Monday, October 10, 2011

2012: Beyond leadership crisis

Steve Jobs is dead. Tim Geithner is still the US treasury secretary. That pretty much summarizes the affairs of the world.

2011-10-10  / Andy Xie

Steve Jobs represents the best of capitalism. He created, contributed, and was rewarded. For one generation, Apple Macintosh was the first IT device that was not only functional but also beautiful, a pleasure to use. His genius was to aggregate all the existing technologies to invent products that people didn't know they needed but couldn't live without after seeing them.

Steve Jobs is an exception in capitalism rather than the norm. Most corporate leaders have climbed to the top through politicking and showmanship. I had my first encounters with America's corporate titans while doing summer jobs. They looked impressive, like Hollywood stars, but were quite ignorant, dependent on sycophants, though ruthless in hanging onto power.

Capitalism may be the best system among all the possible ones. It is certainly not the most efficient or fair in any sense of the word. Adam Smith got that wrong. Scientists, engineers, architects, designers, etc. who contribute most to productivity are rarely rewarded. The just announced Nobel Prize winners remind us of that reality. Their discoveries have or will change the world. Their lifelong compensation, including the prize money, wouldn't be more than that for an average employee on Wall Street.

But, the alternatives to capitalism are much worse. Market competition eventually exposes incompetence, though it may take twenty years. It took the Soviet System seventy years. The capitalist system is more efficient in that regard.

Instead of rewarding most to the ones who contribute most, a capitalist system has a gambling den character. When you ask a lot of people to flip a coin, there is one very very lucky guy who would come out heads up every time. The capitalist system will give everything to him or her. Of course, what follows is either revolution or some peaceful government-orchestrated redistribution. The West picked the later after the World War II. It's called the Welfare State. And it kept peace for half a century.

Capitalism is in crisis at both ends-market and state. The gambling aspect of the system has been magnified by the modern central bankers like Greenspan. The distribution has not been random and more like a setup. As the system collapsed in the past three years, the state has bailed out the ones who gambled with other people's money. They have kept their money but lost other people's money and some. Wall Street CEOs were paid hundreds of millions for bringing down their banks. Geither gets to keep his job after ruining Obama's presidency. That's the reality of today's corrupted capitalism.

The welfare state itself is suffering from too many who receive and too few who contribute. The resulting deficit promises to bankrupt most western countries. We have met nice Greeks (you may not believe it). But, watching the pretests in Athens, Greeks seem like a determined bunch of parasites. If Wall Street bankers are paid millions of dollars for ruining the world, why shouldn't the Greeks get their €70 thousand per annum for occasionally sitting in a government office?

Greece may be an extreme example. But that sense of entitlement has surged in the past two decades across the western world. That force is causing fiscal deficits and, eventually national bankruptcies.

While capitalism is burning on a stick, the world's leaders are too weak to act decisively. Obama bailed out the establishment because he was weak. Angela Merkel couldn't make up her mind because she is weak. Of course, weak leaders are there because the system tends to produce weak leaders.

The US congressional maneuvers look like kindergarten food fights while the country is in deep economic and social crises. They are who they are. They won't change. The system has elevated them there.

Looking east, a gigantic farce is going on in Russia. Medvedeve and Putin have decided to switch jobs. Just like that, Putin is becoming the president of Russia again. Russia looks like a third world banana republic. Well, Russia is a third world banana republic. A lot of people in China worship Putin as a strongman. All his power comes from using the oil money to buy the hearts of Siberian peasants. Everything else is just a show. For that, he should thank Chinese demand for keeping up the oil price.

I'm quite positive about the stock market in the fourth quarter. The weak leaders in the world will provide predictable responses to the market turmoils. They will throw a few bones to calm the sentiment.

You can always count on Bernanke to do something when the market is down. He chickened out last month in launching a more radical QE 3, because Rick Perry, the Republican presidential contender, was surging in popularity and threatened Bernanke something pretty nasty, like dragging him to Texas, if he launched QE 3. Now, Perry is faltering. Mitt Romney, the current top dog in the Republican field, is an ex PE guy. Bernanke will be boldened to do something soon.

If European banks go under, the European leaders will act to prop them up. While they are weak, they will hurdle for cover when bullets really start to fly. Some sort of bank bailout package will come soon in Europe.

A new Fed stimulus and a European bank recapitalization package will give hope to the market, leading to a Q4 rally.

But, the problems-deficit, debt, and unemployment will continue to haunt the western world. When the existing system cannot solve the problems, revolution may come and create a new one. In the 1930s and 40s, the process was traumatic. Crazy men rose to the top amidst economic, political, and social turmoils in Italy, Germany, Japan, and Russia. They destroyed the old world. The new world did rise from the ashes. But, the process brought so much pain to the world.

Could the world avoid revolutions, or, when they come, could the revolutions be peaceful? We may get the answer in 2012.


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