BahHumbug

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Gambling

(What to change)

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The problem with gambling is that it is a personality trait. People who are gamblers gamble, it is what they do. They are always looking for a way to game the system. Any system, any time, anywhere.

Which is fine if they want to play their games with each other, but unfortunately that’s not where it ends, they want to play with anything and everything. They want to play with the rest of us and if they can game and manipulate us then they couldn’t be happier.

Quite frankly, we can’t afford to let them, we need to ring-fence off that sort of behaviour from the rest of society and the economy. Gambling isn’t going away, so get used to it, get wise to it and learn how to deal with it effectively. There needs to be some fairly serious changes.

As I said in my post “Surplus” our modern societies have enormous surpluses, and yet we have still managed to make a pigs ear of it all. And it is because we have let the lunatics run the asylum. Or more specifically, we have let the gamblers free rein to gamble with our economies and with our money.

It is like giving crack to an addict, they will snort it up until it kills them. Ohh – and us at the same time, in case you haven’t noticed.

Why would the serious gamblers bother gambling at a casino? The game is rigged and frankly that’s penny-ante chump change anyway. If they can gamble on the worlds financial markets, that’s where the really serious money is, trillions of dollars of it. What’s more, that is a game where they can get to set it all up and rig it so that they are the House, they make the rules and can guarantee their cut. Can we say Goldman Sachs anyone? Their preferred casino town isn’t Las Vegas, its Wall Street and City of London.

So, we have addicts controlling our lives and livelihoods. You know what, that’s not too smart! We are going to have to find a solution to this because as we are finally starting to see, we can’t afford not to.

Its just not going to be easy, the whole essence of a gambler is that they are always looking for a loophole, an opening and an opportunity to get around the system, the rules and the regulations. They inherently don’t like the safe and stable and the regulation modestly profitable approach. They are always trying to sniff out a scheme, a scam or a subterfuge to escape the rules, justify their behaviour, or otherwise bias the situation to their advantage.

Which is unfortunately why my favourite idea to deal with this just wouldn’t work. I reckon they need to be licensed. You don’t get to be allowed to gamble unless you are a registered and licensed gambler, but if you are a licensed gambler then you would be excluded from working in certain types of jobs. Like dealing and trading with other peoples money for example. See, simple and elegant – and unworkable. If there was money to be made by cheating the system, then these are exactly the people who have the psychological makeup to want to try to.

Still, that doesn’t mean that mean we shouldn’t try and regulate to license gamblers and licence gambling operations. We already have laws and regulations to manage Casino’s and that is entirely appropriate. Equally there are certain types of trading environments and markets that need to be properly monitored and regulated in the recognition that if left to their own devices they will become populated by people motivated to also make these into just another casino. Things like currency markets, share and commodities markets, futures and hedging contracts, and derivatives are all sitting ducks ripe for exploitation. Unless they are regulated in such a way as to exclude gambling behaviour, then they will attract risky behaviour and attempts to subvert the rules and regulations to allow the gamblers in. In the United States the prime example of that is the repeal of the Glass-Steagall Act. That Act was a package of regulations introduced in the wake of the Great Depression specifically to address the causes of the rampant speculation, insider trading and convergence of financial control that had precipitated the whole mess. 70 years later there is effectively no-one left alive that lived through that last catastrophe and is old enough to remember exactly what had happened. Those who forget history are doomed to repeat it. So at this point the sharks and shysters were able to manoeuvre a repeal of the rules that had prevented then from gaming the system the way they wanted too. There were good reasons for not letting them do these things, and now we get to see all over again why it is a bad idea to let the gamblers set the rules.

Re-regulating would entail a whole lot of bleating about interference in markets, economic socialism, blocks to market efficiencies and constraints on the availability of capital for worthwhile investment opportunities. All of that is almost entirely a smokescreen of course. It has just fractionally enough creditability to cast doubt, but far and away it is mostly just whining by the gamblers that you aren’t letting them do what they like. Therefore, if they can play a public relations and political game to get their way then they will, that’s all par for the course . And if they have got a bit of money to slosh around to grease the wheels, that’s all to the good too, that’s how it has been played for centuries. A bit like prostitution, this is one of the oldest games around.

If we are not aware the game is being played and we don’t have the right rules and structures in place to constrain them, then these junkies will play us. I don’t know why so many people respect and bow to the super wealthy, the billionaires and the like. Well apart from the obvious reasons of course, these are the people with the money, power and patronage to disperse and it’s not so terribly hard to buy many people. But just take a bit of a look at the bigger picture for a moment and add up the facts. How many of the worlds billionaires made their money through financial wheeling and dealing, as opposed to actually productive industrial and commercial enterprises. People in law enforcement who have dealt with narcotics trafficking come around to the thinking that the most dangerous and destructive people involved isn’t the drug addicts, it is the money addicts, because they will push anything, hurt or exploit anyone, in order to secure their money fix. Just because these types may wear suits and ties and work on Wall Street doesn’t mean they too aren’t dangerous, they most certainly are. They are not constrained by rational evaluations of risk like the rest of us and they have no compunctions about systematically undermining the system if they can get theirs. People addicted to money are junkies and will do anything to get their fix. It would be an interesting exercise to test all the senior financial executive for psychopathic personality traits. Being a psychopath doesn’t inherently mean you want to kill people and eat their brains, but it does mean they will have little to no sympathy or empathy for anyone else. It is all about them. While that can make then very focused and driven people who can make things happen, you really don’t want them running the show.

So that leaves us with the quandary of how to structure the system, the economy and our society in order to best manage this issue and mitigate any damage. This isn’t an issue that is going to go away, it is build into our nature and indeed can have some positive advantages. Gambling covers a very wide spectrum of behaviour, from drunk-driving to rock-climbing and from the pokies to the share-market. Most gambling is extensions of legitimate and even conservative practises, but taken to extremes. It is the money side of gambling I am interested in here. Money markets were set up to provide legitimate avenues for the productive investment of finances and capital. Unfortunately if there is more money to be made in gaming the system than in building productive enterprises, guess what happens. Our problem is how to demarcate between what is reasonable and acceptable and what is not. How to accommodate a inherent human instinct and how to structure the system so it is not subverted by it.

Lotto is an interesting example of a state administered gambling scheme that offers a game of chance, taxes the process pretty heavily and then distributes the revenue into worthy social organisations. All in all it actually works pretty well. Casino’s are another sort of ring fenced gambling operation; although it is interesting just how much peripheral offending occurs around them, they tend to be a bit of a crime magnet – surprise, surprise. One quite useful approach is to impose a hefty tax on gambling, such tax’s can generate useful revenues and remove a certain degree of the attraction. A sin tax creates a handy addition to social services revenues and can help to balance the harmful side affects on an individual level. But on a larger scale it can further assist by removing much of the incentives. Buying and selling in order to take a percentage profit on price differentials isn’t gambling per-se necessarily, it’s called arbitrage and proponents will argue that in theory it is a useful market mechanism for creating efficient markets, price discovery and correcting distortions in markets. There is some justice to all of that, but once again it all depends. It can just as easily work counter to those objectives if it instead becomes a gambling operation. Far too often that is exactly what happens. There is no easy answers or quick fix, but a transaction tax could significantly reduce the incidence of gambling by limiting the incentives.

In the end the incentives are what any solution will have to address, removing the profit from the gamble. Although, how do you differentiate between what is a normal and acceptable business operation and one where there can be no assurance, or even expectation of successful resolution of risk? If there is only the hope that it will be possible to enter and exit the game in a manner that can take a profit before the system collapses, it is speculation, trying to time the market on a gamble. In theory at least, if it was only their own money at risk and that was the end of it, I would leave them to it. One solution could be to regulate who may operate in any type of market. For instance, commodities markets could be limited to actual market participants, Hedge-funds and the like, which are just interested in speculative trading positions could be either excluded completely or taxed so heavily as to remove any incentive to participate.

Another approach that there is a definitely need for, is proper retrospective action. In the event of outright fraud, Ponzi schemes and the like, where it is mathematically certain that when the music stops there will be big loses; there needs to be mechanisms for effectively reaching back and confiscating the proceeds of the crime. It is axiomatic that the worst type of junkie gambler will attempt to lay off their loses onto any stooge they can find. The best of them are master at this trick, just look at all the big Wall Street banksters getting bail-outs, they do it because it simply pays so damn well. These guys should be bankrupt, in jail or both, instead they have now got your money. Interestingly, there exist plenty of laws that should do exactly what I am advocating, and yet somehow they don’t ever get applied. Ahh, the convergence of money, politics and corruption, that’s always a hard one to beat. But assuming you can manage a revolution to remove all the crooks and cronies, then we need to ensure we investigate and reach back as far as it takes to confiscate all the ill-gotten gains. There is a lot of damage to pay for afterall.

Unfortunately it is always going to be an ongoing battle countering the scheming and excesses of gamblers, but it is also a fight we can not afford to loose. Our societies should be enjoying the fruits of our stunning productivity and surpluses. Instead, the gains have been privatised and the loses socialised. The change that needs to occur is that we need to be actively aware of the threat that Junkie Gamblers pose and be prepared to deal with them. The cost of doing nothing or neglecting it is a disastrous corruption of our political and economic systems, bubble economies and boom/bust cycles. Managed appropriately, gambling does actually have a very important place. It is what leads us on to try new and different things, some of which work out, some of which don’t. On a small scale, we are all gamblers and a flutter on Lotto for instance is neither here nor there; most of us can control and manage how and when we gamble. The thing is, gambling is much like fire; it makes for a good servant, but a terrible master.

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Slavery

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Consider slavery for a moment.

It is a term that gets applied to a lot of different situations, so you couldn’t consider it as one specific thing particularly, but there is a thread in common. That is that you have control of one person’s life by another. So whether it is white slavery, wage slavery, slave labour etc etc, it is all about control.

And yet when you have a situation as in for instance with children and their parents, or handicapped people or the aged, there is not the same negative connection. The difference of course is the circumstances, motivation and intent, there the situation is one of a dependant and their caregivers. The dependant is in a vulnerable situation and the capable partner in the relationship is not trying to exploit the situation.

And therein lies the crux of the matter entirely.

In the end there wouldn’t necessarily be any problem with slavery, even in the ownership of one person by another, if the relationship was one where there was proper care and consideration – but of course there never is, is there.

If a slave owner could only ever own someone if they treated the slaves at least as well as they treated themselves – ideally even better than themselves, their family or children, then almost all the objections would collapse. Imagine it for a moment: I can own a slave, but I have to keep them in better housing than mine, feed them better than me and offer them education, recreation and companionship better than I enjoy.

But that’s not what happens is it, that would rather put a crimp in the whole concept. The Whole Point of slavery is that you can treat some-one else badly. You can do unto others as you wouldn’t dream of doing to yourself or your own. And isn’t that an interesting concept – I want to be able to treat another person with contempt, to degrade them, even humiliate and torture them. I want to be in control and to be able to treat others anyway I like and to act out my petty insecurities and tyrannies. Indeed it happens in many domestic relationships every day.

Whatever the reasons are, and I am sure there no end of justifications dreamed up as to why it is OK to treat someone else with less care than you treat yourself, it is something that goes beyond being self centred.  It is being actively aggressive to another, exploiting and using them for your own ends. I suppose we shouldn’t be too surprised, people are prepared to kill for that after-all.

But what is that all about?  It sounds a lot like someone didn’t get breastfeed enough as a baby or something…!

Interesting that while we have laws against one person owning (and killing) another, indeed we get all a little precious about it sometimes, somehow it is OK for business and corporations, commerce and governments, even spouses and parents to treat other people like slaves. Hmmm…

I think there maybe needs to be a bit of a re-examination of some of our social relationships and society constructs. Exploitation of people is normalised in our societies and it is not a situation of freedom of choice for all parties. If people actually had a genuine choice over their circumstances, there would be some pretty sharp changes going on. While it is a theoretical consideration rather than a practical possibility perhaps, it is also still a very interesting intellectual exercise.

Are you treating other people at least as well as you would want to be treated yourself? Do you work for an organisation that treats both its employees and customers with care and consideration – or are you locked into a cycle of work and debt and commitments that there is no escape from? Do you have a psycho boss, or a controlling partner? Do you feel like a slave?

And what is the role of society and the state to regulate and sanction slavery and exploitation?

I just raise the question rather than try to answer it.

Perhaps you might like to.

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Global Warming

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I was looking at the news today online and there were several articles about global warming and CO2 emission etc etc…   Along the lines of:

UK climate targets unachievable

APEC leaders drop climate targets

…that sort of thing.

I was particularly interested in the top one about the UK, because I have just finished reading a book about just this subject.

It is “Sustainable Energy – without the hot air”, by David JC Makay.

It is also available online at:      http://www.withouthotair.com/

It is pretty well written everything considered, although like all scientific books it does take a bit to wade through it. (I recommend reading it, if only to get a grasp of the scale of the problems)

Still, the point he makes is that much of the debate is so much hot air, and then sets out to determine what is practically possible to achieve, how much reductions in CO2 are theoretically necessary and what it would take to achieve this. If you don’t know what you are aiming for then you have no hope of hitting it.

He concludes, amongst other things that yes, major carbon emissions reductions are possible, but it would require a major effort to achieve that.

At which point we come back to the headline saying that UK targets are unachievable.

Actually they are achievable, its just that no-one wants to pay the price to achieve them.

At this point it is cheaper to ignore the the whole issue and by that means, pass the cost on to later generations to deal with.

Included in the online headlines today was one claiming; “Earth headed for 6 degrees of warming”.  Whether that is true or not is a whole other debate, along with the question of what the consequences of that would be.

But lets assume for the sake of argument that the warnings are correct and that all sorts of catastrophic (for humans) effects flow from rising CO2 levels. Then essentially we are in a situation where we are saying that it is all just too hard and we can’t be bothered and we have got other problems to worry about.

A psychologist would call that immature behaviour, in other words the behaviour of people who cannot or will not act like rational adults. ‘I don’t want to’ is the call of a child. An adult says ‘it doesn’t matter whether you want to or not, if it needs to be done then it needs to be done, just get on with it’!

Unfortunately of course, that applies to pretty well all our problems. Our current global financial crisis is another example. We are where we are because we have continued to dodge and weave to avoid having to pay the costs of facing up to our previous bad decisions and behaviour.

Being forward looking and making rational adult decisions isn’t really that hard, you just have to stand up and do it – and pay the price.

No it doesn’t pay as well as scamming the system and passing on the costs to some-one else, but quite frankly it is time for the children to go back to their rooms and for the adults to step forward and take charge – and responsibility.

Unfortunately, we have a lot of bills to pay.

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Apparently there is some-one who is prepared to pay the price and is getting on with the job. And guess who it is:  China.

The country that has been berated for being the worst polluter, is actually moving harder and faster than anyone to go green.

Read more – China pushes Solar, Wind development

This is an article to upset a lot of our preconceptions.

~ “China is pushing harder on solar now than anywhere in the world,” says Mark Pinto, chief technology officer for the U.S.-based Applied Materials. “In China, nothing is too fast. They’ve got the land, the need and fast decision-making.” Applied Materials is the biggest maker of equipment to make solar panels. Last month, it opened the world’s largest solar research facility – in China.  “If the manufacturers are in China, that’s where we need to go,” Pinto says

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As it happens I have never really looked into what the supposed affects of a 2, or 4, or 6 degree increase in global temperatures might be. There is a large body of science that says that bumping up the amount of CO2 in the atmosphere like we are doing will cause increases in average global temperatures. Well, OK, thats the theory, in the absence of any particular knowledge on the subject I will accept that provisionally. The consequence of that is postulated as various injurious affects, like rising sea levels. OK again I can’t comment of the validity of those claims or projections, but assuming they are correct then changes are coming that we cannot ignore and cannot talk our way out of. If the theories are correct, then this is a chain of domino’s that have already been stacked up, if and when the cascade starts there is no stopping it, it WILL happen. King Kanute will have nothing on this.

My basic understanding and assessment of the situation is that in order to pre-empt and avoid this scenario, we would need to cut our carbon emissions by something like 80% almost immediately, if not sooner. Well, quite obviously that is simply not going to happen is it. Carbon emissions have been on a growth trend that has run for over a hundred years and is accelerating on a geometric scale. It would be a monumental achievement to simply hold at the current global levels – unfortunately that wont cut it and doesn’t help us.  My bet is that the reality is that over the next twenty years the rate of CO2 emissions will  continue to increase. Which means that whatever the consequences are going to be then we had better get used to the idea that it is going to happen and try and prepare for them. Because whatever changes may be coming, they ARE coming – ready or not!  At this point they are baked into the cake, we can’t stop it.

I am reminded of a famous line from last century: “How I stopped worrying and learned to love the Bomb”.

Or if you like your philosophy a little more spiritual: “God give me the grace to accept the things I cannot change…”

Interesting times huh?

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X and Y (edited)

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Due to the NZ Herald dicking about and not letting sleeping permalinks lay, I am reprinting the whole article in full, and not just linking back to their website.

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Generations X (30-45) and Y (15-30) need to wake up and see the massive inter-generational theft happening before their eyes. Baby-boomers need to be shocked into knowing they are being shortsighted and will end up living in two retirement islands and having to visit their grandchildren overseas. Bernard Hickey writes Gen X and Y a letter. They can imagine it is a long email or text message.

Dear Generations X and Y

Did you realize the baby boomers running the country have just decided to make you poorer for decades to come so they can retire early with all the assets and high incomes?

Did you realise your taxes are going to rise and you won’t be able to afford your own home? Did you know the baby-boomers are refusing to save their own money now for their retirements so they can live off your hard work?

Did you know you will be slaving away paying high taxes in your 40s and 50s to pay for their pensions and health care? Did you know you’re wasting your time trying to build a family and life in New Zealand? Did you realise you have huge student loans while they received free tertiary education?

Do you realise they voted themselves Working for Families so they could have children and afford to pay the high mortgage costs of their borrowing to buy property? Do you know this cannot be afforded in the next 20-30 years?

You didn’t? Let me explain.

There were two big decisions in last month’s budget that guaranteed this intergenerational transfer of wealth, but they are not the only factor.

Prime Minister John Key and Finance Minister chose to abandon contributions to the New Zealand Superannuation Fund (the Cullen Fund) for the foreseeable future. Yet they also guaranteed their fellow baby-boomers (they were both born in 1961) they would keep their pensions at 66 per cent of the average wage and could still retire at the age of 65. John Key has even promised to resign if he breaks this promise.

There is another unwritten rule that no baby-boomer politician will break and that will guarantee many in generations X and Y will never be able to afford to buy a house. John Key again ruled out this month that his government would ever introduce a capital gains or land tax. Any change to the massive tax break in favour of residential property investment would immediately reduce the wealth of baby boomers who were able to buy cheaply in the 1990s and early 2000s. They will never give this up voluntarily and they will continue to vote for politicians who support that view.

So the two budget decisions, the unwritten rule on capital gains/land taxes and the decade of slow growth forecast by Treasury will combine to cement in a massive transfer of wealth. There are other forces at work here. Our banks are congenitally conservative about lending. They will lend up to 100 per cent against the value of land and buildings, but are reluctant to lend to back the business ideas and entrepreneurial vigour of Generations X and Y.

The dream of baby boomers is to keep buying rental properties and renting them out to generations X and Y. They can even afford to make losses on them because they can claim the tax losses against their personal incomes and make their money back with capital gains. That baby boomer dream was looking wobbly earlier this year when prices fell 10 per cent from their peak. A smidgen of light appeared for Generations X and Y. But it seems those hopes are now dashed because the banks are back lending to the baby boomers, who are even more convinced now that property is their only hope because of the collapse of finance companies and the stock market.

Now you can look forward to steadily rising taxes over the next 30 years, particularly from 2020 onwards, to pay for the increased costs of an expensive universal pay-as-you-go pension scheme and much higher universal ‘free’ health care costs. You will pay as they go into the retirement homes.

You could try to overturn the baby boomer bias in our political system by voting them out, but you’ll fail because there are too many of them and you don’t vote much.

Your only choice is to migrate as soon as the global economy starts recovering and the jobs become available again.

This will be the best revenge you can get. They will have to watch their grandchildren grow up by email and the occasional flying visit.

I’m not kidding. Leave ASAP.

Kind regards

Bernard Hickey (42)

P.S. The other option is to leave and earn enough money working overseas to afford to come home to buy a house. That’s what I did. But will your children be around to have their children (your grandchildren) here?

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Money

(What to change)

Money is an interesting concept. Mostly because it isn’t what we think it is. Which means that the thing that needs to change is how we think.

Money isn’t actually any one thing at all, it has aspects and uses and effects that are separate and distinct depending on circumstances and situations. For instance, the types of money that I know of, comes in at least nine forms. There is the spending cash you have in your pocket for a cup of coffee, a donut, or a lotto ticket, etc. There is the money set aside for major or regular expenses. There is taxes, savings, credit, interest and dividends. There is Capital and there is currency. It is all the same stuff in some ways and yet it is not either. There are important distinctions and we need to appreciate what those are and what they mean.

Unfortunately most people haven’t got a clue. I worked in a bank for several years in my twenties. In retrospect I can look back now and appreciate that I am pretty fiscally ignorant in many ways. But even then I was much more conversant with how money worked than many of the people I dealt with across the counter. And that was just talking about the very basics of money management like interest rates. As a friend of mine recently said to me, he always thought he was pretty good with money, he was conservative and careful, he didn’t get into debt and didn’t habitually waste money on trivia. And yet he was not well off or even looking like being so. So if he was brutally honest with himself, he would have to admit he wasn’t actually any good with money. If he genuinely was good with money then he would have known how to manage and leverage what he did have into a significant fortune. It has been done by others, so the failing must logically therefore lie in his appreciation and abilities with money. In general, that’s probably true, and the same logic would apply to me as well and indeed most of the people I know. I do have several friends who have managed to do very well for themselves and patently they do have a more insightful grasp of what they are doing with money and I applaud them for that.

I might make a couple of nitpicking comments. One is that mathematically you can’t have everyone being above average, therefore not everyone can be wealthy. Wealth being a relative thing after all. By whatever mechanism, it can only be a slim minority who can fight their way through to the apex, and in consequence the rest of us must end up being also-rans. My second comment is a quote attributed to Honoré de Balzac: ~ behind every great fortune there is a great crime. Which isn’t to say that my friends who have done well are criminals :), we will leave that aspersion to lie upon the truly wealthy.

(NB – try Googling the phrase “behind every great fortune there is a great crime”. There are some very interesting and disturbing stories)

Link – Billionaires

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At this point I will cut and paste a couple of items that I have recently read that are relevant to our subject.

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(from: Oftwominds ~ by C H Smith)

Pareto’s curiosity was sparked by the fact that the greatest amount of wealth was in the smallest number of hands. His observation boiled down to: If you gave everyone in a society one dollar, eventually 80% of those dollars would wind up in the hands of 20%. And of course out of that 20%, 4% would hold 64% of the dollars. In this sense Nature’s capitalism is always at work. Money moves from poor managers to strong managers. Strong managers put that money to use by investing in plant and capacity which puts people to work. Albeit imperfect and prone to greed, when left alone it works better than socialism.

It has been my experience that nearly all of the people I know and have met have no idea what to do with their money. Doctors, lawyers, engineers, government officials and even money managers, all have no clue what to do with their money. Multi-million dollar lottery winners are broke in short order. People in entertainment routinely die broke. Bubbles come and go as they all chase the dream of something for almost nothing.

It is not under-education or an inability to think critically which part people from their money, it is their uncontrolled emotions. Faced with purchasing a house which they know is unaffordable or choosing to rent they will not bother to run the comparison as long as it is their dream and “someone” told them they could. Had grumpy old Mr. Critical Thought been allowed to show up and run a spread sheet or put the numbers into Quicken they (the cold, emotionless reality of the numbers) would have irrefutably deprived them of their “dream”.

This drama plays out everyday at different levels across the spectrum of human psychology, the food you should not eat because you are morbidly obese, the years-old but never used exercise equipment in the garage, the spouse or partner who is abusive but you can’t leave, the dress, shoes, house, boat, car you have to buy but cannot afford, the candidates we vote for because we like the way they part their hair. The inconsistencies, contradictions and convolutions are endless and mind-boggling to the point of madness to the observer.

I close with a comment by Harun I. on the intrinsic difficulties of managing capital assets to retain purchasing power. “We have met the enemy, and he is us.”

Hedge Funds and The Pareto Principle (February 19, 2007)

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And from: Market Ticker ~ by Karl Denninger

There have also been those who disagree with my definition of “money.”  I will therefore remove that term entirely, since “money” connotes different things to different people and we’ll go through the definitions again:

Asset: An item that has value of some varying amount of stability.  Examples are a stand of trees, a stack of sawn and finished lumber, a bushel of corn, a house, a car, a CNC machine and a computer.


Currency: An abstraction of a collection of assets, also of varying value against those assets.  Often used as a medium of exchange between parties who wish to exchange one asset for another, and sometimes used as an abstracted store of value.  Examples include federal reserve notes and quarter coins.  Some forms of currency are officially backed or mandated for certain uses, but not all.


Credit: A further abstraction of currency, but generally fungible with currency in commerce.  When brought into existence backed by an asset, credit is “hard” or “secured”; when not, credit is “speculative” or “unsecured.”  Credit always, in some form, requires payment of interest.


Interest: The amount one pays for the use of credit, usually (but not always) denominated as a percentage.  The elements of interest are the risk of failure to pay, the risk of debasement of the unit credit is denominated in, the scarcity of credit and the demand for profit on the lending transaction.


Liquidity: The amount of currency and credit in an economic system that is available for deployment (that is, is not committed to some other purpose) at any given point in time.

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It was very good of Karl to do half my work for me there, and cover a few I didn’t mention, now for me to expand on the rest.

…I know of money that comes in at least nine forms: There is spending cash,  money set aside for major or regular expenses, taxes, savings, credit, interest, dividends, Capital and currency.

Karl covered Currency, Credit and Interest: so that leaves me Cash, Expenses, Tax, Savings, Dividends and Capital.

Cash – folding, walking around money, readies. Cash is what you have for incidental expenses, it is disposable income and needs to budgeted as such. After everything else is accounted for, then cash is what you have left over to be used or wasted however you like. The comment about gambling where you only bet what you can afford to lose applies to this. It is a medium of exchange and of value to pay for the things you like and enjoy. It can be used to buy something solid and long lasting, but typically it is for consumables and the ephemeral, such as your lunch or a bunch of flowers. For most people this would also only amount to at most a couple of hundred dollars a week, although there are the wealthier amoungst us who can burn through many thousands of dollars disposable income. Our little luxury purchases might be some nice sun glasses, theirs might be a Loius Vutton handbag at $3000. So there is a pretty wide spectrum of what constitutes disposable income/cash, but it all comes under the category of things that you can do without and would survive losing.

Expenses – Bills, rent, mortgage payments, weekly groceries, car running costs….  These all cost money to service, but it is a different order of money use than Cash. This is money that has to be spent, that has to be budgeted for and is a constant call on our income. Some expenses we can not avoid and these need to be ranked, prioritized, then paid. This is money that we only nominally have in our possession and is traded away for the essentials we need. In fact our expenses are our current and future income committed to being paid to another party. All that we can do is analysis very carefully what we are spending this money on and why, then determine just how essential it is. Typically we will stack all sorts of expenses up against our income, right up to the limits of what we can afford, but truth to tell there is often much we can do to rationalize what our outgoings are as well. It is incumbent upon us to clarify and define exactly what is essential and why, much of our expenses may be rather more optional than we imagine. At that point our expenses have become large-scale cash transactions that we have chosen to commit to long term. That’s fine if you can and want to do so, but recognize the difference between what is essential and what is optional and discretionary.

Tax – this is not optional and if it is structured properly it is seamless and invisible in deducted money from you. It is necessary in our modern social systems to pay taxes to finance the administration and support of our society. The more efficiently that can be done the better. If it is your money, then it is in name only, and should ideally be collected without you doing anything or being materially involved. GST for instance is built into the cost of anything you buy and takes away a percentage of your money as you use it. In contrast, a user pays scheme like road registration requires you to specifically go and buy a coupon or license for the right to drive and use the roads. (actually that is a poor scheme and should be replaced with a fuel tax – but that’s an argument for another time). So if tax systems are designed properly they should be unavoidable, everyone gets to pay their fair share, and the money involved is really only a book entry. It will show on a bank statement but that’s all, in a way it is the ultimate expense, money that is yours but not yours and is not seen or missed.

Saving – There is a very wise observation that noticed the only way to get rich is to spend less than you earn. It really is that simple, less money going out than coming in means you accumulate an increasing positive balance. Most of us struggle with that, either we don’t have good enough control of our expenses and other outgoings, or we are restricted by a low income, it is not easy but knowledge helps. If we can find a surplus of money over essential expenses then it becomes a choice about how we handle it from there, it is a bit like coloured sand. As a kid it was possible to buy test tubes with multiple layers of coloured sand in them. It is all sand but it was organized into bands of different colours, money is the same. We need to be able to divide our money up into various roles, categories and functions. And we all need to be able to save. That can be helped a lot by good public policy, but it also requires good habits and knowledge by everyone too. The positive results of turning money into savings is increased control of our lives. It is then available for emergencies or it can become another different form of money if enough of it is accumulated, it can become Capital.

Capital – This is just a particular form of savings. Some savings is just an accumulation of enough money in order to finance a large purchase, expenses money on a larger than normal scale. Savings that are retained and structured as capital is not spent per-se, it is invested. It has been said that an asset is something that will not just retain its value, it will earn and return you additional value, as opposed to something you own that does not return you any additional value but instead continues to cost you. By that definition, a car, a house or a boat are not assets as they typically will cost you money to maintain and might not even be sold for as much as you paid for them. Houses can attract a capital gain, but that is certainly not guaranteed whatever anyone may tell you. Therefore savings in order for it to be capital has to be utilized in a way that does not involve spending it in the normal sense. Savings that is capital is money in a financial instrument which is an asset you own that can be assured of a reasonable expectation of retaining its value, as well as earning a return. The basic and standard mechanisms for achieving that are: retaining your money as a cash deposit in the bank and allowing them to hire out your money to third parties, or buying shares in a company and getting a dividend return from them for your money. Thereby, your accumulation of money has been put to work in a productive and useful enterprise that creates additional wealth. This is a completely different use and understanding of money from all the rest.

Dividend/interest – (this is the other half/side of Karl’ s definition of interest)  So there are a few basic and a number of more complicated mechanisms for getting a return on capital. The more complicated schemes will often try to nett a capital gain in addition to a dividend or interest, but that often starts to slide over a very blurry line into gambling, which is something that needs very rigorous regulation. In any event, the ideal is that we would all have enough accumulated money/capital that there can be a sufficient return gained on it that could cover our requirements for savings, taxes, expenses or cash. What sort of percentage return you get on your capital is a bit of an open question. As in all the rest of life there are no guarantees on anything and inherently with money there is also the likelihood that someone somewhere is going to be trying to steal or scam your money. So both your capital and your dividends are always at risk. On the positive side, money is working for you rather than you working for money and you will be cash-flow positive from good money management.

(NB ~ just a note on taxes, capital and dividends/interest. There is no justification for taxes on capital or capital gains taxes. Certainly no government is going to cover anyone’s capital loses, so they have no rights to any capital gains either. But taxing dividends and interest is entirely justified and should be pitched at the same rate as GST. This is proper place for an income tax, and has the big advantage that it can be done easily, seamlessly and universally)

Coloured sand – so to return to analogies and coloured sand, money is money and it is all the same stuff basically, but it can be divided up into many different flavours, colours and functions and it is up to us to determine how we allocate it and use it. Some uses are just wasteful, some are dangerous and many are useful. It is better we don’t misuse and misapply it through ignorance. Used properly it can be very useful stuff indeed. It is both a store of value and a medium of exchange, hmmm did I cover those two functions…??? At any rate, moneys is a tool to be used and like any tool can be used or abused, the problems tend to come from it being a lot like a swiss army knife, it has so many functions it can dazzle and confuse. Hands up who has managed to cut themselves opening and closing blades on a pocketknife, haha. The same rule applies, the more careful you are and the better you know how to use the tool the better it will work for you.

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Billionaires

Global Ruling Class: Billionaires and how they “made it”

~ by Prof James Petras

Even as the world’s billionaires grew in number from 793 in 2006 to 946 this year, major mass uprisings became commonplace in China and India. In India, which has the highest number of billionaires (36) in Asia with total wealth of $191 billion, Prime Minister Singh declared that the greatest single threat to ‘India’s security’ were the Maoist-led guerrilla armies and mass movements in the poorest parts of the country. In China, with 20 billionaires with $29.4 billion net worth, the new rulers, confronting nearly a hundred thousand reported riots and protests, have increased the number of armed special anti-riot militia a hundred fold, and increased spending for the rural poor by $10 billion in the hopes of lessening the monstrous class inequalities and heading off a mass upheaval.

The total wealth of this global ruling class grew 35 per cent year to year topping $3.5 trillion, while income levels for the lower 55 per cent of the world’s 6-billion-strong population declined or stagnated. Put another way, one hundred millionth of the world’s population (1/100,000,000) owns more than over 3 billion people. Over half of the current billionaires (523) came from just 3 countries: the US (415), Germany (55) and Russia (53). The 35 per cent increase in wealth mostly came from speculation on equity markets, real estate and commodity trading, rather than from technical innovations, investments in job-creating industries or social services.

Among the newest, youngest and fastest-growing group of billionaires, the Russian oligarchy stands out for its most rapacious beginnings….

(read more)  http://www.globalresearch.ca/index.php?context=va&aid=5159

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(and more)  Questia

(and more)  NotionsCapital

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“Something is rotten in the state of Denmark.”

 

 

 

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Useful Endeavours

This Post is a sequel to – Surplus

I couldn’t resist it, so here is a list of things I have pondered on regarding where we might redirect the surplus wealth of our societies in order to achieve better outcomes.

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This is a tricky subject because it involves telling people who have money and power, and who in general have acquired it from the skill in which they have handled their assets, what and where they should be doing with it. That could be a dangerous exercise on several levels. What makes you think you have any better idea or any right to tell them what to do with their money?  Additionally, if you are going to interfere with their security and wealth, you are likely to provoke an antagonistic response.

Lets be clear though, not everyone lives their life trying to accumulate as much power and money as possible. There are people that do, and fair enough if that rocks their boat. But just because that is their thing that doesn’t mean the rest of us want everything to be all about money. Somewhere, somehow, there needs to be a balance between all the competing interests and factions, such that the actions of one group don’t improperly impact upon the interests of another, and that works both ways.

Capital needs to flow where it is needed and commerce needs to occur without excessive socialism leaching off the system. Capital needs to be constrained from intruding into social relationships where it is inappropriate. And most especially, gambling needs to be excluded from anywhere it has the potential to disrupt the normal business of commerce and society.

You are simply not going to be able to stop gambling, and why even bother, but it is critical that the surplus wealth that is available to gamblers isn’t allowed to become a market force that games the system in an attempt to manoeuvre advantage from momentum trading or other like “investment” strategies. They are not investment strategies at all of course, they are simply trying to play the market and swing money into any situation where there might appear to be a momentary advantage in the volatility of prices. Even better if your trading action can provoke such volatility and open the opportunity to increase the profit from the resulting even larger swings. Better for the trader that is. But it is gambling in the same sense that card counting in a casino is gambling. If you have markets that were established for the express purpose of providing investment funds for productive enterprises, why on earth would you want gamblers swamping the system with excess cash and interested only in provoking price swings that they can take a percentage cut from. Investment Banks like Goldman Sachs and all the big and small Hedge Funds you have never heard of, but which have been surging monumental amounts of money around the world for the last decade, have morphed from investors into just such gamblers. I will be writing a post on ‘Money’ shortly which will cover this, so I will try here to stick more specifically to the matter of redirecting surplus into genuinely productive endeavours and enterprises. Suffice to say at this point, Gambling needs to be something actively excluded from the normal process of investment of surplus capital and resources (albeit investing in new and unproven businesses is a gamble too of a different sort). So to that end we are left with defining those activities which do fall within the definition of productive and useful.

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One approach to that is start with the negative, eliminate those things you don’t want and see what you have left – I have probably already covered the things we don’t want done sufficiently for the meantime. Another approach is to look at the things we already do, but not very well and really rather need to do a lot better at. That would include: healthcare, education, pensions, prisons, housing, transport and communications. Finally that leaves the things we aren’t doing at all and yet we need to be.

Just a very quick recap on the first point though. We don’t need gambling on our capital markets or on our commodity markets. We don’t need speculation on asset classes blowing up into price bubbles. And we don’t need financial institutions growing so large that they become “too big to fail”. We could also probably do without a lot of the fluff and nonsense that is luxury brands too, but that’s not a fight you are ever likely to win and then who’s to say what people can or can’t spend their own money on…!

On point two: We do need investment and sound management in all the things we currently do. Unfortunately we don’t seem to be able to manage to achieve that very regularly. And yet, why not? Its not like it is really that complicated. A lot of the problem is vested interests and conflicting agenda’s. That can infact be settled reasonably simply with an appropriate regulatory regime. But it would require a significant adjustment process and acclimatisation to the new environment. Additionally it would need to be handled pretty comprehensively and concurrently. So a revolution is probably the only way you could get a big enough and fast enough change happening to be effective.

Arguably we already invest all the money we need to into our various social enterprises and it is the management of them that is the issue, not the money. However on the other hand there is the golden rule, the person with the gold makes the rules, so if the current manager isn’t doing the job well, then restructure the situation so that some-one else’s money and therefore rules operate. Better still, open the situation up so that there are a multitude of operators and providers. Most mismanagement comes about because there is a monopoly situation or there is no cost or penalty to mismanagement. There absolutely needs to be accountability for getting it wrong. Businesses or bureaucracies must be bankrupted or disestablished if they fail. Far too often they are bailed out or otherwise protected because no-one wants to pay the price of the failure. Of course you do still pay that price anyway, but it is just spread out in other directions and isn’t so obvious any more. That is a phenomena that needs to be crushed ruthlessly. Not only does it continue to provide a bad service, it ultimately costs more too. So, in respect of our term of reference – productive and useful – we can start first with the stuff we already do but need to do better.

My quick checklist was: healthcare, education, pensions, prisons, housing, transport and communications.

Healthcare: private capital can provide the bricks and mortar infrastructure easily enough and should be encouraged to do so. There is very little justification for having a state body being property managers or owners (this argument applies equally to schools, prisons or any other institution). The only caveat to that is that the State has often taken ownership onto itself in order to stop unreasonable cost escalations. That is a genuine issue, but the solution to it is to find a solution, not to just throw your hands in the air, say it’s too difficult and return to the status quo. Just as a for instance, Americans complain about the cost of medications in their country and point across the border to Canada where there is a system in place not too dissimilar from here in NZ and medications are much, much cheaper. Between unfettered capitalism and a particular regulatory regime, the cost of medicines in the US have climbed away to ridiculous extremes. Other countries have managed to harness capitalism and competition to their advantage and driven down the cost of medicines. Quite obviously it can be done. That same approach can, and needs, to be applied to the provision of all of the services I have listed. Of course that would also mean that government oversight and contracting would need to be of the best quality, but paying more for better managers would save far more than it cost.

Staffing of medical facilities could also be provided by private organisations. Indeed in NZ many healthcare providers are already just such institutions and businesses working alongside the public/state system. Just recently we have had an interesting example of a healthcare service here being contracted out to a private provider over the incumbent private provider after a competitive contract negotiation. Medical specimens and blood collection and testing has been transferred to the new provider to the tune of a nominal saving of some $14 million. The transition hasn’t been without its hiccups, but at least it is steps in the right direction and everyone should get better at the process with practise. So we have private hospitals, we have private medical service providers, we have private specialists and we have a public system. There is no reason why they cannot all get along well together, the only issue is cost control and that resides more to questions of monopolies and institutional capture than anything else. Therefore, let the private capital flow into the healthcare system and let the state concentrate on standards, regulation and transparency, not on trying to own and operate it all with a centralised bureaucracy. Yes you will have the occasional failure, but obvious and public failings can be noticed and addressed quickly, whereas previously the failures were unnoticed and ignored.

In general then the NZ healthcare system is actually slowly evolving in quite a positive direction. True, it could be substantially accelerated, but at least the philosophy is correct. In that respect, eduction and prisons can also be the subject of much the same process. There are other issues involved with these sectors which I will address in specific posts on them, but once again, the bricks and mortar doesn’t necessarily need to be owned by the state, let private investment flow into this were it can and reserve government to the management and oversight roles as appropriate.

The significant point is to direct private capital into as many areas as is practical and thereby both soaking up some surplus capital and also limiting the amount of tax dollar funding that is needed. It becomes a whole lifecycle cost equation and is not a trivial exercise, but there are a multitude of benefits and opening up the process to competition will do more to control costs than anything.

Transport and communications has its own tricky set of problems, mostly pertaining to the barriers to entry of capital and technical requirements. But competition is still possible and there is the potential to pour huge amounts of capital into such infrastructure projects. If you are looking at ways and means to soak up surplus capital, then here is a big opportunity, and even better it is patently useful economically. Telecommunications in NZ is already a large-scale industry, which invests staggering sums of money within a competitive commercial environment. The government is involved basically only insofar as regulating the industry. While any changes often seem glacial, that is probably just in the nature of large and capital intensive industries. There is another sector that has had proposals for private investment and which also seems subject to glacial movement, that is the building of privately financed roads. It was proposed that where there is an existing state owned road that is reaching the limit of its capacity and in need of upgrading or replacement, then there was the opportunity for a private sector company to invest in building an alternative second route that they could then charge a toll on. The public would get the option of a new and better route for a cost, or the free use of the old route with its attendant problems. Several corollaries were imagined with such a scheme. If it wasn’t planned and executed well, then the private owners could take a loss on it, so that would be a big incentive to plan and execute properly. Additionally it was conceived that the tolls would only last for so long as it took to recoup the initial investment, maintenance cost, plus an agreed return on that investment, and that when that was achieved the road would revert to state ownership. Such a project could have a lifetime of twenty or more years for the investors and be a very secure investment for the life of the contract as well.

I have left pensions and housing for last and bracketed then together for a reason. Anyone who is relying on governments to provide pensions into the future is dreaming. We already know that the statistical models used are either not truly sustainable, or point blank state that the funding mechanisms will be in deficit alarmingly quickly. Relying on taxing the current working population to fund the existing retired does not add up when projected into the future. Therefore the only sort of scheme that has any chance of success is a contributory savings scheme, such as ‘Kiwi-saver’ nominally is. Unfortunately Kiwi-saver does have a few issues of its own, but on the positive side at least they are things that can be rectified through intelligent policy. One criticism that was directed at a proposal for Kiwi-saver was that it should not be constrained by having to invest any particular percentage of its funds within NZ. That was actually a pretty stupid comment quite frankly. The most significant feature of Kiwi-saver is that it can be a vehicle for directing long term and stable investment into the NZ economy. NZ has always suffered from a lack of sufficient internal capital and Kiwi-saver could kill two birds with one stone here. On the one hand it is a large scale national savings plan, and on the other hand it needs stable and secure investments it can put its money into. Investing in overseas equities markets is not a stable and secure plan, it merely offers the potential for higher returns, which is what the critics were so interested in when they were looking to be allowed to invest off shore at will. If they can manage to swing a few good years of higher than average returns from that, then more people would be inclined to choose them as their approved Kiwi-saver provider and that would mean higher commissions and fees for the managers. Ultimately that is really only about skewing the playing field so as to favour the money men over everyone else, because you can be sure that the losses that might come along wouldn’t be born by them. We have had rather too much of that sort of behaviour already thankyou very much.

What is needed is for our national savings, our surplus, to be invested in something that usefully helps the economy and society as a whole and provides a secure return for those savings in retirement schemes. Those funds are currently directed into a number of areas by the finance companies who manager the schemes, and in general most are perfectly acceptable investments. But I have a suggestion for an investment destination that can deal with several domestic fiscal issues, killing two birds with one stone. We need to develop substantial investment within NZ and we need to address the situation where real-estate has become such a problematic financial component of the NZ economy. It has left us with both a bubble in housing prices and quite frankly a substandard stock of housing. Houses here are in general both badly built and unreasonably expensive. Somehow that dynamic needs to be reversed and corrected, thankfully it can be. It just wont be popular because it would directly impact on the kiwi love of speculating on property and houses. However ultimately it would benefit everyone.

My proposal is that NZ’s entire stock of rental accommodation should come under some new and very stringent regulations that would mean that essentially all existing dwellings would fail the rules and would not be eligible to be rented out as accommodation. The new rules would cover high standards of building, insulation, double-glazing, amenities and facilities, parking and security. Yes, that sounds like arrant nonsense, but only on the face of it, look deeper. Firstly it wouldn’t be applied over-night, but would have a transition period of some years, between maybe 5 and 10. All dwellings that could not be brought up to specification by that time would not legally be able to be rented. Either a landlord would have to invest the money required to improve the property to code or more likely would probably need to sell it off. That has benefits in several directions, no-one is left renting in substandard accommodation any longer, it increases the supply of houses onto the market for people looking to buy their own house, and it is a direct stimulus to the building industry. There would be a huge demand for newly built accommodation that meets the new and improved standards and that building program could be tied in with new local body rules that directed development into new higher density housing that worked in concert with public transport planning and improvements. Endless suburban and exurban developments are not in any public interest at all. Properly planned urban and inner-city apartment developments could contribute substantially to improved quality of life, reduction in traffic volumes, reduction in fuel and energy use and reduced Utility overheads. This would be a gigantic and stable investment opportunity for Kiwi-saver and other pension fund schemes, as well as any other managed fund scheme that wanted to be involved. It wouldn’t though do anything for your fly by night property developers who have just loved chopping up yet another outlying rural farm and putting up ticky-tacky boxes they call houses. Well tough, I have no sympathy for them anyway. As for existing suburbs, anyone who desperately wanted their own slice of quarter acre paradise would then be much more able to afford it, if that was their desire, as demand for that would have reduced.

Over say a 5 to 10 year period (or maybe even 10 to 20?) the building industry would go into overdrive to provide the dwellings that the new codes and regulations required. That would be a huge stimulus to the economy and would bring the average age of the nations housing down with a bang. Most of the material for that building work would be sourced domestically and the labour must inherently be domestically employed also, so there couldn’t be any of the outsourcing that has happened in other industries. The financial sector would of necessity be heavily involved too, which would provide the stability they need to mitigate the effects of the current financial crisis. A critical component of this scheme is that most existing houses would not only not meet the code requirements in the first place, they would be prohibitively expensive to retrofit for most landlords.

As it happen, most landlords should not be landlords anyway, they are undercapitalised and/or incompetent. Typically they are also likely to sell the property out from under a tenant whenever it suits them. At which point the new owner is likely to want vacant possession and the tenant is forced to pack up and move. That simply would not be tolerated in much of Europe and rightly so. There, rental accommodation is rental accommodation. If you own it you may sell it but the new owner is fully of the understanding that they are buying a rental property with a sitting tenant who is under no obligation to move. In fact the tenant has very clearly defined legal rights to the safe occupancy of their dwelling and I would advocate for the same here in NZ. Currently what we have is a situation where Joe Blogs with a half-arsed home loan buys a dingy old shack down the road, rents it out to a poor family and hopes that between the rent sort of covering the mortgage and some capital appreciation there might be a quick buck to be made. Rental accommodation needs to be a properly organised and professional business with adequate capital and management and the residences, houses and apartments need to be of good quality and maintained properly. It needs to be regulated properly by central and local government. And it is an industry that that has the potential to match the requirements of the pension fund business for stable long-term investment with a social requirement for housing that is equally stable and long-term. They are a natural match together.

What it is not however is a passport to high and glittering returns and profits. That is a mindset we all need to get over as soon as possible. Regular commerce and other practical, useful enterprises actually return maybe 10% per annum. Get used to it, that is normal life. All the rest was gambling and funny money that only ever existed on paper anyway. It was a bill of goods sold by the shysters to the credible and gullible which, wonder of wonders, hasn’t actually panned out per the prospectus.

On the final point regarding investing and allocation of our surplus to useful endeavours: doing things we aren’t doing at all but should be. I have some personal favourites: energy efficiency, alternative energy, distributed micro generation, intelligent power transmission networks, intelligent traffic control systems, R&D and expended business education initiatives. It can basically be categorised as innovation and initiative and comes on many levels, from research and development within a big enterprise to some-one starting a small business out of the back room of their house. In some ways that’s easy enough, R&D for instance can encouraged with a variety of mechanisms to facilitate investment. On the other hand, financing the start up of a new business is notoriously difficult. It would be lovely to think that surplus money and other resources could be channelled into supporting and incubating the next big thing, and maybe enterprise crèches could be a part of that. Too often though the new entrepreneur has grossly inflated ideas of what their business is worth, grossly inflated ideas of their own competence and a business plan that is sadly lacking. Sorting the nuggets from the dross is pretty much a case of having to leave it to natural selection to kill off the weak and incompetent. Harsh but realistic. The corollary of directing surplus resources to useful enterprises is that they need to actually be useful, in other words to make a profit. There are any number of activities we could or maybe even should be supporting, but this can get intensely political and if all it ends up doing is pissing money down a hole then that is actually some-ones hard labour and endeavours we are wasting.

What we should be doing is a very tricky concept really, treat it with caution and respect.

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