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Resiliency

Long ago, most Americans lived as Laura Ingalls Wilder chronicled in the “Little House” series.  Pa Ingalls and family were out in the wilderness, surviving with the rhythm of the land and putting away what they could to survive long winters and perhaps beyond.  The family’s net worth was what they had around them – nearly all put toward surviving on their own.

That life has been replaced with interdependence based on a dollar value assigned to absolutely everything.  We all get by with any extra scratch, should there be some, not stored up to get through the winter but properly invested in convertible assets.  This means that everyone is subject to the values of the Free Market™, which determines the value of all assets including experience, talent, and work.

The real lessons from successful financial companies like Bain Capital are the demonstration of what these values of interdependence are – and how our world far beyond Pa Ingalls has become as hostile as any winter on the Great Plains.

Out on the late 19th Century frontier what it took to survive was something a bit more than hard work and a diverse collection of skills.  It was essential to build up resiliency, a store of food and fuel and just enough gunpowder to hunt for fresh meat.  The exact amounts were determined by the seasons and the nature of the land itself, and reading the signs given by the land was a critical skill.

Life in cities at that time was essentially not that different, though it depended on the vagaries of social interaction more than the cycle of seasons. Big companies kept a few months’ payroll on hand in cash and tried to be self-insuring, taking a very long view of their development, image, and relationships with customers and suppliers.  Shocks might come through the market but big industrial firms were reliable, steady institutions. This concept remained more or less intact as long as the USofA was a manufacturing nation.

This all changed around 1980 as cheap capital made stores of supplies or money salted away to get through the rhythms of life look very expensive.  It seems contradictory, but the concept is critical.  And that brings us to companies like Bain Capital.

When capital becomes cheap through a concerted “Supply Side” effort that includes subsidy and socialized risk, a funny thing happens to stagnant “working capital” salted away to cover the ups and downs of the market – it starts to look just like ordinary cash flow.  It makes companies that have a lot on hand look “troubled”, at least in the sense that they are not leveraging their assets with Other People’s Money (OPM) to the maximum possible return. I couldn’t say it any better than this:

“Troubled” companies have a particular meaning on Wall Street. Sure, sometimes they refer to companies that are just muddled, have over-expanded, and are badly managed. But more often, what they are talking about is companies that do not seem to providing a large enough return to shareholders—a stagnating stock price in particular. But that does not mean a company is “troubled.” It can be quite profitable, have productive and loyal employees, have satisfied customers, and cash on hand.

What players like Bain do is enforce a Wall Street preference. There is a bias against companies that seek a “quiet life.” They are shunned by institutional investors, which depresses stock prices and makes these companies “troubled” in the first place. It isn’t that they are not profitable, but rather than institutional investors don’t like them, and as a result they trade at dramatically lower P/E ratios. Indeed, it isn’t even clear that takeover targets do have weaker stock performance if you look at total returns, including dividends.

This is how resiliency, or the ability to survive ups and downs independent of the vagaries of capital markets, becomes the ultimate casualty of “Supply Side” policies geared towards developing cheap money.  And interestingly, one of the great champions of this system and its queer values of high dependence on an international finance system has the endorsement of a major party to become our President.  His record is outlined very well in this piece from Bloomberg:

What’s clear from a review of the public record during his management of the private-equity firm Bain Capital from 1985 to 1999 is that Romney was fabulously successful in generating high returns for its investors. He did so, in large part, through heavy use of tax-deductible debt, usually to finance outsized dividends for the firm’s partners and investors. When some of the investments went bad, workers and creditors felt most of the pain. Romney privatized the gains and socialized the losses.

Like any social agreement, the economy we have is subject to beliefs, fashion, and political philosophy.  The current system we all operate under is fueled by easy debt developed by low capital gains rates, under-regulated banking, and a general belief that idle assets are wasted assets.  But these are not the same values that made the nation we live in.  These are not the values of people like Pa Ingalls, who valued independence and resiliency.

What we are ruled by are values that make us dependent on each other, all around the world, far more than we could ever imagine.  The storms that cross the oceans to challenge our survival are not biting cold or sweltering drought, but man-made disasters created by people with values that we often understand less than the rhythms of nature herself.

This system is one we created.  We made it happen by making people like Mitt Romney fabulously wealthy for destroying the values that created our nation, thus creating even more people operating his way.  The irony that he is running as a Republican and an advocate of “conservative values” that include personal liberty requires a very deep cynicism to appreciate fully.

Pa Ingalls, for his part, would almost certainly be appalled.  And that’s worth thinking about.

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18 thoughts on “Resiliency

  1. Simply brilliant. The only thing more ironic than how what the republican party stands for these days is that it takes a self confessed liberal like you to call it for what it is. Everything is completely messed up and this is probably where we have to start to right the wrongs. Keep down this path but don’t you dare leave out how liberals have left behind whatever it is they were supposed to stand for too.

    • Thank you, but I think we’re all better at saying what’s wrong with “the other guy” than ourselves. I’d love to debate a true “conservative” who can articulate what’s wrong with the left – and I have met quite a few. I think I covered a bit of what’s wrong with the left in that piece I did on Marx a short while ago, weak as that criticism was.

  2. Yes, yes, and yes! Remember long ago when people had simple “saving accounts”? Now we are supposed to put our money to work for us and do things like play the stock market. It is totally insane. The idea that people would simply salt away something for a rainy day is considered a waste. But people who were agressive in the stock market probably lost everything so they do seem more quiet now then they used to be. I don’t know where people put there money when rates are this low.

    • I don’t think anyone is aggressive about the stock market or any of this corporate buyout stuff anymore. That’s interesting, given how cheap money has gotten. But we do have to assess the damage done in the past, and the fact that a genuine king from that era is running for President seems very strange in a way. But, of course, it’s also to be expected.
      It just means we have to speed up our assessment of the situation and get a handle on it.
      Where do people put their money now? I have no idea. I would hope they take Warren Buffett’s advice and invest in stuff they can see, ie local.

  3. you make it sound like there is some kind of decision here when in fact it was nothing more than greed that made it all happen

    • All true, but we accepted it pretty universally. I think many people believed they could be rich one day, too. Certainly, the Boomer generation seemed to buy the idea that with a 401(k) they could all retire rich.
      Not so much a decision but a beguiling.

  4. Where did the farmers of the great plains get the money to buy land and tools and supplies? Banks in New York City. Some did’t like the interest rates the banks charged. The rates were higher probably because the great plains were subject to drought. We know now that maybe some parts of the great plains should not have been farmed in the way that they were.

    Money in the form of gold and silver coins has been used for a couple of thousand years. Prices have always existed although capitalism is a younger phenomenon. In the US in the 19th century when there wasn’t enough currency around individuals and stores and companies extended credit to to each other. There weren’t enough finance companies around and the federal reserve banking system was not created until 1913. The populist party wanted a better regulated money supply and what they asked for came true in 1913.

    Farming is a tough business. You don’t know how the crops will turn out. You can’t predict the market price exactly. In the late 19th century a lot of people were going in to farming. Some of them weren’t profitable since they were too small and the world market was driving prices down. A feature of the system was foreclosing on the farm. Lack of currency to some extent was causing deflation and periodically there were nasty recessions and deprerssions. Farming had to industrialize, get bigger and divesify. Those capitalist farmers applied all the technology and tools and knowledge they could get a hand on, in conjunction with places like the University of Minnesota, St. Paul Campus, adjacent to the MN State Fair.US agriculture in the 20th century triumphed. We gave grain to the Soviet Union in the 1920s to help their famine problem. We sent them engineers and tractors. Borlaug was saving India and China from starvation. We fed the Soviet Union again in the 1970s. Dean Schuh at the Humphrey Institute did agricultural economics and tried to help Latin America.

    • Won’t disagree with a thing here. But the idea of resiliency, or ability to ride out the vagaries of life in the middle of a big continent without help from banks and other institutions, made it all work. It was almost in spite of being generally capital starved (although there is a reason there is a big banking center in both Minneapolis and St Paul – these are the banks that made opportunities where New York wouldn’t dare go).
      It just seems to me that the same principles apply no matter the weather – natural or human made. There have to be natural breaks in the system, places that are self-sufficient on some scale. Those used to occur, as much as possible, at the very smallest level. It wasn’t efficient – Lord, no. But it was resilient.
      There has to be a way to properly measure and track resiliency. And I do know that keeping something “salted away”, to use Anna’s term, made you a takeover target in the 80s and 90s. 3M, for one, changed completely in that time. And now, the Greek government lying about its finances for a decade can screw over everyone all around the world. This is not a global system that makes any sense. No matter what Black-Scholes-Merton tells us, not everything can be properly insured with market forces because markets are not entirely rational or regular. The theories we have today manage ordinary risk very well but fail utterly when it comes to extraordnary risk – making the latter nail-bitingly ordinary at the end of the day.
      No. This ain’t right. The old way had its problems, but this way is lunacy. But it was enforced with great rigor and revel by outfits like Bain that made a lot of money off of it. That left us all unprepared, as if Pa Ingalls took the harvest time off and kicked back.
      Winter sucks when you aren’t ready for it, natural or Kondratieff Winter. That’s the lesson of the Great Plains, IMHO.

  5. Conservative Republicans like the philosophy of President Reagan because he took a moral stand against communism and for freedom. Conservatives also like President George W. Bush because he took a moral stand against terrorism and for spreading democracy. Liberals take a moral stand against Reagan and George W. Bush. Liberals stand against capitalism but get academic degrees to participate in the system and work for multinational corporations, all the while benefiting from it like everyone else, going on vacations to Europe, buying and renovating houses, taking advantage of historic preservation tax credits. Liberals were wrong about communism, wrong about terrorism and wrong about spreading democracy. Republican values are rock solid. We stand for freedom and that is why we back Mitt Romney.

    • When it comes to elections, we wind up with two choices – both from big tents and a lot of history, both with flaws. You can pick you side and I won’t insult you for it. Well, not too much, at least not while sober. :-)
      Politics, however, is the greater discussion of working things out as a social arrangement. I use two definitions –
      1) The art and science of human interaction, eg “office politics” or “domestic politics”.
      2) The operating system of a Democratic-Republic

      When it comes to politics, more discussion is good. This upcoming election was framed by discussion had years ago, maybe decades. I’d like to frame it as much as I can with a new discussion based on what the Hell happened over the last few decades. We’re stuck with two deeply flawed parties and two candidates who have their own debts, personalities, and agendas. But we can sure crank up something interesting as long as we have everyone’s attention, I think.
      Well, it’s worth a try, damintall. :-)

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