Tag: Wealth

The Perils of our Workless Future

America is creating wealth and not working for it.  Even on the surface this statement seems dangerous, but most people can see that its true.  Many companies are worth billions of dollars as startups.  Take the example of Facebook acquiring Instagram for 4-billion-dollars while it only had 16 employees.  This acquisition was followed up by Facebook with a 16-billion-dollar purchase of WhatsApp.

The youngest billionaire in history will be a 20-year-old girl named Kylie Jenner.  She launched a make-up product line at age 17 and due mostly to her family’s fame, it is selling out everywhere.  She own’s 100% of the product line so the brand has become very valuable and sales are topping a billion dollars.

The product is made in Asia and Kylie is doing very little beside owning the asset.  Yet, here she is doing little work and making an enormous amount of money.  The illusion is that work is being done, that Kylie earned all that money.  The problem is that illusions don’t last.

Kylie’s billions were not created through work, it was created through asset appreciation.  The problem isn’t with Kylie, the problem is that the economy is over rewarding Kylie’s small contribution.  The economy has to reward Kylie with such an extreme fortune because asset prices have to keep going up in order to create the illusion of growth based on debt.

The thing about all these newly minted billionaires is that they are only worth a billion on paper they don’t actually have a billion dollars in the bank.  Kylie will however buy massive mansions in Malibu and dozens of other places using mortgages.

It is unlikely that Kylie has even earned enough cash to put ten million dollars in her bank account.  By the time she pays the manufacturer, the distributors and the retailors, Kylie’s share of the sales will be a fraction of the sales.  But her brand as an asset will still be worth a billion dollars.

Kylie can borrow money against her assets which allows her to spend like she actually has a billion dollars in the bank.  And all the Jewelry, cars, yachts and real-estate will all be bought using borrowed money.  And the people who she buys these things from will use it to borrow even more.  All the while nobody is actually doing any work.

America needs to understand that without work nothing has value, that asset prices unsupported by actual work is a recipe for disaster.  The only thing supporting America’s astronomical asset prices is debt and debt has to be paid back.  

The Definition of Money is Work

Once upon a time, people used to trade with goods and services to obtain the things they need. But after a while, this became tiring and inefficient due to the lack of transferability of bartering for goods.

Then, people decided to develop a medium of exchange to solve these problems. They created a type of good that worked as currency – commodity money. Goods such as corn were used for buying and selling because these goods were widely desired as well as easily storable, portable, and durable.

The dollar banknotes we use today are considered to be the U.S. medium of exchange and they don’t have inherent value. The money we earn and spend is more a tool for trading rather than capital.

If you found yourself on the top of Kilimanjaro or a desert island, the money in your pocket won’t mean anything because you don’t have a place to spend it. However, the one asset that you do invest irreversibly in order to get to the money is – work (or rather the time that you spend working).  Its work was done as a service for someone else or to produce a product desired by someone else, that’s how money is defined as work.

Economics has become so complex and confusing that the definition of money can be illusive and confounding.  However, if all the financial products created by the banking system are put aside then the definition of money can be simplified to mean work done by people.  And as people spend time working they accumulate money.

If the definition of money is work done by people, then automation is worklessness or something that does not make (cost) money.  Automation and technology, that displaces people from their jobs, shrink the economy because it produces less work or less money in the economy.

A clear symptom of this dilemma is the ever-decreasing interest rates on debt.  The economy is actually shrinking due to automation and in an effort to compensate central banks around the world have kept interest rates historically low.

Technology is Waging War on the Working Class

It’s a common topic of conversation the robots are coming for our jobs.  What most people do not understand is that there would be no robots without banks.  The cost of technology is actually astronomical.  Human labor is much cheaper than technology unless the technology can be paid for with a bank loan.

The bank loan allows the technology to cost less since it can be paid for overtime and this allows it to be competitive with human labor on a per hour bases.  Technology is only waging war on the working class because banks are financing the hostile takeover of people’s jobs.  But this is a zero-sum gain for the economy since people not working and earning less means a smaller less productive economy.

The economy is work done by people

Economics is the messiest of all human systems.  It is unpredictable and poorly understood.  At some point, people went from living in harmony with the environment to living in an economy that is wrecking it.  The economy has no direction, no goal and provides no certainty for our future.

But despite this massive distortion of outcomes, the economy is still the exchange of work (money) between people.   What is different today than in the past is that value (work/money) can be borrowed from the future in the form of debt as debt turns into work done today.  It used to be that if you needed work done today then it must be paid for with a transfer of value that didn’t come from debt.

Now, a person can charge work onto a credit card and pay for it at a future date.  This has worked well in the past but advanced technologies are having unintended consequences.  Technology can be paid for by people NOT doing work. Future debt payments that pay for the technology will not go to employees they will go to the bank that funded the loan and it literally disappears.

Making things worse, banks have access to an infinite amount of debt, they simply print money to fund their loans.  Banks only have one requirement and that is for the debt to be paid back.

Money is work done by people and therefore debt is negative work.  In other words, the money earned in the future will not be used to create more work it will be used to pay down debt.

The more debt on the books the less work can be done in the future.  The problem then arises when one considers that robots are being paid for by negative work while the debt eliminates work in the future.

So, when you read the national debt has reached 21 trillion and the total US debt is $74 trillion while the total global debt is $244 trillion, you should be looking at those numbers with the idea that less work can be done in the future because money has to be used to pay back the debt unless even more money is borrowed in the future.

How can debt keep growing?  The debt keeps growing because asset prices go up in tandem with debt.  The more an asset is worth the greater the debt that can be leveraged against that debt.

But assets have a real-world value they cannot just keep going up without an economy to support it.  And an economy that is only growing because of massive increases in debt is actually not growing and therefore not supporting the high valuations.

The Asset Illusion

Many people make money from stocks and real estate.  This should not be considered work because the majority of the money they make is from asset appreciation.  It may require work to figure out how to invest in assets that turn out to be worth more when selling then they were worth when bought.

However, that effort did not meet the needs of another person so, it is by definition not work, it is merely an effort for personal gain like combing your hair.  The illusion than of making money from asset appreciation is that it required work to do so when in all actuality one only worked for oneself.

Asset appreciation has become the main driver of wealth in America, not work.  America is getting wealthy by not working.  How is this possible?  Assets can be leveraged to fund loans; those loans can be used to buy assets and that increases the price of assets.  The problem is that while assets prices are going up the debt eventually has to be paid back with real work.

Take the example of a house, the materials required to build the house in the middle of nowhere is $100,000 and the labor is another $50,000 and the contracting firm sells the house for $200,000.  The house is worth $200,000 in the middle of nowhere.  However, move the house downtown Manhattan and it’s worth $10 million.  The surrounding real-estate is worth much more than the building materials.

The asset prices have reached such extreme valuations because of debt financing the continuous increase in property valuations.  Let’s face it, the house is the same, debt financing allows for debt to be leveraged against the asset making ludicrous valuations seem reasonable only because other people are spending exorbitant amounts of money on similar assets.  So, who would buy $200,000 worth of building materials for $10 million?

Just about anybody who thinks it’s a good investment and the market confirms that every day.  The problem is that banks fund the purchase of the house based on the asset value of the house or $10 million and the buyer only has to pay a small percentage of the price.

Work must drive the economy, not over inflated asset prices

The economy has been turned on its head by the financial industry, asset prices are creating wealth not work.  Asset prices are overvalued while work is undervalued.  Work is undervalued because debt is financing technology that eliminates work while the debt payments take the money and work out of the economy.

And as you would expect to see from an economy that is run by banks who sell debt, the global debt is exploding in an effort to have debt create work through the leveraging of assets.

However, no matter what is done with the money printed by the creation of debt, debt means less work in the future.  If there is going to be significantly less work in the future, then it will be significantly more difficult to pay for the debt of the future.  If the debt cannot be paid back, then we will have another financial collapse.  Under the current paradigm, the only way to get out of this mess is with greater quantitative easing.

The Future is Quantitative

Debt is exploding, assets have risen to irrational valuations, interest rates are rock bottom or even negative.  An asset class that has been driven up in valuation from years of low interest rates on loans will eventually cause a correction in the stock market that leads to another financial collapse.

The Federal Reserve does what it’s owners tells it to do, save the banks.  The Federal Reserve starts buying assets that are underwater (which means the debt leveraged against the asset is greater than the value of the asset).  And by doing this the Federal Reserve bails out the commercial banks once again using quantitative easing.

In addition, in order to pump up the value of the assets the Federal Reserve will lower the interest rates and hope asset prices recover since that’s what America’s economy is based on.  All these measures only make the situation worse.  It allows for cheap credit to pay for more automation and less work done by people.  Quantitative easing only makes things worse.

How bad can quantitative easing make things?  There is certainly a possibility that countries will stop valuing the American dollar as the reserve currency of international trade.  This could make inflation in America absolutely unstoppable and a disaster.

But there is an even worse consequence, quantitative easing is forcing a workless dystopian future of technology owners which leaves everyone else as secondary citizens.  The secondary citizens are the homeless of today, technology does not serve those who do not have money.

Quantitative easing and asset prices based on debt creates an illusion of wealth which will persist as long as other nations support the dollar in international trade.  But make no mistake it’s an illusion of value, America’s wealth is no longer based on work.

The Illusion Grows and Self Destructs

The problem with illusions is that they do not last.  Like the oasis in a desert created by heat vapors coming off the sand, eventually the stark reality hits.  Assets are just not worth what people are paying for them.  And if real work isn’t the reason for high asset prices then those asset prices aren’t really worth that much.

And if debt payments are going to replace real work in the future then asset prices are going to be worth even less.  If asset prices go down, then the amount of money that can be borrowed is reduced.  A reduction in borrowing undermines asset prices.

In other words, the higher the asset prices go based on debt the more unstable the whole system becomes.  Another round of quantitative easing only exacerbates this issue.

Chart

It’s in the data

Over the last 70 years, the global population has been exploding.  The global debt has been exploding.  Global production of goods and services has grown considerably but the growth rate is heading south.  In fact, global economic growth is projected to be negative by 2060 as seen in the chart above.

How can the population and debt be growing so fast while the growth rate is slowing?  Simple, it’s taking less and less work to produce goods and services.  The real economy is based on work did not asset prices.

The real question is, do we really have 40 years of growth before the economy spontaneously shrinks?  Its notable from the chart above that the only year of negative global growth was in 2009.

There have been many recessions in the past 60 years, but the global economy grew despite it.  Asset prices based on debt as a means for economic growth is not sustainable especially with a backdrop of debt financing the elimination of work.  The slow growth of the jobs market post quantitative easing proves this point, as the low interest rates made automation and technology even more attractive.

Therefore, it would seem very likely that we are one recession away from the economy shrinking permanently.  The lower the interest rates and the greater the quantitative easing the faster the adoption of technologies that replace people at work.

Conclusions on Money

Money is often defined as a medium of exchange but that misses the point.  Money has to be earned or it’s worthless, especially when its FIAT money, not backed by gold.  A loan is supposed to be paid back with future earnings not with future loans.  The world economy as it stands today is not earning its way to prosperity, it is borrowing it.

The modern economy is like a person with no job who pays there bills with a revolving credit card scheme.  If the debt is pushing asset prices up, then the value of those assets is an illusion because nobody is earning enough money to actually pay for those assets.  Until work done by people is made the driver of the economy and not debt, the world is in for more pain.

There is a solution to this mess.  It all starts with monetary policy at the Federal Reserve.  The Federal Reserve is responsible for printing and circulating money but because the Federal Reserve is owned by commercial banks they do it for the purpose of their owners.

It should surprise no one that the commercial interests of banks do not align with humanity or even the citizens of America.  Redesign the Federal Reserve with the interest of the people of America and the world by getting the bankers out.

*Note:  The Bretton Woods Agreement of 1944 made central banks around the world follow the same structure as the Federal Reserve.   This means commercial banks are in control of the central banks in other countries as well.  This has been called ‘the new world order’.  Let’s face it, the new world order is getting very, very old.

 

Nixon’s Devastating Legacy

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In 1971, President Nixon permanently dislodged the USD from the gold standard, ending nearly forty years of global monetary policy in which the USD was equal to a fixed price for gold. In its place, Nixon decided to introduce a floating currency exchange system called Fiat which remains in place today.

Continue reading “Nixon’s Devastating Legacy”

The Curious Wealth of Cornelius Vanderbilt

There was a time when wealth meant the collective value of your material goods. Before the creation of the Federal Reserve System, the American economy operated on much simpler terms. There was no speculative investment in stocks and bonds, few debt financing schemes to fund one project after another, and less money being printed by the government.

Making money in America may have been physically exhausting work — but at least the payoff was in real material wealth and within everyone’s grasp.

Take the case of Cornelius Vanderbilt, for example. In today’s dollars, he would be roughly twice as rich as Jeff Bezos, the founder of Amazon. Its A amazing fact about Cornelius Vanderbilt Wealth.

How is it that Vanderbilt, who died in 1877, could have amassed so much more material value than Bezos? Because back then the economy was not mired in debt financing schemes and a plurality of American dollars that inflates the price of everyday living. Curiously there were less than 20 million people in America. This means that Cornelius would have achieved trillionaire status in today’s dollars and today’s population.

Smaller Economy, Hard Working Population

By all estimates, life in 1830 was rough compared to 2018. Electricity was in its infancy, there was only coal heating in homes, and department stores were a new hot thing.

In the years in which Vanderbilt made his money, the economy was much smaller. This was partly due to demographics: there were simply fewer people in the country, so the potential for profit was lower than today.

However, it was mainly due to the fact that the economy was cash poor. Legal tender only came in the form of gold, silver and copper coins, and credit lending was kept to a minimum.

These conditions meant three important things:

1. People Were Poorer.

The average American needed far less money to get by. A loaf of bread cost a couple of cents, a bag of potatoes even less. The nature of industrialized labor was such that work was hard to come by, so a large majority of the population learned to live with less and make a living using their hands and whit to create value.

They were forced to save up and had no option of buying things on credit like we can today. The reality is that people are just as poor today as they were back then — it’s just the credit system makes it seem like we are wealthy because of all the material goods we have now.

2. The Gold Standard Minimized. Borrowing and Work Paid for Livelihoods not Loans.

The gold standard kept the banks in check because they were only able to lend out as much gold as they had on site. What the gold standard ensured was that everyone pretty much played by the same rules — including the government — and no one could borrow more than they were worth. That way, when someone like Vanderbilt actually found success, his material value was far more than the inflated value we see all around us today. Vanderbilt and everyone else did not work to pay off loans — they worked and kept their money.

Think about the number of hours you work paying for your mortgage and paying taxes towards government debt. By the time the banks are paid, there is very little left.

3. Life Was Simpler, and Work Was Harder.

Vanderbilt managed steamboat lines across the Hudson River. He began working at the age of 11 with only a third-grade education and through hard work and cunning built a massive transportation business off the manual labor of thousands of people. With automation in ascendance today, all we can say about Jeff Bezos is that he creates a lot of value for his shareholders but not much money.

Wealth Today is Mostly Asset Appreciation, Not Hard Money in the Bank

In some ways, Cornelius Vanderbilt was quite lucky. Born in a time when vast portions of the country had yet to be connected in a national economy, he was able to fund the creation of railroads that brought commerce across the country and remain fundamental assets in our economy to this day. What he earned was real, physical, material wealth that contributed greatly to the American project.

Can we say the same thing about Bezos? Not quite. Bezos owns plenty of stocks in the companies he helped to build, but these stocks do not translate directly into material wealth.

They are tied up in debt repayment schemes set up to build the companies in the first place. Much like the American economy since the end of the gold standard, the wealth Bezos has is built off the back of debt financing on an inflated quantity of American dollars.

On the other hand, Jeff. Bezos and Amazon deliver the product with service to almost everyone in America routinely — not to mention the rest of the world. It is a staggering accomplishment compared to Cornelius. Vanderbilt, and yet the Vanderbilt fortune will remain unmatchable as long as debt dominates our economy.

Conclusion

Even though it looks as though Bezos is one of the richest men in history, a lot of his wealth is virtual based on the debt-driven economy we live in today. We should strive to create an economic system more like the one in which Cornelius Vanderbilt earned his fortune. Cornelius Vanderbilt Wealth is a best example.

In those days, the scarcity of physical currency and tight fiscal responsibility of the banks and government alike meant an economic system that accurately reflected material conditions.

However, we can make things better than ever by reducing debt financing with higher interest rates while creating demand through direct monetary supply from the federal reserve. The key to producing wealth like Cornelius Vanderbilt Wealth is to engineer the economy to deliver products and services that are not produced by debt bearing corporations.

In other words, higher interest rates reduce borrowing and inflation risks. This can then be offset by demand side schemes issued by the federal reserve, and allows for true wealth creation as opposed to virtual asset appreciation.