Lessons from Russia on Plutocracy

No.: 
5

The investing public needs to make sense of the fast changes underway in the U.S. economy. One useful means of untangling current events is to compare the Russian experience with our unfolding situation. The comparison illustrates the likely fate of both countries.

The Bolshevik Revolution of 1917 that led to Communist domination of Russia was assisted behind the scenes by certain elites. An egalitarian style “democratic uprising” was the vehicle of change. Owing to the long standing concentration of the nation’s wealth in the Tsarist oligarchy, and secondarily in the estates of financiers, communist “democracy” was operationalized through a one party monopoly. Equipped with near-exclusive powers, the party was able to capture the wealth of hereditary elites as well as part of the financiers’ assets — the latter change only being a shift in generational control. Thus, the state came into increasing possession of the country’s commercial capital. The party, as the State’s trustee, managed the nation’s wealth allegedly for the people.

When the Iron Curtain fell in 1991, the assets held in trust for Russians were quickly privatized, the lion’s share of important resources and enterprises falling neatly into the hands of party elites and their cronies. Thus, the Bolshevik revolution served the purpose of capturing hereditary power and wealth that could not be wrested away without a new state authority moving brutally against the wealth holders.

Later, when the U.S.S.R over-extended itself in the Cold War and discredited itself in various matters, the State was brought to its knees in a political sea change. The change involved laissez faire capitalist democracy and the assumption that the market would produce fairness over time if given a chance. In reality, however, the move allowed the best assets to be sorted into elite hands without the public fully understanding what was transpiring. Granted, the dynamics of free commerce produced leakage of wealth into the general populace. But the ratio of wealth acquisition continues to favor plutocratic elites. (For more on the great robbery of Russian capital, see Jeff Gates’ 2000 book, “Democracy at Risk.”)

Owing to differences in history and culture, a similar outcome is developing in the U.S. but through other means. The history of the U.S. is one of the dispersion of capital and governmental power, unlike the history of Russia. Hence, the U.S. has never had a class based revolution to capture and disperse centralized wealth. When wealth is dispersed in a broad Middle Class it takes decades of speculative interplay to shift it to the adroit hands that move the markets surreptitiously. Nevertheless, when working class people are creative and industrious, the differential of speculative gains between classes may not be sufficient to reduce people to dependence upon elites. Thus, a credit crisis is called for. But a credit crisis is only possible when people and businesses can be induced to over-extend themselves in debt.

Now on the backside of stock, real estate and commodity bubbles, we flounder in the long awaited credit crisis. But we do more than thrash around. Loaded to the gills with debt, we capitulate to “moral hazard.” While we vest pride in the idea of a brave fight against Islamic terrorism, when faced with Wall Street’s financial terrorism we gulp hard and surrender. Our aggregate lack of courage bears witness to the form of terrorism that is more formidable.

It took but one 777 point drop in the Dow before a blackmailed U.S. Congress waved the white flag and begged for forgiveness from Goldman Sach’s former CEO. Americans were informed that any delay in meeting the demands of “the market” (never mind the devil in the details) would result in the crumbling of massively leveraged financial institutions, thus bringing down the world financial system through a domino effect. While American businessmen are pretty brave fighting a war on foreign soil through the surrogacy of 150,000 soldiers, when “growth,” employment or retirement accounts are threatened, the spunk to evaluate alternatives drains right out.

The profound reality is that our experiment with laissez faire capitalism equates to Russia’s experiment with communism. In Russia, the State took control of assets through the party. In the U.S., the State is taking responsibility for financial liabilities through the FED. Free market excesses are allegedly compelling the FED to partner with the U.S. Treasury in saving the Republic. In this sense, the FED becomes the American counterpart to the Communist Party in Russia. (There is no attempt here to depreciate Ben Bernanke who may be sincere, in possible contrast to Greenspan.)

In the current scenario, the U.S. Federal Government plays a role like mythological Atlas, tricked into holding up the earth (and the heavens). Atlas is made to bear the sins of the nation’s largest investment banking firms and the offshore hedge funds they service, the weight of bad derivative bets made by insurers, the mortgage management indiscretions of Freddie Mac and Fannie Mae, the continuing weight of overpriced real estate in coastal metropolitan areas, and now the indiscretions of corporations manifest in risky commercial paper.

If this were not enough, the Baby Boomer entitlement storm will soon hit along with the Medicare/Medicaid tsunami, the energy earthquake (as Peak Oil Theory is realized), and the ever soaring expense of being the world’s primary policeman. As market excesses are off-loaded from the private sector onto the Federal Reserve balance sheet (and hence, the American taxpayer), Atlas’s knees begin to buckle. Taxes cannot be raised substantially so the burden must be paid through monetary inflation and the price inflation that follows.

Alas! Wage increases will lag for 90% of Americans due to the imperative of cheap global labor – the imperative that now dictates the business strategies of multinational corporations. As the American consumer wilts, business profitability declines. As profitability evaporates, unemployment rises, thus undercutting tax revenues and the ability of Atlas to stand. The American Atlas will either be crushed or turned to stone like his mythological predecessor, thus making way for new global government.

Atlas’s demise will be like the fall of the Iron Curtain, but incomparably greater. In the “American chaos” that follows (a movie begging to be made), a staggered government – managed by a seasoned economic warrior like Barack Obama – will flail for financial lifelines. (Imagine the month of September tenfold.) In this environment, the U.S.A. and Western Europe will capitulate to the demands of financial elites who will offer rescue capital on terms that would make robber barons blush. America will sell its birthright for stew meat. We would not be in such a precarious state had we not long persisted in covetousness, mental sloth, and debt-denominated greed.

In sum, for hereditary assets to be switched to other hands in Russia, the riches had to be taken into the custody of the State, held there “in trust” until the people were adequately brainwashed, and then made available to elites in the midst of a political upheaval that a people not well-acquainted with democracy did not know how to manage. In the U.S.A. version, the federal government takes on damaged corporate assets, derivative bets, and extensive liabilities from the general populace as packaged into securities by Wall Street. Eventually, the credit and solvency of the government are threatened and crisis ensues. In the melee, fast deals are made by executive fiat. Through this process the economic sovereignty of the U.S. is largely forfeited, and with it meaningful political freedom.