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Thursday, June 12, 2014

Leaders: Not the smartest in the room

People become leaders because they are popular, not because they are the most competent or intelligent.

This article, using statistical data, shows that there is no correlation between a CEO's pay and performance.  In fact, there might be an inverse correlation.  Among the CEOs who were in the top 50 percentile of performance based on total shareholder return during 2010-2014, there were more CEOs in the bottom third of pay than there were in the middle or top third of pay.  In other words, the lowest paid CEOs performed the best.

Carl Icahn is one of the most successful investors in the world, who has dealt with many CEOs as an activist investor.  He wrote a blog entitled "About CEOs – Anti Darwinian Metaphor – Survival of the Unfittest".  He explains that the people who become CEOs are not the most intelligent or competent.  Essentially, the most "likeable", do-nothing and non-threatening guy becomes CEO.  The following is from his blog:
"The way CEOs become CEOs in America is a travesty. This is one of our major problems.  I use the anti - Darwinian metaphor. The survival of the unfittest.
If you remember if you were in college the fraternity president was always there for you. When you had nothing to do or when you were a little depressed. Feeling down. You go to the club and the fraternity president would always be there. You wondered when he had time to study which he probably didn’t do very much of in school. He was there to sympathize with you if your girlfriend didn’t show up or didn’t call you back and you obviously sort of liked the guy because the fraternity president was usually a likeable guy
When the elections came up you would always vote for him. He had a couple qualities - the fraternity president. Politically, he was a survivor and he never made many waves. He did not promote controversy. Therefore when he went out into corporate America he was able to move up the ladder fairly quickly. Remember he survived, he didn’t make waves, and he wasn’t a threat. He kept moving up and up. 
Eventually he becomes the assistant to the CEO. The CEO had the same qualities. He’s a survivor. He’d never employ anyone underneath him who might be a threat. The boards like these guys… this type of CEO. The boards generally don’t own any stock (another problem with our system). The boards don’t really care to hold CEOs accountable. Remember it’s a symbiotic relationship. These guys pay the boards very well – they give the boards perks. The boards don’t care to hold them accountable because that might endanger the perks they love so much. 
When the CEO retires the assistant becomes the CEO. And remember what I told you. He’s a survivor. He would never have anyone underneath him as his assistant that’s brighter than he is because that might constitute a threat. So therefore, with many exceptions, we have CEOs becoming dumber and dumber and dumber. We can all see where this is going. It would almost be funny if it wasn’t such a threat to our ability to compete and to our economy in general."
Icahn is implying that the person who is the most popular, most politically savvy or most compatible with the existing leaders and boards, is the person who becomes leader.  Here is a recent CNN article with a quote from Icahn:
"So we're going to have morons running the companies soon. And we're sort of almost there with many companies."
Warren Buffett has been a Chairman since 1970 and has managed or dealt with dozens, if not hundreds, of CEOs in his career.  In his 1988 letter to shareholders, he wrote:
"Their performance, which we have observed at close range, contrasts vividly with that of many CEOs, which we have fortunately observed from a safe distance.  Sometimes these CEOs clearly do not belong in their jobs; their positions, nevertheless, are usually secure.  The supreme irony of business management is that it is far easier for an inadequate CEO to keep his job than it is for an inadequate subordinate. 
If a secretary, say, is hired for a job that requires typing ability of at least 80 words a minute and turns out to be capable of only 50 words a minute, she will lose her job in no time.  There is a logical standard for this job;  performance is easily measured; and if you can't make the grade, you're out.  Similarly, if new sales people fail to generate sufficient business quickly enough, they will be let go.  Excuses will not be accepted as a substitute for orders. 
However, a CEO who doesn't perform is frequently carried indefinitely.  One reason is that performance standards for his job seldom exist.  When they do, they are often fuzzy or they may be waived or explained away, even when the performance shortfalls are major and repeated.  At too many companies, the boss shoots the arrow of managerial performance and then hastily paints the bullseye around the spot where it lands. 
Another important, but seldom recognized, distinction between the boss and the foot soldier is that the CEO has no immediate superior whose performance is itself getting measured.  The sales manager who retains a bunch of lemons in his sales force will soon be in hot water himself.  It is in his immediate self-interest to promptly weed out his hiring mistakes.  Otherwise, he himself may be weeded out.  An office manager who has hired inept secretaries faces the same imperative. 
But the CEO's boss is a Board of Directors that seldom measure itself and is infrequently held to account for substandard corporate performance.  If the Board makes a mistake in hiring, and perpetuates that mistake, so what?  Even if the company is taken over because of the mistake, the deal will probably bestow substantial benefits on the outgoing Board members.  (The bigger they are, the softer they fall.) 
Finally, relations between the Board and the CEO are expected to be congenial.  At board meetings, criticism of the CEO's performance is often viewed as the social equivalent of belching.  No such inhibitions restrain the office manager from critically evaluating the substandard typist,
A recent finding explained in this article entitled Female 'A+' Students End Up Making As Much As Male 'C' Students supports Icahn's claims .  According to this article:
"If you want to make more money, it helps to do well in school, but it helps even more to be a white man."
"The study also found that minorities tend to benefit less dollar-wise from getting good grades than their white counterparts, even though [minority] high-school students with high GPAs are more likely to continue their schooling than white students with good grades."
Since most leaders are currently white men, other rising white men would be the most compatible to replace them.  People who are not white men, are not compatible.  There are a few exceptions, but generally this factor outweighs intelligence. It also helps if you play golf, can chat about sports (especially sports stats), look the part and go to the same church.

There is more evidence to support the claim that the leaders are not the most intelligent:
  • According to the US census, 5.1% of the American population are Asian.
  • According to Fareed Zakaria, admission to top universities is not based on 100% merit:
    • Many of the top schools discriminate by limiting their Asian populations to 16.5 - 20% with quotas.  (What would society think if NBA teams limit the black population in their teams to 16.5 - 20%?)
    • If admission is based on merit without quotas, Asians make up a far higher percentage of the student population:
      • 40% at Caltech and the University of California, Berkeley
      • 72% at New York City's Stuyvesant High School
    • "... the single largest deviation from merit in America’s best colleges: their recruited-­athletes programs. The problem has gotten dramatically worse in the past 20 years. Colleges now have to drop their standards much lower to build sports teams. ... A senior admissions officer at an Ivy League school told me, “I have to turn down hundreds of highly qualified applicants, ...because we must take so many recruited athletes who are narrowly focused and less accomplished otherwise...” William Bowen, a former president of Princeton University, has documented the damage this system does to American higher ­education—and yet no college president has the courage to change it."
If admission is based on merit, then 40-72% of the student population should be Asian.  So, what percentage of the leaders is Asian?  According to DiversityInc, 1.8 percent (or nine) of all Fortune 500 CEOs are Asian and based on their list, only one of them has an East Asian name.

Using Carl Icahn's metaphor, here are examples of "survival of the unfittest":
  • Ron Johnson, who oversaw JC Penney's decline
  • John Sculley, who oversaw Apple's decline
  • Carol Bartz, who couldn't turnaround Yahoo
  • Scott Thompson, who couldn't turnaround Yahoo
  • Thorsten Heins, who couldn't turnaround BlackBerry
  • Steve Ballmer, who watched Microsoft flatline and do nothing in the social media and mobile spaces
  • Tim Cook, who has not innovated much compared to Steve Jobs
  • Brooksley Born warned and tried to regulate the derivatives that caused the financial crisis.  Larry Summers, Tim Geithner and Robert Rubin fought against Born and got her ousted.  For this incompetence, all three got promoted.  Geithner became Treasury Secretary, Rubin went on the board of Citigroup and Summers became economic advisor to Obama.
  • George Bush, who failed at various businesses.  For him, appealing to the religious right and having a recognizable surname were more important.  Then he did a horrific job as president.
  • Senator Chris Dodd, who bragged about how the government created wealth for Americans through home ownership
  • The numerous leaders on Wall Street who drove their companies into bankruptcy, created the financial crisis and drove the U.S. into recession 
One exception belongs to entrepreneurs.  They became stellar leaders by creating their own companies.  Many of them would have never become leaders if they had to climb the corporate ladder or play (office) politics.  Steve Jobs created Apple and made it into the most valuable company in the world in 2012.  With his abrasive and abusive style in his early years, he would never have been promoted to manager, let alone CEO.

The glass ceiling is not limited to Asians and females.  It also applies to geeks and nerds as well.  If Bill Gates and Mark Zuckerberg had to climb the corporate ladder, they would never have been promoted either.  However, one can argue that they are among the best leaders in the world for having created such immense wealth for all stakeholders, as they created some of the most successful companies in human history.

Many other leaders, who became leaders by climbing the corporate ladder and who were articulate, well-dressed and looked the part, accomplished little other than to milk the cash cow.

Other victims of glass ceilings include singles, gays and interracial-couples.  Conservative companies, such as IBM at one time, prefer married men, even though there is no proof that married men are more productive or intelligent than single men.  Evangelicals hate gays.  Some religious groups, such as the Mormons at one time, believed that interracial-couples should be punished with death.

In politics, there is even less of a requirement to have intelligence.  The overriding factors for success are popularity, public speaking skills and knowing how to tell people what they want to hear.  There have been politicians in government who are still students who have yet to graduate.  Many of them have education or career experience with questionable value or relevance.

As explained here, the most important job for the politician is to manage the economy.  Yet, most politicians know little of economics or business, from either an educational or experience standpoint.  Obama has amazing public speaking skills, but did not study business and has less business experience than a cashier at McDonald's. You likely know much more about business and economics than Obama.

Before you vote at the next election, look up the educational background and career experience of the politicians.  You will be dumbfounded at some of them.

Many of you are probably intimidated by people in leadership or authoritative positions.  Generally, this is caused by the belief that the leaders are more competent, intelligent or knowledgeable than you.  However, this is not accurate.  Hence, many voters rarely contact their politicians to raise their concerns or wishes.

According to Dan Ellsberg on ExposeFacts, "all governments lie" and when governments are not held accountable, "disastrous" policies happen such as "Vietnam", "Iraq" and "Climate".

During elections, politicians make promises.  Unfortunately, they are not bound by legal contracts to these promises.  One can argue that they should be.  Short of this, voters such as you need to ensure that they keep their promises.  If you voted for a politician based on his/her promise and he/she breaks that promise, it is akin to fraud.  You need to contact them with your complaints, otherwise they will feel that the people are not against their broken promises or changed policies.

You should never be intimidated by leaders in business or politics.  You should never be reluctant to voice your concerns to your politicians.  They are not leaders because they are smarter or more competent than you.  Quite often, they are less so. They are leaders because they are more popular, or in the case of politicians, because they chose a different career path as well.

Tuesday, January 8, 2013

The Economy

OXFORD ENGLISH DICTIONARY DEFINITION: The state of a country or region in terms of the production and consumption of goods and services and the supply of money OR The careful management of available resource.

WIKIPEDIA DEFINITION: An economy consists of the economic system of a country or other area, the labor, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area.

The above definitions are extraneous. The goal of this article is to define the economy and outline it's structure in basic terms.

BASIC DEFINITION: The production, consumption, and distribution of goods and services of a region. 

Simply stated:
  • the production is the output* or the value added to the economy
  • the consumption is the intake of production or the cost to the economy
  • the distribution is the outflow of production or the allocation of output* to citizens of the economy.
*In theory, each unit of output corresponds to a unit of income.

To outline it's structure, we need to quantify the economy's Production and Consumption by determining each of it's citizens consumer/producer status and social demographic and grouping them accordingly as
  • Children/Students net consumers
  • Public Service Sector
  • Private Service Sector
  • Construction net producers
  • Manufacturing net producers
  • Agriculture net producers
  • Cash Economy
  • Unemployed with benefits net consumers
  • Unemployed no benefits net consumers
  • Social Assistance net consumers
  • Retired Pension Plans net consumers
  • Retired Social Assistance net consumers

Note that the groups above not noted as net producers or net consumers can vary between net producers or net consumers group type   Group types are defined as
  • net producers produce more than they consume
  • net consumers consume more than they produce

The Service Sectors groups can be classified as net producers only if the services of the group provide sufficient efficiency savings to the UN-leveraged values of all their related products and/or services. During the last 50 years, the Services Sector proportional share size of GDP of most developed democracies increased dramatically. Subsequently, they increased the leveraging levels of products and services in their economies. Deservedly, their economy's Services Sectors are net consumers.

Below is the revised grouping for these democracies
  • Children/Students net consumers
  • Public Service Sector net consumers
  • Private Service Sector net consumers
  • Construction net producers
  • Manufacturing net producers
  • Agriculture net producers
  • Cash Economy
  • Unemployed with benefits net consumers
  • Unemployed no benefits net consumers
  • Social Assistance net consumers
  • Retired Pension Plans net consumers
  • Retired Social Assistance net consumers

SUMMATION: In-order to mitigate outflows of capital and the loss of jobs in manufacturing, the economies of most developed democracies became more serviced based and credit dependent. As outsourcing and advances in manufacturing technologies exasperated the losses of jobs, governments stimulated sectors of their economies and expanded their size. As a result, these democracies are subsidizing their economies and indebting their future generations.

CANADIAN PERSPECTIVE - The decline of net producers and rise of net consumers 

The Services Sector as a percentage of GDP has increased from about 50% in 1960 to about 70% today.and now employs over 75% of workers. Meanwhile, the share of Manufacturing as a percentage of the Canadian GDP has been declining since the early 1940's.

The Canadian economy has undergone a broad structural shift.  To illustrate this, the Village of Canada Microcosms below quantifies the decline of net producers and rise of net consumers in Canada.

Village of Canada

The population of Canada was approximately 18,500,000 in 1962, 25,000,000 in 1982 and 35,000,000 in 2012. Listed below are the 1962, 1982 and 2012 village representations of a 100 person Canada. Each person listed in the 1962, 1982 and 2012 village columns is the equivalent of 185,000 (1962) or 250,000 (1982) or 350,000 (2012) Canadians with similar social demographic.

1962 1982 2012


Public Service Sector
Private Service Sector

Cash Economy

Unemployed with benefits
Unemployed no benefits
Social Assistance

Retired Pension Plans

Retired Social Assistance

Net Consumers   Net Producers




































The citizens of the Village of Canada are citizens of the Village of the Damned.


When thinking of the economic distress afflicting major democracies, 'house of cards' may come to mind.  But, if you think in terms of hierarchy of economies, 'thick stone mansions with thin wood foundations' is more applicable. This analogy will make sense after reading below to the end.

What is the hierarchy of the economy?   Essentially, it's the evolutionary order of economic activities determined by the needs of early humans and/or human communities.
  • food, water
  • shelter
  • clothing
  • manufacturing
  • education
  • transportation
  • banking
  • retail
'Food, water, shelter, clothing, manufacturing' are productive activities whereas 'education, transportation, banking, retail' are service activities.  In essence, 'production' activities trump 'service' activities.  The core value of an economy comes from 'Production' whereas 'Services' leverage the value of Production. The most common example of this leverage is when a retailer sells a product at a price above the wholesale price. Even a financial service offered to consumers is subordinate to the production of something. 

'Every service owes it's existence to production. There are no exceptions.'

The level of wealth generated in an economy are dependent on 2 factors.
  • efficiency
  • credit
Efficiencies from automation, economies of scale and cheap labor improve production of goods and some services whereas credit (money supply) boost predominantly the services sector of the economy.  Inherently, the excessive debt obligations from excessive credit can impede the economy.

The growth of the service sector industries of major economies are attributed to credit expansion policies of their central banks. Subsequently, their services sector industries have over leveraged the wealth from their production sector industries. They are too big to sustain.

Production is the foundation of an economy.  Services are the walls and roof of an economy.  Most major economies are like 'thick stone mansions with thin wood foundations'.

Research sources

The views and opinions expressed in this article are strictly those of the author.

Sunday, September 16, 2012

Screwing the Young, Over and Over Again

Thanks to the following, governments, which consist of mainly baby boomers, have successfully screwed the young:
  • Stealing from Children via HUGE government debts in the hundreds of billions.  Children and grandchildren will pay higher taxes, receive less spending from the government or lose wealth due to inflation if the government has to print money to pay for the debt.
  • Massive Manipulation of the Housing Market by the government to create and fuel Housing Bubbles.  (Canada has the longest lasting Housing Bubble in Western history.  Home prices are now out of reach for most young people.)  The ones who borrowed like crazy to get in are mainly the younger generation.  In the U.S., they have lost their shirts.  In Canada and Australia, they will now be far poorer than the previous generation, as they spend the majority of their income for their homes for the majority of their lives.

    Bubbles, such as the Dot Com, Oil and Real Estate bubbles, are extremely disruptive for any country.  They usually make some people filthy rich and some people filthy poor.  After the Housing Bubble burst in the 1990's in Hong Kong, people jumped out of windows.  After the stock market bubble burst in 1929, people in New York jumped out of windows. Governments should do everything they can to prevent or suppress bubbles.  Instead, governments did everything they can to create and fuel Housing Bubbles.

    The role of the central bank is to maintain price stability by fighting inflation.  The single biggest purchase for most people is their home.  In bubbles, home prices inflate astronomically thanks to government policies.  This is huge inflation for the young.  This means that the head of most central banks should be fired for gross incompetence.
  • Our Fake Economies have been fuelled by borrowing, spending and debts.  The previous generation have enjoyed an economy and standard of living at the expense of the future.  Eventually, this borrowing and spending will slow down.  When it does, the economy will do the same, at which point the younger generation will suffer when they run out of money to fuel and support their economy.  Europe serves as a good example of this.  If the borrowing and spending does not slow down, then the government will have to print money, which again creates inflation and steals wealth from the whole population at that time.

    According to this article:
    "One third of Americans now count themselves part of the lower-middle or lower classes, according to a report from Pew Research Center, including nearly 40 percent of young people between the ages of 18 and 30."
    When a country suffers from the hang-over of too much debt, the young is especially hit hard.  50+% of the young are unemployed in Spain and Greece.  Hence, the younger generation will suffer for decades to come.


If you are part of the younger generation, speak up.  Complain to your politicians.  Send links from our site to your politicians, friends and family.  If you do not speak up, the older generation will continue to screw you, because most of them do not even know that they are screwing you.


Stealing from Children

Housing, the Most Manipulated Market in the World

Fake Economy

Sunday, June 10, 2012

Time is Wealth

We tax people based on their wealth.  But who defines wealth?  How is it defined and is it fair?  A person may be wealthy or not wealthy depending on what you measure.

The common definition of wealth is similar to net worth, which is defined as assets minus liabilities.  Therefore, if a person has a lot of assets and few liabilities, the person has a high net worth or is wealthy.

What is normally defined as assets include cash, cash equivalents or something that can be easily converted to cash.  These include:
  • money
  • real estate
  • car
  • boat
  • stocks
  • gold
  • companies
  • etc.
The government uses the above definition of wealth to determine tax rates.  The majority of taxation is based on how much money people are making in income.

However, the above definition of assets is limiting.  Assets can be defined as having anything that provides value.  Other types of assets are never considered.  These include:
  • leisure/spare time
  • health
A person can be wealthy with time.  Time has value.  This is reflected in "overtime payment".  After working 40 hours in a week, the worker will value the 41st hour more than the 1st hour.  Therefore, the worker will demand a higher hourly rate for working any hour after 40 hours.  Similarly, a person, who has one hour of leisure time per week, will value his/her leisure hour much more highly than a person who has 20 hours of leisure time per week.  Conversely, a person who has 30 hours of leisure time is wealthier than a person who has 10 hours of leisure time.  This is true for anybody in the world.

Society and taxation systems do not include time in the calculation of wealth.

Let us assume that there are only two people in our entire country:
  • Jane works 40 hours a week
  • Tom works 40 hours a week
Let us suppose that Jane decides to increase her work hours to 60 hours a week, by working until 7 PM, getting to the office by 7 AM, or calling/entertaining more prospects to make more sales and commission.  If Jane works in a factory, let us suppose that Jane works overtime to make extra money.  Effectively, she has sacrificed and converted her leisure time to money.

Tom does not want to work more than 40 hours a week.  He rather spend that time watching TV, going to the beach, camping, picnicking, watching sports with his friends, visiting relatives, surfing the internet, going to the bar, watching movies with dates or playing video console games.  He gets enjoyment and value from these leisure activities.

In our taxation system, Jane will be taxed more but Tom will not.  The government thinks that Jane is wealthier without having made any sacrifices.  Do most people think that working 60 hours a week is not a sacrifice?

For simplicity, let us assume the following:
  • Each hour in the first 40 hours of the week is worth $10 to both Jane and Tom
  • Jane and Tom are paid $10 per hour worked in the first 40 hours, or $400.
  • Let us assume that each hour of leisure time after the first 40 hours worked is worth $15 per hour to both Jane and Tom.  Therefore, the next 20 hours is worth $300 to both Jane and Tom.  If either of them wants to work these overtime hours, they will be paid $15 per hour.
  • Let us assume that we have a flat tax system and that any income is taxed at 20%.
How much wealth do Jane and Tom have?  If we only count money in determining wealth, then Jane is wealthier:
  • Jane:  $560  ($700 - $140 of tax)
  • Tom:  $320  ($400 - $80 of tax)
If we include time in determining wealth, then Tom is wealthier:
  • Jane:  $560
  • Tom:  $620 ($320 of take home income + $300 of leisure time)
However, the above is using a flat tax system, which most countries do not use.  They use a progressive tax system.  Let us assume that the average tax rate is 40% for income above $400.  Therefore, here are the wealth of Jane and Tom:
  • Jane:  $420  ($700 - $280 of tax)
  • Tom:  $320  ($400 - $80 of tax)
If we include time in determining wealth, then Tom is much wealthier:
  • Jane:  $420
  • Tom:  $620

When you add in time in calculating wealth, then those who you think are poor, are wealthy.

The situation gets even more distorted.  Governments take money from higher income earners and spend it on lower income earners.  If Jane and Tom are the only two people in our country, then this means that part of the money taxed from Jane will be spent on Tom.

For simplicity, let us assume the following:
  • The government will take half of the $280 of income tax that Jane paid, and spend it on Tom.
Therefore, Tom is wealthier whether we include time or not in our wealth calculations.  Here are Jane's and Tom's wealth when time is not included:
  • Jane:  $420
  • Tom:  $460 ($320 + $140 of government spending)
If we include time and government's distribution of wealth, then Tom is significantly wealthier:
  • Jane:  $420
  • Tom:  $760 ($320 of take home income + $300 of leisure time + $140 of government spending)
Is this fair?  Should we not include time in determining wealth?

Does our taxation system motivate or deter people from working harder?

If time was treated as an asset as well, then Tom's time should be taxed and part of that should be given to Jane.  Even though most people want a full-time job, there are some people that value leisure time so much, that they prefer to work less than 40 hours a week.  Should their time to be taxed and given to Jane?

Some may argue that very wealthy people, such as billionaires, should be taxed more.  We agree.  However, billionaires are still rare.  We are referring to the majority of workers and according to the New York Times90% of households make less than $140,000 per year.  Therefore, 90% of individuals make significantly less than $140,000 per year.  90% of individuals are like Jane and Tom.  Are we treating Jane and Tom fairly?

Entrepreneurs are the main source of (money related) wealth creation for any country in the world.  The average entrepreneur makes much bigger sacrifices, such as working more than 60 hours a week, spending his/her savings, making no income, taking huge risks such as borrowing money from his/her house or credit cards, risking his/her friends' and family's money, etc.  According to this blog about start-ups:
"I slept at work again last night; two and a half hours curled up in a quilt underneath my desk" 
"I have no life. I never see any of my non-work friends, and I’m wasting away my one and only youth.  I ought to be out doing fun things and active things, the kind of things I won’t be able to do when my mind and body finally decay.  But instead I’m stuck inside under fluorescent lights, pushing bits around inside a computer in ways that are only interesting to other nerds.  I glanced at a movie listing and there are movies out that I haven’t even heard of.  How did that happen?  That freaks me out."
"This job is destroying my body. This can’t be worth it."
"It’s a saturday night, and I’m in my cubicle" 
"I’m so f_cking burnt. Existence is suffering."
Not only do entrepreneurs sacrifice leisure time, they also sacrifice health according to this blog:
"Maximizing your chance for success means sacrificing health and family."
When these entrepreneurs fail, which the far majority do, they become much poorer compared to somebody who had a regular 9-5 job.  Nobody hears about them or from them.  When a tiny few entrepreneurs succeed, they become CEOs, building big companies and hiring thousands of people.  They become famous and rich due to their equity in their companies.  The rest of the population tend to think that it is unfair that these CEOs have so much money.  Society feels that we should have a progressive tax system to tax them at a higher percentage rate.  If we should do this, should we have taxed Tom's leisure time and health to give to these entrepreneurs?

Thursday, June 7, 2012

Printing Money = Stealing

When governments spend too much money and get into a debt crisis, there are two ways to solve it:
  1. Run surpluses by reducing spending, increasing taxes or growing the economy to generate more tax revenue.  Stimulus spending is the method usually attempted to grow the economy.  However, this method is near impossible to do when the country has a debt crisis and has no money.
  2. Print money.
As countries like Greece and France have shown, when their voters replaced pro-austerity politicians with anti-austerity politicians, democracy will not allow countries to run balanced budgets very often or at all, let alone budget surpluses.  Therefore, most countries have ran budget deficits for decades.

When debt levels become too high, unmanageable and become a crisis, countries eventually resort to printing money.  This is what many countries have done, such as African countries and South American countries in the 1990's.

What most people do not realize, is that printing money, by the government or anybody, is stealing money.  When the government prints money, it is no different than when a criminal uses a photocopier to counterfeit money.

As an example, if anybody counterfeits or prints $1 million, did he create $1 million of additional wealth for his country?  No.  The country's money supply increased by $1 million, but the quantity of goods and services did not increase.  Therefore, the prices for the goods and services will increase, which creates inflation.  The amount of goods and services that you can buy, decreases.  Effectively, the criminal stole $1 million of wealth from you and the population.

Let us use a simple example to prove this.  Let us say that our country has three people:  Tom, Dick and farmer Harry.  Our country has $4 in total money supply.  Tom has $2 and Dick has $2.  Farmer Harry can grow four oranges only.  Therefore, Tom can pay $2 for two oranges and Dick can pay $2 for two oranges.  Instead of this scenario, let us say that Dick counterfeits an additional $4 by printing it, doubling the country's money supply to $8.  Tom still has $2, but Dick now has $6.  Dick can now afford to buy more oranges.  Farmer Harry will now sell three oranges to Dick for $6 and one orange to Tom for $2.  The total wealth of the country has not changed.  It still has only four oranges.  However, by printing money, Dick has stolen wealth from Tom.  Tom became poorer.  This is essentially what happens when a criminal or the government prints money.

Some people think that printing money will not only solve debt problems, but also economic problems.  If this is the case, then there should not be any poor countries in the world.  Every poor country should simply print a lot of money and become rich.  Many countries have actually tried this throughout the world and throughout history.  All they have done was increase their money supply (not their wealth) and created inflation.  Some printed way too much money and created hyper-inflation.  This was the case with Zimbabwe when they experienced inflation in the thousands and millions of percent.  One $1USD became equivalent to $Z2,621,984,228 (source).  One cannot buy very many oranges with a Zimbabwe dollar.

Some people say that printing money is a way for the government to tax the population.  However, a tax is when the government tells you exactly how much wealth they are going to take from you.  When they print money, the government does not tell you that.

Stealing is defined as taking something from somebody without that person's knowledge or approval.

Some will argue that it is okay for the government to print money during recessionary or depressionary times because the money supply is shrinking (deflation).  This is what the U.S. Federal Reserve (Fed) has been doing when they printed billions to buy U.S. Treasury bonds.  This is known as Quantitative Easing.  The Fed is injecting money into the money supply.  The U.S. Treasury uses the money they receive from the Fed, to fund the spending and budget deficits.  This may be okay if the Fed eventually sells the bonds back to the U.S. Treasury to take the money back out of the money supply.  However, the U.S. government has to run surpluses to be able to do this, otherwise they have no money to buy the bonds back from the Fed.  As we have seen with most Western governments, democratic voters will not allow budget surpluses to happen.  Therefore, it is highly unlikely that the government will ever buy the bonds back and therefore, the printed money may never be pulled out of the money supply.  If this is the case, then the government essentially has stolen your wealth via inflation.

This is what will eventually happen in Europe.  Pro-austerity politicians are getting fired.  Therefore, they are not going to be running budget surpluses anytime soon.  The debt crisis can only get worse if their debts continue to increase.  Eventually, the crisis will become so severe that the European Central Bank (ECB) will have to print money and lots of it.  This money will be given to the European governments or banks.  The media will refer to this as "capitalizing the banks", "providing liquidity" or "lending money to the banks or governments".  When the borrowers (governments and banks) have no way of paying back anybody who lends to them, this is more like the ECB is printing money to give to them as gifts, not as loans.  Hence, the ECB will be stealing money from the European population.

This is not the only way the government steals money.  They are stealing trillions from children as well.

Read more:
Stealing from Children  
Europe's "Stealing from Children" goes into Overdrive
Socialism vs Capitalism 
Fake Economy 
Fake Wealth
Housing, the most manipulated market in the world

Wednesday, December 14, 2011

Sustainable Economics 101

Markets, which are fair and free, eliminate unsustainable products and services. The problem for the world's economy is that the world's markets are far from fair and free.

Just as evolution's natural selection eliminates unsustainable biological traits, economies need to purge themselves of uneconomical activities. At present, economic policies and subsidies reward failures and punish successes. They limit the natural free flow of capital that would go to profitable products and services. Economies need to eliminate these policies and subsidies and allow economic natural selections to occur.

Economies also must be balanced and policed. Regulations and oversight that deter predatory competition and greed need to be enhanced and aggressively enforced. If governments worldwide co-operate and implement these measures and other measures that address the world's social and political disparities and environmental limits, a balanced sustainable prosperous worldwide economy could come to fruition.

Unfortunately, the past 30 years have seen developed, democratic economies relying more and more on deficit spending and credit creation to offset economic losses to new emerging economies. They have subsidized their economic growth by stealing from future generations. They have mortgaged their children!

The economic crisis cannot be solved with more bailouts, subsidies and quantitative easing.  Real change is needed.

Monday, December 12, 2011

China... Bubble of all bubbles

China's economic growth has been unprecedented. Many economists forecast that within 1 decade, their GDP will eclipse the GDP of the United States. But these forecasters overlook the Chinese policies that created the biggest economic bubble in history and the likelihood that this bubble will either deflate slowly or burst. Regardless of the degree of bursting, as a consequence, many global economies will inevitably collapse.

The biggest component of their economic bubble is construction and building, principally Real Estate.  It's crashing would play out worse than the 1989 Real Estate crash in Japan. Before their bubble was started, Japan's economy was robust and balanced. When their Real Estate bubble started growing, a significant percentage of their population were able to buy into the early stages of their Real Estate bubble and economically prosper. In China, a much smaller percentage of their population, the connected and early adopters of Chinese economic reforms, benefited and prospered from the rise of Chinese Real Estate. Even though the rising values of Chinese Real Estate were not predicated by a credit bubble, the rate of speculation quickly drove up prices way beyond what the majority of the growing middle class could afford. Combined with the systemic corruption of local government officials, a Chinese Real Estate crash could be socially explosive.

It may be that Beijing has lost control of their economy and is implementing measures to delay and deal with the coming crash and social unrest. It may also be that other countries are implementing measures to delay and deal with the coming crash and social unrest their countries.

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