Under Capitalism, we mainly had capital controlling the production of goods and the distribution of wealth. Under Corrupitalism, we mainly have people in positions of power controlling the production of goods and the distribution of wealth. There have always been elements of both systems within our economy, but over the last half-century the American economy has shifted along a spectrum from Capitalism toward Corrupitalism (and under George W. Bush's leadership, the power of the corrupt in the American economy has reached truly frightening proportions).
With Capitalism, labor is caught in a productivity trap. As increasing capital accumulation leads to productivity increases, there is less demand for labor. As population grows and resources become scarce, capital commands a greater share of wealth relative to labor. The gap between the rich and the poor and social unrest grow unless wealth is broadly distributed and workers have access to sufficient capital of their own.
With Corrupitalism, capital is caught in a liquidity trap. Too much money is created and distributed within the power base. Wealth and profits are taxed with the proceeds being distributed among the power base. It becomes increasingly difficult for outsiders to earn a return on investment that keeps up with inflation as the corrupt claim the greatest share of wealth relative to labor and capital.
The Capitalist model did not guarantee happiness for working people or even a decent standard of living for working people. Labor constantly battled against declining bargaining power. However, a more capitalistic society was generally efficient in the allocation and use of resources and tended to compete well in the global economy.
The Corrupitalist model is inherently inefficient. Resources and wealth are misallocated based on political purpose rather than economic need. Economic booms and busts are created and manipulated for the benefit of the well positioned. Government spending is directed toward the politically well connected. Industries are created and destroyed to serve the purposes of financiers. Corporations operate to generate the appearance of short-term profits and cash flow rather than growth and the long-term interests of shareholders. The result is a steady deterioration in the global standing of the the corrupt economy.
Understanding the nature of a corrupitalistic society requires understanding the nature of the power structure and the way wealth is redistributed within the system.
In our American Corrupitalist economy:
Power is held by elected and appointed government officials and exercised in the laws government creates and chooses to enforce.
Power is held by corporate executives and exercised in the way corporations are run in the short-term interests of the executives.
Power is held by investment banks and exercised in the way access to capital is controlled.
Power is held by central banks and exercised in the way money supply and interest rates are manipulated to create economic cycles and reduce real returns on invested capital.
Some brief examples of how our corrupitalistic system operates:
Our President's personal wealth is tied to the defense and oil industries. Consequently our nation is at war in an area of the world where control of oil resources is in question. The country is at war and wasting somewhere around $300 Billion per year in a manner that generates billions in profits for the defense and oil industries.
Corporate leaders and corporations spend millions annually on lobbying efforts to influence government policy makers. Sometimes the money is spent pushing for legislation that is a big windfall for entire industries, like the almost trillion dollar annual defense budget, or the multi-trillion dollar prescription drug benefit or the bankruptcy reform bill. Sometimes the money is spent on issues that affect the power of the executives of corporations, like stock options accounting standards or corporate governance issues. Either way, political power is secured by handing out economic favors to the elements within the corporate and political power base.
Executive compensation is often tied to short term performance objectives that go counter to the interests of investors. Loose accounting standards often enable managers to create the appearance of increased profits at the expense of future returns. A company can be milked for cash while assets are sold off and the company is gradually dismantled.
Wall Street's big investment banks can direct massive capital flows into any industry, creating sector booms and surplus capacity. They can destroy firms by creating too much competition and keep favored firms afloat by providing enough capital to survive difficult times. While firms are forced to operate at a loss or not operate at all, fees are generated on loans and services for the bankers, while financial strength is drained from an industry.
The Stay-In-Business model requires a steady supply bag holders to provide sufficient rewards for executives and bankers. During the tech bubble, dot-bomb companies stayed afloat as long as investors could be suckered into new stock and bond offerings. When the supply of investor funds began drying up, the companies folded, wiping out billions of doallars in imagined wealth while executives and undeerwriters retreated to count up their very real gains. The sub-prime lending racket now requires a supply of borrowers who agree to excessive interest rates and yield chasing institutional and foreign investors who purchase loans and mortgage backed securities. When defaults rise Wall Street will cease to provide financing and the sub-prime industry will contract as others have before. Then Wall Street will tally up this round of profits and move its financial leverage on to the next hot sector.
The Hedge Fund industry has been financed and provided with great leverage to serve the short term goals of investment bankers. Trading fees and interest income are passed on to the big banking houses in exchange for the power to manipulate markets and extract management fees from capitalist investors. In many cases, hedge funds have earned substantial, inflation-beating returns for investors, but in many other cases investors have been victims of fraud, mismanagement and bad luck. The individual profits and losses of hedge fund investors are not of great importance to the corrupitalists. What matters to them is that they can create as much money as they wish and use this money to fund an industry that feeds back hundreds of billions in profits to the corrupting enterprise. Wall Street's profits and executive bonuses are once again at record highs thanks largely to the hedge fund industry.
The Federal Reserve is perhaps the most powerful and most corrupt institution. It creates money and sets interest rate policy to suit the wishes of its member banks. By facilitating the creation of trillions of dollars in new money over the years, benefiting the member banks first and foremost, the Fed has created a backdrop of steady inflation that eats into the profits of capital. By allowing and enablng the banking sector to create far too much capital, the Fed has guaranteed lesser returns on invested capital. As a result, the nation's pension plans are only beginning to unravel. By eroding the financial health of working people, the status and bargaining position of workers further deteriorates, as does the condition of business enterprises outside the power structure.
Wall Street wielded great power early in this century. J.P. Morgan built great monopolies among a core group of capitalists and was able to control entire industries along with his allies. Capitalism became imbalanced, speculative debt levels soared, and the gap between rich and poor grew rapidly through the 1920s. After the great depression government sought to reign in Wall Street's power. During World War II, tremendous national savings and austerity redistributed wealth broadly and created the basis for rapid economic growth through the 50s and 60s.
However, over the last 50 years the economy has become steadily more corrupt and wealth has been squandered. As waste, fraud and abuse in both government and the private sectors rises, and as wealth and power become intrenched within the power structure, the country borrows ever more from foreigners to promote the illusion of wealth among investors and consumers. High consumption, high asset prices and increased economic activity are not representative of wealth when it is funded through tremendous debt expansion. National indebtedness to foreigners is rising by more than $1 trillion per year and is now racing past $9 trillion in total. The United States now imports roughly twice as much as it exports. Corruptialism has drained the nation of its competitive standing and left its economy at the mercy of foreign investors.
The existing power base now struggles to keep the economic status quo in effect. Economic growth must be generated through the continual creation of new money, even if it is invested inefficiently. Foreign debts must be expanded while foreign companies provide the goods and services the country can no longer produce for itself. The dollar's strength must be maintained, even while trillions of new dollars are added to the economy. Foreign capital must be attracted in the face of diminishing real returns, if not treasuries then corporate bonds or mortgage backed securities, if not those then real estate, intellectual property and entire companies. To continue attracting capital and maintain faith among consumers and investors, asset price inflation must be created, but consumer price inflation must be somehow suppressed. That task is becoming ever more difficult and requiring greater deceptions and distortions by our Government and the Fed. Power has has been used for the accumulation of great wealth, and power must be maintained within the corrupitalistic society to continue generating returns.
Eventually Corrupitalism must fail because of its inefficient nature. How it will fail, what the country will look like after its failure and what steps will taken to rebuild the economy are unknown at this point. Over the next twenty years those questions will all likely be answered.
