America’s strained relationship between democracy and capitalism is at an inflection point that is likely to favor the politicians over the bankers, according to Richard Maraviglia, a hedge fund manager at Carson Capital in London.
“The United States could be thought of as a strained marriage of democracy and capitalism,” said Maraviglia in a research note obtained by CNBC.
“The party celebrating capitalism was a great one, but all parties come to an end and so did that one. Whenever one sector of a mixed economy has been 'in power' too long, it tends to suffer from hubris,” he said.
Governments in the 1970s acted like the capitalists at the turn of the new millennium. when Wall Street convinced itself that “the more capitalist laissez-fair free-market an economy was, the gentler (non-volatile) a business cycle would be”, according to Maraviglia.
“Capitalism offers the opportunity to get rich, but it also requires the occasional duty of going broke,” he said.
“While socialism offers a relatively calm existence, capitalism presents us with a state of continuous revolution. Creative destruction and capital expenditure booms. Except few were ever allowed to go broke in this cycle. Big government stepped in and took away the business cycle through a series of stimuli or truly unprecedented proportion,” Maraviglia said.
We are now at a point in the battle between democracy and capitalism where the politicians and the business leaders are set for conflict, according to Maraviglia.
“Let’s face it, Washington is a disaster. Political brinkmanship is quite clearly exacerbating what is an already Herculean task. When we look at Merkel, Sarkozy, Obama, and Chavez we see a slow wave of socialism building in the absence of a better solution,” he said.
This had led the likes of Warren Buffett and Howard Schultz, the CEO of Starbucks to call for an end to political donations to Washington until it gets its act together as the market deals with huge uncertainty over the debt crisis.
The policy response from the Federal Reserveto the current crisis is likely to be operation twist followed by a repeat of QE2, the second round of quantitative easing , if we enter a full-on crisis, according to Maraviglia.
“Economies will be cocooned in massive ineffectual, dam-plugging QE,” he said.
In the absence of any turnaround in the US or European economies, Maraviglia said global growth is likely to be dependent on an economy that is far from democratic: China.
“China has engaged in a phenomenal fixed asset investment boom and now it wants to morph its economy into a domestic consumption model. As China daily fixes its yuan higher, it is making millions of Chinese people middle class,” he said.