In a previous article, we have made it clear that bailouts have become the status quo response in pretty much any jurisdiction, from China to the United States and… even with the many controversies and frustrations involved, yes, the European Union. In fact, before continuing with this article, we would strongly recommend clicking HERE so as to read the post in question first.
While few market observers are surprised that the authorities are doing “more of the same” (monetary and fiscal stimulus) but in stronger doses and from Keynesian to even libertarian thinkers, most economists are encouraging stimulus at this point in time, there is a looming question which cannot and should not be ignored: are we not transitioning to an age of so-called corporate socialism?
In other words, is this not an extreme form of moral hazard (a topic which has been covered through a dedicated article, one we encourage you to read by clicking HERE)?
First of all, it makes sense to explain the concept of corporate socialism and to put it in plastic terms, think of it as essentially a system that enables corporations and those that run them to take advantage of the best of both worlds: when times are good, they take advantage of capitalism and reap impressive rewards and when things turn sour, “socialism for corporations” takes over and they are rescued. The privatization of profits and socialization of losses, in other words.
A popular counter-argument tends to be this: but aren’t households bailed out as well?
While it is true that for example the $2 trillion US bipartisan fiscal stimulus package also includes assistance to the average person, with the government even mailing checks of $1,200 per citizen, a valid case could be made that such “individual-level bailouts” are more of a short-term buffer until economic activity resumes than an actual bailout, especially in light of the fact that the average US citizen tends to be too indebted to withstand even short-term status quo shocks.
The same cannot be stated about corporate bailouts.
To illustrate this and why “corporate socialism” tends to be extremely frustrating to come to terms with for the average citizen, let us see things from the perspective of a top executive. When the economy was going well, these companies invested copious amounts of capital in share buybacks, with the end result being impressive share price growth. Needless to say, executives who usually sit on a fair number of shares themselves were significant beneficiaries of this state of affairs. Add impressive salaries and remarkably high bonuses to the mix and we have a scenario which revolves around the enrichment of a select few despite them not having enough skin in the game.
The “not enough skin in the game” component becomes obvious when we move on to the post-pandemic measures, which involve the same executives begging for bailouts and governments all around the world complying. Did these bailouts come with strings attached? Yes, but only marginally so, for example corporate pay/bonus caps which lead to scenarios which (at best) involved the executives in question earning slightly less than before, with them keeping absolutely everything they accumulated when times were good and many being “in the know” to enough of a degree to have sold their shares prior to the crash.
Needless to say, things seem anything but directly proportionate when comparing the effects of bailouts on the average individual and on the proverbial one percent. During times of crisis, few people pay enough attention to this dimension in light of the fact that the average market participant tends to be in survival rather than contemplation mode.
After the dust settles, however, frustrations inevitably build up.
In the aftermath of the Great Recession, these frustrations led to movements such as the “Occupy Wall Street” one but which eventually fizzled out. However, lingering anger remained, anger which led to increased polarization across the board. In the United States for example, this anger led to the ascension to the spotlight of populist candidates on the right (Donald Trump, who became the President of the United States in 2016 and is up for re-election in 2020) as well as left (Bernie Sanders, who ultimately lost the internal competition to Hillary Clinton in 2016 and to Joe Biden in 2020).
Make no mistake: more or less unintended consequences abound.
The post-Great-Recession measures ultimately benefited wealthy asset-rich individuals much more so than the average household and in the post-2020 framework, the same principle will most likely continue being valid and even exacerbated.
Will there be another but this time more robust “Occupy Wall Street” movement in the US and equivalents elsewhere?
We are already seeing examples to this effect, with widespread protests despite the anything but under control COVID-19 situation in the United States.
Will politicians on the even more populist side emerge?
As always, the ChinaFund.com team never tries to predict the future and on the contrary, makes it clear time and time again that human beings tend to be remarkably terrible at that. Instead, we firmly believe in being thorough on a risk factor to risk factor basis. In other words, unlike many of our colleagues, we choose not to remain stuck in short-term narratives and on the contrary, always try to analyze current events with the big picture in mind.
This tends to be a very difficult endeavor when the entire world is in full-on panic mode but for those interested in not just wealth preservation but also wealth enhancement, there is simply no other way. In our opinion, those who underestimate the seriousness of the corporate socialism situation we find ourselves in and the severity of its long(er)-term manifestations are making a grave risk management mistake. In the spirit of helping (potential) clients avoid just that, the ChinaFund.com team is only a quick message or email away and will gladly do its best to be of assistance with respect to putting together a robust risk analysis as well as management framework.