Stephens: Capitalism has gone off rails, replaced by populism

The increase in interest rates has hit the middle class, especially those with credit card debt, hardest.

By Bret Stephens / The New York Times

The Group of 7 countries might have set a record when they met in Italy last week. Has there ever been a less popular assemblage of leaders of the free world?

Approval ratings ranged from Giorgia Meloni of Italy’s about 40% to Emmanuel Macron of France’s 21% to Fumio Kishida of Japan’s 13%. Last year the Edelman Trust Barometer found that only 20% of people in the G7 countries thought that they and their families would be better off in five years. Another Edelman survey, from 2020, uncovered a broad distrust of capitalism in countries across the world, “driven by a growing sense of inequity and unfairness in the system.”

Why the broad dissatisfaction with an economic system that is supposed to offer unsurpassed prosperity? Ruchir Sharma, chair of Rockefeller International and a Financial Times columnist, has an answer that boils down to two words: easy money. In an eye-opening new book, “What Went Wrong With Capitalism,” he makes a convincing case.

“When the price of borrowing money is zero,” Sharma told me this week, “the price of everything else goes bonkers.” To take just one example: In 2010, as the era of ultralow and even negative interest rates was getting started, the median sale price for a house in the United States hovered around $220,000. By the start of this year, it was more than $420,000.

Nowhere has inflation (in the broad sense of the term) been more evident than in global financial markets. In 1980, they were worth a total of $12 trillion — equal to the size of the global economy at the time. After the pandemic, Sharma noted, those markets were worth $390 trillion, or around four times the world’s total gross domestic product.

In theory, easy money should have broad benefits for regular people, from employees with 401(k)s to consumers taking out cheap mortgages. In practice, it has destroyed much of what used to make capitalism an engine of middle-class prosperity in favor of the old and very rich.

First, there was inflation in real and financial assets, followed by inflation in consumer prices, followed by higher financing costs as interest rates have risen to fight inflation; which inevitably begets political pressure to return to easy-money policies.

For wealthier Americans who own assets or had locked in low-interest mortgages, this hasn’t been a bad thing. But for Americans who rely heavily on credit, it’s been devastating. “For families already strained by high prices, dwindling savings and slowing wage growth, increased borrowing costs are pushing them closer to the financial edge,” The New York Times’ Ben Casselman and Jeanna Smialek reported in May.

Sharma noted more subtle damages. Since investors “can’t make anything on government bonds when those yields are near zero,” he said, “they take bigger risks, buying assets that promise higher returns, from fine art to high-yield debt of zombie firms, which earn too little to make even interest payments and survive by taking on new debt.” A recent Associated Press analysis found 2,000 of those zombies (once thought to be mainly a Japanese phenomenon) in the United States. Collectively, those companies have a total of $1.1 trillion in loans to pay between now and September.

The hit to the overall economy comes in other forms, too: inefficient markets that no longer deploy money carefully to their most productive uses, large corporations swallowing smaller competitors and deploying lobbyists to bend government rules in their favor, the collapse of prudential economic practices. “The most successful investment strategy of the 2010s,” Sharma writes, citing podcaster Joshua Brown, “would have been to buy the most expensive tech stocks and then buy more as they rose in price and valuation.”

But the worst hit is to capitalism itself: a pervasive and well-founded sense that the system is broken and rigged, particularly against the poor and the young. “A generation ago, it took the typical young family three years to save up to the down payment on a home,” Sharma observes in the book. “By 2019, thanks to no return on savings, it was taking 19 years.”

The social consequence of this is rage; the political consequence is populism.

Sharma is no fan of Bidenomics, which, he told me, took “the 100-year expansion of government and put it in overdrive” with unprecedented stimulus packages and politically directed investments. But unlike other prominent Wall Street investors, he isn’t signing up for the Donald Trump bandwagon, either. The former president loves easy money, tax cuts without spending cuts and record deficits.

“He promised to deconstruct the administrative state but ended up adding new rules at the same pace as his predecessor; 3,000 a year,” Sharma said of Trump. “His exercise of presidential authority to personal ends shattered historic precedents and did more to expand than restrict the scope of government. For all their policy differences, both leading U.S. candidates are committed and fearless statists, not friends of competitive capitalism.”

What happens when both major parties are wedded to two versions of the same failing ideas? And what happens when leading figures of both the progressive left and the populist right seek to compound the problem with even easier credit and more runaway spending?

The answer: We are wandering in fog. And the precipice is closer than we think.

This article originally appeared in The New York Times.

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