In this three-part series, I describe an alarming picture of how dependent the U.S. economy has become on bubble cycles, suggesting that capitalism has taken on a different and dangerous form unrelated to the capitalism of Adam Smith, and I look for ways to open the discussion about moving to a more democratic and sustainable kind of capitalism. Part three summarizes the current situation, as laid out in part two, and suggests some factors to consider going forward.
How Bubble Capitalism Swells from Within
Last time we talked about the surreal combination of stock options, to incent growth for growth's sake in big industry, and the creative engineering among the masters of big finance of new instruments--not for investing, but for "betting," insuring, hedging and swapping. Both of these events were calculated to keep fueling growth, even as slowing demand continued to press. Their efforts were aided and abetted by big government, only to happy to keep the party going, by relaxing its rules and regulations to create what the masters of finance proclaimed would be healthier and freer markets.
Then, even as the inevitable credit "bubble" of valueless growth popped in 2008, big government rode to the rescue by printing unbacked trillions in newly-minted money, with interest rates so low that they it led to a "cheap money" casino-like trading frenzy on Wall Street, indeed, trading value vs. creating it. And, corporate coffers have become engorged with trillions of dollars, not being invested in new plants, equipment or hiring new workers. Why, because real demand has slowed.
So the conundrum continues. The Fed throws more and more cash at the wall, hoping a consumer or two will spark another borrowing frenzy to buy, buy, buy. And of course, our hungry retailers, prodded by Wall Street's demands for growth, are doing their part with deeper and more creative discounting, and opening more and more outlet stores. All of their consumption-stoking is added to by the multiplicity of new websites being launched daily, each one offering a better discounted "deal" than the one before it, or selling "pre-used" goods, or just plain "swapping."
In the face of this deleterious type of demand creation, we must accelerate it to even higher levels because we continue, counter-intuitively, to create more and more stuff and stores, piling onto the over-capacity already existing in most industries.
This is a train wreck that is happening as I write. People in retail can see it every day. They acknowledge it, but then continue to open more stores and websites and throw more stuff into an already overstuffed marketplace, only to have to make discounts even deeper, and/or provide easier credit to get it sold to a consumer whose real, inflation-adjusted income hasn't budged for 30-plus years, to say nothing of their disposable income.
And, I'm sorry to say that for every new, innovative, exciting product, service or experience breaking through with real new value, there are ten times more of commoditized excess that sit on shelves until it is all but given away.
This is simply and clearly a vicious cycle of value deflation, dragging all ships down. In my opinion, this dynamic of a demand- and consumption-driven economy, aided and abetted by government, the financial industry, and big business (all juicing consumption with free money, freer credit, and insane levels and types of discounting), all while being complicit in juicing the supply side using the same tools, leveraging credit and piling on more capacity, is, in a much-overused word, unsustainable.
Furthermore, as I've also pointed out, just as there is too much stuff sloshing around the globe, there is too much capital racing at lightning speed, frantically looking for investment opportunities. Well, guess what? The trillions in capital gets invested in three places: to build more capacity (which we do not need in the U.S.); to prop up losers (I wrote on the Sears example long ago, and there have been, and will be, many others); or to leverage up another "bubble" (technology, maybe?). This vicious cycle accelerates and perpetuates the paradoxical and unsustainable combination of an economy reliant on consumption for growth--the demand side--and overcapacity on the supply side, that is being devalued daily in the attempt to get it all sold.
As value is being deflated, over time, in the aggregate, it deflates the economy and everything in it. The end game may not be quite as dire as the U.S. slipping into third-world status, but it could easily slip us into the ranks of a third-rate global economic engine, as a mere consumption machine for the rest of the world. We're practically there already.
So, If No Real Growth, Where's the Next Expectation Bubble?
As former Secretary of Defense Ronald Rumsfeld said, "...you go to war with the army you have." That's what Henry V did in 1415, winning the Battle of Agincourt, with an army sixfold smaller than that of his opponent.
So, should we accept bubble capitalism as the troops we have, and "go to war" with it? Should we find more bubble opportunities to blow up with credit, enabling everybody to sip champagne (or eat cake) on the way up? Then, following the "pop," the titans of industry, the masters of finance and big government can continue sipping the bubbly, counting their bounty as they also take a headcount of the number of additional jobs lost, levels of income decline, and whatever excess stuff is left scattered across the landscape, adding to all the previous excess?
But not to worry -- our now compulsively consumptive culture will be there waiting, with the multitude of credit cards sent to them in the mail--no questions asked--poised to find the best deal ever for more stuff than they will ever need.
Seriously, There Can Be a Happy Ending
Dr. Robert J. Gordon, Economics Professor at Northwestern University, asked at a recent TED conference, "Would it be so terrible if economic growth slowed to a halt?" He went on to say, "It's worth considering." The editors of Forbes posited, "The great concern these days about a lack of growth is primarily due to technological progress: If GDP growth does not keep up with productivity growth, the result is unemployment, but an end to productivity growth would end this worry." Even by Gordon's estimate, this could happen in the U.S. by the middle of the century at a GDP of around 80,000 dollars per capita. More equally distributed, this should be plenty for a comfortable life.
Interestingly, this point was argued 80 years ago by the father of modern macroeconomics, John Maynard Keynes, in an essay titled "Economic Possibilities for our Grandchildren." In the essay, he suggested that his grandchildren "might use improvements in productivity to enjoy more leisure and less work. Maybe we do not need economic growth beyond a certain level."
Whoopee! We can take it easy and smell the flowers along the way. But, wait a second! I have to go shopping. There's a sale at the "Everything For Free Store." They're paying customers to take the stuff away. Can you believe it?
Yes, I can.
The Final Word
Without the elements of trust and fairness, democracy and free market capitalism cannot work. And poll after consumer poll reveals that a greater percentage than not believes our government and the business and financial sectors are lacking both.
As I said, it's not about rules and regulations -- it's about fixing a broken capitalism. And that would seem, on the face of it, to have a moral underpinning.
Adam Smith, where are you when we need you?
This is the final part of a three-part series.
About Robin Lewis
Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women's Wear Daily (WWD), and Goldman Sachs, among others, and has consulted for dozens of retail, consumer products and other companies. He is co-author of The New Rules of Retail (Palgrave Macmillan, 2010). In addition to his role as CEO and Editorial Director of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.