GuidoWorld

Borrowed Wealth

Before I go onto my prediction of where are economic structure is headed, I thought I’d take a few moment to review and emphasize how much we overestimate the positive role capitalism has played in the US wealth accumulation.

Let’s look at a some of the non-capitalistic aspects of wealth generation which played a factor in our growth in the standard of living of most Americans. First we benefited from the discovery and use of electricity and the use of oil. We were fortunate to have a relatively pristine land with amazing resource wealth, which included huge virgin forests, coal, oil, natural gas and fresh water. Unlike we had no political and few language boundaries.

We were fortunate to be a rising empire at the center of life changing technologies such as the light bulb, telegraph, railroad, radio, car, airplane, TV, computer, nuclear energy, etc. While Europe and Asia were ripped apart by war and conflict we were far from the destruction and participated in their conflicts on our terms. We lent money to the aging powers who were trying to hold on to their past, and gained handsome wealth from being in the position of power at the world war’s end.

Our life expectancy surged from medical discoveries and public health policies (which were more socialistic rather than capitalistic) likewise public education. The US was able to include the new technologies into the infrastructure of cities as they were being built, as opposed to Europe who often had difficulty introducing new technology into infrastructures that had existed for centuries.

All of these advantages allowed us to become an empire. Once an empire we enjoyed the spoils of the victor. We were able to supplement our resource and monetary wealth by tapping into the resources and labor power of the entire globe.

Yet, despite all of these factors we started to find it difficult to maintain and improve upon our wealth. As our nation become less frontier and more developed territory we started to face some of the problems of other industrial nations. Soon our growth become dependent on using the resources and labor of other nations. Our economic dominance increasingly relied on global financial and military dominance. Our economic prowess became increasingly dependent on using resources at faster and faster rates.

At the beginning we were fat and we lent to the lean, now we borrow at a pace which is as unprecedented as was our wealth. We use resources that probably should have lasted hundreds of years in a couple of decades. We use the resources of other nation’s as if they are our own. We borrow money, goods, labor and resources from almost every nation on the globe.

At some point in time one has to wonder when borrowing is a sign of poverty and not wealth. At some point in time the borrowing from the future has to damage not only the future but the present. Here are some statistics that seem to indicate that we may have reached that point. Not only is our borrowing deluding us to overestimate the wealth of our nation and the benefits and superiority of capitalism, but it is deluding us into thinking we our currently wealthy when we are not.

At the website bullnotbull.com I read this article written by Robert Prechtor in April of this year.

Today, much of the public has switched to so‑called hedge funds (a misnomer). Bridgewater estimates that the average hedge fund in January had 250 percent of its deposits invested. This month the WSJ reports funds with ratios as high as 13 times. How can hedge funds invest way more money than they have? They borrow the rest from banks and investment firms, using their investment holdings as collateral. So they are heavily leveraged. And this is only part of the picture. Much of the money invested in hedge funds in the first place is borrowed. Some investors take out mortgages to get money to put into hedge funds. Some investment firms borrow heavily from banks and brokers to invest in hedge funds.

This passage describes how obscene our borrowing has become. It also alludes to how common this practice is and to how basic it is in how we do business. Anyone who borrows 13 times what they have is going to look wealthier than they really are. Anyone who lends money to such an entity when the collateral itself is mostly borrowed is economically insane.

Yet, that is where we are. That is the veneer by which our society continues to look wealthy. That is the method by which record “profits” are currently generated in our society. The question is where is this all headed?

My next post will pose my theory on where this is all headed.

Jim Guido

Capital Idea

So far my series of posts regarding our free market economy hasn’t been highly positive or optimistic. My objections to our current system were plentiful, yet focused on two major areas. One is in how inherently wasteful an economic system based on competition is, and the second problem was in how a profit based system fosters increasing disparity and economic imbalances.

One may point out how it is easier to complain and point our faults than it is to offer viable solutions. The next obvious question would be if I have any great ideas on how to make our system any better, or  do I just feel that we should chuck the whole profit based free enterprise capitalistic system?

The answer to both questions is yes. I do feel our entire system of economics is antiquated and extremely limited. I would go even further and say that just as alchemy became an out dated mode of looking at the real world, so has economics outlived its useful purpose.  I hope some day to pose some of my ideas with what I feel will replace economics, or what will exist which will make the entire realm of economics irrelevant. Yet at this point I feel it would be good to offer an idea which could help tend to some of the flaws and problems I have discussed at length in the previous posts.

In the posts regarding waste and the recycling industry I offered the solution of using glass bottles as a way to reduce the escalating waste and toxic pollution involved in the beverage industry.  Likewise I have a similar common sense solution to the problem of increased disparity of wealth and income.

If, instead of creating laws and incentives which reward publicly traded companies who  maximize  profit margins and thereby increase the gap between the haves and have nots, what if we were to develop a system which rewarded companies for narrowing the disparity.

What if pay raises for government officials were to be based on the economic growth of the bottom 10% of the population? If politicians raises were tied into narrowing the disparity gap, don’t you think they would be motivated to make sure that the wealth and standard of living of the bottom half of society would increase? Wouldn’t they be a better watch dog of exploitative economic practices, and be less influenced by wealthy lobbyists?

Likewise if corporate CEO’s and CFO’s pay raises were dependent on the economic growth of their lowest rung workers, don’t you think they would be motivated to close the gap and raise the standard of living of all workers and citizens? What if we were to pass laws that a CEO of Walmart could only earn in salary, stock and benefits 200 times  that of an entry level employee? And lets say that every three years the gap between CEO and entry level worker had to decrease by 20%?

In such a scenario where the increased wealth and standard of living of the wealthy was dependent on the closing of the disparity between wealthy and poor, society would be viewed as a connected organism. The growth at the top would be dependent on the growth at the bottom. Instead of people competing against each other and the profiteers exploiting the consumer/worker, we would be a team a true community. We would all be working towards creating the highest quality of life and wealth for all members of society.

Is this idea perfect? No!

Does it create a utopia? No!

But I definitely feel it is a far more humane and morally defensible system then what we currently have.

Tomorrow I’ll finish this series of economic oriented posts by posing what I think our current system is headed.

Jim Guido

Economic Puppeteers

If the rich get richer and the poor get poorer why doesn’t the poor ever go completely broke? Don’t the wealthy depend on the poor to have disposable income to buy their products and services and thereby increase their wealth?

There are two basic types of wealth. One is monetary and the other is proprietary. Monetary wealth is accomplished thru the accumulation of currency (such as the dollar, yen, gold or whatever). The second form of wealth is garnered thru ownership. This ownership can be of a company, resources, real estate, etc.

The answer to the first question is that yes, as long as profit is the goal the wealthy need consumers to buy their products in order to create more capital.

In an expansion phase fueled by technological and agricultural growth, medical advance, invention and development of basic infrastructure the standard of living of all increases. Though the richer are getting richer the health and lifestyle of the poor is improving. The entire society is flourishing and all partake in some modest share in the boon times.

Despite this growth the fact remains that only a small percentage are profiting and the rest are just cogs in production. The role of the laborer is to produce and to consume. Yet, as the society goes from a true growth phase and matures into a high maintenance system, the role as consumer begins to grow as the role as producer diminishes.

It is no blind coincidence that the bulk of people in the US are referred to as consumers and no longer identified as citizens. The function of most of Americans is to consume. It is to buy and borrow and generally provide the profiteers with increased opportunities to increase the disparity of wealth.

In every transaction involving profit there is a winner and a loser. There is the one who profits and the one of which profit is made. While the relative wealth of the profiter is increased the relative wealth of the consumer is decreased.

Now logically it would seem obvious that eventually over time the consumer would run out of money. Yet, this is where banking enters the picture. The poor don’t run out of money to use because more and more money is printed and placed into the economy. The consumer/worker continues to make more money while the wealthy continue to harvest the lions share of the money in circulation.

At every moment in time my relative wealth can be determined by the portion of the total wealth of the nation I possess. Rather than trying to understand this by putting forward the numbers of our current nation with 300,000,000 people and trillions of dollars. lets break it down to a nation of 100 people.

If the nation of 100 people had $10,000 in total then if the wealth was distributed equally each person would have $100. A persons relative wealth could be easily be ascertained by totaling his assets and seeing if he is worth more or less than a $100. Yet, if over the next year and additional $10,000 were added to the money supply, thereby doubling the money in circulation. Each individual’s wealth should also have increased. If I went from having a $100 to $150 dollars I would have more money, but my relative wealth would have plummeted.

Even though my total assets grew by $50 and 50%, my relative wealth would have gone from even to down 25% from the average. In this scenario I would have more money to consume, while my share of the total wealth would fall.

Now, some will complain that the above process is called inflation, and that my extra dollars would be met with higher prices for all goods and, therefore, my purchase power would have decreased. And to that I would say yes that is true. The purchase power of the dollar is less than 1% of what it used to be, but so far it has not caused the consumer to run out of money to consume, or restrict the billionaires from increasing their share of the total pot.

By printing more and more money a government is able to have it’s workers have more money to throw back into the economy (consume) while having them believe that they are wealthier when in fact their relative wealth is plummeting.

A perfect example of how depreciating wealth is often misconstrued by the consumer is a rise in their relative wealth is the purchase of a home via a mortgage. The deceptions start at the very beginning when the purchaser of the home is called a home owner. In truth, the bank is the owner and they are letting you live there as long as you pay off the mortgage.

The typical standard American home owner started off by putting a small portion down maybe 5 to 10% while taking out a 30 year mortgage. Interest rates have varied thru the years, but on a 30 year mortgage a person will end up giving the bank three to four times what the purchase price of the house. In other words if I purchased a home for $300,000 and take all 30 years to pay off the loan I will have paid over $900,000 to 1.2 million to pay off my mortgage.

The value of the home will have gained considerably over the 30 years. Yet, often the resale value of the home will not have gone up the three to four fold to make back what  you put into it. Let alone if you think of all the money throughout the 30 years you put into it for maintenance and up keep. Yet, despite these facts most people view their home as an investment which increases their relative wealth.

The above example does not include the decrease in the relative value of the dollar caused by all the additional trillions of dollars that were printed and added to the economy.  When you factor that in, it becomes almost impossible to realize a profit when you sell a home you finally own after paying off a 30 year mortgage.

The discussion of our profit based capitalistic economy has not been very flattering or optimistic. In my next post I will state what I think should happen, and in the following one I will state what I think will happen if we let our current system play itself out.

Guido

Disparity and Our Standard of Living

In previous posts I’ve already described how most workers do not partake in the profit aspect of capitalism. Most workers are laborers and their pay is but one component of overhead a boss uses to tabulate his profit margin.

A laborer works to earn pay to go out and buy essentials and creature comforts. Only management is capable of making a profit on the goods and services produced and rendered. In modern corporations the boss gives himself hundreds of dollars to every dollar he gives a bottom rung employee. This ratio has been going up significantly whereby the top 1/2 of 1% is making over 70% of all money made in the US.

The disparity between the bottom and the top is escalating at a mind bending speed. The rich are getting much richer and the poor are getting much poorer. Many who know this fact to be true defend our economic system by saying that the standard of living of even our poor is much better than most of the world.

This may be true, but the disparity is not the cause of the rise in the standard of living. The rise in the standard of living is due to inventions such as electricity and the computer, and the use of natural resources such as oil, coal and metals.

Much of our nations wealth is due to our reckless use of the planet’s bounty. We are using, in a few generations, the planets resources which took millions of years to produce. Yes, we may find new resources to replace the old before we run out of resources such as coal, oil and water.

Since this discussion is on disparity and the standard of living and not on the future we will not discuss the potential repercussions of using up our natural resources with the hope of finding solutions in the nick of time.

If we were using energy and resources with the thought of preserving some for future generations it would definitely have a negative impact on our current standard of living. The meteoric rise in our standard of life was due to our aggressive use of our land and its resources.

When this nation was formed the US was a relatively pristine land incredibly rich in resources. The birth of the ages of electricity and petroleum came when the US as opposed to Europe was still relatively virgin land bursting at the seams with rich soil, uncut forests, and untapped mineral wealth. The US was well positioned to best utilize the age of discovery and the age of technology.

The US, like every other empire before it, used and uses domestic as well as foreign slave labor. Like, the pirates and conquerors of old, it also used and uses the natural resources of almost every nation on the globe.

Though it is true that capitalism was able to capitalize on this previously unimaginable opportunities offered by the gains in technology and invention, it is also true that every empires wealth ballooned no matter what economic or political system it used.

If we do not succeed at finding renewable resources before we consume what we currently utilize, history will probably not view us well. Future generations would likely sneer as they say that any idiot nation could appear wealthy if they used thousands of years of resources in a century or so. They would say any man could appear to be wealthy if he consumed all the food, goods and money his family was to have for the next several centuries.

Disparity, being inherent in a profit based economy, appears to be an essential component of capitalism. In corporations the top tier of executives make hundreds of dollars for every dollar that a bottom rung employee makes. If they physically handed out the money it would sound something like this, “one for you and a 150 for me”.

Now some would argue that without this disparity our standard of living would not have improved over the years. Yet, the bulk of the growth in our standard of living came when the gulf between the haves and have nots was not nearly so great.

What is indisputable is that our current system causes growth in the standard of life to be top heavy. While the true profiteers amass immense wealth and freedom to do what ever they want, a growing percentage of citizens are nothing more than consumers whose standard of living is treading water if not regressing.

If it is true that the average laborer loses as the boss profits, then why hasn’t the average worker gone bankrupt? I will address this issue in my next post.

Guido

Economic Myths Part 2

Let’s return to the example of a manufacturer who produces a larger product such as a washing machine. In assembly line production, the hallmark of manufacturing, sales volume is the major factor in being able to make a profit.

If when all expenses such as labor and materials are totaled he finds that each machine will cost him $250 to make, he will then calculate his profit margin. If he decides that the marketplace will accept a 10% profit base he will sell his machines for $275 to retail stores who will again add their profit to the price before selling it to the consumer.

The $25 profit per machine could be used as capital to fund expansion of his business. After selling thousands of washing machines he would be in find shape to open new plants and possibly produce other major appliances. In text book fashion this is the essence of capitalism in which profits (capital) are thrown back into the economy to fuel progress and the raising of the standard of life for all citizens.

Yet, in reality this would not be wealth for the manufacturer. The wealth portion comes from the money that is taken off the table and horded. Some would say that his expanding ownership of more and more factories is wealth. And in many ways it is, but in many other ways it is only potential wealth. Real wealth comes when his standard of living rises faster than his workers or the bulk of society.

Now the workers at these plants are not really partaking in the profit of the business, for their pay is but one component of the overhead the owner takes in consideration when calculating his profit margin. If the workers were the one’s making a profit, the owner would be losing money and the business would fold.

In the real world an owner’s profit serves two purposes. One it allows him to invest a portion of his profits (surplus funds) into expanding his business and thereby becoming a leader in his industry. Two, it allows him to buy more and more creature comforts and invest in areas outside of his business which help procure and define his wealth.

We listed in the previous blog the areas of overhead for the typical business. The more overhead one has, the harder it is to keep the costs of the product down and therefore the harder it is to make a sustainable profit.

Any owner who pays his employees more than his competitors is fighting an uphill battle. Though many people will be able to sight an example or two where a tycoon has paid his employees more than his competitors, the vast majority of businesses have succeeded by using slave labor or finding a way to pay their employees less than their competitors. In many areas of our society the business leaders have successfully convinced the public that they are the good guys and that the worker advocates and unions are inherently bad and corrupt. This along with many other propaganda techniques and strong arm tactics have allowed businesses to foster worker loyalty while having their pay lag behind their escalating profit scale.

One of the strongest myths in our culture is that capitalism and the profit motive are the central, if not sole, reasons that the quality of life and standard of living have improved in industrial societies. Many would go so far as to say that any improvement in the standard of living is impossible without the profit motive.

Who would go thru all the work and effort to make the world a better place if there was no personal payoff? If one didn’t have to work to survive, why would anyone do anything?

If one looks back at many of the discoveries and inventions which had the most positive impact on our society you will find many of them were done cheaply and not for monetary gain. I think it is very unfair to human nature to say that people would not try to improve the quality of life or the standard of living without an economic carrot.

Why wouldn’t a person want to increase the amount of pleasure in their life or the quality of their life if they had the opportunity to do so? Is charity and self-sacrifice no longer a motivator of human behavior? Doesn’t the profit motive often breed selfishness and reduce one’s desire to improve the lot of others?

Many people do things because they find it rewarding or fulfilling and some even find doing these things for money repugnant. There are many people who have hobbies that involve craftsmanship or artistic talent which they could do for money, but don’t. They instead like to give the fruits of their labor as gifts or just do it for their own enjoyment. There are literally millions of people who spend countless hours making art or providing services for others without expecting a penny for their time.

I must admit that greed is a motivator and that many people are basically selfish and self-serving. I also admit that profits have played a positive role in funding research which has led to many important discoveries and inventions. In the early years of industrial expansion one can sight many medical and social improvements which would not have been possible without industrial funds and incentives.

Yet, as time goes on and the power and control of business increases with their wealth, one can find many examples of how industries have stifled or destroyed discoveries and technological inventions which could have improved the quality of life.

It is ridiculous to think that a business would not protect their interests, and the interests of their stock holders. In modern international law it is often illegal not to take any action which protects the maximum profit growth of the corporation. Therefore, if a corporation had the ability to suppress or destroy a new technology that harmed or could even destroy their profit growth than it is a business moral imperative to do so.

Years ago when the electric trolley car and electric railroads looked to be the wave of the future it took a mighty effort by the automobile, oil and construction lobbies to kill the budding industry. The oil industry in particular bought and shelved the technology while popularizing creative reasons why the electric technology was inefficient and impractical.

In todays medical universe we see the war for profits fought on many fronts. The AMA, insurance companies and drug conglomerates all are protecting their interests often at the expense of the consumer. Just as the recycling industry is dependent on increased waste and inefficiency so are the above interests dependent on sickness and tending to symptoms rather than cure. Issues such as universal health care and cheap prescription medication are just two of the fronts the battle is being waged.

What would a pharmaceutical company do if someone found a true cure for all cancers, or found a way to prevent all heart disease? Would they produce it if it threatened their very existence, or would they suppress it? Sure a cure for a minor disease would be good for business, but what about real cure and prevention is it something that a profit based economy can afford?

Let’s take a look at another myth of our capitalistic system and that is the law of supply and demand. Just as was the case in the myth of the profit motive, there is some truth to the law of supply and demand, but there is much where this so called rule does not apply.

If the law of supply and demand were a law then we would expect everything in society to follow this rule. We would expect that the largest profits be made in areas where there is a high demand and a short supply. We would not see a situation where an ample supply of unimportant things would be highly lucrative.

In our society things which we need seldom have a high profit scale. Food and clothing are two of our basic needs and neither has been a business in which high profit margins dominate. In fact the highest profit margins are made in luxury foods or in highly processed ones which have little nutritive value. Even at times when the food supply is low, there still is little room for profit. The cost of food increases at those times, but the decrease in volume of sales makes profits stay the same or even shrink during lean times.

In our society things that are truly needed often have some of the smallest profit margins. As grains became more vital to our total diet, being used for oils, spreads, sweeteners and additives in thousands of products plus their traditional use in cereals and breads the profit margin for them came down even as their demand skyrocketed. Individual farmers failed and commercial farms took over.

The general cost of produce and grains is very low when you consider their overhead. You have the cost of the seed, the machinery used to plant and harvest, the cost of watering, all additional labor and the cost of transportation, and despite this you pay less than a dollar a pound for many goods.

In our society it seems that the more essential something is, the cheaper it costs. This seems to defy the law of supply and demand. Instead it seems to bear out the law of profit. If people spent their money on necessities they would have nothing left to use on the thousands of generally useless things which make our consumer culture possible. If people spent the bulk of their money on necessities their would be none left over to spend on things which give us the impression that we have economic progress or a higher standard of living.

People spend gobs of money on recreation, vacations, gifts, entertainment and art. None of which are in short supply or are a real need. Top professional athletes, entertainers, artists and authors make quite a bit of money while the rest of their ilk make almost nothing. Supply and demand in these areas is highly subjective and therefore proof is hard to come by. Logic says that the highest demand should be in areas where need is present, and none of the above professions are mentioned when one talks of the fight for survival. Many artists will talk of how the bulk of the money is made by middle men and promoters and the artists themselves bank relatively little.

I personally have worked in human service agencies in which the people who work with the clients and actually provide services work numerous hours under highly stressful conditions and make far less than their supervisors. These service providers are truly what is needed, there is a high demand for their services. The people in human services who make decent money are the administrators and public relations people at the larger agencies. The rational for this, is that the administrators have more responsibility and usually are older and more educated than the line staff.Though this often is true, the fact remains that they are not as essential or in as high of demand. No one is clamoring for more bureaucrats and feeling that their is a shortage of people in these positions.

In the next post I hope to talk more on how our system creates and is dependent on increased disparity between the profiteers and the consumers.