Saturday, June 27, 2015

The Value of Money - Part 3

The Western world generally saw the collapse of the Soviet Union as proof positive of the superiority of capitalism over communism/socialism. Most of the arguments bordered along the lines that the sheer scale of managing an economy, that it resulted in nepotism, bred corruption, stifled innovation, and that it didn't feed into the needs and wants of it's constituents were the reasons for their failure. The irony is that you can see many of the same flaws in communism and socialism that you see in capitalism now. Given the fact that more and more developed economies are getting into trouble I wonder whether this is the true way forward. The European Union, United States, Japan, and others have all recently endured serious economic difficulty and have been projected to continue to experience prolonged issues.

My belief that if capitalism and free market economics is to work into the future constraints must be placed on the size of firms relative to the size of the market/economy. Below are some reasons for my belief in this as well as some other notes regarding market economics:
- I believe that one of the reasons we only favour free market economics because it limits the severity of problems if/when someone/something collapses. If a government collapses you have trouble everywhere. If a company collapses it only impacts the company and the immediate supply chain, distributers, retailers, etc...
- the other problem is most of the companies that grow to this size have no choice but to be driven by greed. Even if they pay their fair share of taxes most of them rely on debt of some sort in order to maintain a viable business. Without cash flow from the stock market, their creditors, etc... they can't continue to pay the bills. Hence, they must satisfy their own needs as well as that of their shareholders and creditors at the expense of those in the wider community. An example of this are the large retail chains that operate in many of the more developed countries. The problem is that their power can now rival that of the state. For instance, in Australia, "Almost 40 cents in every dollar we spend at the shops is now taken by a Woolworths or Wesfarmers-owned retail entity" with their interests including the "interests in groceries, fuel, liquor, gambling, office supplies, electronics, general merchandise, insurance and hardware, sparking concerns that consumers will pay more."
If the chain collapses it's likely that hundreds of thousands of jobs will be lost in the event of administration/receivership. I'm arguing that we need to spread the risk a bit. If one part collapses it doesn't bring the whole thing crashing down around you
- despite politician's complaints about MNCs/TNCs not contributing their fair share towards the tax base they aren't willing to make enough of an effort to change things to create those circumstances. There needs to be an understanding that without someone to buy their products and services these companies will go bankrupt. Large firms need employees and consumers as much as we need their tax revenue
- the irony is that we believe that since companies are large they are automatically successful, we should support them. Think about many of the recent large defense programs that were undertaken by large firms. As indicated previously, there's currently no incentive for them to help the state. They just want to survive and generate profits. The JSF program was deliberately structured in such a way that we've ended up with a fighter jet that isn't up to the original design spec, well and truly over the desired budgetary parameters, and way beyond the original design constraints putting the national security of many allied nations at risk
- progress within the context of market economics is often only facilitated through proper competition and regulation. At the moment, many of the largest donors towards political parties are large companies. This results in a significant distortion of the playing field and what the ultimate decision makers deem to be important issues.
Think about nature of the pharmaceutical industry and electronics/IT industries. They both complain that progress (research and development) is difficult. The irony is that it's difficult to argue this if you're not making any worthwhile attempts at it. Both sectors sit atop enough savings to be able to cure much of the world's current woes but they have absolutely no incentive to bring it back on shore for it to be properly tax or to spend it
Moreover, they more often than not just use their existing position to continue to exploit the market. A lot of electronics now is simply uneconomical or impossible to repair locally which means that you have to purchase new products once it has gone out of warranty and has failed due to engineered lifecycles (they are designed to fail after a particular period. If they didn't they would suffer the same fate that some car manufacturers have been complaining about. If they don't fail no one will buy new cars). My belief is that there should be tax concesssions if they are willing or they should be forced to invest into SME firms (which comprise the bulk of the economy) via secondary small capitalisation type funds (especially if the company doesn't know what to do with spare cash and it is left 'stagnant'). Ironically, returns on broad based funds in this area (longer term. Losses are often magnified if invested in the short to medium term or even over the long term if invested by a less than compentant money manager) more often than not exceed the growth of the company in question as well as the economy in general
- sometimes I wonder whether or not managing an economy (from a political perspective) is much the same as operating as a market analyst. You're effectively taking calculated bets on how the world will end up in the future. Is it possible that good economic managers need to be more lucky than skillful?
- in some cases, the nature of capitalism is such that the state has grown so large (because in general government services aren't profitable) that they are beginning to groan under the pressure that many of the more developed nations are now feeling. This is a case of both mis-management and a mis-understanding of how to use capitalism to your advantage
- one of the biggest contradictions in business is that it should all come down to the bottom line. The stupid aspect of this is that most companies have double digit turnover and continue to make the excuse that you should simply put up with whatever is thrown at you even if employee turnover is high. If workplaces were generally more civilised and conditions better then you would have a huge cost removed from your business (loss of employee, advertising, training, etc...)
- normally, when people are taught about life, we start with the small and simple examples and then we are pushed into more complex and advanced examples. The irony is that is often the opposite of the way we are taught about business. We are taught to dream big and win big or else crash and burn and learn your place in society. There is a major problem with this. In the Australian economy, SME business accounts for 96% of the economy. It is similar elsewhere. People leaving our educational institutions basically aren't equipped to be able to run make money by themselves right out of school. Help them/teach them how and you could help the overall economy as well as these students by equipping them to be able to look after their own needs reducing the burden on the social welfare system and giving them valuable employment experience that may be worthwhile later down the track. Most students are equipped to work for other people not to start their own company or operate as individuals
- all politicians (and people in general) like to talk about the success of their country in being able to attract MNCs/TNCs to employ people locally. However, the problem is that they aren't the main employment drivers in the economy. Across most of the world's economies small businesses are the driving force ("Such firms comprise around 99% of all businesses in most economies and between half and three quarters of the value added. They also make a significant contribution to employment and are of interest to governments primarily for their potential to create more jobs."). One wonders that even with the increased business (direct and indirect) around a large firm when they exist in a country are you getting value for money (especially if you are subsidising their local existence)?
- we actually do ourselves somewhat of a disservice by creating a perception that dreaming and living big is what you should want. Popular culture makes it feel like as though if you don't go to the right schools, work for the right companies, and so on you are a failure. The irony is that if every single graduate were taught about how to commercialise their their ideas while at school I believe that we would have a far more flexible, innovative, economy. Moreover, both they as well as economy in general would get a return on investment. It's no good telling people how to be enterpreneurial if they don't know how to be enterpreneurial.
- the irony of the large donor phenomenon is that SME business accounts for most of the activity within the economy...
- as we've discussed previously on this blog the primary ways you can make money are to create something of value or by changing the perceived value of something such that people will want to buy it no matter what the disparity between perceived value versus effective value. Once upon a time I look at German prestige and performance vehicles to be the pinnacle or automative engineering. The more I've learned about them the less impressed I've become. If I told you the evidence points to them being the least reliable, the vehicles which depreciate the most (within any given time frame), most expensive to repair, the most expensive to insure and service, average safety, and that often only have comparable technology to other cars (once you cut through the marketing speak) you'd think that people would be incredibly stupid to purchase them. Yet, this trend continues...
Another good example is the upper echelons of professional sport and artistry (includes music, art, etc...). If anybody told you that you were paying several hundred dollars an hour to watch a group of individuals kick a ball you'd think that they were mad. The horrible part is when you realise top tier amateur competitions which are free to watch can be just as entertaining and skillful
- in reality, in the real world very very rarely are pure market forces at play and it often takes a lot of time for it to get through to them that for all the stuff/theory that you learn at school there's a lot more that you will also learn in the real world
- most industries fit into the following categories; something that you need or something that you want. By selling people a dream we can turn what you want into something you need and create employment from it
- if you want to make abnormal (excess) profits it's mainly about being able to distinguish between perceived, effective, and actual value. Once you can establish this you can exploit it. This is easier said than done though. Let's say you discovered Lionel Messi playing in the streets of Somalia versus Paris. More than likely, you'd value him much less if we were found in Somalia. Sometimes it can be pretty obvious, at other times it's not much different from predicting the future. For instance, the iPod was essentially a re-modled MP3 player with an integrated software solution/ecosystem, Coke is basically just a sweet, fizzy drink which is actually beaten by Pepsi in blind tests
- we like short term thinking because we like the notion that we can make a lot of money in a short space of time. That means that we can retire early, purchase luxury goods and services. The irony is that this feeds into a disparity between actual, perceived, and effective value which means that flawed businesses can continue to still work. The irony is that this flaw works in practice but in the long term it can results in asset bubbles. Valuation at the correct level is in collective's overall interests
- risk isn't necessarily directly related to reward if you're modelling is good. One way to reduce risk is to let others take it first. You might not make a massive name for yourself but should at least not break bank for a high risk project. This has been a common theme in the Russian and Chinese defense establishments where they have often taken significant cues from American technology
- it's becoming clearer to me that many financial instruments actually aren't required. The industry itself relies on the fact that that many will fall for the perceived notion that you can make a lot of money in a small amount of time or for little labour. However, the reality is that most will make a lot less that what is perceived to be the case. An example of this is the following. Many financial instruments are created for the express purpose of increasing risk exposure and therefore possible profits/losses. In reality, most people lose. It's like a casino where the house wins most the time. The other irony is the following, while liquidity can have a direct correlation with volatility (allows you to reach a more valid price earlier especially if many are involved in pricing), the same is also true in the opposite direction. It only takes a few minor outliers to be able to change the perception where value within the market exists
- may SME firms collapse within a short time frame but easy credit makes it easier for bad business models to continue to exist. The same is also true of the United States economy where uncompetitive industries were allowed to continue to exist for a long time without adequate trade barriers. If the barriers are lifted we should create circumstances where we force companies to alter their strategies earlier or force them to re-structure/collapse/declare bankruptcy. It will help to reduce the impact of when we provide credit to flawed companies which ultimately collapse
- the way we measure credit risk is often questionable. Financial institutions often turn away low income earners because they are considered a credit risk. I looked at this further and the rates that they are actually charged are diabolical. At one particular place, they were charging 10% for a one week loan, 15% for a 3 week loan, and then 25% for a month long loan. If the industry was so risky though how does it continue to exist? Most of the people who understand the problem have basically said that people who require this money simply have a hard time budgeting and managing their affairs. Essentially providing them with a lump sum component every once in a while makes them believe that they can spend freely. The irony is that the rest of society is also somewhat guilty of this. If we were paid cash and by the hour (rather than regular lump sum payments) and had to pay a component of our bills and other expenses each day we would look at our purchases very differently
At the other end of the scale, there exists another paradox/contradiction. I've heard stories about people with relatively high incomes being denied credit even though their credit history was good (companies can't make money if you don't breach credit conditions every once in a while). Despite what we say about free market economics, regulatory frameworks, etc... the system is corrupt. It's just not as overt and no one likes/wants to admit it.
- despite what many may think of him, I think Vladamir Putin is actually trying to look after his country's best interests. The collapse of the Soviet Union gave rise to the oligarch. A circumstance that was facilitated by the nature of free market economics without an adequate framework (rules and regulations such as that provided by law). Essentially, the state was replaced by private enterprise where the needs of the many were placed lower on the pecking order than had the state still been in charge. I understand his perspective but I don't believe in the way he has gone about things
- people say that we should do more and spend more in the fight against organised crime. The stupid, ironic thing is that when society is unfair and unjust organised crime grows much stronger because it provides people with a way of making a living. In Europe, the Italian mafia has grown much stronger with the advent of the European economic difficulties and it was much the same in Japan when their asset bubble burst during the 90s
- the EU was borne of the fact that no one wanted war again in Europe. It feels like much the same with the rest of the world. We've used progress and better living conditions as an argument against going to war. However, the world has essentally ended up engaging in an effective 'Cold War'. Much of the world's spending revolves around the notion of deterrence. Namely, if I go to want to go to war with you I know that I'll suffer just as much damage (if not more)
There are a number of ways around this. By reaching a concensus for that countries will no longer attempt to project power outwards (defend yourself only, don't interfere with others. Highly unlikely.), invasion will no longer be part of the future landscape (other countries will come to the aide of those in trouble. Unlikely especially with the rise of terrorism.), or else collapse a economies such that countries will no longer be able to afford to spend on defense. The troubling thing is that the last scenario has actually been outlined in various US intelligence and defense reports. It's essentially war without war. If you can wreak havoc in someone's economy then they'll no longer be a problem for you. The irony is that the larger your intelligence apparatus the more likely you can engage in this style of activity. Previous leaked reports and WikiLeaks has made me highly skeptical that the average country doesn't engage in this style of activity.
The irony is that you if you don't engage in these activities you may lose a significant advantage. If you do, you're sort of left to question whether or not you are the good guy in this affair
- people who haven't spent enough time in the real world only often understand the theory. Once you understand how things actually work your whole perspective changes. Let's take the housing asset/bubble that we may be going through. As stated previously, making abnormal profits is about managing the difference between perceieved, actual, and effective value. It's clear that in theory boosting supply may change things. The thing I've discovered is that in free market economics it only takes a small thing to change perception. Once the perception snow balls you're stuck with the same problem. This is the same whether it is a new home buyer or a foreign investor purchasing in the local market
- a business structure is simply a focal point of communication between business and consumer. It also affords the opportunity for a government to tax it more effectively
- by being so insistent on upskilling and education it makes low labour costs almost impossible to achieve. This makes a lot of infrastructure projects in developed countries impossible because they are economically unviable. A good example of this is 457 visas in Australia, and illegal immigration in the United States (especially from Mexico) which are often used and abused to acheive lower labour costs than otherwise would have been possible. Another example of this is the Snowy River Hydroelectricity project. It's said that hardly anyone on site knew English and that often people just learned on the job.
Another recent project put this into perspective. It was said that building a building infrastructure (tunnels, office blocks, etc...) in China, shipping it, and then assembling it here in Australia would be more cost effective then building it here alone. We need to give people a chance no matter what their education or skill level if we are to balance government budgets and to reduce the incidents of off-shoring without necessarily having to resort to often expensive anti-shoring techniques such as tarrifs, rebates, taxes, etc...
- our perception of success feels odd sometimes. If you look up the background of Rupert Murdoch, Donald Trump, and several others you'll see that thye are continually on the point of brankruptcy. Under normal circumstances anyone continually on verge of losing everything would be considered mediocre but in the business world they're considered successful because they can keep the whole thing going... Also, look at the poverty figures for the United States, Germany, United Kingdom, United Arab Emirates, Iran, and Japan. Notice the odd one out? Iran has been under sanction for a long time for their alleged nuclear research activities and yet the level of poverty in Iran is comparable to all these others.
- the only other way to achieve lower costs in developed countries is to resort to automation and robots (else tap developing countries for lower priced components). I've looked at Australian car manufacturing plants and American and European plants for mass produced vehicles. The level of automation in American and European plants seem to be significantly higher with build quality that is comparable
- the perception is that we always should hire the best and brightest in order to get the job done and that we should try to do our best to make them happy. The irony is that I've worked on both sides of the fence. By hiring only the best and brightest (perceived to be. A lot of the time the best and brightest don't necessarily get hired based on what I've seen) and only settling on them we force wages up across the board and we make work more difficult for your existing workforce. It may even be more difficult to keep them happy. The other irony is that there are many wealthy global companies who can afford to hire away your best staff forcing prices up even further. Complete free trade works in favour of those who are already wealthy and makes it harder for those down the chain to make a living and to progress
- if all the best and brightest are hired by the same companies (based on personal experience) you aren't necessarily always going to get the best out of them. Companies have an increasing tendency (regulatory as well as political issues) to pigeon hole them into specific roles which doesn't allow them to realise their full and complete potential. The individual, company, as well as the collective lose out
- we believe in out current style of capitalism because we have a perception that it gives everyone a chance in life to be and do whatever they want. In reality, it's a lot more complicated. At it's very core I think it's very much like Winston Churchhill's opinion of the Westminster parlimentary system, "Democracy is the worst form of government, except for all the others."
- it's clear that I believe in limited capitalism and for the most part we should try to work with those within our regions to reduce the chances of a systemic collapse. Currency manipulation, foreign investment law, tarrifs, taxation, etc... are all lawful means of changing the playing field. In fact, the exact same techniques that countries use to protect against trade sanctions can be used to guard the economic safety of citizens locally. By playing by the current rules and free trade we are essentially playing into the hands of the larger companies of the world (mostly based in the United States). It's a form of imperialism/conquest (deliberate or not) without necessarily having to engage in open warfare and with the effective ruler being the United States with these companies acting as proxies
- making or saving money can sometimes be counterintuitive. If you've ever worked in the IT industry in any sort of support role then you'll realise that no matter what level of support you operate at one of the main aims is to establish whether or not the problem occurs without your own area of oversight. If it is, you try and fix it, if not you ignore it and basically tell the other end to kindly go away because you often don't have the expertise to fix it, nor do you have the oversight to be able to. The medical and pharmaceutical industry is much the same. The irony is that this perspective can result in longer term harm than good. The United States budget is out of whack with one of the major causes being the high cost of drugs as well as short sighted perspective of medical practitioners who tend to not attempt to treat the problem till it's fixed but keep on managing it. Fix it if you can and the problem goes away, your budget is in better shape
- if so many countries are so concerned about profit shifting why don't they simply make it un-economical/impossible to re-locate from now on? That way existing financial centres for such activity can adapt in the meantime while others countries can begin to regain some of their investment
- every company engages in anti-competitive behaviour. Even though (and others) Google are a supposed proponent of the 'Don't be Evil' mantra they still have shareholders to report to meaning that even if they don't want to they have to
- if too few countries make changes their companies are going to be subject to foreign takeover interest (friendly and non-friendly) if adequate measures aren't taken to protect them. Moreover, they will be at a competitive disadvantage when attemping to branch out. The only way to look after these interests is to look at the way companies are structured in order to look after the needs of both the individual and collective simultaneously
- making changes for a fairer and more equatible society isn't easy and the irony is that those who are already successful will always appeal to reduce the chances of the status quo changing. They will insist that since they 'made it' so can others. Moreover, there are always those within the political and public services who will always have differing opinions on how to acheive the same thing
- people say that globalisation and free market capitalism is a guard against collapse. Someone in the system is always going to be looking for money or someone is always going to have money. The problem is that there's no incentive to do this. Moreover, it has been proven in the United States and Europe that pure private, free trade capitalism isn't necessarily going to fill the void should there be significant underlying problems. Even states and unions can not hold back the dam should the market burst. Moreover, firms have shareholders and creditors to report to. Without adequate safeguards in place the needs of the many are never going to be met by the few who are lucky enough to have survived (there is only one exception to this. If there is strong leadership/management in the private sector which I haven't seen to many instances of)