Abrogation of Justice Will Delay Recovery Indefinitely

Futronomics: contrarian analysis of global macro trends, commodities, currencies, equities: Abrogation of Justice Will Delay Recovery Indefinitely

The sanctity of contract law is being rapidly dismantled in the United States. The same laws that have made doing business in the US more secure than anywhere else in the world for centuries, are being torched in favour of political partisanship.

Never mind the economic interventions, the bailouts and rising deficits. Never mind the future taxes that are sure to crush any attempt at a recovery. Never mind the price fixing that is sure to cause shortages. Never mind all that.

The most important factor in determining whether an entrepreneur should invest in future production is the rule of law. Without the unhindered rights to private property and debtor protection in the event of bankruptcy, there is an enormous risk premium put on entrepreneurial activity.

It is for this reason that third world countries cannot manage to develop into civilized economies despite having plentiful natural resources, cheap pools of labour and often even decent education. It is not worth the risk! Why take all the risks of investing in some new factory or piece of farm machinery in order to improve your yearly productivity by 3-4% if some corrupt judge or politician can willy-nilly take that asset from you without compensation? Why bother? Why not just keep your savings buried in a hole in order to ensure you can feed yourself for the next year?

80% of the world's population lives under such circumstances. America seems determined to join them.

My worst fears were realized in the outcome of the Chrysler bankruptcy. In the name of "expediency," the company was torn away from its rightful owners (the secured creditors) and given to union interests, a foreign company (Fiat of Italy) and the US government themselves. Those who had lent Chrysler money over the last decade with the impression that, should worst come to worst, they would at least have claim to the factories, the brand names, etc, were run roughshod over, given mere pennies on the dollar. These people accepted a lower rate of interest on their loans in order to ensure this priority in the event of bankruptcy. Hundreds of years of judicial history was on their side.

There are many reports of certain secured creditors being threatened if they were to stand in front of the proceedings. Many of the larger bond holders were the same banks that had received money under the TARP programs. They were not given a choice. In a round about way, they were paid off by taxpayers to remain silent and not object. And the remaining few holdouts, like the Indiana State Pension Fund, were publicly vilified and subsequently dismissed by the Supreme Court. (continue...)