Money makes money for a few

Money makes money for a few

Photo by Daniel Barnes on Unsplash

How does wealth concentrate? 

Alloporus has discussed whether or not it’s fair to give a 10% pay rise to every employee in a business

It sounds dutiful and egalitarian, and it also suggests the company must be doing well to make such an intelligent investment in its workforce. 

Breaking the numbers down, it is clear that 10% to the lowest-paid workers in the company and even those on the average salary in the company results in far fewer extra dollars in the paycheck received by the CEO; let’s call him Jerry, for his 10%. 

The average worker gets, say, $200 extra a fortnight after tax. On his $750k a year, Jerry is looking at an additional $1,700 despite his heavier instalment to the tax office.

Justifications abound because the CEO is the boss and must make the decisions and wear the risk. He is worth the extra pay and has considerably more buying power in raw dollars from his 10% pay rise. 

Jerry is an intelligent fellow — not a given — so he chose to put the money from his pay into a unit trust, nothing too fancy, just a rainy day option. He did this each month.

The shop floor worker, Tom, was in debt, and he decided to put the extra money into credit card repayments to bring his balance down. His kids wanted presents for Christmas, which took care of December’s extra pay. His eldest daughter was about to go to college, and Tom wanted to send her off with a small sum to get her through the first semester away from home and used January’s extra pay. 

Tom consumed the extra money, and Jerry put it away in a modest investment. 

After ten years, Jerry’s investment of $3,600 each month was worth $577,971, of which $132,328 was the result of compound interest at 5%. 

He decided to cash out his units and made a hefty downpayment on a property south of Brisbane that he immediately rented to increase his net returns to 7.5% and convert his principle into a more stable asset class.  The property doubled in value over the next decade, giving Jerry another $1.5 million property in his portfolio. 

Now, you could say that Tom could have done the same thing and matured his salary increase by investing it. His $433 per month in the same unit trust would be worth $67,950 after a decade, including $15,500 of interest.

Making an investment choice might have been a clever play. Tom may have saved just enough through the investment to offer his daughter a deposit on a flat or maybe pay for her wedding that came ten years down the road. 

But his material wealth would never reach the same levels as Jerry in his working lifetime. 

As they say, money makes money. 

But the point here is that wealth also concentrates. 

The company has one CEO and a handful of executives with salaries large enough to easily invest their 10% but lots of workers, many struggling to make ends meet. The opportunity to make real money falls to a few.

Of course, the owners were happy too. The major shareholder in the business, Mr Hannah, also enjoyed a 5% share dividend each year. His 2.5 million shares were worth $5 million when the first instalment arrived, a handy $125,000.

Similar dividends were paid annually for a decade, with the money moved into various assets that yielded 5% interest. That initial $125,000 plus the annual instalments grew to $1.8 million in a decade, $400,000 of that in interest. Naturally, the shares rose on a buoyant market to be worth $10 million. 

The owner’s wealth accumulated too.

Then there are the super owners. Here is one chosen at random. In June 2021, Bloomberg Billionaires Index listed Dieter Schwarz, a german businessman who built his fortune owning supermarket chains, as the 61st richest person globally with an estimated net worth of US$27.3 billion. 

Should Mr Schwarz earn 5% interest on his assets, he receives $3.7 million a day before tax.

It is hard to figure out how to spend that kind of money. 

Of course, most of the time, these people do not. They invest it after paying clever accountants to minimise their tax. Then, on occasion, they give some of it away.

Dieter Schwarz.  $13,500,000,000
Mr Hannah. $1,800,000
Jerry. $578,000
Tom. $67,000
Annual returns after ten years on a 10% pay rise or 5% dividend compared to the cumulative returns from Mr Schwarz’ existing assets

The pattern is clear —  capitalism creates wealth that concentrates into a few individuals or entities. Over time this opens a wide gap between those who have and those who do not.

None of this is new nor much of a revelation. Accumulation and concentration are how capitalism works. The reason for revisiting the basics is that there is a lot at stake should this pattern continue.

Poverty and excess make each other very uncomfortable, and history tells us that resolving such disparity is ugly for everyone.

Better not to let it get out of hand.


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Please mind the gap

Please mind the gap

Photo by Tim Hüfner on Unsplash

Here are some interesting numbers

  • Jeff Bezos is worth $US183 billion according to Bloomberg’s Billionaires Index.
  • Since March 2020 when the COVID pandemic was declared, Bezos’ wealth has swelled by $US67 billion.
  • His income is roughly $US2,000 per second.

The arrival of the COVID pandemic with its lockdowns, social distancing, and unprecedented hand sanitisation has been a shock. It’s jolted perception of the way the world works and made a few folks think twice about how our societies function.

People are reminding themselves of exactly what goes on in the system of economic production and social organization. The one structured around profit. The successful are those who are able to sniff profit from gaps in the market, new products, and price anomalies — the everyday activity of trade.

And trade makes us all happy from shoppers to shopkeepers, groceries wholesalers or investment bankers who trade in futures, derivatives and their latest invention for a complex financial instrument. It doesn’t matter what type of financial transaction you’re engaged in, ultimately you’re looking for more in return than you give away.

It is often said that the best products are those where the buyer perceives greater value than he’s giving you in payment. Only you must receive from him more than it costs you to deliver the goods or service.

When this happens everyone wins.

So what is there to question given that the pandemic is, after all, just a blip in the never ending growth trajectory? Well, how about the privatization of asset recycling and the fundamental belief that free trade and minimum government will maximize our society and the profit opportunity?

Apparently, the theory of free trade and the mathematical formula that underpin it still holds true. Minimum government is ideal until there is no work for people to do and then maximum government is necessary, spending big by printing money to prevent everything crashing, and, of course, maintaining the opportunity for profit. Governments whose prime agenda had been to balance the books have racked up extraordinary levels of debt. Global debt in US dollars is now pushing US$270 trillion. That’s an increase of $50 trillion in less than five years.

Great success according to Jeff; US$2,000 a second anyone?

Over the years of promoting profit, growth and more growth, many economists jettisoned an equally important concept on the other side of the ledger. They forgot about distribution. What should happen for any system of trade to be sustainable is that the wealth creation is evenly distributed or at least has the potential to flow down to the lower levels of the system. If it doesn’t flow fast or far enough then a critical mass of people might become disgruntled enough to cause a ruckus.

Only what we’ve seen is that the distribution of wealth is now concentrated more and more into fewer and fewer people.

Check out this excellent website that shows just how much wealth is concentrated into first Mr Bezos’ accounts and then those of the 200 most wealthy people in the US.

Take your time, it is hard to fathom.

The gap between the unimaginable levels of wealth of the people controlling the money compared to working-class living is growing and not because living standards in the developed world have declined in recent decades. The decline that fueled the popularism that delivered Trump his presidency.

It is because of wealth creation and concentration.

The liberalization of financial markets has seen debt levels explode at a national corporate and personal level. There’s now so much cash injected into the global financial system by reserve banks that the traditional business cycles have halted. It’s added to our past excesses, rather than curbing them. And all the while the wealth has become ever more concentrated at the top.

The .com crash added debt. The global financial crisis was solved with more debt. Now we have the COVID health crisis shutting down the global economy and the solution is even more debt.

Remember what debt is ”an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor” only a huge chunk of this printed money is making a handful of people… Well, you know what I am saying.

There are only three possible outcomes. One is that central banks wind that an economic recovery allows them to withdraw their stimulus without collapsing asset prices like stocks and housing. The second is that governments take over pick up the slack in jobs and corporate cooperate with each other the solved global poverty and equality. The third is war this yard uses the most likely and the least pleasant outcome.

Victor Schvets, Macquarie group managing director and group head of Asia Pacific.

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