Trust in Gov

An excerpt from Bill's last book, Un-Civilizing America: How Win-Win Deals Make Us Better

[Ed. Note: Members of the Bonner Private Research team are spending time with respective family and friends over the holiday period. But we didn’t want to leave you, our dear reader, empty handed. So please enjoy these complimentary excerpts from Bill’s last book, Un-Civilizing America: How Win-Win Deals Make Us Better, available on Amazon, here.

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Trust in Gov

By Bill Bonner

Civilization and its win-win deals both require trust. And they help bring it about. You need to trust that your barber won’t cut your throat and that your money will still be worth something tomorrow. Then, the more often you get shaved without having your throat cut, the more you trust that your barber won’t slash your throat—ever. 

Trust is probably deeply etched in our social programming. Out on the savannah, a pre-human had to trust that his companions wouldn’t run away when they faced down a pack of hyenas. Survival required those in small groups to trust one another... to use all available eyes to watch out for trouble and all available hands to fight off danger. And even today, cowardice in the face of the enemy—being untrustworthy in battle—is the worst sin a soldier can commit. 

Generally, “high-trust” societies are more prosperous than low-trust societies. Switzerland, for example, has a much higher per capita income than Haiti or the Congo. Trusting societies are richer because trust increases the efficiency of investment and economic activity of all sorts. If you trust that your investment firm won’t rip you off, you can save on the amount of research and due diligence you might otherwise have to do. If you trust that your investments will always go up, there will be no need to hold unproductive cash as “insurance” or “hedge” positions. With less need for investigation and protection, you can simply take someone “at his word.” You can do more win-win deals. Knowledge and wealth grow faster. 

And if trust is widespread, so is credit generally available on easy terms. When creditors are assured of getting paid back, in money that has not lost its value, they offer better terms. One of the strange things that happened in the last few years was that creditors made money available to selected borrowers (large institutional borrowers and governments) at negative rates. In theory, borrowers were paid to take money off lenders’ hands. 

This was so bizarre (suggesting that lenders had more than 100% confidence that nothing would go wrong) that we will explore it further in a later chapter. Our point here is that the safer the currency, the market, and the firms in it appear, the richer the society... and the more tempting it is to defect. Typically, markets go in cycles, roughly corresponding to the ebb and flow of trust. As trust recedes, so do asset prices. Bond prices, for example, fall and yields rise as people lose faith in the future. 

But remember, there are two ways of doing things, and two ways of getting what you want. And they’re not permanently fixed. As a society does more win-win deals, it becomes richer and more trusting. Then, win-lose deals and defection become relatively more rewarding. There are fewer armed guards, fewer locks, and fewer skeptical widows. Generally, as people become more trusting, it is easier to rip them off. 

So, too, “pacifist” nations become easy targets for warlike people. Steven Pinker explains: 

If a nation decides not to learn war any more, but its neighbor continues to do so, its pruning hooks will be no match for the neighbor’s spears, and it may find itself at the wrong end of an invading army. 

In a broader sense, trust and the progress of civilization itself are cyclical, too. 

The Great Leveler 

A billboard in the Baltimore area simplifies the message of a local firm specializing in tort cases. “Get More!” it says. 

Chasing ambulances is a competitive business. It is not enough for a lawyer to promise a courtroom victory. After all, it’s not the principle of the thing. It’s the money. So, one billboard advertises “More Aggressive” lawyers. Another suggests that “You may be entitled to a big settlement.” Still another, from Johnnie Cochran’s outfit (Cochran is the attorney who helped O.J. Simpson beat the murder rap), says, “Turned down for disability? Let us help you get the money you deserve.” 

This “Get More” message is not aimed at the rich. Instead, it is aimed at the poor and middle classes, where the target market seems to know exactly what it means. It is an effective message, too; it appeals to basic desires: greed, envy, and, sometimes, larceny. If you get in a traffic accident, slip on ice, or end up with a limp after hip surgery, you may have a chance to “get more” in a settlement. All you need is a mad-dog law firm fighting for you. 

The ad, however, sounds a little crass, crude, or vulgar to most people. And in matters of public policy, they prefer to talk of “alleviating injustice” by “palliating inequality.” The name “Piketty” is frequently invoked. 

In 2013, Barack Obama described the “defining challenge” of our time. The problem, he said, was a “dangerous and growing inequality.”  He never explained why it was such a problem. In fact, we’ve never seen any real explanation. Some say it “causes instability.” Some, including Mr. Obama, say it’s “unfair.” Others think it “inhibits growth.” Most just don’t like the idea that some people are getting more than they are. 

Getting more than the other guy is the theme of a book by Walter Scheidel. In The Great Leveler, the Stanford professor worries about the inequality of income and wealth. He wonders—but not too hard—what causes it... and observes the awful circumstances in which the playing field is commonly leveled. 

The phenomenon is well documented. The rich get richer. And richer. And richer. Why do the rich get so rich? Partly because they are smart, disciplined, and hard-working (the traditional Republican view). Partly because they are greedy capitalists, who use their money to gain more capital (they “make money when they sleep,” as French President François Mitterrand put it). And largely because the government colludes to rig the system on their behalf (our focus here). 

Most people have nothing against the “deserving rich.” If they have done more win-win deals than others, they should enjoy more of the fruits. Nor does it bother us that people save their money rather than spend it, and that by putting it out to hire, they make more money for themselves. Nor does wealth “inequality” itself seem sinister or unjust. It doesn’t stick in our craw that we are much richer than the typical Pakistani peasant or much poorer than Donald Trump and his crony friends. The evidence suggests, at least to us, that it is not really wealth inequality that makes people mad; it is the win-lose deals that cause it. 

Clever, ambitious people always want to get ahead. When they exercise their ambitions honestly, few complain. Periods of stability give them a chance to multiply their wealth by doing more win-win deals. Each win-win deal advances, in some small or large measure, the “wealth” of society and the satisfaction of the people in it. These win-win deals create surpluses, from which we get savings— capital—which can be applied to even more wealth-building. In the aggregate, everyone is better off. 

The trouble is, there is always a temptation to cheat... to defect... to gain wealth, power, and status in the fastest, surest way: by taking it from someone else. That is how the win-losers benefit from periods of stability, too, burrowing into the rotten wood of government and building their nests in its nooks and crannies. 

Over time, the number of chiselers and malingerers increases; the number of people contributing to growth and prosperity goes down. Insiders gain more power. The swamp gets deeper. This is why, too, after a war, it is frequently the losers who end up the winners. In the winning camp, the insiders get more and more of a hold on old industries and corrupt, geriatric government. In the losing camp, the old government has been dismantled... cronies and zombies have been chased away or killed; people are free to build new wealth on the rubble. 

After World War II, for example, which were the world’s most dynamic economies? Germany and Japan. Within a single generation, the two bombed-out economies were back on top of the world, the second- and third-largest economies (after the U.S.)—until China took the lead in the twenty-first century. 

The U.S. was king of the hill after World War II. Its industries were intact. Its ships ruled the seas. Its salesmen roamed the land, offering quality, American-made goods to a grateful world. But the Republic was already 170 years old. The beasts were already slouching toward the District of Columbia, bringing win-lose deals by the thousands. They were soon embedded in the 178,000 pages of the Code of Federal Regulations . . . and 75,000 pages of the U.S. “tax code.” The Obamacare regulations alone are eight times longer than the Bible.

Regards,

Bill Bonner

[Ed. Note: If you’d like to pick up a copy of Bill’s book, Un-Civilizing America: How Win-Win Deals Make Us Better, for a spot of holiday reading, you can grab one on Amazon here.