Guest Post by The Zman
Every businessman understands that every dollar of revenue that comes in has with it a cost required to earn it. If the business provides a service, then the biggest cost of sales is the labor required to provide the service. If the business sells a physical item, then the cost of making or acquiring the item is the big driver. There are indirect costs like rents and administrative expenses, but the starting place for any business is the cost of sales, as that is what ultimately determines profits.
There is another cost that is important, sometimes the most important, that does not show up in the financials. That is the cost of profit. This is an intangible cost. What unpleasant things do you have to do in order to make a profit? Maybe you have to be terrible to your employees or tolerate nasty customers. You can make a nice living running a pawn shop, but most people don’t think it is worth having to deal with the sorts of people, who avail themselves of the pawn shop.
As a society, this concept is easier to quantify, or at the minimum articulate, as a society has a shared morality. There is an agreed upon set of things that a society wants to minimize and a set of things it promotes. It may be better for the economy to rely upon slave labor in certain kinds of agriculture, but the moral cost of slavery is too high to contemplate such a policy. One reason manufacturing was shipped abroad is the cost of the pollution and the aesthetics was too high for our rulers.
The point is that certain types of economic activity may be lucrative for the people in that business or for the economy as a whole, but the intangible cost is too high. It is not just the moral cost either. There is the cost of risk. To allow certain types of lending, for example, puts the credit system at risk, so we forbid it. The cost of profit can also be the long term risk it poses the society, which generally means the cost that will be imposed on future generations when those risks become real costs.
A good example is the very lucrative basis trade popular with hedge funds, where they buy US Treasuries, while selling equivalent derivatives contracts. There is a small difference in price between the two, but when done in volume and with cheap credit, the profit to the hedge fund can be enormous. This is great for the private investors in the hedge funds, but it has huge risks for the economy. The recent bailout by the Federal Reserve is a good example of socializing the cost of profit.
This is just one example of economic activity that is profitable to the people doing it and good for those GDP numbers. It’s also high risk and therefore has an unacceptable cost for the profit gained. Throughout the financial system we see high risk strategies that can be highly profitable and serve some important purpose, like lowering the cost of borrowing, but bring with them unacceptable risks to the system. Socializing the cost profit through bailouts does not make it go away.
Another example of how the cost of profit works in the financial system is this story from Reuters about Capital One. This is the bank that peddles high interest rate credit cards to poor people and non-whites. They can specialize in high risk borrowers, because they charge mafia-esque interest rates. That covers the cost of collecting from deadbeats and the inevitable defaults. It turns out another one of their activities was gambling in the commodities markets, namely the energy markets.
Now, the obvious question is why is a credit card company that preys on dumb people playing at the high stakes tables in the commodities casino? Betting commodities is like playing at the baccarat tables in Monte Carlo. Actually, the odds are better in the casino, as the odds of winning are just 1.23% lower than the odds of winning a hand. The answer, of course, is the potential profit for the bank was huge, just as long as energy process never fell below a certain level, like they have recently.
As American states lost the will to directly tax their people, especially their rich people, they turned to indirect ways to fund government. One is the legalization of gambling, especially state-owned casinos. Since every state is in the gambling racket, a new type of casino has evolved. This is one with a grand shopping mall and Potemkin town center attached, so people can dine and socialize. The idea is to get everyone under one roof in order to encourage more consumption.
This model is the symbol of modern America. Our economy is a massive shopping mall, an international bazaar operated by traders from around the globe. Attached to it is a massive casino called the financial system in which the profits from the bazaar are wagered on increasingly high stakes bets. It has become so unstable that the landlord, the Federal Reserve and central government, has to keep stepping in to keep everyone afloat. It is a high tech, high stakes palace economy.
This is very profitable for the nation’s rich people, which get to enjoy luxury unimaginable just a couple generations ago. Even Louis XIV could not have rode out a pandemic aboard his floating castle. Meanwhile, the cost of such luxury will be his fellow citizens (does he consider them his fellow citizens?) lining up for miles to get food distributed by the local food bank. The price of such profit in terms of risk and inequality is simply too high to tolerate much longer.
In times of want, people are forced to think hard about their priorities. The same is true of a people facing a crisis. The Great Madness over the plague is going to send the economy into a depression. The West in general, but America in particular, is going to have to decide if the cost of profit, the cost of this high stakes casino economy, is truly worth it. Is this how we want to live? For what shall it profit a man, if he shall gain the whole world, but lose his soul?
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The big problem is weaning all the feckless from the governmental “teat”. That includes the likes of Capitol One…” of what’s in your wallet” fame. How they managed to “diddle” the CFTC to get their “free shit” should be subject of a grand jury investigation.
Hmmmm…maybe Capital One is EXACTLY the company with which a new account should be opened. It’d be a real shame if an unfortunate set of circumstances – such as a layoff – occurred and you’d have to run the tab up.
The system has difficulty changing when the people who run the system, our esteemed elected officials, make such a profit from the corruption of the system. The only way the system will change is a true revolution with torches and pitchforks.
Now in the past I didn’t think this was conceivable. Americans prefer sitting on their asses watching sports on TV to sharpening their pitchforks. But Mr. Corona may have changed that dynamic. With no more sports on TV and unemployment likely to exceed 30%, my fellow citizens might have a bit of time on their hands to contemplate how badly they are getting screwed. I don’t think a $1,200 check in May will change their minds.
This may be an interesting summer.
“Vulture capitalism” can be defined as the owners of businesses and industries that collude with each other, also in collusion with governments (corporate welfare) and with the “money types” (banksters) depressing wages solely to increase their stockholder “profits” at the top while impoverishing those who actually WORK, producing their products.
Wall street sees “labor” as being a necessary evil, its true value to be minimized at all cost while valuing the CEOs and “stockholders” above and beyond their true worth.
This even applies to CEOs, that run their corporations into the ground while still receiving massive “rewards” for their “expertise”.
Let’s not forget the corporate vultures (a la Mitt Romney) that specialize in parting out viable businesses in order to maximize their “profits”
Henry Ford “got it right” when he CREATED a market for his cars by making them inexpensive while paying his workforce a decent wage. He realized that a well-paid workforce would be able to buy his products, among other things.
It could be safely argued that Ford, CREATED the middle class. Automobiles, once “playthings for the rich” were made affordable for the “ordinary common man”.
Henry Ford KNEW who the banksters and vulture capitalists were and made no bones about calling them out and naming them. Father Charles Coughlin did the same thing and was ostracized by the Catholic Church for pointing out the TRUTH about our vulture capitalist society.
All one has to do is look at today’s CEOs, even in failing companies, being paid exorbitant salaries, along with stock options and other “perks” while pleading poverty, pushing down wages for their employees.
Today’s capitalist “mantra” is that labor costs must be as cheap as possible while the “value” (profit) to the stockholder must be as great as possible. Sacrificing labor on the altar of “maximum profits” NEVER works in the long term. The sad part is that this is the mantra taught in business schools…
Of course, in the short term, with cheap Chinese goods flooding the market, the economy looks, good, but without CONSUMERS who hold jobs that pay reasonably well, all bets are off. There needs to be a balance between profits and labor.
Presently, labor is looked upon as a “necessary evil” to be minimized at all costs. The problem arises-without labor there are no consumers. As I previously stated, a “balance” must be maintained. Labor is not evil, but a necessary component of capitalism.
Pre-WW2 Germany’s economic successes and the rapid rise of the German economy was predicated on labor being assigned “value”and monetized-something that is (and has been) missing in capitalist societies today.
If labor costs need to be trimmed to assure “profit” at the top, something is seriously wrong. In fact, in the well-paid American automobile industry, labor costs account only for approximately 10% of total costs.
Offshoring production results in consumers (customers) being “lost”.
As to “tariffs”, the American country ran on tariffs from its inception until 1913, when the “income tax” and “federal reserve” was established.
The American economy is being propped up by the “social safety net” which obscures the TRUE economic situation in the U S .
An-check out The Vagabonds by Jeff Quinn; excerpts here:
https://www.thehenryford.org/collections-and-research/digital-resources/popular-topics/the-vagabonds/
“They can specialize in high risk borrowers, because they charge mafia-esque interest rates. That covers the cost of collecting from deadbeats and the inevitable defaults” Actually Z, this is not quite accurate. The banks and other lenders pretty much instantly securitize this into bonds and sell the debt. The bonds are then sold to pension funds, which are required by law to buy them. That scheme allows unlimited amounts of money to be written off. Ever wonder why pension funds can’t generate a measly 7% a year when the stock market is going up 30%? Securitized bonds are where bad money is sent to die.
An astute and fun read. America as a casino with attached restaurants, boutiques, and gift shops. The odds have always favored the house. But who now owns the house? It’s a million-dollar question right there.
Black Rock (and the Clinton Foundation) are the new owners.
“As a society, this concept is easier to quantify, or at the minimum articulate, as a society has a shared morality.”
What is our shared morality? I can’t seem to find the new rules.
We still have some amount of shared morality, though much of it is latent. We will see how much when SHTF time comes. He who has the most ammo likely will be the one with the new rule book.
No doubt in my mind, Great Depression 2.0 is underway NOW.