Tag Archives: End of monetarism

The Business Roundtable, The Most Powerful CEOs and the Legacy of Milton Friedman

Six years ago I ruffled some feathers at a conference organized by the friends of Milton Freidman of the Chicago School of Economics. Friedman is the father of Monetarism, an economic ideology that has taken the world by storm. It has elevated neo-liberal economics and politics to the stratosphere and is now responsible for most of the instability that world economies are grappling with: Record government and private sector debt, bubble economies everywhere, and dangerously high balance sheets of the world’s top central banks. It delegitimized the very function of central banking and contributed to social instability and the greatest wealth gap in modern US history.

If you live in capitalist society, the best way to understand Friedman’s philosophy is by substituting the words “only money matters” for everything that ails you personally. If your wife leaves you, only money matters, you get a better-looking trophy wife right out of a catalog. If your dog dies, only money matters, you buy a more expensive dog. If government takes too much of your paycheck, only money matters, you kill government institutions, or you buy its politicians.  Focusing solely on the power of money and the overuse of monetary policy as prescribed by Freidman -as foolish as it seemed- became the dominant thinking in the world’s leading universities and at its most valued corporation.

The controversy at that conference started when I criticized Freidman for leading corporate America to believe that the sole purpose of a publically traded corporation is to serve the stockholder. Repeat after me, only money matters. Several people walked out of the room when I introduced the stakeholder model that’s at the heart of the MEMEnomics Corporate Sustainability Platform. You can call it Other Things Matter More. This is a model that serves the 5 P’s for Sustainability in the MEMEnomics-Spiral Dynamics framework: Purpose, Profit, People, Planet, and Process. A modified version of Don Beck’s original conception has been adopted by the Conscious Capitalism Movement, which continues to be informed by the Spiral Dynamics model till this day.

Friedman’s ideas represented a legitimate way for businesses to abandon all other virtues that fall under corporate social responsibility and pursue the sole goal of making money. So much so, that in 1978 the Business Roundtable which is made up of the most powerful CEOs on the planet, adopted Friedman’s guidelines as its end-all be-all source for corporate governance. So, why is this relevant today? In 40 plus years, the Business Roundtable has rarely deviated from supporting what they call shareholder primacy – until a few days ago.

On August 19, 2019 the Business Roundtable, in a major shift in focus announced that it’s moving away from the stockholder model and embracing a commitment to stakeholders such as employees and suppliers. The signatories to this statement are the who’s who of the most powerful corporations in the world, from Apple’s Tim Cook, to Amazon’s Jeff Bezos and heads of every Pharmaceutical and Oil Company on the planet and everything in between. (Click here to read the full statement and see the list of signatories)

Does this new statement of corporate purpose reverse the damage that monetarism has caused over the last 4 decades? Since 1978, nothing has been more important for the American corporation than preserving shareholder value. Capitalism became a simple mathematical equation. On one side was management hiding behind this fallacy of efficiency for the sake of the shareholder and on the other was the worker fighting the uphill battle to keep his job. The working class that built American cities and factories and those who supplied them became a variable in an equation that needed to be reduced to as close to zero as possible.

Fighting for the shareholder became a blood sport. This wasn’t a fiduciary responsibility like it’s supposed to be. To attract this rare industrial butcher talent, CEOs were offered a generous amount stock and their compensation was tied directly to the price of that stock. The brightest Friedman clones had taken over corporate America and its financial markets and they immediately went to work. They increased the price of the economic pie instead of creating a bigger pie because only money mattered. Jobs were outsourced, streamlined and offshored because only money mattered. Businesses, large and small were securitized, monetized, and downsized, because only money mattered. Jobs, unions and workers disappeared and you guessed it because only money mattered. Then as this whole house of cards was crashing down in 2008, instead of seeing the fallacy of an economy based on Monetarism our clueless politicians finished the job of debauching whatever value was left of our currency by making money available at 6 times the normal liquidity.

The Business Roundtable’s new declaration from a few days ago is like a statement made by a habitual criminal in court proclaiming innocence and vowing to change his ways. It reminds me of the movie series The Purge where, in a dystopian America, mayhem, anarchy, and murder are condoned for one night out of a year and where reality looks a lot different the morning after.  Well, corporate America has been purging its stakeholders for four decades in favor of those who became the 1%. They have systemically murdered any sense of loyalty they have for Main Street America. Now, They are realizing that the purging is reaching an ugly end and that a new and threatening dawn is on the horizon.

These powerful CEOs are looking to mitigate the damage caused by the rise of a new economic era that doesn’t fit their narrative for business as usual. It’s driven by those who haven’t drunk the shareholder Kool-Aid. They see the anger of the Millennials who witnessed their parents’ jobs being downsized then outsourced to places where slave labor increased shareholder value. They don’t understand why this new generation would rather “share” than “own.” They spend billions on consumer research but they won’t bother to look inward to examine their own conscious and sense of patriotic duty. What they do see is a new breed of politicians who are ready to put an end to the fallacy of an economy based entirely on money and stockholder value.

When only money matters, unending greed becomes the only virtue. When that virtue defines corporate values and culture for over four decades, the behavior becomes the norm. Jeff Bezos is a man who’s company put tens of thousands of stakeholder mom and pop shops out of business. When he says he supports the new stakeholder model, I have my doubt about corporate America being in touch with the stakeholder. If my work with evolutionary values over the last two decades tells me anything, it’s this: corporate America has become the habitual criminal in the court of public opinion, and with all it’s arrogance and desperation it’s asking us to believe that it’s ready to voluntarily go on the straight and narrow path. What it hasn’t noticed is that the judge and jury have changed. The pendulum is swinging the other way. It’s empowered by a culture with higher values and a new breed of politicians who see the deep damage that Milton Friedman has caused to the cultural fabric of America and the world.






On The Edge Of Disaster, The Tail That Killed The Dog

In my 2013 book MEMEnomics, I dedicate an entire chapter to the analysis of the 2008 financial bailout, its shortcomings and the toxic effects it had and will continue to have on the global economy. To get a better understanding of how dangerous and toxic things have gotten today, it’s important to understand the simple, but delicate relationship money must maintain to economic activity. A layman’s statement of this correlation appears in the book and, to my surprise, has been quoted by several financial planners in their newsletters to clients. It also came close to having me thrown out of a conference in Chicago that was organized by the friends of Milton Friedman, the father of Monetarism who popularized the term “Only Money Matters.” These 3 words became the title of another chapter in which I describe the dangers of having a financial sector in an advanced economy decouple from that economy’s measure of productive output. The quote is this:

“Money is to an economy as nutrition is to the human body. When central bankers ignore that relationship by providing more capital that functionally needed, they debase everything capitalism stands for.”

In the fall of 2008, the financial sector was addicted to a gambling problem originated by something called notional assets, which was made worse by the absence of regulation. The growth of this toxic form of finance had thrown the historically delicate relationship between money and productivity way out of balance. This became a phenomenon that threatened to collapse the global economic order. The entire organism called the global economy, was suffering from  metabolic syndrome and its major organs were shutting down. As this ravenous beast ran out of money, it came home begging for a bailout from a government whose regulatory institutions had become impotent and its representatives had no capacity to understand what a responsible regulator should do.

A prudent course of action would have been to rebalance the system by forcing the financial sector to go on a diet. In other words, what was needed in 2008 was a downward revision of the value of the banking industry’s assets, what was historically referred to as price discovery after a market crash. This also needed to be coupled with the decision to allow insolvent banks to collapse or be taken into receivership. This would have allowed the economy to organically regenerate, as the detoxification process would have realigned the financial sector back with productive output. The problem was that instead of our government being the good doctor who saw the long term benefit of these painful and necessary choices, it chose the easy way out and granted the addicts everything they asked for.

One might think this was the end of the story that averted disaster, but the bailout was just the tip of the iceberg on the road to the complete debauchery of global financial systems. Enter Ben Bernanke, Chairman of the Federal Reserve during the financial crisis. Bernanke was considered a god sent to the demigods of global finance as he built his entire career on the argument that the Great Depression would have been averted if it weren’t for Fed policies that tightened the money supply. Desperate for a miracle from the most powerful banker in the world,  leaders and CEOs alike,  embraced this philosophy as their savior. A decade into these unproven grounds of finance and the move seems to be nothing but a long desperate gasp for air.  This linear fallacy from the very top became the catalyst that is now destroying monetary policy and the very virtues that money  historically stood for.

In the years since the financial crisis, the Fed started printing money out of thin air. Sure, they gave these financial instruments fancy names like Quantitative Easing, asset buybacks, and special credit facilities. The list of clever names was endless, but the truth remained the same. A central bank only has two boring tools at its disposal and they must remain boring due to the critical function they perform, and here they are: 1. Regulating the money supply and 2. Controlling interest rates. But this was Bernanke’s Fed, and he had completely exhausted these tools and backed himself into a corner from which there will be no escape. Interest rates were effectively at zero, and the money supply had long lost any relationship to economic output. Additionally, the hope that the toxic assets the Fed purchased, will become investment grade at some point has greatly faded. But, instead of writing down these assets, the Fed extended their buyback programs into 2014.

Here we are, a decade into these policies and a gigantic tragedy is beginning to unfold in front of our eyes. In addition to keeping a steady, fat-rich diet of low interest, and an unimpeded money supply, global markets and the Fed’s balance sheet are full of over-inflated and non-performing assets. This phenomenon has become common among many advanced economies it matters not who is in charge of their central banks.

As of April 2019 the central banks of the top 4 economies in the world, the US, EU, England and Japan have a hugely bloated balance sheet that represents an astounding 36% of their countries’ combined annual GDP. This is unprecedented. It is more than 12 times the post WWII historic average. What this essentially means is that the global economy has been living on borrowed time and that the Fed has been in crisis mode since 2008 and must remain in crisis mode for years or maybe decades to come. It has acknowledged defeat and cannot take its foot off the gas pedal. It is a corner from which the only escape is to keep doing the same. It cannot raise interest rates for the fear of crashing stock markets, and it’s unable to sell the toxic assets it has on its books. These holdings are called  Mortgage Backed Securities that were at the heart of the 2008 collapse. Today they have grown faster than all the other segments of the Fed’s balance sheet and represent 40% of its holdings, or $1.6 Trillion.

The economies that these 4 central banks represent account for over 55% of the total global output and the bigger these numbers get, the higher equity markets rise on a completely deceptive premise that has little to do with real economic output. It is one big bubble that’s making the global economy increasingly more vulnerable to several contagions. One of these contagions could be an economic slowdown that confirms the systemic failure of this end-stage monetary policy where investors  in a panic dump their equity holdings and resort to the safety of cash. The other and more likely catastrophic scenario is if the economy heats up and the Fed decides to raise interest rates to stem the threat of inflation. We witnessed a glimpse of this in 2018 when the Fed raised rates twice and the market lost 5000 points in a few short months.

Whatever wildcards appear, we know one thing for sure, and that is the world’s central bankers have abused every possible tool available to them. Add to that the overvalued toxic assets that caused the 2008 financial crisis which have systemically been legitimized by the world’s central bankers who sanctioned them under different names and repackaged them as legitimate holdings on their books . All these actions  have completed the debauchery of  money. Today there’s a palpable fear about the precarious state of the global economy and central bankers  are quietly beginning to acknowledge their role  in getting us there.  It’s just a matter of time before the whole house of cards begins to collapse.

Sven Henrich, a leading market strategists and an expert on macroeconomic issues describes the central bankers’ ill advised journey of the last decade and the predicament they’re in today  in these terms:

“The capitulation is as complete as it is global and 10 years after the financial crisis there is not a single central bank that has an exit plan. So great is the fear of falling markets and a slowing economy that the grand central bank experiment has ended in utter failure.”  

This destiny wasn’t written in 2008. It was born when the Monetarists rose to power along with Reaganomics in the early 1980s. This is when central bankers drank the Kool Aid that sought to make finance an economy on its own. They fully bought into the idea that financial innovation can take money far beyond  its historically  boring function and made themselves much richer in the process. When the experiment failed in 2008, instead of reversing course, they decided to become even more creative. They manipulated the world’s resources and debauched its financial architecture.  They made the poor ten times poorer and the rich 20 times richer and  didn’t care about the deep damage they were causing  in the long term.

Today, the debasing of a capitalist system based on finance has reached its end state. The tail that has been wagging on a fat-rich diet for the last 4 decades has finally killed the dog. It’s just a matter of when the death certificate will be signed, and who will be brave enough to sign it.