I would like to describe a contributor to the economic prospect facing the world and especially lower and middle class western populations. This suggestion was prompted, in part, by Edward N. Wolff’s description of the partitioning of North Americans into an increasingly wealthy 10 percent, and remaining 90 percent who must make do with correspondingly less.
My inspiration has also been David Chilton’s The Wealthy Barber and a stream of like-minded advice from financial institutions.
The consensus of these gurus? If one invests modest sums early in life, the middle and later years can be taken off so far as investing is concerned. Because of the magic of compounding, a princely sum will await them upon retirement.
What we need to understand — and what Mr. Chilton allowed in response to my question during an early morning ‘feel good’ presentation at an AMTCO conference in 1994 — is that compounding investment strategies covertly require that only a small population so conduct themselves. Consider what would happen if everyone took Mr. Chilton’s advice. The number of dollars in circulation would reflect the widespread incidence of compounding wealth. This would be accomplished through mechanisms enlarging the money supply — which are not restricted to printing money, but include the issuing of cheques, mortgages and other promissory instruments drawn on financial institutions.
Obviously, the magic of compounding requires — and achieves — a volume of dollars sufficient to ‘contain’ the benefits enjoyed by investors. The fly in the ointment is that dollars are constantly adjusted so that they fairly represent available wealth. There is an inevitable relationship between (1) money supply: (2) the volume of goods and services and the quantity and quality of public and private infrastructure. When this correlation is other than 1:1, the result is either inflation or deflation, depending upon whether the money supply is ballooning or contracting with respect to ‘tangibles’.
The point is this: if compounding investments do not have corresponding affect upon the production of tangibles and services, investors would achieve princely sums only to find their dollars so inflated that they are scarcely better off!
The related reason investors prefer to keep their numbers small is that there would otherwise be too much investment capital. Everything else being equal, this would suppress interest rates and yields.
In other words, the Chilton plan works but only if it is not universally applied. This may not be a logical flaw, but it surely constitutes a moral conundrum. For example, how can a financial institution recommending RRSP’s and mutual funds know whether the next investor will not tip the balance so that existing investors come up short in stock and bond markets? David Chilton and his peers in banking and financial institutions inhabit a strange niche wherein the quality of their advice depends upon most people not taking it.
Having said this, there is obvious merit in investing in public and commercial infrastructure and private estates. If the resulting economy is vigorous — and willingness to invest is the only proven route to vigor — employment opportunities result, companies are formed or prosper and the rising volume of goods and services benefits everyone.
However, it is increasingly the case that investments do not have this result. One increasingly common scenario operates by transferring wealth from the population of existing investors, to new consortiums. This occurs, for example, when large retail developments in urban areas render existing retail establishments worthless. However, the most hypocritical example of “taking something and giving nothing” is government-sponsored gambling. The reason that gambling is deemed criminal (by governments!) when convened by mafia types, is that it is a form of robbery.
Politicians are aware of this. Consequently, they talk about channeling lottery and casino proceeds into charities and public projects ... examples of "giving something and getting nothing" ... which presumably balance the moral equation!
Unhappily, there are much more important — and pervasive — examples of corrupted investing. The North American landscape has been transformed — some say transmogrified — by commercial activities. Billions are spent every year in commercial activities which do not even pretend to meet or create new needs, but seek the clientele of existing outlets. What is the harm of such investments? Little additional wealth is achieved, though enormous sums are spent in manpower and construction costs. The value so generated must be offset by the value of prematurely obsoleted or bankrupted organizations.
In addition to the erosion of city centers, profits are siphoned out of communities for the shareholders of corporations; local politicians are traduced into tax-revenue buffoonery; and senior governments prostitute themselves for campaign contributions.
This destructive pattern is not restricted to the retail sector. In November 1996, Ford Canada president Mark Hutchins warned of a worldwide overcapacity in automobile assembly plants of about 20 million vehicles. (Global sales are approximately 50 million.) Even so, more plants are being constructed in third world countries where low wages will translate into abandoned factories and increased unemployment in industrialized nations.
Automakers are falling over themselves to throw up new plants in emerging nations, especially Asia.
South Korea has bumped up car production dramatically. Japanese car makers, meanwhile, have overcapacity troubles at home after building a number of assembly plants in North American, Asia and Europe.
“It’s the problem that all the manufacturers think they are going to win at somebody else’s expense."
In short, as communities are discovering, the level of commercial activity and local employment need not increase because of such ‘investments’. Commercial vigor may well decrease — although this is unquantifiable and therefore inadmissable to politicians and accountants.
What I propose is that the aggressiveness of such stratagems signals that the equity vested in the wealthy sector is outstripping legitimate investment opportunities. However, the pressure to invest, on both financial institutions and wealthy individuals, is inescapable. They will seek out investment possibilities, and create opportunities where none existed.
Historically, this has been capitalism’s most provocative feature.
However, in the ‘developed’ world, investors have devolved to creating ‘opportunities’ where none should exist, which is a different matter. Amalgamations, hostile takeovers, buy-outs, price-fixing scams, political contributions against the possibility of quid pro quos ... occupy the world’s fiscal cognoscenti to an alarming extent.
The consequences are pervasive. The public’s de facto investment in existing infrastructure is regularly devalued by invasive ‘competition’. Buildings and lives are demolished decades before their natural conclusion, replaced with non-unionized or off-shore workers, sophisticated machineries, self-service gas pumps, ATM’s, Big Box retailers and malls. If it is true that investments vitalize economies, it must be equally true that needlessly devalued workers and commercial operations are unindicted depressants.
Wal-Mart arrived in Canada in November, 1994, purchasing the Woolco chain and developing new centres. By 1996, Wal-Mart boasted 133 stores and had doubled Woolco’s share of the Canadian retail market: namely, $3.3 billion of $71 billion, a figure which has remained flat for some time. Writing in the Toronto Star, November 7, 1996, business reporter John Deverell reported that Wal-Mart has
“siphoned nearly $1 billion in sales from ... other department stores and $700 million from other general merchants and specialty retailers.”
In the face of this jockeying for position and market share, it is appropriate to ask why investable equity has not continued to lead to innovative manufacturing?
Part of the answer appears to be that loyalty, pride of place and community are vanishing features of urban life. In the past, these characteristics have given short shrift to unnecessary retailers — a fact not lost upon those contemplating arbitrary or redundant projects. Thus, investable equity was channeled into new possibilities — and these almost always involved new products or services, new employments and economic vigor..
An equally important obstacle to local economic vigor has been that the products purveyed by both big box corporations and the traditional retailers locked in competition with them have tended, in recent decades, to come from off-shore. This, in itself, is neither good nor bad. However, the increasing percentage of consumables manufactured by ‘emerging nations’ — i.e., by workers harmed because the value of their labour is transferred elsewhere — is now turning upon exploiting populations. They are finding that there is a depressed market abroad for their productions. Of course, this may not always be obvious insofar as balance of trade figures are concerned. However, what is happening is that first world nations are importing consumables and exporting expensive and sophisticated manufacturing technologies.. These technologies are being placed in offshore locations wherein they contribute to local manufacturing prowess ... and increase competition with domestic first world workers. In addition, the exported technologies which are presently balancing the trade books of first world economies are doubtlessly depressing third world wages by giving multinationals and indigenous third world employers options with respect to domestic labour. It is reasonable to expect that this dynamic will trigger further consumable product diminutions. Of course, the world population is growing rapidly — at close to 200 persons per minute — and there will be some increase in third world consumption for this reason. My point is that this increase in nothing like the increase that would be occurring if the financial community was still making the wholesome investments that characterized the western world since the industrial revolution began 200 hundred years ago..
In the meantime, westerners owe a good portion of the luxuriousness of malls and shopping concourses, the frenetic pace and expense of marketing ploys, and profits, to brutalized lives abroad and, increasingly, at home. We are not funding these proceedings ourselves but by transferring grotesque proportions of the value of marginalized work. We cannot pay off-shore workers — and, increasingly, our own domestic workers — living wages because it costs so much to convey the fruits of their labour through the distribution system. In addition, we must retain sufficient value to reimburse clamorous investors .
Until recently, developed nations have been getting away with this, and we clearly regard the present contretemps as an anomaly we will soon leave behind. There is, however, a fatal worm at our economic heart. We are all agreed that the North American dream assumes a certain level of local employment and income. What we have failed to grasp is that only a certain portion of this employment can consist of flipping hamburgers, cutting hair or flogging real estate — the activities comprising the so-called service sector. We need to produce a critical percentage of goods, and we need to produce this percentage in ways in which human beings are employed and reimbursed.
This is true for a simple reason: For most people, there is little benefit in the existence of sophisticated machines in the absence of procedures distributing the resulting wealth. Historically, this was achieved by manufacturing employments abetted by trade unions and the politics of liberalism and socialism.
However, these elements are foundering upon the realpolitik of capitalism: only those owning means of production or distribution have a prima facie claim upon wealth. All others must make their case. Along with the need to remain competitive — a much talked of obstacle to distributed well-being — lurks monstrous public debt figures. In the face of these, public expenditures for infrastructure maintenance, health care — and, especially, welfare, must give way. There are, after all, service charges to be met. These have, in fact, become so onerous that politicians speak unanimously of the desirability of retiring government debt.
However, any such retiring will have to wait until deficit financing has been eliminated — and even this seems beyond reach. Public debt-servicing or amortization can only come from one of two sources: increased taxes or service clawbacks. Historically, liberals and socialists raised taxes and levels of service to distribute the wealth flowing from new technologies, industrial and commercial infrastructure and historical investments in education. Conservatives have little patience with any of this. Only those who own (a piece of) production equipment, or find employment therein, have any claim upon wealth. Historically, a relatively small population — the royalty and the aristocracy — owned virtually everything. The poor existed by making themselves useful to the wealthy in some fashion: as serfs, vassals, caretakers, sharecroppers, concubines, soldiers ... .
This is still the modus operandi of many nations; and was the order of affairs in the western hemisphere until the industrial revolution spawned the middle class. We should notice that at no time was ownership of means of production distributed across populations. Factories and commercial ventures remained vested in comparatively few hands. Wealth was distributed because millions had secured employment
Moreover, there is reason to believe that socialism and trade unionism — more generally, the middle class — enjoyed their day in the sun because there was money to be made out of an enlarged sphere of creature comfort and security in the company of vigorous ambition.
Indeed, such pragmatic accommodations by conservatives (and we seem to all be conservative when hard-pressed or taking a profit) suggests an explanation for the unprecedented interest in democracy and capitalism occurring around the globe. The wealthy in non-democratic societies may have observed and envied their even wealthier counterparts in democratic environs. It cannot have escaped their notice that an important engine of extraordinary wealth is the initiative and enterprise of workers in democratic-capitalist socieites. All that remained for would-be fascists to feel comfortable embracing democracy was evidence that democracy was manageable.
The last few decades appear to have demonstrated this to their satisfaction.
Of course, industrialists and entrepreneurs could not have carried off this project without help; and the help they have enjoyed was the ‘conditional generosity’ of millions willing to countenance one another prospering so long as the middle was getting ahead, and there was the associated belief that the well-being of others was fertilizing the prosperity of everyone. We were even willing to countenance welfare payments because of this faith — and because John Kenneth Galbraith had persuaded us that maintaining consuming capacity was an important buffer against recessions triggering economic meltdown.
With a decade or more of economic contraction tightening their belts, Mr. Wolff’s non-wealthy 90 per centers have been shaken from such ideological perches. They have retreated to conservative politics and rhetoric. Individuals are now willing to sacrifice one another for even the possibility of enhanced job security. This, not automation or free trade, is the reason trade unionism is in retreat everywhere. Smelling blood, neo-conservatives ideologues are coming out of the woodwork. The only governments being elected that are not nominally conservative are those that are conservative to all intents and purposes.
Unhappily, there is little reason to believe that Mr. Galbraith was mistaken. Try as they may, the wealthy 10 per cent are unable to consume enough to occupy even a portion of existing retailing infrastructure. Moreover, they are rarely to be found in malls. In the meantime, collective greed and willingness to exploit third world nations has depressed the evolution of off-shore markets.
There is reason to believe that western economies are on the brink of catastrophic collapse.
I would like to conclude with a Chilton-style illustration using well-known facts about wealth distribution and the magic of compounding. Echoing Edward Wolff, the Organization of Economic Cooperation and Development (OECD) advises: “The richest 1 percent of the U.S. population, as of this year (1992), holds 42 percent of the national wealth. In Canada, the top 1 percent holds 25 percent of all assets, and in Britain this group holds 18 percent.”
If we consider the American case, it seems reasonable to assume that of this 42 percent, 30 percent exists in some form of investment. We may also conservatively estimate their real rate of return (nominal interest rate or yield — minus inflation) to be 3 percent. Then — using the “rule of 77" — the wealth held by this 1 percent will double in 25 years. Similar compounding is available to anyone with investable equity, but these people are now almost entirely within the top 10 per cent. (In rough terms, according to Edward Wolff, the top 10 percent own 90 percent and vice-versa.)
There is therefore only one question middle and lower class populations need to ask: Is it plausible to expect that total wealth in America, Canada, Britain ... will also double over this period? If so, there is at least the logical possibility that trickle-down benefits will occur. In any other future, additional wealth enjoyed by the upper ten per cent must be achieved by transference.
Even if we are sanguine about real growth keeping pace with the money supply in the near future, it is logically compelling that eventually growth possibilities will be exhausted in the context of compounding, legally-binding fiscal devices that will then occupy themselves transferring wealth from bottom to top.
In the meantime, there are three statistics that should command our attention:
- The top 10 percent of (American) families as a group account for about 90 percent of stock shares, bonds, trusts, and business equity, and 80 percent of non-home real estate.
- United States citizens, according to the federal debt clock November 8, 1996, owed above $5 trillion. They number 266,149,624, and each owes $19,674.97.
- This debt is increasing at a rate of $659 million every day. It is estimated that over the 15 years between 1995 — 2009, interest on the debt will amount to $5.2 trillion — i.e., the present face value of the debt.
Such statistics suggest the following question: Which of the populations identified by Wolff and others — the haves or the have nots — authored, conceived of, motivated and legislated public debt? Received wisdom (i.e., the innate conservativism we all harbour) holds that public debt was authored by self-interested groups, squeaky wheels that, over decades, forced politicians to cater to short-sighted greed and gratuitous folly. Since public spending and other consequences have run amok, right-thinking people must intervene before all is lost.
Intuitively however, there may be other, more powerful players. The rate of capital accumulation among the top ten per cent may have grown so rapid that it can no longer be assimilated and invested in wholesome ways. The need would be to find fast-fix places to vest money, hence investors’ interest in corporate takeovers, existing retailer displacement — and the evolution of enormous public debt, an investment vehicle featuring excellent returns and virtually no risk.
Indeed, the risks involved in managing wealth — which have always been cited to justify the rewards enjoyed — seem now to be greatly overstated. At this point in the investment cycle (the position of a Chilton investor approaching retirement, all the 10 percenters have to do is be conservative and avoid any compromising of their position, i.e., any leaking of value to those below. This is the new face of conservatism, which had heretofore been advancing what Edward Wolff termed the bigger pie model:
Conservative economic Policy has once central idea: just create a bigger pie and everyone will have a bigger slice. In fact, conservatives predict that if we cut the rich a bigger slice by lowering their tax rates, the resulting growth will enlarge everyone else’s slice too. This was the core idea of Reagan’s tax cuts, and it is central to such conservative goals as lower capital gains taxes.
In other words, since money cannot really be lost, the wealthy have recently been consoled by the verity of ‘general vitalizing’ — the ‘everyone wins’ rationale of trickle-down, supply-side analysis: the wealthy sector soon regains any inadvertently lost ground — and then some!
It is worth remembering however that such considerations carried little weight throughout history. However, we have come to believe that a mix of liberalism and socialism, guiding the economic dynamo of conservative capitalism, flagged economic and social moral achievements. Moreover, we believed that these precedents would not be lightly rescinded or repealed. For this reason, many doubtlessly voted for conservative governments believing that they would be tempered by the corpus of liberal and socialist accomplishments. What we have believed was needed, in other words, was a more rigorous hand upon the helm so that the special quality of Canadian life would be preserved ... health care, social safety nets, the CBC ... the elements comprising the “just society”.
What we are getting is more than we bargained for. Even the most trenchant conservatives appear startled with the rapidity of ‘slash and burn’ downsizings and clawbacks. What this astonishment refuses to consider is that our mix of liberalism cum socialism has no legs of its own. In other words, liberalism and socialism emerged because they were thought by conservatives (and we are all conservatives deep down) to be, on balance, useful marketing tools and instruments of social order. Accordingly, nothing prevents their summary withdrawal as soon as this usefulness is vanished or replaced.
In particular, the wealthy have grown comfortable with an unprecedented measure of distributed wealth — not because of any new morality or empathy — but because distributed well-being was seen (1) as an engine of profit, and (2) as a means of securing order. However, this tolerance is being undermined. Corporate/shareholder greed, the unprecedented ability of corporations to take advantage of emerging populations; the unprecedented ability of multinationals to disentangle themselves from moral and political constraint altogether ... is setting the stage for conservatism and insular wealth.
Finally, it is necessary to consider the population of largely impoverished human beings now in the world, and the fact that this population is expected to 9.3 billion by the year 2050.
Even though the percentage rate of population growth is projected to decline steadily between 1950 and 2050, annual growth in number of persons alive continues to either rise or remain stable. Obviously this is because a smaller percentage is being applied to a progressively large population. Parallels with the compounding return circumstance of the wealthy are unmistakable. Together, these relationships define the predicament of the bulk of the human race. Every other issue is peripheral. Every other crisis probably has an important root
The question is what to do in the face of these ineluctable processes. Even if compounding proceeds more slowly because of lower interest rates, the process of radical polarization will continue. Indeed, as population growth figures demonstrate, the rate of polarization will not diminish, given that great wealth is already vested in such few hands.
The wealthy appear to have grasped the paradoxical nature of their fortune, and to be making a logical move: reduce the visible accretion of wealth and take equity increases through mechanisms of deflation — or at least through some combination of lower interest and lower inflation. Indeed, they have no choice. The continued, unmitigated operation of compounding, value-siphoning machineries would cause the entire structure to implode. This is the problem Chiltonites have not anticipated: the wealthy sector can be regarded as a single immortal person several hundred years into the investment strategy. Sooner or later, such a person’s investment strategy must transform into conservation: the stability of continued returns requires that the golden goose remains alive. In short, at the risk of losing everything, the wealth flowing into the ten per cent sector must be moderated.
American citizens, over the next 15 years, will pay debt servicing costs equal to their present national debt of over $5 trillion.
This is not to suggest that this moderation need stop anywhere short of very real impoverishment of what we might term ‘remaindered populations’. History and the contemporary world contain lots of examples of how great the spread between top and bottom can be. The trick has much to do with perceived responsibility and managing expectations.
In the meantime, by way of short-term benefit, not only are equity increases through deflation more manageable politically, the wealthy would have less difficulty with income taxes!
The problem with deflation has always been that it removes a powerful incentive for the ordinary person to lodge money in banks so that interest returns defray inflation. However, with the preponderance of wealth already in banks, this reason vanishes, and the way is cleared to pursue deflation-driven gains.
Source: U.S. Bureau of the Census, International Data Base.