Financing the Industrial Revolution
Off the Keyboard of RE
Discuss this article at the Economics Table inside the Diner
Along with most of the rest of the Financial Bloggers out there, I make it a daily practice to scan the articles being posted on Zero Hedge. the Tyler Durdens have a plethora of contacts in the World of Wall Street, so they are often the Blog that Breaks Big Newz first.
I no longer read the commentary there, and to be honest most of the time don’t even read the articles either, because mostly they fall into the category of Helicopter Ben/Super Mario Draghi bashing or Gold Bitchez! articles. You pretty much know the spin that will come off the pages of any Tyler Durden article.
In the case of a recent article, Tyler quoted from Diapason’s Sean Corrigan and the whole excerpt was on the Home Page of Zero Hedge to read under the title of The Circular Logic And Prayer Tactics Of Draghi Queens, Sinomaniacs, And Other Orwellians
“Companies in the steel sector should be prepared for a long-term depression,” Zhang Changfu, secretary-general of the CISA, told media earlier.
Strange then, that the official data for July suggest that Chinese steel outout hit a new, all-time high of 61.7M tonnes during the month, the YoY increase making up no less than 99% of the entire global increment over the year. Why on earth would this be?
Chalk it up to moral hazard – specifically, the same zombifying belief shared by the whole motley crew of Sinomaniacs, Draghi queens, and QEasers everywhere; that bad news equals good; that, in true Orwellian fashion, ‘Weakness Is Strength’ – that any shortfall in voluntary demand will elicit a large enough crank of the printing press handle that the glut will soon be removed from the market and so obviate the need to undertake any painful restructuring, or to quit the business and release scarce resources for use by those with a genuinely viable business plan.
Back in metal-bashing business, Wang Lei, the head of a Shandong ore trading company, bemoaned the current adversity, telling Caixin:
“If you had iron ore [last year], you could hold it for a couple months and then sell it and earn $20 to $30 per ton easily. We bought ore for about $135 per ton, but no one will take it, even if we try to sell it at a loss.”
Wang and his friends apprear to have drawn a deangerous lesson from the events of 2008-9 though. As he told the magazine, Wang remembers watching the value of his company’s inventories decline rapidly in 2008 until the price bottomed at US$60 per ton the following year.
When the ore prices fell, he reminisced, he and his fellow trades were not pessimistic because they correctly assumed that the Chinese government would step in with an economic stimulus to offset the crisis and so revive demand. Sure enough, as the boom progressed, prices soared, reaching close to $200 a tonne in 2010, a level they revisited some 18 months ago, before policy began to tighten and the long slide to sub-$100 began.
So, once bailed out, always bailed out seems to be the guiding inference. Meantime, close your eyes and pray.
Why do I find this particular snippet interesting? The reason is that embedded in this is how the whole Industrial paradigm got funded in the first place, and why the same old tricks aren’t working now.
The whole Industrial Revolution got funded by a few people who hold the power to issue essentially Infinite Credit. Ever wonder where Henry Ford got the money to build his first Model T plants with his novel Production Line method? Henry had gone BANKRUPT not once, but at least TWICE before he got Ford Motor Company off the ground making Affordable Carz. Some websites put his Bankruptcies as high as 5 before getting Rolling.
In 1893, Henry Ford was the chief engineer at the Edison Illuminating Company. Within nine years, Ford had built his first automobile, named the Quadricycle, and started the Detroit Automobile Company. A gifted engineer, Ford focused heavily on the mechanics of his auto, and completely ignored the idea of marketing his invention. Ford’s first product failed to capture the public’s attention, and Ford was forced to leave his company and file bankruptcy. One year later, Ford started the Ford Motor Company and designed a car that broke the land-speed record. In 1908, Ford released the Model-T to an eagerly awaiting public, and changed the face of American industry.
Filed Bankruptcy when his first automotive company failed. His second automotive company failed also. In June 1903, at the age of 40, he created a third company, the Ford Motor Company, with a cash investment of $28,000.00
He also apparently was nearly outta cash AGAIN before he started selling some Model Ts. One suspects though had he gone BK again, he would have drummed up some more money AGAIN from “Investors”.
WTF was investing in this guy and why, after failing before? Notice who Hank worked for as Chief Engineer? The Edison Illuminating Company. Basically the same folks who backed Edison were backing Henry Ford. Who backed Edison?
Edison General Electric
Edison’s businesses in Schenectady grew quickly. He moved his underground tube company to Schenectady. But Edison’s businesses were struggling financially. His decision to stick to direct current hindered the success of his electrical and lighting companies. Electric lighting was still expensive, affordable only by the wealthy. Despite widespread interest, it was not available to the average person.
In 1889, Edison’s chief financial backer, J.P. Morgan, had concerns about the operation of Edison’s businesses. He worked with some of Edison’s financial associates, including Samuel Insull, and created the Edison General Electric Company, a merger of Edison’s lighting and electric companies, which included the Edison Electric Light Company, Edison Lamp Works, and Edison Machine Works.
Unsurprisingly, J.P. Morgan was the primary backer, but all the Big Money names of the era were involved, the Vanderbilts, Astors, and of course the Rockefellers as well. these are the folks who had the Open Tap to Unlimited Credit, which really was coming from over in Europe at the time.
Notice also that just like Henry Ford, Edison’s Electric Bizness ALSO had financial problems early on, yet he never went completely Outta Biz either. Electricity remained available only for the Wealthy, it was not an every J6P sorta thing in those days powering Refrigerators and Plasma TVs.
Our Industrialist friends however were enamored of the Progress involved here, and with the spigot of Unlimited Credit available to them, BY GOLLY they were gonna MAKE IT WORK!
How to make it work though? If J6P doesn’t have the MONEY to buy the Expensive Electricity, you can’t sell it to him. So you first gotta make the Electricity CHEAP enough to buy, and that takes CHEAP ENERGY. Fortunately for said Industrialists of the era, they HAD a source of Cheap Energy, the Oil coming a bubblin’ up from Jed Clampett’s farm, which Standard Oil’s John D. Rockefeller handed Jed enough money to move to Beverly Hills while he pumped Jed’s old farm dry for its Oil.
Still though, even pricing out this Oil dirt cheap, unless J6P had money to buy it with he wasn’t going to be buying the Thomas’ Electricity OR Hank’s Carz! So now you gotta get Money to the Customers, but of course you don’t GIVE it away, you LOAN it out. Who do you loan this money to, and where do you get it from?
First and foremost, you loan the money to Goobermints to build roads and build an electric grid. You create the money on a Balance Sheet the moment Da Goobermint signs up to Build these Improvements for J6P. The Money begins to Trickle out to J6P as he gets employed building the new roads and wiring up all the McMansions for Electric Lights.
You also loan out the money to other Brainy Entrepreneurs who come up with novel ways to use the Electricity, like Wireless Radios and TVs; and also novel ways to use the Carz, like Fast Food Drive Ins and Shopping Malls. Everybody LOVES this stuff! They are also Happy because there are new Jobs in the Industrial Economy and if they are smart guys like Henry Ford they can get an Engineering Degree and hop on the High Paid Gravy Train also!
Reminder here, Henry Ford is ALSO the guy who said this with respect to our Monetary system:
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. Henry Ford
Interesting of course that someone who was the most direct benficiary of this corrupt system of Cronyism would make such a statement. Essentially Hank had a line of virtually unlimited credit, and by virtue of the Limited Liability Corporation the losses taken on his first two Bankruptcies were not borne by Investors like JP Morgan, who did the old Pump and Dump with the stock and were out from under the loss well before his first companies tanked. Your more average dummy financial speculator of the time took the losses, and of course with them came the various Financial Panics of the era.
The KEY to getting this all matched up and Rolling Along was to marry the Cheap Energy to a Centrally Controlled money distribution system, and this of course was the genesis of the Federal Reserve Bank, which most everyone knows now isn’t Federal or goverment at all, but rather a Privately Owned consortium by the TBTF Banks, the same ones JP Morgan, John D. Rockefeller and Andrew Mellon founded, all with direct connections to European Banks run by the Rothschilds and Warburgs.
Thus began the real ramping up of the Debt of the Industrial Revolution, and speculative Money flew out the door, unfortunately a whole lot faster than the whole system could absorb all the new production and faster than jobs could be created for people to them have money to buy the products. That whole specualtive bubble came crashing down a little over 16 years after the founding of the Federal Reserve with the Great Depression.
Again here, the Bath is not taken by the Industrialists who made the Loans and undewrote the Stock issues in the first place for these Boondoggles, the bath is taken by Goobermints that put up Power systems they could not pay for, which then got repoed and Privatized. Edison Electric was NEVER a money making Bizness, it always got subsidized in some way on the backs of the Taxpayers to keep it running. Since the Taxpayers never could really afford it, Goobermints kept on taking on more and more debt to keep the system running. They have been rolling over and refinancing this debt for over a Century now.
The story of the Automobile is not a whole lot different than that, although in this case rather than many local municipalities putting up small Electric Grids they could not pay for, in the aftermath of WWII the Eisenhower Interstate Project was undertaken, the single Largest Public Works Project ever undertaken inthe History of Mankind. Bigger than the Colossus of Rhodes, bigger than the Pyramids of Egypt, Bigger than even the Great Wall(s) of China built over Centuries of time. Where do you suppose the Money for that came from? Taxes? No Sirree Bob, the Interstate was Financed on Debt through a new Goobermint Special Purpose Vehicle, the Highway Trust Fund.
The United States Highway Trust Fund is a transportation fund which receives money from a federal fuel tax of 18.4 cents per gallon on gasoline and 24.4 cents per gallon of diesel fuel and related excise taxes. It currently has three accounts, the Highway Account which funds road construction, a smaller ‘Mass Transit Account’ which supports mass transit and also a ‘Leaking Underground Storage Tank Trust Fund’. It was established 1956 to finance the United States Interstate Highway System and certain other roads. The Mass Transit Fund was created in 1982. The federal tax on motor fuels yielded $28.2 billion in 2006. In 2008 the fund required an additional $8 billion from general taxation due to reduced receipts from fuel tax in order to meet its obligations.
So here, on the expectations of the Revenue it would generate from Gas and Diesel burning in taxes over these new Roads, billions of new dollars are created out of thin air to establish this “Trust Fund”, which sorta remained solvent up until 2008, when reduced Tax income and rising maintenance costs finally crossed over and the Fund could not service its own debt.
Who did the Interstate Highway REALLY benefit? The Industrial Monopolists who built the Carz and owned the Oil production and refining facilities of course. The more people you got to consume the Oil faster, the Richer you got, and boy did they EVER get Rich! J6P of course is completely clueless about how this all got financed up, as Henry Ford said if he actually DID have a clue there would have been a Revolution quite some time back here.
The Debt Financing of Industrialization was not of course just limited to the Electric Grid and the Interstate Highways, just about as big a Boondoggle was undertaken to finance the Biggest War Machine ever built, which I refer to as the BAM or Big Ass Military. Billions upon Billions of Dollars of Debt Money created to finance corporations like General Electric, Lockheed and McDonnell-Douglas to build ever more powerful and expensive War machines of all sorts. Concurrent with that expenditure was the expense of Large Public Works Projects like the NASA Space Program, which did a lot of the basic research into Rocket & Jet engines that power Supersonic Fighter Jets and Electronics systems that run the Fly-by-Wire systems necessary to control such aircraft. Still more debt money went into the Super Conducting Super Colliders in the effort to develop the Holy Grail of the industrialist, unlimited Cheap Energy from Fusion Power. With Fusion, the Jetson’s Futre was ASSURED, and they gambled very BIG MONEY on that idea. Those SCSCs don’t come cheap. Sadly of course, 40 years after reading my first articles about the Promise of Fusion Power on the Pages of Popular Science and Popular Mechanics we aren’t really any closer to it now than we were then.
Industrialists have always held out the Jetsons future for general consumption as Inevitable Progress. It’s everywhere in Pop Culture and Media, from Star Trek and Star Wars right back to the early Scifi of Jules Verne. Probably 90% of people inside the Industrial World really do believe this stuff is inevitable and we are just going through a temporary Economic Glitch here. The Mars Landings, the “Discovery” of new Exo-Planets, all the Science Newz you read every day is designed to reinforce that belief in the inevitability of Progress and the Techno-Future.
Industrialists close to the Credit Spigot like Richard Branson even try to Live Out these dreams, with their own Private Spaceships, financed of course on Debt on the idea they will get tons of people involved in Space Tourism on Virgin Milky Way Spaceships. or they will be Mining Asteroids for Mineral or Jupiter for Methane or other such Pie in the Sky nonsense.
What all these folks remain Willfully Blind to is the fact that not only do we not have sufficient Energy to Conquer the Final Frontier, we really do not even have enough just to maintain all the systems build over the last century on gobs of debt money. The Debt is coming due, and it can’t be Rolled Over anymore because the Growth has STOPPED, regardless of what massaged GDP statistics say. Money creation right from the Get–Go in the time of John D. Rockefeller has been tied to Energy production, and as long as Energy production (or rather extraction is the better term) kept increasing, the Debt Money kept on flowing outward. Long as you had the Inside Track on any new technology, you could always invest and Pump & Dump it for a profit. This of course was what the whole Dot Com Bubble was all about, and you see the last gasp of this type of action with the Facepalm and PoopOn IPOs.
Really though, those in charge of Credit Creation now are less concerned with Investing in any New Biznesses than they are in trying to figure out where and how to sequester their money in “safe” inestments like USTs and Gold, either of which are very productive enterprises which create any Jobs of course. The same priniciples of vast expansion of Debt which came in the runnup to and aftermath of WWII can’t work this time, because the cheap energy that Debt was issued to buy does not exist anymore. All the cheap stuff has been converted to CO2 molecules floating around willy nilly in the atmosphere doing nobody any good at all, and quite possibly doing a lot of harm as well. Only EXPENSIVE energy remains, and a world of increasingly impoverished people cannot afford it, and they aren’t “credit worthy” either.
Few in the Industrialized world want to see the Gravy Train end here, certainly not the Elite running the show so they keep trying the same old straategies that worked before, but they aren’t WORKING. Well, at least not to fix the general problem they aren’t working; they are working pretty good to transfer the last of the reamining wealth into their grubby little hands though. For the most part though, that wealth is ephemeral, and there really are not any “safe havens” to sequester this stuff anymore. In the Bye and Bye, it will all collapse, possibly quite suddenly given how fast HFT programs run these days.
Industrialization was the equvalent of a Harvard Keg Party, run pretty much by the same Harvard Frat Boys that ran the Keg Parties themselves in Hahvahd Yahd. The problem here is they are Outta Beer to sell at a price 90% of the population can afford to buy, and you just cannot scale down this type of infrastructure too much before it all collapses. Even if you are a Pigman with enough Bonus Money to buy a Lamborghini, its not gonna last too long driving on pothole ridden streets. Hell, they don;t last long on well paved streets! LOL.
Until the population as a whole grasps how they were taken for a ride here though, and as long as this population itself continues to hold onto the dreams of a techno future that will never come, those in control of the credit creation Biz will continue pulling rabbits out of the hat here to keep it going one week, one day, one hour longer, until at last it can go no more.
Coming Soon to a Theatre Near You.