Archive for June, 2010

I write a lot about economics, and honestly I’ve come to understand a pretty good bit about how power is exerted at the macro level (remember economics is about levers and incentives, not money).

At work (and in life) I have no real macro power, but I have seen people who do.  Though I do not like politics from the perspective of Democrats vs. Republicans (since they are largely the same); I do like politics from the perspective of how to influence and how to barter power.

I read Nietzsche’s “Will to Power”; I read Machiavelli’s “The Prince”.  I even read the best-seller 48 Laws of Power.  Sadly I never read Sun-Tzu’s Art of War.

Here is some truth about Power:

– I will never have any….at least not enough to truly influence events on a macro level.  Influence at a local level is nice; however, it will not likely change the general circumstances of my life.

– Money is Power.  Information is Power.  Guns are Power.  I will pretty much never have those in any significant amount (and I don’t want them).

– We aren’t even in the game.  We are pawns.  The top 1% control 42% of wealth in the US.  The flip side is that 40% of the population vies for 1% of the wealth.

– We will never make enough money to escape the hedonic treadmill.  As our salary goes up, so will our lifestyle.  Some people make enough to get our of this trap…most don’t.  Working hard is not the answer.

– We will not be smart enough to “game the system”.  There are a few people at the bottom who draw social security disability that shouldn’t or get too many food stamps, but they are still certainly not the winners.  For us to begin to “game the system” at a higher level we will need more power/information than we’ll likely ever have.

So what is my advice?

CUT EXPENSES…and save.

That’s it.  You thought it was going to be some great revelation, but it isn’t.  We don’t have access to that kind of power.   We play by the rules; we don’t make the rules.

That’s the best most of us can do.  We cannot avoid taxes since we have no deductions.  There is no get rich quick scheme and we’re always faced with potentially crippling medical/education/unemployment/whatever costs.

We will not get ahead by making more money; our lifestyles will go up in lockstep with our salary, but we will be no better off (after about 40K there is no well-being bump from increased earnings).

We cannot pick stocks.  We will not win the lottery.  We will not become rappers and sports stars.  Most of us will never even become managers or VPs.

There are only two sides to the equation:  Expenses and Income.  We cannot affect our income in a way that will allow us to get ahead (where did your 2% raise last year go?), so that leaves Expenses…the only thing we control.

To get more concrete, it is FIXED expenses that kill us.

– A house.  Don’t buy a big, expensive house. A house is not an investment; it never was.  It is a place to live.  Living in a smaller house with a smaller monthly payment is key.  A smaller house will also help your energy bills.

– A car.  Don’t buy a nice car. A car is a waste of money.  Drive the worst car that your lifestyle will allow you to drive…then pick one a little crappier and older.  When you’re out of work and you have 15K extra because you didn’t buy the brand new Infiniti…you’ll be happy.  On a related note, pay cash for your car.  Do not take out a loan.  The car you can afford is the car you can pay for.

Cable.  I fucking hate cable and as soon as I find a way to watch sports online, I will be ditching cable. I can already watch all the shows I want online.  I can get movies (which I can never find the time to watch anyway) through Netflix.   I still find it frightening that I drop nearly 100 bucks a month to watch a few sporting events.

No debt: Don’t get trapped servicing debt, credit card or otherwise.

Student Loans: Don’t go to a good school. They are expensive and will, at the best, get you a good paying job…which will not be all that beneficial for you.  It will be much more beneficial to have no debt and be a hard worker, which will make up for the fact your didn’t go to a good school.  However, do go to a GREAT school if you can get in (Harvard, Yale, MIT, etc.).  This is where the people that make the rules go to school.  If you become tight with them it is definitely worth the money.

What can you spend money on?

– Flat screen TVs, expensive beers, going out to eat, etc:  I’m not saying go crazy, but one time purchases can always be stopped.  Next month simply don’t buy a flat screen TV.  Easy enough. The expense is gone.  This crap about the American consumer being in trouble because they spend too much of frivolous junk is a load of shit.  Those kind of expenses, unless you have some sort of psychological shopping disorder, will not get you in trouble.  It is the recurring expenses, FIXED expenses, that will cause you to go bankrupt.

– Health Insurance:  Unless you’re 20 years old and invincible…buy some, at least a high deductible indemnity plan.  Just wait till you get unlucky and drop 100K on open heart surgery…then try for the rest of your life to recovery economically (and medically) from that.

So that’s it.  That’s being rich:  spending less than you make and having a piece of mind about it.

It occurs to me that I’m giving the above advice to myself and others in my income level, which would be pretty much everyone in maybe the 50 – 90th percentile of earnings.

If you are below that (and most people will be below the 50th percentile by definition)….its still good advice in general; however, there is very little you can do.  Sorry.

Your expenses are likely already cut (except on crap like cigarettes and lottery tickets, which you should definitely cut out), and your income will likely never rise high enough to give you significant options.  The US has poor income mobility, especially at the bottom end.

Not that any one person can’t rise above their station in life.  We can.  It just isn’t likely to happen on average.

There is advice I can give; however, it isn’t likely to have any affect for a good number (if advice could help people we’d all be millionaires as there is plenty of it out there).

It is not that I write off the bottom half.  I have been in it (and may be again), and there are plenty of good, nice hard-working people there.

The fact that so many have so few options is what is troubling…not for me, but the future of the country and our children.

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There.  I said it.

And I mean it.  Not that certain stocks are a ponzi scheme….the entire concept of the stock market is a ponzi scheme.

Think of all the people that work in industries related to the stock market……are you thinking?  There are newspapers, magazines, and entire TV channels that employee only people talking about the stock market all day.

And they all have no fucking idea what they are talking about.  They are so spectacularly wrong, even weathermen are more accurate than these people….and if weathermen are wrong you simply get wet.  When all these clowns are wrong the global economy is wrecked.

Let’s examine some fundamental truths about the stock market:

Stock shares are fiat money (ie. THEY ARE WORTHLESS): A company issues stock, but what is a stock?  It is simply debt, and they raise public debt (issue stock), because it is cheaper than bank debt.  If they could raise money cheaper simply by borrowing from a bank….they would.  They issue stock debt to YOU because it is cheaper than asking a bank.

Why is stock so “cheap”?  Well….because it is FREE.  Bank debt is harder to get out of.  If the company fails, the liquidated assets of the company will go first to the banks (before the stockholders).  Since debt is concentrated with the bank, they can ask the company to do things (stock ownership is dispersed, so stockholders (unless you’re a really large one) aren’t well organized and have no power).

Do you understand? Companies give you a piece of paper (you can call it stock or you can call it currency), that gives you no charge on the company (you can’t trade it in for any product), puts you last in line for liquidated assets if the company goes bankrupt, and is worth something only because other yahoos agree to pay you for it (but it has no utility).

Stock is simply currency that a company has issued (like the government issues US Dollars)……except you can’t buy anything with it.  You simply own it, like art or baseball cards, until someone else agrees to buy it from you.

The exception to this is companies that issue a dividend (you do actually get something in this case); however, the companies that don’t issue a dividend are still bought and sold very regularly (Microsoft didn’t for years and Google still doesn’t).

Stock price changes do not make (or lose) any money for the company:

Companies issue the public debt of stocks once, at the IPO (Initial Public Offering).  At the IPO they sell a bunch of shares to us and we give them money.  They then spend that money.  They gave us “shares” (which are worthless; they are not “sharing” anything)…..we gave them money.

The stock market is simply a second hand swap meet.

Stocks are to companies as used cars are to car makers……they make NO MONEY when their stock goes up (just like a sold used Toyota makes no money for Toyota).

People investing in stocks do not help business or the economy:

You’re not creating jobs (except in finance) or helping the company; stocks (at their best) are supposed to reflect the underlying health of a company; they do not CAUSE the underlying health of the company.

Here is a thought experiment:

If everyone bought the stock of a company, what would the outcome be?  Nothing except an inflated stock price.  No one really has anything.  Nothing has been produced (except fees for finance companies).

If everyone bought the PRODUCT of a company, what would the outcome be?  Well, they would have something (the product), and the company would get that money.  That is something you can work with.

Stock market prices do not predict anything:

Stocks may reflect some things, though what they reflect I’m not sure (human psychology about the markets themselves perhaps?).  The smartest PHDs in the world have thrown every algorithm in the world at stock data.  It is random from one day to the next.

The only proven way to predict the stock market is to have INSIDE INFORMATION.  The rest of us will never do better than the market in general except by luck.

The capital gains tax reduction on stock investments is simply a tax break for the rich:

The average person gets almost no income from stocks; functionally we don’t really care about the capital gains tax rate….because we don’t have any significant capital gains.

1 percent of all taxpayers collect over two-thirds of all capital gains; that top 1% gets a tax break on their income; we don’t.  We pay 33% or whatever, and they pay 15% on their capital gains.

It is said that a reduced capital gains tax encourages investment.  Perhaps (I won’t go into the economic arguments here)…however, in the labor vs. business struggle…..labor has really been losing out over the past twenty years.  Its hard to have sympathy for the capital gains crowd (since they just wrecked the world economy).

What is good for the stock market is not what is good for America:

Correlation is not causation.  It is true that if the underlying reality of the the economy is good then you’ll probably have a decent market return; however, you CANNOT WAG THE DOG in this case.  Propping up the stock market will not cause a fundamentally sound economy.  It will simply cause the stock holders to get rich…while the underlying fundamentals (labor, jobs, etc) continue to worsen.

Chew on that.

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Rent Seeking:

Not to be confused with simply paying rent….rent seeking is an economic term to describe extracting an economic “rent” (i.e. some sort of value) on a transaction where the party adds no actual value.  Another definition (from is when a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.

This is easily applied to the current financial industry.  It is a simplification; however, if the high-finance industry simply ceased to exist, no harm would be done.  They don’t actually produce anything…they simply extract rent as a piece of other, hopefully productive, activities.

Finance claims to do risk assessment. That is almost laughable.  They failed to properly evaluate the risk they themselves created with their fancy debt instruments……and we ended up bailing them out.  If I were them….and they were smart….I would fire themselves.  They are obviously incompetent and a self-contradiction:  If their purpose is to mitigate financial risk and they themselves are the largest risk to global finance…the only logical conclusion is to close their doors and go home.

Rent seekers are bad. They produce nothing and extract a “rent’ (i.e. are a burden) on people who do.  If the rent seekers get bad enough….the producers simply stop producing.

Wealth creation:

Who then are the non-rent seekers?  What actually is a productive pursuit?  This is the more interesting question by far.

I argue that productive pursuits improve lives.

Productive:  Growing food is productive.  Building houses is productive.  Air conditioning, plumbing, refrigerators.

If you have these things….your life will be better.  No doubt.  Black and White.  It gets more difficult though.  Some things are necessary to make things that make life better.

Compliments to wealth creation:  Roads, electricity, computers, telephones, etc.

These are necessary to make the things that make life better.  It gets even harder.

Ambiguous:  What about lawyers?  Are they navigating the law for the wealth creators so they can do their job or are they using their special knowledge of our byzantine legal system to bend the rules in their favor….to rent seek?

What about the health insurance industry?  Are they helping people get health care or are they using their legally created special status to rent seek on people trying to get health care?  If the whole industry simply disappeared, would it really matter?

What about service industry jobs? Are barber shops and nail salons creating wealth? No.  They are not.  They are compliments.  Theses industries (and many others) do not create wealth; they exist solely because of the excess wealth of the industries which create things that make our lives better.

Only when the first dude created enough excess wealth from his labor would their ever be demand for a service job like laundry or cleaning.

After all…..imagine a society where everyone is cleaning for everyone else and cutting their hair….where do these people live?  What would they have to clean if nothing were being produced?  The service industry exists as a compliment.

So……I’ve probably lumped over half (forgive the imprecision) of US economy into non-wealth creating pursuits.  Most people work in service or rent seeking industries.

If this is the case, what about the US economy with its dwindling manufacturing base and increasing service sector?

Can a purely service economy exist?

No.  I don’t think so.  Not for any extended period of time and be prosperous.

There are a precious few things that truly make life better….and the vast, vast majority are all actual THINGS.  They are things enabled by advances in technology.

That’s what true wealth creation is:  Technology enabled stuff we produce that makes our lives better.

Everything else exists on the coattails of those very few items, because without those very few items all the other stuff wouldn’t NEED to exist.

Example:  It might be true that the greatness of the Seinfeld TV show made lives better.  I could agree with that; however, without food, a roof, warmth, indoor plumbing, electricity, etc….no one would care about TV.

What does all this mean?

1) Technology is the basis of everything that makes our life better.  Invest in it.  Waste money on it if needed (don’t waste money on foreign wars).

2) Make stuff that improves lives.  Everything else is either service for those that make things…..or rent seekers.  If you don’t make things, you’ll soon be lining up to be friends with those who do.


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