Thank goodness for Bret Stephens. Think about it. While most who lean right protest left-leaning views about economic policy far from those who create it and support it, Stephens writes for the New York Times. Not only does he get to be in the other team’s huddle, he also gets to call the proverbial play once, but realistically twice a week in consideration of his friendly weekly debate with Gail Collins.
That’s why his latest column, How Capitalism Went Off the Rails, was so disappointing. And unfortunate.
In Stephens’s defense, his source for capitalism’s alleged decline is economist Ruchir Sharma. For a long time Sharma has made a case that interest rate fiddling, or the impossibility that is “easy money,” has driven up U.S. equity markets. No, that’s not true. Capitalism’s dynamism is borne of the future relentlessly replacing the past as innovators with very little access to “money” expose the giants of the present as hopelessly outdated.
The dynamism also plainly informs U.S. stock-market vitality. The future rarely resembles the present. Consider the most prominent U.S. companies when the 21st century began: GE was the world’s most valuable, Tyco was seen as the next GE, Enron was viewed as having the smartest executives in the world, AOL was seen as the present and the future of the internet, and ExxonMobil was the always of energy.
At present GE is forgotten, AOL a cautionary tale about acquisitions, ExxonMobil was removed from the DJIA a few years ago, and on and on and on. The companies that replaced those formerly at the top were either seen as yesterday’s news in 2000 (Microsoft), unable to turn a profit (Amazon was known as Amazon.org), flirting with bankruptcy (Apple), unknown and private (Google), desperately trying to stay alive (Nvidia), while Facebook didn’t even exist. They’re all big in 2024, but the stock market’s future strength will spring from those that replace them.
Stephens disappointingly makes a case that the market’s vitality is a Federal Reserve thing. He quotes Sharma as saying in an interview that “When the price of borrowing money is zero, the price of everything else goes bonkers.” Let’s start right there about the notion of “zero.” Stephens knows price controls or attempts at same don’t yield the result desired. Why would the Fed be any different in this regard? In that case why, oh why, did someone as bright as Stephens accept Sharma’s assertion without even a hint of skepticism? That is so because there’s no such thing as a zero interest rate in capitalism.
To believe otherwise is to believe that the brilliant power of compounding that has long informed savings, investment and retirement plans is limp, and incredibly weak relative to the simple minds that populate the Federal Reserve. That if Ben Bernanke, Janet Yellen or (gasp) Jerome Powell decree credit free, those with title to money throw the genius of compounding to the wind in order to just give money away without any compensation.
Sharma’s charitably obtuse view of how money works also raises a question of why investment bankers put in such grueling hours week after week, year after year, and decade after decade, and why they’re paid so much in the rare instance that they possess the remarkable skill required to find the most promising and best companies (more on them in a minute) in the world, only to match them with capital. To think if they’d just asked Sharma, they would have known that money was free in the 21st!
It’s worth adding that Jensen Huang (founder of the most valuable company in the world) and Elon Musk (the richest man in the world) didn’t get the memo about free money either. To this day there’s a sign up at Nvidia headquarters indicating “Our company is thirty days from going out of business.” In Musk’s case, during the years in which Sharma claims money was “easy” and could be had at “zero” interest, he routinely stared bankruptcy in the face given the unwillingness of any source of finance to lend to him at any price. Little did Huang or Musk know…
Sharma’s view about the Fed as the source of stock-market vitality implies not only that investors cheer government intervention in prices in ways they do nowhere else, but also a level of information asymmetry in markets that most surely doesn’t exist; as in if central banks offering “easy money” could boost markets, why would anyone sell to buyers certain to make a killing based on Sharma’s rather facile viewpoint about how the world works? Put another way, for every buyer there’s a seller.
Sharma might also explain why Japan’s central bank was at zero for nearly thirty years, but no rally. Or as Stephens’s fellow Times columnist David Brooks wrote last year in a piece more laudatory of capitalism, “If in 1990 you had invested $100 in the S&P 500, an index of American companies, you would have about $2,300 today,”, but “If you had invested that $100 in an index of non-American rich-world stocks, you would have about $510 today.” Yet central banks globally were at or near zero. Why the disparity?
To the above question no answer is given. Better, it seems, to appear introspective and downcast about the country with the most dynamic economy in the world. Which is the point. American stocks have crushed those outside the U.S. for decades not because of the impossibility that is “easy money,” but because companies like Nvidia, Microsoft, Apple, Amazon, Google, and countless others are the best in the world.
Sharma has seemingly convinced Stephens that it wasn’t great companies pushing market indices up, but instead a “bonkers” era care of the Fed. It’s hard to believe he believes it, but if Stephens does he’s sadly implying that the world’s greatest entrepreneurs actually “didn’t build that.”
Republished from RealClear Markets
