I want to discuss a recent WallStreet Journal article by Ruchir Sharma entitled “The Rescues Ruining Capitalism.”
We talk much about the bailouts and stimulus programs related to the economic shutdown and pandemic. However, the bailouts began back in 2008 when the Federal Reserve intervened with the insolvency of Bear Stearns.
To date, the Federal Reserve, and the Government, have pumped more than $36 Trillion into the economy to keep it “afloat.”
I say “afloat” rather than “growing” because, during the last decade, economic “growth” was a function of population growth. Monetary interventions were successful in creating inflation in financial assets. However, during the same period, the economy grew by only $2.92 Trillion.
In other words, for each dollar of economic growth since 2008, it required $12.67 of monetary stimulus. Such sounds okay until you realize it came solely from debt issuance.
Bailouts Ruining Capitalism
We need that bit of history to understand why “bailouts are ruining capitalism.”
“Modern society looks increasingly to government for protection from major crises. Whether recessions, public-health disasters or, as today, a painful combination of both. Such rescues have their place. Few would deny that the Covid-19 pandemic called for dramatic intervention. But there is a downside to this reflex to intervene, which has become more automatic over the past four decades. Our growing intolerance for economic risk and loss is undermining the natural resilience of capitalism and now threatens its very survival.” – Sharma