Opting Out of State-Directed Capitalism

By John Banks

“Turn on, tune in, drop out” was a counterculture phrase from the 1960s. Perhaps it is time to revive it.

The thing to “turn on” in 2020 is awareness of Bitcoin…

So that one can “tune in” to a digital store of value…

And then “drop out,” or rather opt out, of state-directed capitalism.  

Make no mistake, state-directed capitalism is the new thing. We saw confirmation of this on July 1, when the U.S. government bought nearly 30% of a private sector firm.

YRC Worldwide Inc. is a publicly traded North American trucking company — symbol YRCW on the Nasdaq — that ships freight for a wide variety of customers, including military equipment for the U.S. government.

On July 1, the U.S. Treasury Department announced it would provide a $700 million loan to the struggling firm, while taking a 29.6% equity stake.

The 29.6% stake is compensation for the fact that YRCW is a dead duck, or would have been if not for government largesse.

Prior to the $700 million loan announcement, the company’s market cap was less than $70 million. After news of the loan hit, the market cap jumped to $116 million. The market presumably anticipates $584 million worth of taxpayer funds getting burned up or wasted.

The YRCW deal is probably a watershed for all the wrong reasons. With the government willing to disperse hundreds of millions in exchange for sizable stakes in the equivalent of busted penny stocks, the grifting possibilities look endless.

Here is the playbook that will have Congress members and senators licking their chops:

  • Identify a business that is on the ropes, or perhaps just “needs help” as a result of the pandemic, or the real-economy crisis, or for whatever reason at all.
  • Wrangle a chunk of Treasury Department cash (i.e., taxpayer funds) in exchange for an equity stake, supposedly to make sure taxpayers get value for their money.
  • Repeat this process, over and over, until a big chunk of the American business landscape is quasi-nationalized, with all kinds of pork and perks and crony capitalism payouts en route.

State-directed capitalism comes down to people with unscrupulous connections figuring out the best way to milk those connections.

Sometimes the milking process will be subtle. Other times it won’t be subtle at all. But there will always be a surface-level justification, and a means of payment in the form of endless taxpayer largesse.

The game-changing insight of Modern Monetary Theory (MMT) is the observation that governments do not need to tax in order to spend. They can simply spend as much as they want, and then bother with taxes later — or perhaps not bother with taxes at all.

The government is like the player who takes the role of “the bank” in a game of Monopoly. Except in this particular game, there is no hypothetical limit on the total number of notes, and the bank can issue those notes to whomever it wants.

Tax revenues play a role, of course, and so does government bond issuance.

Modern day governments collect tax revenues and issue government debt securities — even though, in theory, they don’t have to — because taxes and debt instruments are visible accountability mechanisms.

If a government commits to funding itself with tax revenues, the citizens of a system can know that excess currency is not being printed.

Comparably, if a central bank commits to only buying government securities, the citizenry can know there are limits to how much liquidity can be injected, and how much debt will be taken on.

If you leave those mechanisms behind, however — letting, say, the government fund itself through direct currency creation, or letting the government buy private companies, or letting the central bank buy junk bonds — then all of a sudden the guardrails are off.

Under those circumstances, it doesn’t take long for the politicians to realize: “Hey, we can nationalize stuff.” And if they only quasi-nationalize stuff, leaving private management in place, it becomes the best of both worlds, because they can milk the cow (the private asset) without actually having to manage it.

This is a recipe for a nation’s economy slowly becoming sluggish and corrupt and generally terrible.

That is because an increasing number of decisions get made in the “public interest,” supposedly, when the actual decisions being made are in favor of private connections.

Under this setup, zombie companies proliferate, roaming the land like the walking dead.

Meanwhile, the process of “creative destruction” described by the economist Joseph Schumpeter, which gives an innovative economy its new growth and lifeblood, is all but stalled or halted.

And how is all of this paid for? Slowly but surely, the currency gets debased. Fat cats in the private sector get together with enablers in the public sector. Then, if representatives of the labor class complain, more handouts are distributed.

It’s an impressive racket, really, because the grifting process skims from the pockets of hundreds of millions of Americans.

Anyone who has a savings account in U.S. dollars feels the pain of state-directed capitalism through the pilfering, ever so quietly, of the purchasing power that once existed in those dollars.

The winners in this setup pay a hidden dollar erosion tax too, of course, but they couldn’t care less. For those reaping the spoils of a crony-driven system, fiat debasement is like a $5 surcharge on a $50,000 payday.

The system is huge and gross and metastasizing, and you and I can’t stop it.

There is a way to “opt out,” however, by seeking stores of wealth that don’t feed the beast. This means getting away from fiat-based transactions and fiat-based stores of value.

The inevitable, ugly rise of state-directed capitalism — like so many other things, accelerated by the pandemic — may also enable the transition to “what comes next” on the other side of a fiat-based global monetary system.

Crypto assets are unique in this equation because, for the first time, individual savers have access to a viable transaction network that exists outside the fiat-based network.

Gold, by the way, has long been a sovereign store of wealth that is “outside the system,” but gold is also notoriously hard to transport, or transact with, or enable long-distance exchanges with.

So, let the state-directed capitalists overrun the economy. Let politicians give grandstanding speeches with garbage reasons for why such-and-such company should be partway nationalized, when the real reason is lining pockets. Let the corrupt system mire itself in the quicksand of inefficiency and bloat. It was going to happen anyway, whether or not anyone resisted.

The answer to state-directed capitalism, it seems, is not to “fight back” but to “opt out,” in effect choosing to go a different route, adopting something new.

With each passing day, that “something new” looks more and more like Bitcoin, along with investments that safeguard against fiat erosion, and serve as an alternative to propping up state-directed capitalism.