Friday, November 07, 2008

Something to ponder about

First off, with the beautiful weekend weather I may hitch up the baby-monkey-carrier and take a little bike ride tomorrow morning.  That might be a lot of fun.  He likes zooming around in the little trailer and I’ve got a couple of BIG decisions to make, so the fresh air and quiet time might be good for me.


There’s something else I’ve been pondering rather recently.  In light of the latest round of discussions over “stimulus packages” in congress, there’s an interesting definition to consider. 


What is the difference between “money” and “capital”?


Let’s say every man, woman, and child gets another $300 in the mail.  That $300 will be enough to pay down some debt, maybe.  Make a payment or two on the car you don’t own (and possibly can’t afford).  Maybe make a house payment (for the house you don’t own and possibly can’t afford to delay the inevitable foreclosure).  Possibly even put some more garbage in your house that you don’t need so that you can impress neighbors that you don’t like.  Generally speaking that “stimulus” money will be spent and gone in 2 to 3 months, probably in the hands of some multi-billion dollar corporation where it will go to pad the pockets of the executives.


That’s what happens when you have “money”.  You go buy stuff (from a giant multi-national corporation) or maybe pay down some debt (held by a multi-national gigantic bank),   That’s what money does.  It’s one of the fundamental pillars of our economy—money buys stuff which allows companies to make more stuff.  If the money goes away, the stuff sits on shelves, companies don’t make more, people get laid off.  When people get laid off it DOESN’T mean the fundamentals are weak, it means the fundamentals are working (there’s your 8th grade economics lesson, Spartikus).


The alternative to “money”, however, is “capital”.  Capital is the stuff that businesses are made on.  At some point enough money—or other resource—is accumulated to become “capital”.  When someone has “capital” it gets invested.  The land rushes of the 1800s allowed people to get free “capital” in the form of acreage.  (1 acre does not a farm make, but 40 acres suddenly is a productive portion of land, or “capital”.)  You could leave EVERYTHING behind and strike out for the great frontier with the expectation of settling your own homestead.  A few months later you had some land, a house, and then some crops.  The crops go to market and you have some extra money which you spend, invest, and save, but the land—the CAPITAL—was still there and generating more and more each year (until it didn’t in the dustbowl, 2nd grade history there). 


That’s what “capital” does.  “Capital” generates “money”.  Those who have it—the capitalists—generate money for those who don’t—the consumers—who then spend money that comes back to the capitalists and a portion gets invested and a portion is kept.  The invested portion generates more money and the cycle continues (more 8th grade economics, there sport).


The latest number I saw for a possible “stimulus” plan was $60,000,000,000 (60 billion), or roughly $300 to 200,000,000 people.  If you take the same 200 million people and make the stimulus plan, say, $1 TRILLION dollars, but instead of just sending everyone a check for $5,000 you sent them a voucher that represented a deposit into an investment account of $5,000 and allowed them to invest that money as they saw fit—not withdraw it, only invest it—then it might represent the first steps toward a fundamental cultural change in this country away from a nation of consumers to a nation of capitalists.


Over 10 years, at a VERY modest 2.5% interest rate (CDs are running at 3.5% at my bank, simple savings are offering 2.5% at my bank, any decent mutual fund and most index funds beat that over 10 years), that $5,000 generates a little over $1400.  In the 11th year it generates an additional $162.  In the 12th it generates an additional $166.  The dollars returned continue to grow as the principal—or “capital”—continues to grow. 


There would, of course, have to be rules.  The treasury (because I presume this would be handled out of treasury) can require that no more than ½ of the accumulated income can be withdrawn from the fund at any given time.  That insures that the principal will grow over time and nobody will be allowed to withdraw the funds completely.  Additionally, they can make the account non-collateralized so that nobody can ever make a loan against the asset—this protects the wealth building potential of the account. 


People would be able to add to the fund as much as they like (unlike with IRA and Roth IRAs where people can only add so much).  What about survivability of the fund?  Well, when you die that $5000 goes back to the originator of the fund and the accumulated income remaining in the account (1/2 of all accumulated income that you were not allowed to withdraw) will go to your decedents, less a hefty inheritance tax of maybe another 50% so the government gets its original $5,000 back plus 25% of accumulated income—not a bad return for the feds. 


This would be TRULY priming the pump and stimulating not only the economy today, but the economy tomorrow and the culture of tomorrow.  We could turn away from the buy and spend and borrow and spend economy and policies of today and truly go forward into an ownership economy where the wealth can truly be spread around, not by some benevolent government but by the OWNERS of the wealth. 


This also has another added benefit.  Because the funds would be cash on hand deposits, it would bolster the liquidity of banks in the short term—not unlike the near 1 Trillion dollars already spent—allowing them to extend credit to companies so that they can get on with the business of getting on with business. 


What would you do with an income of $3000 a month and no debt to pay?  Answer:  whatever the hell you want.


Where would you work if your only monthly obligation was food?  Answer:  Anywhere you want.


How do you live without any debt and a pile of cash saved for emergencies?  Answer:  like no one else.

We live in a capitalist economy where only 5% of the population are capitalists.  We live in a market economy where nobody understands the market.  We are on the harbingers of the financial world, but we’re looking for industrial solutions.


It’s time.  It’s past time.  It’s way past time.


Blogger K said...

Good luck on those big decisions...

It's the little ones that get me.

7:01 PM  

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