The Brave New World, Avoided?

Take a tour of what life on earth would be like if hedge funds and private equity funds ruled the universe.

September 12, 2007

Take a tour of what life on earth would be like if hedge funds and private equity funds ruled the universe.

The private sector is currently eliminating large corporate bureaucracies at the rate of four or five a week.

As a consequence, laid-off employees — both blue- and white-collar — struggle to find further employment that may not be as well-paid or comfortable as the job that disappeared.

And yes, there is always the alternative of entrepreneurship. Just become your own boss. No more corporate shenanigans and suffering at the hands of ruthless corporate machines.

Although it is alluring in principle, there still is reality to contend with. And the sober reality for those who even have the courage to try it is that it turns into a recipe for anxiety. For most, the remuneration levels remain far below what would be appropriate for their services.

The alternative scenario is that the 21st century may see the death of the large corporation — and its replacement by rapidly shifting aggregates of capital seeking to maximize returns. In the latter case, it’s worth considering for a moment what the world of, say, 2030 might look like.

In terms of income distribution, there would be a small elite of very rich people, managing hedge funds and private equity funds, whose reach would be worldwide. In theory, these would be the best and brightest of each generation, a true meritocracy.

In practice, judging by fund management’s current practices, nepotism and favoritism would be rife. The funds’ resources would be raised from passive investor sources, notably in the pension and insurance sectors, but they would be wholly under the control of the fund management elite.

As well as the truly rich who run the funds, two penumbras would exist. One would be the gilded youth, chosen by the fund elite as their minions and eventual successors. They, too, would be paid superbly — but would have to abandon both their integrity and all semblance of a life outside their fund world in order to qualify for the largesse showered upon them.

The other would be the managers employed by the funds to asset-strip the companies they buy. These would be tough operators, perhaps even military-trained. Their job would be to overcome the hostility of the masses whose lives they destroy.

In that brave new world of heroes and minions, bomb threats and even assassination attempts inevitably would become an accepted part of their existence.

Their sole goal would be to extract “value” from the assets they oversee — rather than to produce any operating improvements. These managers would be less well-paid than the true mega-titans of the fund world — and would serve at their pleasure, but they would still be hugely richer than everyone else.

There would be completely free migration around the globe, since the fund titans would have made sure that politicians are paid off to ensure that all barriers were removed, whatever the wishes of the electorate.

In this way, labor would always be available at the lowest possible cost to carry out the fund managers’ wishes. This free movement of labor and utilization of the near-infinite pool of developing-country manpower would be the most important weapon enabling fund managers to “extract value” from all situations.

Accordingly, they could break up or squeeze out any activities whose operating managers and staff appeared to be building a fund-proof alternative power nexus that insulated them from pressure from fund shareholders.

Job security would be something that little people didn’t enjoy. Jobs would be available in most specialties, and career ladders would be dangled before the proletariat to ensure docility and hard work — but jobs would be terminable at a moment’s notice.

They would be vulnerable to asset-stripping (when fund managers wished to loot the operation for which you worked), to outsourcing (when the funds found a cheaper source of labor for the work you did) and to office politics (when the funds or their tame top corporate managers decided you were subversive or they didn’t like your face).

Once you lost your job, if lucky you might be able to find another in the same specialty, albeit probably worse-paid, but most probably you would have to retrain expensively for whatever new specialty had become fashionable in the years since your last redundancy.

Naturally, the masses would need to be kept in a state of passive discontent rather than outright rebellion, in spite of their modest living standards and lack of prospects. The fund managers and their political allies would have a number of ways to achieve this.

The government would be large, supported primarily by taxing the labor force. The fund titans in all likelihood would not pay taxes, like the Russian mafia and foreign bankers in today’s London.

As well as providing innumerable reasonably paid near-sinecures, the government would also provide social security and healthcare, available to all but revocable at the pleasure of the bureaucracy so that control could be maintained.

Even government economic statistics would be tailored to the fund managers’ needs, disseminated by the fund-controlled media so efficiently that any minion who attempted to disbelieve their universally sunny data would be unable to propagate his subversive opinions.

Elections would be held, but only candidates acceptable to the funds would get adequate campaign financing and access to the fund-controlled media.

Internationally, an immensely powerful World Bank, supported by the West’s taxpayers but controlled by the funds, would provide handouts for developing governments to keep them in line with the funds’ worldview — and to ensure that sufficient labor was adequately educated and available for the funds’ needs.

Cooperating governments would find their people’s living standards modestly improving, and their leaders would be directly rewarded in person by fund-controlled think tanks or the World Bank. If there were governments that refused to cooperate, they would be largely cut off from international trade and investment and World Bank subsidies.

Military force would be controlled by the United Nations and other international bureaucracies, which would themselves be controlled by subsidies from the funds and the World Bank.

Don’t like this future? Recognize aspects of it already appearing? Well then, pray that the present period of easy money and rapid-fire private equity acquisitions ends quickly.

We live in a curious world indeed. As things stand, it seems that only a recession will allow normal economic and democratic forces to retake control of the world economy, removing the more egregious of the capitalist cowboys to the jail cells where they belong.

Otherwise, every month of rising stock prices and negative real interest rates will increase the control of the fund managers — and lock the new dystopia more irremovably into place.

Editor’s note: This feature has been adapted from an article that first appeared on “The Bear’s Lair,” published on the website Prudentbear.com.