The Scandal of Money: Why Wall Street Recovers but the Economy Never Does - George Gilder (2016)
Chapter 1. The Dream and the Dollar
Acrisis of the American Dream is no minor malaise. It is the dream that brings the American future into our minds and motives today. It is a belief in a world where work and thrift today are rewarded by prosperity and progress tomorrow, where savings promise comfort in retirement, and where our children enjoy glowing prospects on new frontiers of opportunity.
The way monopoly money has savaged these hopes is a great untold story of our time. In an information economy, governed by wealth achieved through learning, money is a messenger from the future—a bearer of information and a signal of opportunity. If the money no longer conveys a reliable message—a way of thinking coherently about our priorities and our values—how can we harbor intelligible dreams?
Today we fear the dream is failing—that something has corrupted the links between our history and our horizons, that some insidious force is stealing our future. But across a cornucopian land, we have trouble defining what has gone wrong. Beyond various volatile indices of GDP and growth, beyond poignant tales of penniless grandparents ultimately triumphant through their proud progeny—Look at me, on this very podium, a politician!—beyond a wistful sense of lost mobility, we are left with images of money and its decline.
Money is finally valued in dreams. The past is over and the future is unknowable. Where the dreams go, the dollars follow. Are they all to flow down a new, faintly perfumed, economy-sized American drain? Or can we retrieve the dream of a global monetary order like the one established in 1944 at the Bretton Woods Conference in New Hampshire, which based world currencies on the dollar and the dollar on gold?
Our national morale has long fed on a faith in the frontier—first an expansive landscape, then a Promethean technology. The dream beckons a special people to surmount any challenge and arrive on the shores of a democratic prosperity. “The great cloudwagons move / Outward still, dreaming of a Pacific.”1
Because the future can never be fathomed in mere financial terms, we evoke it by summoning poets or novelists or science-fiction prophets for what we call the dream. “Where there is no vision, the people perish.” A failure of the dream thus portends an eclipse of the future.
Now giving up on this cornucopian faith, this future, are American academic and political elites. Following a vanguard of scientific activists and economic celebrities, we have arrived at a consensus that the American Dream is a deadly burden for the planet. The very biosphere is said to groan under the weight of American exceptionalism. And the entire globe runs up against what Malthusian fashion-plate pundits call a World Technological Frontier.
All entrepreneurial and technological ventures, according to a canonical paper by the productivity theorist Robert Gordon, face the closing of the world’s “productivity frontier.” In a dismal account of the limits to growth, Gordon foresees productivity’s running into six “headwinds”—demography (slowing of workforce growth), education (diminishing returns of learning as schooling spreads), inequality (with 52 percent of income gains siphoned off to the “One Percent”), globalization (the worldwide reach of U.S. technology pushing down U.S. pay), energy and the environment (“global warming” halting the huge historic growth contributions of fossil fuels), and an overhang of consumer and government debt, perhaps epitomized by the crisis of entitlement liabilities, $120 trillion in the United States alone.2
Such luminaries as the former Treasury secretary Lawrence Summers sum up the result as “secular stagnation”—a near-permanent retardation of growth.3 The Frenchman Thomas Piketty, demonstrating that not all his countrymen share Alexis de Tocqueville’s admiration of American exceptionalism, has extended the essential argument into a new Marxian “central law of capitalism.” Free markets have reached the end of the line of accumulation and growth, ushering in an era of redistribution and zero-sum reshuffling of wealth.4
Spreading this pall of pessimism in American politics is the Democratic Party. In a signature appointment, President Obama named as his chief science advisor John Holdren, a population and climate catastrophist who once called for poisoning the water with sterilizers to halt population growth. Importing the Marxian-Malthusian theories of Piketty, Democrats see inequality as stemming from an oppressive and conspiratorial accumulation of wealth. The cause of poverty, the Left tells us, is wealth!
Building up faster than wages in accordance with inexorable capitalist logic, the yield of investment exceeds the rate of economic growth. The harvest is an increasingly top-heavy, winner-take-all economy, smothering middle- and lower-class opportunities. President Obama’s friend and counselor Ta-Nehisi Coates, from his perch atop the bestseller lists and at the pinnacle of power in America, denounces the American Dream, in terms that echo Obama’s previous spiritual guide, Pastor Wright in Chicago, as a “genocidal weight of whiteness.”5
Evidence grows that in the United States upward mobility and even geographical mobility are being choked off. An American child born in poverty at any time since the 1960s has had only a 30 percent chance of rising to the middle class and only a 5 percent chance of making it to the top 20 percent. That child’s prospects would be better even in Europe. Vertical mobility is hurt by the near halt in horizontal movement. The “movers rate” dropped in 2011 to its lowest level since the spread of the automobile after World War I. In 2014 an unprecedented one-third of all Americans between the ages of eighteen and thirty-one had not yet moved out of their parents’ home.6
Hedge fund philosopher Sean Fieler points out that prime-working-age males have increased their real median income only 6 percent since 1971. With a record low 66 percent holding fulltime jobs, the total real median incomes of all men in the their prime working years has dropped 27 percent, while men without education beyond high school have undergone a 47 percent drop. Mitigating some of these losses are higher female earnings, but exacerbating them are elevated levels of family breakdown.
In response to such developments, leftist economists offer only defeat and despair. They predict a permanent slowing of world per capita economic growth rates. Piketty calculates a 50 percent shrinkage, from 3 percent to 1.5 percent per year already under way, to be followed by a further fall to 0.8 percent. Subtracting incrementally for each of the six “headwinds,” Gordon in 2007 forecast an eventual permanent drop of U.S. per capita consumption growth to 0.2 percent. He now points out that by 2012 real per capita growth was already running 8 percent below the level implied by this dismal forecast of 2007.
Many eminent economists cherish the idea that the retirement of baby boomers like themselves dooms the economy. They fret that the declining yield of education, the exhaustion of technology, the rebellion of the biosphere, the rise of inequality, the globalization of markets, and the payback of debt are all grave problems for free economies around the world. Gordon speculates that Swedes and Canadians might remain more buoyant in the face of his sixfold forces of doom. Is it their relative socialism that saves them?
To American academics the data represent a failure of capitalism and a pretext for new interventions. Politicians now move to tap, till, and tamp that “technology frontier.” Declaring that the Internet has passed beyond its entrepreneurial phase, a bureaucracy of lawyers and accountants at the Federal Communications Commission is taking it over, putting the net in “neutral,” where the government can follow it better, probing all its nodes and prices as a public utility under Title II of the Communications Act of 1934, like an old telephone or railroad monopoly. The Dodd-Frank Act is an invitation to nationalize the large banks as too big to fail and to marginalize the small ones as too little to succeed. Free of all legislative constraint, the federal Consumer Financial Protection Bureau is regulating all consumer finance, from investment advisors to pawn shops.
Obamacare (also known as the Affordable Care Act) is extending its web of taxation and control over all healthcare, requiring sixteen thousand new Internal Revenue Service agents to make it all work. Redressing the crisis of inequality will be expanded taxation of capital and savings capped by a progressive wealth tax—a program that may begin with Hillary Clinton’s proposed hike in the tax on capital gains. Redressing the diminishing returns of education, under the Democrats’ trickle-down education theory, is $350 billion more for educators. The waning benefit from globalization suggests “sustainable technologies,” more appropriate dreams, and rich reparations for the third world. The headwind from global warming blows on balmy gatherings in tropical hotels where the industrial world confesses its sins and offers further reparations with 97 percent pure unanimity.
Finally comes the debt overhang: well, it can be addressed by more money printing and devaluation and new progressive taxes on any savings and investments that survive the other headwinds.
From Piketty’s new Marxism to Gordon’s declinism, the dismal science offers convenient excuses for the continuing failures of leftist economics. The warning that these transitory changes in Gordon’s anemometer will paralyze progress for the next hundred years is overwrought, but regulatory paralysis occasioned by fear of spurious “headwinds” such as global warming, inequality, and globalization is entirely capable of producing a new dark age. Even debt is less dangerous than panic-driven high-tax austerity policies to fight it.
According to the declinists, all the numbers began going south in 1972. Productivity growth sank by 40 percent, from an average annual gain of 2.33 percent over the previous eighty-one years to 1.38 percent from 1972 to 1996, sinking in 2014 to 0.5 percent.
From Gordon to Summers, the explanation for the doldrums is nothing less than a historic watershed in the history of science and technology as portentous as the eighteenth-century eruption of the industrial age. Driving the productivity boom for the eighty-one years ending in 1972 was a unique convergence of transformative inventions—electricity, the internal combustion engine, internal plumbing and central heating, fossil fuels and their transmutations such as plastics, and finally telecom and TV. Sulfa and antibiotics extended human life; jet engines boosted air travel. The United States changed from 75 percent rural to 80 percent urban.
According to the theorists, these steps were all singularities—they could happen only once—and nearly all were completed by 1970. As Gordon puts it, “Diminishing returns set in, and . . . all that remained after 1970 were second-round improvements, such as developing short-haul regional jets, extending the original interstate highway network with suburban ring roads, and converting residential America from window unit air conditioners to central air conditioning.” Even the computer revolution, according to Gordon, happened mostly in the 1960s, with computerized bank statements, credit cards, and airline reservations. Automatic telephone switches and industrial robots also entered before the 1970s.
The critics of the dream rest their case on a detailed account of the overwhelming and singular transformative power of what they dub “the second industrial revolution” beginning about 1890 (following the first revolution of steam engines, coal, gas lighting, and metals a century earlier). From cars and planes and central heating and indoor plumbing to antibiotics and air conditioners and telegraphs, technological progress doubled life spans, accelerated transport from five miles an hour to five hundred miles an hour, and reduced communications delays from days to seconds. Overall measured productivity rose a hundredfold and growth rates surged.
It makes sense to them that the ensuing productivity slowdown stemmed from a decline of technology from these vertiginous heights. But there is a problem. The only index that identifies 1970 as a technological turning point is the very collapse of productivity growth that the doomsters are trying to explain.
Belying the notion that technological potential declined in the 1970s is the list of new corporations launching breakthrough innovations during that decade. Among the emerging transformative companies were Intel with its memory and microchip revolution, Apple with its personal computers, Applied Materials with its submicron semiconductor capital gear, Genentech with its biotech revelations, and Microsoft with its packaged modular software. The first modern ATMs were spitting out cash. Soon polymerase chain reaction tools would enable mass replication of the DNA codes of life. Ethernet and the Internet Protocols portended a coming transformation of communications.
Also continuing to advance were the technologies of the second industrial age as they combined with information tools. Federal Express launched its overnight deliveries, Walmart its retailing revolution, Southwest Airlines its democratization of the air. Containerization vastly facilitated international shipping and trade. Annual productivity growth, as the advance of GDP over hours of labor, did not plummet from 3 percent to .5 percent because of any putative 1970s exhaustion of intrinsic technological gains.
In an information economy, growth springs not from power but from knowledge. Crucial to the growth of knowledge is learning, conducted across an economy through the falsifiable testing of entrepreneurial ideas in companies that can fail. The economy is a test and measurement system, and it requires reliable learning guided by an accurate meter of monetary value.
The elephant in the room ignored by most of the economists and the productivity experts was the sudden eclipse of money as a meter, as a measuring stick, as a scale of value, and as a signal of opportunity. Through two centuries of fabulous industrial creativity and progress under the gold standard, as even Piketty recounts, every major currency long “seemed as solid as marble . . . seemed to measure quantities that did not vary with time, thus laying down markers that bestowed an aura of eternity on monetary magnitudes.”
How did enterprise move from these changeless marmoreal tracks into an oceanic wavescape of microsecond transactions? How did we change from frontiersmen into “flash boys”?
This predictable carrier of the surprises of creativity, this perdurable channel for productive innovation, gave way like a great dam, unleashing a turbulent sea of fluctuating values. The change occurred on a single, identifiable day—August 15, 1971. This was the day President Richard Nixon permanently detached the U.S. dollar from gold.
As the British politician and historian Kwasi Kwarteng puts it in War and Gold (2014), “Nixon’s decision in August 1971 . . . substantially altered the course of monetary history and inaugurated a period, for the first time in 2,500 years, in which gold was effectively demonetized. . . .”7
The absence of a legal link between the dollar and any physical reality plunged the world into monetary anarchy. With no dollar anchor for long-term investment, financial horizons shrank and markets dissolved into trading over bets on bits. Contemplating the 1970s without mentioning this epochal event could be justified only if it had as little effect as Nixon promised at the time.
Nixon’s announcement was full of reassurances that leaving the gold standard would “strengthen” or “stabilize” the dollar. Milton Friedman, who urged Nixon to make the move, predicted that it would have little effect on the worth of the currency. Paul Samuelson led a parade of eminent figures forecasting a sharp decline in the price of gold. That gold in fact quadrupled over the next three years and rose by a factor of twenty-three before a correction at the end of the decade illustrated the blindness of both the economic profession and the politicians in charge to the metrics and dynamics of money. Most economists endorse John Maynard Keynes’s onetime dismissal of gold as a “barbarous relic” and cannot bear even to think of its continuing sway in the minds of men.
Barring any more persuasive explanation, the collapse in productivity growth after 1972 must be deemed just another of the cascading effects of the destruction of the information content of money as a metric. The most salient immediate result was the abrupt end of two centuries of nearly stable long-term interest rates in both the United States and Great Britain. With the dollar off gold, interest rates on ten-year bonds began to move up and down wildly, in unprecedented ways. Since time preferences could not be similarly swinging, this instability reflected the new chaos of currencies.
Amid that chaos, the values of assets and liabilities gyrated unpredictably, producing bankruptcies on one side and bonanzas on the other. Because the changes were unexpected and came in the money rather than in the actual performance of companies, the results for most citizens seemed random. Debt burdens surged mysteriously for some and were inflated away for others. Bankruptcies soared. Relishing volatility, the financial sector thrived. Trading triumphed over work and thrift. Inequality broadened, as the top 10 percent of earners jacked up their take from 33 percent of all income in 1971 to 45 percent in 2010. Economic horizons shrank.
John Tamny recounts many of the effects of going off gold in his book Popular Economics (2014). One of them was Jimmy Carter’s famous “malaise” decade. Oil and commodity prices spiked. The Chicago Mercantile Exchange started a financial futures market for commodities largely to enable hedging by farmers whiplashed by gyrating prices. Hedge funds began their long boom. The yen went from 360 per dollar to 100 per dollar. The U.S. automobile and air transport industries collapsed as the price of oil soared. Manufacturing withered. Governments pushed real estate as a haven from dollar depreciation, turning the U.S. economy from an industrial powerhouse into a financial and consumption casino.
With no global standard of value, currency trading became the world’s largest and most useless enterprise, accounting for more than a quadrillion dollars in transactions every year by 2015—a third of the GDP every day. It gobbled up the profits of what is called “seigniorage,” the gains from issuing money. These gains represent the difference between the coin’s cost of production and its value. The central banks and government Treasuries win most of these gains. But these quantitative changes also lavishly benefit any early borrowers or lenders of the government money who can act before related price changes propagate through the economy. But all the currency trading failed in its one crucial role: it failed to find values even remotely as stable as the economic activity they measured. Meanwhile the public sought shelter and consolation in housing appreciation, which at least was more rarely marked to market. But people suffered a sharp rise in the cost of key human needs—food, fuel, medical care, shelter, and education.
Measuring the extent of the damage were sky-high prices relative to what they would have been under the Bretton Woods standard: translated to a value of thirty-five dollars per ounce of gold, a barrel of oil would sell for less than $2.80, and gasoline might still be around thirty cents a gallon.
Chaos in money stultified the entire economy. To blame technology—the one part of the system that continued to thrive and arguably to accelerate—is simply a way to deny the obvious. The world financial establishment had converged on Richard Nixon and persuaded him to make a tragic and tremendous error.
The middle-income crunch and decline in productivity that still endanger the American Dream began with Nixon’s default on gold. Despite President Reagan’s and Fed Chairman Paul Volcker’s heroic and temporarily successful battle to prop up a viable dollar with supply-side tax cuts and an informal gold price target, “there was no permanent repair of the world monetary system,” as Seth Lipsky writes. There was “no restoration of the legal checks on government overreach,” no limits to the tempests of short-term trading and trafficking in a surf of meaningless money values. The world economy ever since has suffered from a hypertrophy of finance. Currency trades in the trillions per day and derivatives totaling in the scores of trillions a year divert an ever-growing share of world commerce to bets on the volatility of increasingly vacuous aggregates.
U.S. entrepreneurs fought back, empowered by technology and spurred by tax-rate reductions and deregulation. But during the late 1990s, a wrenching and unexpected 30 percent dollar deflation (a 57 percent gain against gold) temporarily brought down the Internet economy, bankrupting thousands of telecoms that had incurred heavy debts to build out the new networks with fiber optics. Suddenly these debts loomed 30 percent larger from unexpected deflation of the dollar. To this day, most of these entrepreneurs—some, like Bernie Ebbers, still in jail for enigmatic accounting crimes—don’t know what hit them. But a long canonical history ordains that unexpected deflation ruins debtors. From Asian builders to U.S. retailers, the bankruptcies tracked debt burdens, and no one incurred debts like Internet telecom in the new age of global fiber optics.
Ever since the millennial crash, the United States has been buffeted by currency shocks, interest-rate gyrations, and financial device bubbles. Government fashions move “investment” from real estate consumption to climate distractions. It was technology alone that saved the world economy. But as Steve Forbes put it, the world underwent “four decades of slow-motion wealth destruction, as the value of the dollar dropped 80 percent.”
Dissolved were the maps and metrics across both space and time. The spatial index is the web of exchange rates between currencies that mediate all global trade. This is a horizontal axis, the geographical span of enterprise. Here existing products are replicated across now-globalized space—in Peter Thiel’s trope, from “one to n.” The indices of time are the interest rates that mediate between past and future—the vertical dimension that takes the economy into the future, what Thiel depicts as the vectors from “zero to one.”8
Since the early 1970s these once-golden gauges and guideposts have lost their meaning, subject now to constant manipulation by government bodies around the globe and by their increasingly nationalized banking systems. With currencies and interest rates far more volatile than the economic activity that they guide, the horizons of investment and commerce had to shrink proportionally with real economic knowledge. Only China, ironically, fixing on the dollar and focusing its trade on America, managed to insulate a workable monetary path. (In return, it faced constant charges of monetary manipulation.) But the Chinese strategy worked until mid-2015, when even China had partly to give in to the global currency chaos.
Most insidious was the eclipse of time, the flattening of interest rates in a global governmental raid on the future. Government debt seizes assets and moves them to the present. It is justifiable only if the spending on present goods promises a large yield for the future. Debt incurred for near-term stimulus merely depletes the future, bidding up the prices of current assets without improving their yields or creating new assets that can repay the debts. The result is swollen asset values, quantitatively “eased” but qualitatively empty—a bubble. When the prices fall back, the debts remain and weigh down the economy in much the way Piketty describes. But he comically errs in seeing the problem as actual saving and investment rather than government expropriation of the real creators of value.
In the United States, the costs of the policy fell first on the pensions of the middle class. The Fed ultimately imposed near-zero interest rates, giving governments and their cronies free money, shrinking the horizons of future enterprise. This exercise of government power suppressed entrepreneurial knowledge. Corporate pension liabilities soared, and the yield of new savings cratered.
Behind a bond bubble was a decline of returns. With interest rates flattened, government zeroes out the future. Abandoned were 80 percent of private defined-benefit pension plans. Public plans faced a similar evisceration in the future. With no acknowledgment, the U.S. government had casually dispossessed the American middle class of its retirement assets and pushed millions of Americans into acute dependency on government programs such as Social Security, disability, Medicaid, and Medicare. Government dependency negated the American Dream.
Without dreams, the dollar perishes.