History shows that every “ism” is subject to periodic reformation or collapse; capitalism is no exception. 20^th century capitalism has exceeded its limits and will now reform or threaten collapse. America is bankrupt; there is no real money, not in the banks and not the treasury. In other words, 20^th century capitalism has failed by creating more debt than it could write off and promising more benefits than it could deliver. Since we remain the leader of an ever-more-economically homogenous globe, we will reform capitalism to reflect the values of a world swimming naked at low tide.

This reformation is not occurring because Obama is moving into the White House. Rather, his decisive victory is in response to the growing realization that we have ridden the 20^th century paradigm to failure. The mathematically impossible social net is manifesting its insolvency while reoccurring financial bubbles threaten capitalism’s ability to survive. The result of the reformation will reconnect our decades-old, borrowed standard of living with economic reality; more than a bit lower than we’ve been sold.

We have been living beyond our means due to the magic of late 20^th century capitalism. It convinced us that we could afford both our present over-consumptive lifestyles and our future overly generous social system’s benefits. In reality we have been living larger than the numbers can ever support and financing it with hope, but now things must change. Defining 21^st century capitalism will be a hybridization of our public and private health care systems as well as an expanding Treasury partnership with essential industries.

Health Care

The disproportionately high cost of health care, both public and private, is untenable. Realizing future growth cannot pull us out will soon lead to an examination of the biggest budget-buster of them all, Medicare/Medicaid. Forty years ago America inaugurated Lyndon B.J.’s Great Society, with a foundation built on a landfill of faulty assumptions. Projecting the Baby Boom’s birth rates forward made the benefits impossible before the ink dried. Consequently, the unfunded mandates of Medicare & Medicaid have grown to more than three times our annual GDP and continue to accelerate! Increasing longevity, rising costs and millions of missing fresh young workers to keep the system funded has bankrupted the system. Symptomatic of 20^th century capitalism, we continue to pretend it’s solvent. But without significant premium increases or big benefit reductions, it’s mathematically impossible to sustain.

Privately, health insurance has become a necessity as health-related incidents are the leading cause of bankruptcy. My personal health premiums have risen 25% a year for the past three years and if they continue to rise I will drop them in favor of carrying catastrophic coverage and self-insuring the large deductable to retain disposable income. 20^th century capitalism’s greed precluded any meaningful tort reform because it tried to balance both high-quality healthcare and the option to spin the malpractice wheel of fortune. 21^st century capitalism will ditch the wheel and replace it with lower quality care and less, if any legal recourse.

Healthcare represents in insatiable demand for a painfully finite supply. Simply stated, healthcare must be allocated more cost effectively and efficiently than it is at present. America is not ready for the tremendous drop in service that completely socialized medicine demands but she is ready for an intermediate step. So whether we continue to call it private medicine, while hiding the deficit, or begin calling it social medicine and face the music, benefits will go down and our mortality tables will top out. This is not pretty news because no one (especially me) wants to face the end of their life on a waiting list while trying to do without an organ. The reality is that we have borrowed the past few decades’ high healthcare standard and must now reorient our limited healthcare budget to prevention because we can’t afford the full cost of the cure. It’s probably not the change you hoped for.

Automakers

The inexorable decline of the automakers really bred the financing-ueber-alles ethos that brought 20^th century capitalism to this ugly conclusion. Automakers represented the single (organic) industry that vaulted and secured America’s position atop the world. When they started to lose market share in the early 80’s, they quickly switched to more financing to make up the lost revenue. As their hope of regaining their preeminent status got smaller in the rear-view mirror, the profits from their financing arms increased to eventually eclipse profits from the automobiles themselves.

Nationwide, many industries followed suit and figured out they could manufacture and export “financing” more efficiently than finished goods, and they never looked back. Through the miracle of financial engineering our gross domestic product grew even as our manufacturing (organic) industries continued to contract. Now, however, that music has stopped and all the car manufacturers are utterly bankrupt. Their failure would devastate the economy, perhaps irreparably at this tenuous juncture, and thus they must be sustained. The proposed loan is woefully inadequate because they are no longer competitive. Automakers must be substantially upgraded and that will make the proposed 25 billion dollars look like mere change.

Banking

The big nine remaining major banks have been forced to accept a new (vocal) partner, the US Treasury. The dramatic measure is intended to establish a federal presence in the new, hybridized banking system that is now too big to sneeze. As an equity partner they will internally monitor risk practices to prohibit the creation of another pyramid scheme (hopefully, at least until more confidence is restored) and be in a position to bring sanity to the mutual admiration society that compensation committees have become. 

The big nine are now flush with funny money from the Treasury but no one wants it; credit has had a vowel movement and become a four letter word. Criticized for prudently hunkering down, they are just like Japan’s banks post 1990, full of money with no place to go. On Halloween Jamie Diamond quickly seized the budding 21^st century capital bull by the horns and forged a brilliant solution; stop the foreclosures now in process and essentially apply the funny money infusion to help many survive. It was inspired because it provided a conduit for targeted reflation directly to the most important deflating assets. It will be followed by the remaining big eight and force the hand of the government to more prudently indemnify risk, case by case, rather than en masse. Hopefully that will serve to stem the deflation and also institutionalize the process. The music of capitalism will go on but the rhythm has changed forever.

Epilogue / Prologue

20^th century capitalism is dead, 21^st century capitalism is dawning. The veneer of our assumed growth rate has been lifted and the non-financially-engineered rate is less than prodigious. Although it worked for decades, it was dependent upon ever-more credit to stay alive. Each recession saw a further extension of credit to patch the growing hole created by declining organic growth. The final, desperate chapter was over-mortgaging our most precious asset, our homes, to sustain the illusion of growth. The deflation now occurring is the natural consequence of a failed loose-money paradigm, just as it was in 1929. This reformation will take several years to complete during which the yellow racing flag will fly; we will survive as the world’s premier economy.

World markets are thrashing because capitalism’s fate is in play. Wiping out decades of growth removes lots of reason for many to stay in the game and, little reason to help restore a failed paradigm. However, it now looks as if we are passed the crisis point. When 21^st century capitalism fully emerges it will be radically different with governmentally 1) tempered use of leveraged financing, 2) overseen allocation of finite healthcare resources and 3) partnered manufacturing relationships established with the companies most responsible for mass employment.

21^st century capitalism comes with a mandatory GSE insurance rider to aid the sale to a country inching back from the precipice, with a renewed fear of high places. A national landscape littered with the fresh cadavers of our formerly venerable institutions, titans of 20^th century capitalism, needs no more company to make the point. Our days of living larger than our means are suspended and we must get back to what made us a great and solvent nation - manufacturing things the rest of the world needs. We held the title for decades and with a little training can reclaim it.

Dear client,

Everyone is in shock.  The speed and depth of the worldwide market decline is rewriting economic theory.  The level of fear has never been higher and the level of public confidence has reciprocally never been lower.  Right now the market is acting as if Capitalism has only an even chance of succeeding.  However, there is little alternative, we salvage what is left of public confidence and restore a new and improved version of Capitalism or begin the descent into anarchy.  I believe we will recover but if confidence is not restored and everyone wants cash, the system will fail.

As this calamity has unfolded I have tried to keep my head as the world has lost its.  I have created a defensive portfolio for you to weather and even prosper in what should have been a sane deflationary process.  It is not sane and this once-in-a-century event is far from resolved.  The continuing panic has accelerated the deflationary process and it has been particularly severe in foreign markets.  

What is clear to me now is that we “manufacture” financing more than anything else.  When we export our financing overseas, it picks up speed and acts like a steroid to the foreign recipient’s growth.  Now, when that credit is withdrawn, it acts like the vacuum of a nuclear explosion; everything gets sucked up.  Domestically many age-old, foundational American companies are gone or on the verge.  They are symptoms of the global delusion that credit growth equaled real, organic growth.  GM, once the prized feather in our national cap, will not survive in its present state.  There are no more Investment banks in America and they provided the financing to build this country!  A new day is dawning in history.

Although the drama unfolding is mortifying, signs of a complete breakdown remain absent.  I am fixed on   1) US dollars continue to rise reflecting the domestic deflation as well as the flight to the quality of our currency.  2) US Treasury obligations have gone so high that their yield is almost 0%.  Again, if there was going to be a complete collapse, everyone would flee everything including US Treasuries and their interest rates would be rising.  3)  Gold is the only vehicle of true value on an Earth that has not broken down to chaos.  Gold hit a peak of $1,000 per ounce and reflected the tremendous expansion of credit that occurred during the housing bubble.  Now that the bubble is deflating, gold is also falling.  In a legitimate crisis, one that threatened a complete global meltdown, gold would now be measured by the thousands of dollars per ounce.  Although the market is pricing in a 50:50 chance of Capitalism’s failure, it is not showing up where it would make the most sense.

Therefore, although this is the ugliest financial climate of our lives, we will survive.  In the midst of a crisis we are all emotional and anxious.  This is a Modern Depression that is progressing at light speed.  The outrageous moves and the depths of this descent have as much to do with just how out of control regulators are, as with a financial system being reformed right before our eyes.  The manipulation of oil this year; tripling and then collapsing, is ample evidence of the virtually unregulated horseplay.  It works because we are all subject to the emotions which are easy enough to manipulate by wildly swinging market prices.  Behind the scenes, the fundamentals are reflecting a more orderly deflation.

Thank you for calling me and attending my recent presentations as I am here to explain the situation and my analysis.  My hand is on the wheel and will remain so.  

Thank you for your continuing confidence.

David Roskoph