Peter Schiff: Capitalism Isn’t the Problem Here

How are all of these unprofitable companies staying afloat and even making big splashes with media-hyped IPOs?

Peter Schiff addressed this question, along with the supposed “failure” of capitalism in his most recent podcast.

The rideshare company Lyft had its lowest close since going public yesterday (April 9). In fact, the company has only closed above its IPO price twice – the day it went public and last Friday. This probably shouldn’t shock anybody, given that the company has never turned a profit.

Meanwhile, social media company Pinterest is gearing up for its IPO with a lot of media hype. The company has been around since 2010. It’s never made any money either.

Peter asked a poignant question. What makes people think these companies will ever make any money?

[Pinterest] has been around for 10 years. If they haven’t figured out how to make a profit yet, are they ever going to do it? Because at least in the frenzy of the dot-com mania, people were saying, ‘Look, the company hasn’t made a profit yet because it’s only been around for a year. But don’t worry because it’s got all of this explosive growth.’ You know, ‘We’re grabbing eyeballs,’ or whatever it was. But people were willing to bet the companies would eventually be profitable, and they didn’t have a lot of data to go on because the companies hadn’t even been in existence for very long before they were going public. It was a rush to the market. But now that you’ve got these companies that have been going on for 10 years — I mean, they’ve had 10 years at Pinterest to try to figure out how to make a profit and they haven’t done it.”

But as Peter pointed out, because of the easy-money policies of the Federal Reserve and the resulting availability of cheap capital, companies have been able to continue to operate even though they don’t make any money.

A lot of companies are able to attract funding and stay in business that under a normal free market system – a capitalist system – they would have gone bankrupt.”

This is one of the unseen impacts of central bank monetary policy. It distorts the market.

Consider Pinterest. The company has a lot of employees. It consumes a lot of resources to operate its website – land, labor and capital. These are resources that could be put to some other use if they weren’t being consumed by Pinterest. So, how do you know whether these resources being put to their best use? In a capitalist system, profits provide that information. Profits signal that resources are being well-used. The lack of a profit tells us these resources are not being put to good use. If the lack of profit persists, the company goes under and frees up those resources for better uses.

As Peter put it, if a company can combine resources to produce a product and then sell it at a higher price then the resources that it consumed, it is adding value to the economy. The consumer gets more enjoyment out of that product then the resources consumed in producing it.

You see, resources are scarce, but demand is unlimited. And the idea behind an economy is how to satisfy unlimited demand with limited resources. And resources that are utilized for one purpose are not available for another purpose. And if a company though is losing money, then the market is basically saying, ‘Hey, you’re destroying value. You’re creating products, but your customers don’t even value those products as much as the resources were worth that you used to make them.'”

If a company is creating value, it is rewarded with profits. If it is destroying value, it is punished by losses.

The Federal Reserve and its manipulation of the monetary system short-circuits this process. You end up with a misallocation of recourses and all kinds of asset bubbles — not to mention piles of debt.

Back to Pinterest:

I think that if during these 10 years we had normal interest rates, if the Fed was not keeping interest rates artificially low, Pinterest would already be profitable right now, or they would be out of business … The Fed has been able to keep this company and a lot of other companies in business. And all of this gambling mentality where people are willing to buy money-losing companies is only there because of the casino-like mentality that has been created by the Federal Reserve and the perpetual supply of cheap money. “

Simply put – capitalism isn’t the problem. It’s government and central bank intervention that has failed us.

In this podcast, Peter goes on to break down comments by Ray Dalio about the supposed “failure” of capitalism.

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