We might be looking at the death of American capitalism. Ask Charlie Munger, Warren Buffett's partner and vice-chairman of Buffett's Berkshire Hathaway.
In a recent piece in Slate Magazine , Munger writes a parable about the US economy, drawing on the story of a place called Basicland, a country that was established in the 1700s by the Europeans, a place where trade was encouraged, property right respected, where there was a simple banking system that provided loans to credit worthy businesses but nothing to the incompetent, where no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property and there were no derivatives.
But all of that changed. Munger tells how 2012 was the turning point when gambling and casinos took over the economy. no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. He writes: "The winnings of the casinos eventually amounted to 25% of Basiclands GDP, while 22% of all employee earnings in Basicland were paid to persons employed by the casinos" and "many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called financial derivatives."
Let's not forget that Buffett called these desrivatives "financial weapons of mass destruction". And for casinos, think of the US banks that were run like gambling houses placing big bets on dangerous risks.
The results were disastrous and completely unforeseen. Munger writes: "And then came the twin shocks. Hydrocarbon prices (for that, read oil prices) rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors."
There were suggestions to fix this. Like discouraging casino gambling, partly through a complete ban on the trading in financial derivatives, and encouraging former casino employees-and former casino patrons-to produce and sell items that foreigners were willing to buy.
Trouble is this was opposed strongly by economists and, of course, the casino operators themselves. The result left the country sinking into irrelevance. Munger writes: "The Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland."
There is no doubt the tectonic plates are shifting. Still, American capitalism is still too big, powerful and I would say at its best, too creative, to be condemned to irrelevance. Nevertheless, we are probably seeing the end of the American century.
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