Wednesday, June 06, 2007

Wealth , Riches and Money .

Wealth , Riches and Money .
Andre Willers
20 May 2007

Synopsis :
By use of brutal reductionist arguments , we find the underlying relationships between Wealth , Riches and Money . Only Homo Sapiens (not Ants , etc) economies are considered .

Discussion :

Wealth :
The end-users define wealth .
The entities that create the definition of wealth are Homo Sapiens . As biological beings they have an irreducible rate of using Air , Water and Food . (Ref Maslow) .
This is the brutal reductionist part , since we only consider these three factors .

For the species to remain in existence , they need to be sustained at minimum levels at least for a term equal to the time it takes for children to start having children of their own . (Say 15 + 15 =30 years .) .

Most human societies have evolved another term (the Grandmother effect) , and optimizes on the grandchildren ( ie 45 years of good nutrition is needed .)

The crucial points :

Wealth is a process , not a state .
A Monetary system that does not destroy money to mirror the underlying wealth fluctuation , locks the society into a limited number of states , and , even worse , a fixed sequence of these states .
Systems which are non-linear will hunt for stability (ie if the control system is monetary , it will attempt to bring the monetary system into a one-to-one correlation with the wealth system .)
If Humans are in the loop , the system is non-linear .
The System will try to destroy Money to keep it in synchronization with Wealth .

A human is wealthy if the rate of income is bigger or equal than the rate of expenditure . The difference is stored if the society has the mechanism for storing wealth (ie air , water , food equivalents) .

Stored wealth is defined as riches .

A hunter-gatherer is wealthy if his food intake exceeds his body’s rate of usage .

Later on , when surpluses could be stored , the concept of riches = saved surplus evolved . Eg Egyptian or Mesopotamian food surpluses .
This is Capital by classical definition .

A surplus means trade . This led to Money .

Money is an analogue counter of Saved surplus wealth (Capital) , not of Economic Activity . The Free Market is then the most efficient way of apportioning surpluses . But it breaks down (ie liquidity vanishes) when there are no surpluses . Then central planning is more efficient to ensure the survival of what is deemed essential .

Hence the well known mechanisms of war-time and famine rationing . Marxism evolved out of the famine-type conditions caused by the Bust part of Boom-Bust monetary based economies . These cycles developed partly because the monetary systems could not mirror the economic activity , as money was not being destroyed .

Humans also optimized on making money instead of creating wealth , under the impression that the two are synonomous . But they are not . They can only be interchanged if there is a large surplus of wealth (eg food) . Note that the Free Market locks up into illiquidity long before the surplus is zero . This is well known from famines in India and China . (The rich merchants lock up their warehouses once they know that no new supplies are coming in . Even if a lot rots , they could still make more money by selling the remainder at hugely inflated prices .
The State , Mandarins , Empire etc has to step in .)

Once again , Wealth is a process , not a state .

This was how it developed right from the start . For instance , taxation in the late Roman Empire and Medieval periods worked quite well on kind , without money .

This confusion had an unfortunate side-effect : Wealth is used up day-by-day by human metabolic processes . Money has no equivalent destruction process (since it originally evolved to count only surpluses) .

Original coins or paper notes tied to the gold-standard ( ie British pounds circa 19 th century) had a physical life-time , but modern electronic money lasts forever until it is deliberately destroyed .

The politicians could not bring themselves to do this .

Hence the present (2007) system where a Central Bank creates money , and lends it out at the repo rate , but does not actively destroy it . This causes severe distortions when money is tried to be used as an economic activity indicator .

This argument has to be seen over a number of transactions:

A very simplified Example will clarify this :

The Central Bank lends $10 trillion to distribution banks at 3% pa (the repo rate) for 1 year . They lend it out in turn at 10% for 1 year .

New higher repo rate :
(Say from 3% to 5%)
After one year , the distribution banks repay the $10 trillion plus 3% , then promptly borrow only $8 trillion (less than the previous amount because of the higher repo rate) at 5% (the new higher repo rate) . The profit (7% = 10%-3%) accumulates in their capital account .

There is thus an effective destruction of $2 trillion due to free market forces caused by the increase in the repo rate . This destruction of money is not offset against any accounting item , and is a singularity point in the accounting system . But note that the capital growth in the Distribution Banks’ Capital Accounts remain .

New lower or same repo rate :
The same argument as above , except that there is now no destruction of money .
But the concentration of capital in the hands of the distributing banks continues .

Note that in all three scenarios above , capital increases in the hands of the distributing banks , but in only one is money destroyed . This leads to asset inflation .

Inflation strategy :
The present recipe is to aggressively increase repo rates , which does destroy some money in circulation . Then it falls (the whole aim) . But it concentrates capital , mainly in the hands of the distributing banks and other “haves” . This gets worse when rates have to rise again (the system is never stable) . The result is asset inflation.

The results can now be seen planetwide (due to globalization) .
Wealth per global capita (ie food , water ,air) is increasing planetwise , mostly because of decreasing population growth in North America , Europe , Russias or China . Other areas like South America , Africa , India , Indonesia are becoming more impoverished in real wealth terms . In the mean time , money (ie the number of units of dollars , yen ,yuan ,etc) are increasing . This causes a major asset inflation mostly in the hands of the distributing banks and other “haves” . Property and share prices shoot up into unrealistic levels , where no rental that has to be paid from non-shareholding income can compete .

Eventually this spills over into the price of food-producing areas , which stimulates inflation in food prices (Cf the price of wine). Ie wealth decreases per capita for a non-shareholder . Social unrest increases and Fundamentalist Religions (which arose out of exactly similar conditions at the fall of the Roman Empire , Christian as well as Muslim) resurges .

The system has very cleverly recreated an aristocracy and a starving proletariat .
Does this sound familiar ?

This system limps along as long as there are no severe shocks .

Capital accumulates with Credit .

A basic principle .
This is equivalent to statement that large cross-subsidising concerns can weather temporary downturns that wipe out smaller individuals .

Ho-Ho-Ho !
Many companies have followed the pernicious advice emanating from the US economic gurus to create profit centers . Once they have conveniently disentangled their affairs , the predators , in old times called corporate raiders , but now usually in-house management , do a leveraged buy-out . The finance is done on debt from credit companies (banks) on collateral from the accumulated capital as described above .
Also known as private equity . The planet is awash with capital (ie large numbers of currency units , which should have been destroyed , but were not .)

The other factor .

Why did limited liability companies evolve ?
These are after all the defining characteristic of Western Civilization .
The humble company is the generator of the Western world’s riches .
And the Stock Exchange is it’s handmaiden .

Answer :
It is cheaper to finance expansion into an envisaged increasing market via a Stock Exchange than borrowing or issuing bonds , since buyers of the shares think that the increase in the capital value of the share due to increased market share will make up for the smaller dividend .

This has been generally true since Jethro Tull invented the seed-drill in 1701 . There has been a sea-change in this attitude .

The Market is increasingly beginning to think that the present growth rates cannot be maintained . More money can be made by moving out of equities into bonds and promises to pay by companies and governments , hoping that they will survive the coming upheavals .

A side effect of this is that there is a large surplus of capital sloshing around . These are huge systems , which do not turn on a dime . One of the symptoms of this that the capital available for Private Equity buy-outs increases.

Another way of looking at it , is that the low birthrate in Europe and US means that the capital growth component of shareholding is worthless and everyone is scrambling for income . This is exactly what Private Equity is doing .

The social consequences are devastating .
The middle class are excluded from mobilizing capital . Exeunt middle class . Back to the aristo’s and serfs . Social mobility between classes decreases to nearly zero .

The small man can only invest his little surplus in an enterprise where the most lucrative returns already belong to a small group . He can only be mercilessly exploited by the whole system , which has ground to halt in terms of wealth .

Sounds familiar ?
This happened towards the last two centuries of the Roman Empire

Remember Credit concentrates Capital .
Hence the violent Christian and Muslim abreaction to interest rates .
Their original founder members had all been screwed by the Roman banking system into penury .

The History of the Humble Company.

How to destroy money without beggaring the shareholders .

The price fluctuations in the stock market made certain periods of unrealistic pricing possible . The shares were overpriced .These made money destruction possible , thereby making the system more realistic as far as using a monetary system to control an economic system . See below

Note , that if Company builds a widget and pays cash , the number dollars (the money) does not decrease . Money is not destroyed . However , if it uses credit (like an inflated share price based on unrealistic future income) , then if it crashes , the number of monetary units in circulation does decrease . Money is destroyed .

In accounting terms , the debt must be offset against capital . Capital being the saved surplus of wealth . Wealth eventually being based on something like food . Do you see how it worked ?

It made it possible that an exuberant stock market can exist . That the same individual can risk small amounts on say twenty different stocks , win on two and lose on eighteen and still survive and maybe come out ahead . Hence the extremely exuberant stock markets of the 19th century .

Money was destroyed in unsuccessful enterprises , since most of these involved building something physical , using credit based on the stock price (cf Suez Canal)

An intriguing speculation is that the 19th and 20th century propensity for very large ,very expensive science projects with little return is based on the attempt to destroy money . As any real scientist could have told them , Blue Sky projects have an even higher return rate than venture capital enterprises .

Hence the old standbys : weapons and war . The more useless and expensive , the better . The system is not creating a lot of new wealth (ie food , etc) , but it certainly is creating a lot of extra monetary units . They have to be destroyed , but the politicians do not have the courage to simply decreate them the same way they created them , so we have the Battleships , the Maginot Line , the ICBM’s , the Pentagon , etc , etc .

Most wars are financed by credit , so this is an easy way of destroying money .

Are we condemned to repeat this cycle ?
Do not make a mistake , persuading highly competitive , effective individuals to destroy their money ( the result of their hard work ) for some putative future reward has worked before (Christianity) in the building and gilding of Cathedrals . The only problem is that they must be convinced to sink into something with no conceivable return .

More seriously , for themselves , no . Their children , maybe . Their grandchildren , probably .

After all , it has been done before .

Ho-Ho-Ho !
Money in those medieval days could only be destroyed by locking up gold or silver in religious objects . It locked up (destroyed) money in untouchable holy relics . Even today it will be a brave burglar who thinks he can get away with stealing religious relics .
The Muslims gilded whole buildings .
The Egyptians buried it .

But look at the effect . The destruction of all this money stimulated intense searches for new sources of silver , gold or other wealth . The other wealth usually proved more enduring and important .

The building of cathedrals in Europe had a direct effect on technological development in Europe .

Creating money is easy .
Creating wealth is not much more difficult .
Creating lasting wealth is worthy of marks : Mark one century , Mark two centuries ,
Mark three centuries , etc .

What benefit can it have to the major shareholders ?
None . The religious trick will not work twice ,

Survival of the gene-line . The children .

A Modest Proposal :
That the inherited wealth is shotgunned into limited liability companies , with a bias to benefit the son . But not enough to give decisive advantage .. He will have to pull finger .
This does not sound like much , but you have to see it over a spectrum of about a million individuals .

Fat chance . To enforce this a world government will be needed .
Humans simply will not relinquish their perceived game-playing advantages , even if it means the demise of them and their line .

Actual Monetary Destruction in history :
The German Mark 1923 , Reichsmark 1947 , Franc 1950’s , Lire 1950’s , Ruble 1990’s etc , etc .
Notice that each economy rebounded , especially the German one after the destruction of the Reichsmark in 1947 . Most of the others were an ostensible conversion between the old unit and the new one , with the actual destruction of money hidden in the fine-print for political reasons . The Americans could dispense with this nicety in 1947 , yet the effect was stimulative , not destructive .

To get back to the Limited Liability Company :
It originated in the Netherlands . It was a method of mobilizing small groups of capital , without incurring crippling losses . (Limited liability companies were illegal under Roman Law ) .

It must be noted that the Netherlands and surrounding lowlands , never suffered catastrophic depopulation in the aftermath of the Roman Empire’s collapse . This means that they were not looted , and taking the times into account , means that they more likely charged the looters (eg the Angles and Saxons on their way to England ) a hefty fee . Invaders like Attila , the Vandals , etc also bypassed them . Presumably a combination of diplomacy and a hard nut .

Brittany and Normandy are pointers as well . What do they have in common ? They are not in the Netherlands , the easiest reachable and fertile area .

Yet these toughest SOB’s around never settled in the easiest target . The AngloSaxons did not settle in the Netherlands , neither did the RomanoBritons or the Vikings . William the Conqueror thought it more politic to marry Matthilde (from Belgium) .

The Dutch saw off the Spanish , on level ground .(Like facing the Wehrmacht Panzers on their best day .)
They also saw off the English in the Spicy East and New York . But the long heritage of survival shows in the merger with England (See Niall Ferguson) . They were simply too small and exposed to land-warfare from the continent . Yet today Brussels is the capital of Europe . Looking at Medieval Fair maps and trade routes of old Europe . It always was the capital .

They fight to win if facing annihilation (Phillip II) , but otherwise seek accommodation and survive .

Hence the history of useful traitors in old Dutch colonies like SA . The memes are there from Roman times .

As Sun Tzu would say : “The Belgian reeds bend with the wind , but shelters the skugtere fish .”

So let us hope that they face the threat of rising sea levels due to global warming with the same resolution . A Solar Umbrella is well within their technical and financial reach .

Homo Sapiens has free will , and does not have to repeat these patterns .


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