massively overinflated valuations thanks to trillions in central bank liquidity, knowing they can then turn around and pledge them to the Fed at a collateral value that is determined by an easily biddable back-office minion. Despite equity securities had been used during the GFC, that was only made in backstage negotiations. Additionally, there will be a program worth $300 billion to support the flow of credit to employers, consumers and businesses. At last, there is going to be a lending program to Main Street businesses in order to help "support lending to eligible small and medium-sized businesses, complementing efforts by the SBA." To conclude, lending with equity as collateral may be the final nail of capitalism's coffin. Although this program is supposed to be a temporary measure until the crisis passes and normality is restored, those stocks could stay in the Fed's balance sheet for years, simply because the monetary and financial system may very well collapse, as I have been arguing. Since the economic and financial crisies will only get worse, the primary dealers will use this procedure increasingly more often or, as things are going, the Fed might even commit to straight out purchase equity securities. Therefore, the stocks in the Fed's balance sheet may multiply very soon, quickly expanding its participation in corporations. Accordingly, in such a terrifyingly possible scenario, the Fed could end up being the majority shareholder of several corporations by the time the reset of the monetary and financial system is set up. Thus, we may see the US become a full-blown marxist socialist country, with the government owning the means of production. In light of the rising acceptance of socialism in America, as the Democratic Party has demonstrated with the favourite candidates being those coming out with the most preposterous proposals and entitlements, I believe a lot of Americans would welcome and not many would vehemently oppose such a regime. Sadly, the same could be said about virtually every other developed nation, from Canada to New Zealand. All of them embarked on a race through the Road of Serfdom and all are only a few steps away from the destination. Now, we can only guess which ones can step on the brakes in time and which ones have their brakes slashed.
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March 2024
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