Publish date:

The Bank of Wal-Mart

Wal-Mart succeeded in obtaining a Canadian banking license, while failing to do so in the U.S. How did that happen?

By Jeff Nielson of Bullion Bulls Canada

Last month,


(WMT) - Get Report

obtained a Canadian banking license -- essentially becoming the Bank of Wal-Mart. Since many readers already know that a banking license is a "license to steal," I won't bore those individuals by droning on about all the reasons why Wal-Mart wants to become a bank. Instead, I will focus on why it has been unable to obtain a similar license in the U.S. despite more than a decade of strenuous lobbying, and what implications the "Bank of Wal-Mart" has for all of us.

In understanding why Wal-Mart was able to succeed in obtaining a Canadian banking license, while failing to do so in the U.S., we need to look at two factors: the nature of Wal-Mart's business model, and the large differences between Canadian and U.S. banking.

Most people are familiar with the Wal-Mart business model, so I will be brief. Wal-Mart seeks to under-cut the prices of any and all competitors, in order to drive them out of business, and absorb all of their customers. Thus, the initial delight of U.S. consumers in managing to sate their rabid desire for more consumer-goods, thanks to Wal-Mart's "low, low prices" quickly gave way to dismay -- as Wal-Mart hollowed-out local economies across the U.S. (and then in other nations), by destroying one retail-chain after another, not to mention a nearly infinite number of small-business retailers still in their infancy.

Many of the retailers who have managed to survive the Wal-Mart onslaught have done so by creating their own mega-stores, and also making low prices an obsession. This actually increased the "Wal-Mart effect" as the other large retailers who sought to imitate Wal-Mart only accelerated the trend which has destroyed small-business retailers all over North America.

The side-effect of Wal-Mart's business model was to create a similar hollowing-out in the manufacturing of consumer goods. Just as the Wal-Mart business model made it impossible for most retailers to survive unless they were also able to become a low-price vendor, it also made it impossible for any but the lowest-price producers of goods to survive.

This created a second major negative economic trend of the Wal-Mart business model, in North America generally, and the U.S. in particular. Since few North American manufacturers could match the low prices of Asian manufactured goods (made with labor costing less than 1/10th of the average North American worker), the growth of Wal-Mart spelled the death of much of the U.S. manufacturing base. This also affected Canada, but with resource-production being a much larger component of the Canadian economy than manufacturing, the "Wal-Mart effect" has not had as devastating an impact in Canada.

Another major difference between the Canadian and American economies is the completely different structure of the banking sector. Essentially Canada allowed the creation of a "banking oligarchy" at a much earlier point in time than in the U.S. This oligarchy, comprising roughly a half-dozen major banks, has been able to stifle any competition -- and thus in Canada (unlike the U.S.) there are virtually no local or even regional banks.

However, Canada's banker-oligarchs had to accept a "stick" to go along with their "carrot": Canada's banks are constrained by a much stricter regulatory code (in virtually every respect). Thus Canada's banks were not allowed to totally erase their lending standards, just to "juice" their profits, and they were not allowed to gamble with the money of depositors in any and every risky "investment opportunity" (i.e. scam) they could devise.

There are two principle consequences of this major difference in banking structure. First, there was no subprime housing market in Canada, thus there was no huge, housing bubble, no massive losses when the bubble burst, and therefore no need for any massive bail-outs/hand-outs for Canadian banks.

This didn't stop Prime Minister Stephen Harper from stuffing hand-outs into the vaults of the world's best-capitalized banks (while totally ignoring the needs of the rest of the Canadian economy). Given that Harper's Conservative instincts compel him to copy the U.S. at every opportunity, the fact that Canada's banks didn't need one penny of the taxpayer money which was handed to them wasn't even a relevant consideration.

It is the difference between the banking sectors of the two countries which explains why Wal-Mart was able to obtain a Canadian banking license with relative ease, while its evolution into a U.S. "bank" has been delayed. Since Canada has no competitive banking sector (with the exception of a few specialty niches), and no collection of small- and mid-sized banks, Canadian regulators were not afraid of Wal-Mart doing to the Canadian banking sector what it had already done to the Canadian (and U.S.) retail sector: cannibalizing all smaller rivals.

This is clearly the only reason that Wal-Mart has not been able to obtain its cherished U.S. banking-license, yet. If GM,

Goldman Sachs

(GS) - Get Report

, and other U.S. oligarchs were given their own banking licenses simply by "virtue" of having bankrupted themselves with unwise "lending" and/or "investing" (i.e. reckless gambling), then it becomes very hard to refuse to grant Wal-Mart a similar license, simply because it had not already bankrupted itself. One would hope that companies which do well in avoiding bankruptcy would be favored for a U.S. banking license, over those companies who don't.

Just as there were two reasons why Wal-Mart was able to obtain a Canadian banking license before it obtained an American one, there are two reasons why Wal-Mart is guaranteed to (eventually) obtain its U.S. license, despite the reasons for refusing it until now. First, with the Wall Street oligarchs well on their way to exterminating most of the local and regional U.S. banks (thanks to U.S. government policies), in a few more years there will not be a local or regional banking sector to protect.

Meanwhile, from the other end, Wal-Mart has launched its own attack on the retail banking sector, through opening banking-kiosks in their stores, through partnership agreements with existing U.S. banks. Thus, the only practical difference between its current status, and allowing Wal-Mart to officially become a bank is that it could stop calling its financial-services departments "Money Centers" and simply call them "banks".

TST Recommends

With "selling out to oligarchs" being standard, government economic policy in most of the Western world, once enough of the U.S. local/regional banks have been killed-off, we can expect Wal-Mart to obtain its U.S. banking license. At that point in time, there will be only the existing banker-oligarchs, plus Wal-Mart: the banking/retailing oligarch.

When I first envisioned that scenario, I momentarily hoped that there could be some silver lining in yet more monopolizing activities from Wal-Mart. Specifically, if the model of Wal-Mart's "low, low" retail prices were to be extended to the banking sector, then this could result in forcing existing banks to scale-back their usurious lending rates (via credit cards), and their rampant gouging through excessive service charges and fees.

I quickly abandoned such insanity, however. Wal-Mart does not engage in its retail pricing-policy to help consumers. In other words, Wal-Mart does not reduce prices purely to give consumers a better deal (which would reduce profit margins). Instead, it keeps prices at low levels to maximize market-share, and ultimately maximize profits.

It is important to understand this distinction, as it leads to two very unsettling conclusions. First of all, the Wall Street oligarchs have "deeper pockets" than any retail competitors which Wal-Mart has ever come up against. More specifically, they have their corporate coffers directly hooked-up to both the printing press of the

Federal Reserve

, and the debt-factory known as the U.S. Treasury Department.

Between hand-outs from the Treasury Department, and infinite amounts of 0% loans (i.e. free/subsidized money from the Fed), there is simply no scenario where Wal-Mart could destroy any of these Oligarchs, in order to steal their market-share - unless/until the U.S. two-party dictatorship is overthrown, and big-banks no longer own the U.S. government. Thus, the pragmatic Wal-Mart is much more likely to adopt the philosophy of "if you can't beat them, join them" -- and engage in just as much price-gouging with its financial services as the current banking oligarchs.

In other words, as a "banker" there would no longer be any incentive for Wal-Mart to be a low-price operator. Thus, Wal-Mart's banking customers would not benefit from low, low prices, but would likely be inflicted with high, high prices. It is at this point that astute readers should start quaking with terror, as they ponder Wal-Mart's future as a retailer.

As I previously explained, Wal-Mart's ultra-low retail prices are solely aimed at destroying competition and maximizing market-share. The obvious question is: what happens after Wal-Mart has destroyed the maximum number of competitors, and maximized its market share?

Unfortunately, we don't have to wonder about this. More than two centuries of the collective wisdom of capitalist theorists are unanimous about how oligarchies/monopolies behave once they have grown to maximum size: they maximize prices.

I know there are many readers out there who don't trust the opinions of such economists and "experts", and who are not even willing to accept my own, humble analysis. Fortunately, you don't have to take our word for it, since we already have a classic example of this economic theory demonstrated in real life (in addition to the Wall Street oligarchs, whom we all know so well): the oil companies.

Once the oil companies had grown as large as possible, and eliminated all smaller competitors among gas stations, we entered the modern era of gasoline prices: where the small group of oligarchs don't charge the lowest prices possible for gasoline (because of the pressures of competition), but instead charge the highest prices possible (in order to maximize their profits). They are able to maximize prices (and profits) in this manner by colluding on prices with their fellow-oligarchs.

As we have seen over the last two decades; a) governments have been unable to prove such collusion with enough regularity to prevent/prohibit such parasitic pricing, and b) the oil company oligarchs have been able to prevent any low-price competitors from entering the market, and forcing the oligarchs to return to competitive prices.

There are two mechanisms for monopolies/oligopolies in maintaining their choke-hold on markets. They can either buy-out competitors, or they can engage in extended sales -- where they temporarily reduce their prices in order to starve these competitors of any profits. Indeed, the two tactics are generally used together. First they reduce prices so that the would-be competitor (with smaller "economies of scale") is most likely unable to "break even", they let the competitor know that they are prepared to maintain low prices for "as long as necessary" and then they make an offer to buy-out these new entrants to the market.

As I stated previously, governments have known about how markets evolve once oligopolies and monopolies are allowed to come into existence, for over two hundred years. This is why all "free market" economies have laws in place which (supposedly) prevent monopolies or oligopolies from ever being created.

As we have seen, these laws have consistently failed in one sector after another (and one country after another), due either to being written with too many loopholes, or (more often) simply not enforced. We already have oil oligopolies, banking oligopolies, and various other versions of these corporate obscenities either already in existence, or on the brink of achieving that status.

Two hundred years of capitalist theory teaches us that such entities are always parasitic, sucking the wealth out of economies, and lowering the standard of living of people, as corporations achieve a status superior to that of mere human beings. Decades of personal experience have shown us that (at least in this one example) the predictions of "experts" are warnings which must be heeded.

As Wal-Mart nears achieving the status of oligopoly/monopoly in the general retailing of goods, a similar trend is growing in food production. A glance at the shelves of any/every supermarket shows that the multitude of brands from which consumers once could choose (in a competitive marketplace), have dwindled to (in most cases) only two brands, or (even worse) only one brand plus an in-house generic equivalent.

A rather silly CNN article drones on about how the Wall Street banks would be/will be "worried" about the presence of one more Oligarch in the U.S. banking sector. As usual, the mainstream media have gotten things totally backwards. It is not the bankers who need to worry that Wal-Mart will bring rock-bottom prices to banking services -- since there is no profit in doing so.

Instead, what should fill each and every one of us with fear is the rapidly approaching day when food and basic consumer goods are priced according to the same principles used by banks and oil companies (and others). The "Bank of Wal-Mart" is not a good thing.

Jeff Nielson studied economics for four years at the University of British Columbia, before going on to attain a law degree from that same institution in 1989. He came to the precious metals sector around the middle of last decade as an investor, but quickly decided this was where he wanted to focus his career. After publishing his own, amateur blog for a year, in 2008 he founded Bullion Bulls Canada: a web-site providing information and analysis to precious metals investors. Today, reaches a global audience of precious metals investors in more than 120 countries.