Grantham wonders if Marx was right after all
Commentary: Capitalism will gladly sell the rope used to hang itself
29 February, 2012
With all the news focused on Warren Buffett’s annual shareholder letter, it was easy to miss Jeremy Grantham’s more urgent missive.
Like Buffett, Grantham is a legendary value investor. He’s co-founder of the Boston-based investment firm GMO LLC, which manages $97 billion. That’s about half the market value of Berkshire Hathaway Inc. but still big enough to produce a noteworthy letter. Read Grantham’s letter to GMO investors.
Buffett, in his widely anticipated letter, is content to repeat platitudes, such as “America’s best days lie ahead.” The Oracle of Omaha proclaimed “the banking industry was back on its feet” and even managed to find the bright side of foreclosures: “Large numbers of people who have ‘lost’ their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost.”
Grantham, however, takes a longer view, and isn’t so “aw shucks” about the future of our broken economic system.
“Capitalism,” he writes, “threatens our existence.”
Already, capitalism is proving that Karl Marx and Friedrich Engels were at least partially correct. They “looked forward to globalization and the supranational company because they argued it would make capitalism even more powerful, overreaching, and eventually reckless,” Grantham writes.
Globalization “would ... offer the capitalists more rope to hang themselves with ... rope ... bought from briskly competing capitalists, eager till the end for a good deal.”
Grantham, who is British, studied economics at the University of Sheffield and has an MBA from Harvard Business School. He started his investment career as an economist with Royal Dutch Shell before starting GMO in 1977.
He says capitalism does almost everything better than any other economic system. It’s just that its two or three main flaws are potentially fatal and have gone largely unaddressed. A sustainable economic system, for instance, can’t be based on ever-increasing debt, corporations can’t be allowed to run governments and loot treasuries, and “growth at any cost” is a recipe for planetary suicide.
Here are some of Grantham’s finer points:
• Capitalism too heavily discounts the future value of cash flows as it seeks to raise debts: “Your grandchildren have no value.”
European banks and institutions took €530 billion in loans from the European Central Bank under its long-term refinancing operation.
• Companies foolishly reward executives for taking on debt: “Total remuneration ... for senior officers ... rose as a percentage of the average worker’s pay from 40 times in Eisenhower’s era to over 600 times today with no indication of any general improvement in talent.”
• It’s about profit, not people: “Capitalism in general has no sense of ethics or conscience. Whatever the Supreme Court may think, it is not a person.”
• The more people borrow, the more they just gamble: “Leverage ... increases your returns over and over until, suddenly, it ruins you. ... There are no Investors Anonymous meetings to attend.”
• This time, it’s not so different: “Ignore the ... inevitable cheerleaders who will assure you that this time it’s a new high plateau ... even if that view comes from the Federal Reserve itself. No. Make that, especially if it comes from there.”
• Washington is becoming a corporate subsidiary: “What capitalism has always had is money with which to try to buy influence. ... The issues they influence are precisely ... the ones that are most important to society’s ... very existence.”
• Big companies can’t help it: “Ethical CEOs can drag a company along for a while, but this is an undependable and temporary fix.”
• Economic theory ignores natural laws. It suffers an “absolute inability to process the finiteness of resources. ... Capitalism wants to eat into ... limited resources at an accelerating rate with the subtext that everyone on the planet has the right to live like the wasteful polluting developed countries do today.”
• It’s not just inexpensive oil we are running out of: The “loss of our collective ability to feed ourselves, through erosion and fertilizer depletion — has received little or no attention.”
• Americans are too optimistic: “They adopt a hear-no-evil approach to life and listen exclusively to good news. ... There are always a few experts lacking in long-horizon vision, simple common sense, or whose co-operation has been rented, like “expert” witnesses at a murder trial, who can be dragged out to reliably say that everything will always work out fine.”
• Governments must step in. “To interfere with Marx’s apocalyptic vision, we need some enlightened governmental moderation ... before capitalism gets so cocky that we have some serious social reaction.”
• Where Marx and Engels got it wrong was in thinking workers would unite. “It’s going to be hard to have a workers’ revolution with no workers. Organizing robotic machine tools will not be easy.”
Al Lewis is a columnist for Dow Jones Newswires.