Category Archives: Economics

Billionaires are not Benevolent, but they aren’t all Bad Either (Bad Billionaires 2/3)

This is the promised follow up to The USA is a Third World Country.

As the great Robert Reich points out in How Much Wealth is Too Much?, there are now only five (5) ways to become a Billionaire, and none of them are good!

  1. Exploit a Monopoly
  2. Exploit Inside Information
  3. Buy off Politicians (20M in lobby funds gave Billionaires a 1B tax cut)
  4. Defraud Investors
  5. Inherit It (60% of all wealth is inherited, tax free)

There are no “Self Made” Billionaires. As the great Robert Reich again points out, the origins of today’s Billionaires are Multi-Millionaires with the money and connections to get them going. Wealth is begot from wealth.

And due to all the inheritance and capital gain loopholes, every time it’s passed on it just grows and grows so millionaire families from a century ago had 100 times that before the turn of the century and now have billions today. (Unless, of course, they exploited a monopoly, inside information, or investors, in which case they may have went from millions to billions without the intermediate step.)

Then there’s the fact that most of them greatly increase their wealth by:

  • manipulating stock prices for short term gains
  • paying their workers as little as possible to increase profits
  • using their success to get massive raises and bonues, and even bigger salaries and bonuses at their next job (CEO pay has skyrocketed 1,322% since 1978 [Economic Policy Institute], your pay has increased less than 18% … see the discrepancy (as their pay has increase 73X more than yours has)?
  • borrowing against their wealth to invest in other ventures …
  • including borrowing against their capital gains tax free (while paying less interest than they make on their new investments)
  • contributing to lobby groups / SuperPACS that create new loopholes for them to exploit
  • etc. etc. etc.

So they’re not benevolent.

Not to mention the fact that, in GDP terms, 6 Trillion is more than the GDP of every country on earth except for China and the USA. In fact, that’s more than the GDP of the bottom 128 countries combined (Worldometer). They have more buying power than 70% of the world. (And if you tell me it’s not right, I’d agree.)

But banning them is not the answer. If you try to take away their wealth, they’ll flee with it to another country. If you overtax them, they’ll invest all their money somewhere that doesn’t. If you limit their earnings, they’ll go elsewhere.

And while the departure of some of them would lead many of us to say goodbye and good riddance, the reality is that the country needs the (very) small number of “self-made” billionaires that start with millions and end up with billions and do it the old fashioned way they used to do it a century ago (after the US government busted up the railroad tycoons and brought in anti-monopoly laws) … i.e. there used to be a 6th way, and that way was build a business that increased value for everyone involved … the founder, the shareholder, and the workers. Like Ford did.

Ford wasn’t perfect (do your research), but he knew two things.

  1. if you want to grow your business, you need to make an affordable product
  2. if you really want to grow your business, make sure you pay your workers enough for them to afford it

Billionaires like that grew the economy because they lifted all boats (not just theirs). It’s billionaires like that who are needed to grow it again. Hopefully some well meaning ones will come along and start the cycle on their own, but like Reich, I’m a bit doubtful. The government may need to stand up for the people who elect them and push the billionaires in that direction.

How? That’s a damn good question. But we’ll tackle that in our next post.

The USA is a Third World Country (and by now, Canada is too!#) (Bad Billionaires 1/3)

Why do I say this? Because the “official” US poverty rate is over 11.5% and the official US (long term average) unemployment rate (U3) has been averaging 5.7%, and we both know the official rates (far) undercut the reality since:

  • in big cities and wealthy states, you couldn’t afford rent and food if all you made was $1 above the poverty line; and the US leads all nations with the highest overall child poverty rate of 20.9% (Source: Confronting Poverty)
  • the official unemployment rate (U3) excludes part time workers seeking full time, people who have not been able to secure a job in more than a year, went back to school (even part time) in an effort to level up, etc. and this (U6) rate is usually 50% to 60% higher (putting the long-term average U6 rate at 10.1%)

None of these statistics should exist in a first world country!

According the World Bank, of the 162 countries they track with a poverty line, 18 have a lower percentage of people living in poverty, including pre-war Ukraine, Belarus, Vietname, Kazakhstan, and Algeria. Something is VERY wrong here!

According to Trading Economics, 68 countries have less unemployment than the United States, with Uganda, Liberia, Vietnam, and Mexico included in the countries under 3%! Something is VERY wrong here!

According to UNICEF, there are 34 countries with a lower child poverty rate than the USA. THIRTY FOUR! Something is TOTALLY FUCKED UP here. You are (way) better off having a child in Slovenia, Czechia, Poland, or Croatia than the good Ol’ US of A.

Moreover, if you’re a blue collar worker or a low-tier white collar worker, you’re also screwed since you’ll never be able to pay off your student loans as almost everything you make will go on rent and food. And even if you’re true white collar middle class, good luck buying a house or sending your kids to college.

While all the economists and politicians want to tell you how great things are because the averages keep going up and up, this is all a facade to prevent you from finding out the truth that things have actually getting worse for you since the eighties (when “trickle on”*, which the Republicans like to call “trickle down”, economics were introduced) because the median is not getting better. (In good years, it’s barely holding steady.) The problem with averages is that they include everyone, which includes billionaires that are collectively worth more than 6 Trillion dollars. (If Bezos moved to a small town with under 1,000 people where the average income was 35,000, the average income per person would suddenly be over ONE Million dollars, while the median would stay the same. It’s all lies, damn lies, and statistics.)

The problem is that our buying power has decreased considerably since the 70s (which was the last time things were really good for the average American) as our median family income has not kept up with rising costs (which should not be a surprise as the federal minimum wage in the US has not increased in 15 years). The relative cost of a house has almost doubled, and the cost of sending our children to a community college or trade school has almost tripled.

Here’s a simple table to break it down for you.

Year Median Income Median House Price X times Median Income
1975 13720 39300 < 3X
2020 76600 391900 > 5X

And yet another simple table:

Year Median Income Average Tuition % Median Income Harvard Tuition % Median Income
1975 13720 542 4% 5350 39%
2020 76600 9488 13% 47730 62%

When you break it all down, relatively speaking, the cost of almost everything has increased significantly since the 1970s. The only budget item that has stayed relatively flat (in the 10% to 15% of median household income) is food for a family of 4, but that’s only looking at the numbers. Today, most Americans can only afford cheap (ultra) processed foods, and even Fox News is now warning us about those! (If you were to compare spending on healthy food baskets, the buying power does not remain constant.)

In other words a significant number of you are poor (and much worse off than the majority of OECD Countries [Confronting Poverty]), unemployed, or both, and the way things are, this number that has been rising for decades is going to keep rising unbounded unless something is done. And until that something is done and these numbers start decreasing and level off at acceptable levels (5% max for poverty and 3% max for U6 unemployment), as far as I’m concerned, the US (and Canada, which switched from following the UK’s lead to America’s lead a few decades ago), is a third world country!

So what can you do about it? Some would say ban billionaires (because no one needs that much money and it should be shared more equitably) while others would say fix government (and ban SuperPACS and lobby groups that have too much influence over governments and divert them from your welfare to theirs) and others still fix economics (and what it actually measures), but neither is a solution on its own. It’s not about fixing the wealth imbalance (it’s always been there, it always will be), or ending lobbying (although we probably should end SuperPACs and limit funding levels from any individual or corporation), or changing the definition of economics (because, thanks to lies, damn lies, and statistics, there will always be ways to corrupt the measures and mislead the public), but about increasing the prosperity of the average blue collar and white collar worker, getting them back to 1970 levels, and putting them back on the path to increase prosperity (compared to the majority of the world and making the USA a true first class country again).

How? That’s going to be hard, especially since you’re one of the last “democracies” (well, not really, you’re a republic) still on a two-party system (which is easily corrupted and has been for decades and that’s why you’re not a first world country anymore), but if a party would come along and focus on the right things, it wouldn’t be too hard to right the course … especially since productivity of the average worker has increased almost fourfold since the 1970s due to American ingenuity and grit.

But first, let’s babble about those Billionaires and why they simultaneously are and aren’t the problem. Stay tuned.

 

* Republicans have been telling us that “trickle-down” economics are good for us, when history has shown time and time again that they are not. In reality, those Billionaire tax cuts are “trickle on” economics, because that’s what the Republicans and their Billionaire buddies are doing to you, and if you don’t understand what that means, then type “golden shower” porn site into Google and it should bring up links to at least 30 sites that should have very graphic visual descriptions that demonstrate precisely what “trickle on” economics really is! (I asked Google how many golden shower porn sites and it said top 30, so I am assuming it will deliver at least 30 links to you.)

# Statistics Canada is always years behind compared to other countries, with no good data beyond 2021, but the projection for Canada this year was a 10.1% poverty rate!

The Death of Factoring Will Be Highly Exaggerated

Last Friday, Spend Matters published a great Friday rant by the prophet aptly titled “Die Factoring, Die”! because Factoring can be the death of many an uninformed supplier who, like desperate individuals, take out payday loans to pay off payday loans at insanely compounding interest rates until they go bankrupt.

Factoring should die. It is no longer needed, but the doctor fears just like the pulp industry has survived for over a century when it should have died out long ago, it will still be around a century later. Just like the pulp industry had the perfect environment to grow until it was big and powerful enough to effectively outlaw the competition, the factoring industry has the same perfect environment to grow and crush the better options.

Before we explain, we’ll point out that just like there is a better alternative to factoring, as the prophet pointed out in his post, there is a better alternative to wood-based paper. In particular, the alternative that was around before the wood-based paper craze: hemp. Whereas hardwood trees take decades to mature, hemp can be grown and harvested in a single growing season. It’s the number one biomass producer on the planet (10 tons per acre in 4 months) and contains 77% cellulose (needed for paper) compared to the average tree at 30%. It’s stronger, the paper lasts centuries longer, does not require any bleaching, and the production requires significantly less water and energy than paper production from trees. (The pulp and paper industry uses more water to produce one ton of product than any other industry and is the fifth largest consumer of energy on the planet.) Hemp for paper is many order of magnitudes better, but since hemp (which contains, on average, 1/5 to 1/10th the THC of cannabis) was made illegal with the delegalization of THC in North America, it’s not an option.

This was possible because the pulp and paper industry was rich and powerful enough to lobby for the delegalization across the board, vs. just the delegalization of cannabis. They got that way because, during the start of the industrial revolution, when paper was needed en-masse to “power” back offices, North America was filled with old hardwood forests and there was not much hemp, as hemp was native to Central and South America. The population was much smaller than it is now, the possibility of deforestation was not even considered (as manual logging could only go so fast), and the technology to produce paper from pulp was understood and easy (at the time). And it could meet demand fast — logging could happen year round whereas hemp could only be harvested once a year in many of the central and northern parts of the US. So it became the defacto paper producing industry, and since everyone needed paper, it obtained a monopoly. And since no one knew better, or was even allowed to learn of a better way, the monopoly persists until this day.

Similarly, the factoring industry has obtained a monopoly on what is effectively “payday lending” to suppliers that need money now, can’t get it from the bank, and don’t want to beg the local “godfather” for a loan (at interest rates that put even North American credit card companies to shame, with default penalties much worse than repossession). How did it get like this? First of all, there have been no other viable options for many of these suppliers (as not all suppliers are lucky enough to get buyers that will offer the [slightly] better alternative of early payment discounting, as not all buyers can afford that). Secondly, growth demands working capital, and the capital has to come from wherever it can, and if you are a supplier in an emerging or tight market, it’s often factoring or death. Thirdly, the banks stayed out of it for too long, allowing the industry to grow and cement on its own, and now that it is “proven”, the banks have been drawn to it like moths to a flame, and they control the global cash flow.

So as long as it is effectively a cash cow, which it is as it is a slow cash drain (death) for most suppliers (meaning that you’ll acquire and keep more customers in a year than you bankrupt), more suppliers need it everyday (as they try to stay in business when times become troubled or they try to grow faster than they can afford), and it’s relatively low risk compared to other types of lending, it’s going to continue to gain support and traction from the lenders, who are going to do their best to present it as the only option available. And some suppliers will believe, lock-in, and get trapped in the factor cycle, factoring more and more invoices over time until every invoice needs to be factored as soon as it is issued just so the supplier can make payroll.

So even though modern platforms, backed by “big data” (even though the data doesn’t have to be all that “big” to adequately calculate risk and buyer payment time-frames), and enabled by networks (that give the supplier dozens or hundreds of options including half a dozen or dozens of better ones), could provide better options, the doctor just doesn’t see it happening any time soon. We’ve known since 2000 that multi-line item optimization can save an organization 10% or more on just about every sourcing event (and since Aberdeen’s advanced sourcing study in 2005 that it will save an organization an average of 12% across all categories) and still less than 10% of organizations using strategic sourcing platforms are effectively employing it — even though modern optimization-backed sourcing platforms make it easy enough for even junior buyers to use it self-serve and run basic models and identify considerable savings without expert support. (Not always the full 10% to 12%, but enough savings to justify its use on each and every event!) Factoring is finance, and banks have made finance unnecessarily complicated to maintain the monopoly. So it’s here to stay. And when big data and networks enter the picture, you can bet it will be the factorers, and not the factorees, that gain.

It’s sad, but for now — and the foreseeable future, it’s true.

Societal Damnation 41: Fraud & Corruption

As per our damnation post last year, fraud and corruption is everywhere and running havoc on your organization and your supply chain. A recent Kroll Global Fraud Report in late 2013 found that 70% of companies were affected by fraud in the prior 12 months, which represented an increase of 15% over the previous twelve months. In other words, at the time, 7 in 10 companies were hit by fraud in the previous year. But it gets worse. The Economist at the same time also found that fraud was on the rise and predicted that it would continue to rise. If the rate of increase remained steady, then 4 of 5 businesses got hit with fraud last year and 9 out of 10 business will get hit with fraud this year. Yowzers!

Procurement fraud can be particularly costly and damaging regardless of if you are in the public sector or the private sector. The UK public sector estimated that fraudulent purchasing on an annual basis cost it £ 2.3 Billion in 2012! Zoinks! And while it’s harder to find good numbers for the US, a 2011 report by Computer Evidence Specialists found that Fraud cost the US $1.32 Trillion in 2010, of which 733 Billion was Corporate (with 68% committed by corporations and 32% committed by employees). Hamana! Hamana!

If you are a large organization, whether you want to admit or not, there is a small percentage of employees, suppliers, and customers that are looking to rip you off for as much as they think they can get. Every day of the week, including Sunday. Not everyone, not by a longshot, but enough people to make your job miserable.

So what can you do? As per our damnation post, a good start is to

  • have an invoice policy that is strictly followed that only accepts invoices from approved suppliers, only for approved goods or received services, and only at contracted or publicly advertised rates
  • have strict spending limits and controls that enforce them which ensure that only people with authority can grant approvals for bypass, and that such approval is clearly logged in an auditable fashion
  • careful inspections of all goods received to make sure the organization gets what was ordered and what is paid for

But that’s just a start. The organization should also:

  • analyze all invoices or expenses without a PO very carefully to ensure they are not duplicate, that the goods or services were received, and that the prices billed are the prices the organization committed to pay
  • have strict policies on who is allowed to buy and what they can buy and have a policy that repeated or serious offences can, and will, result in immediate dismissal
  • have a standard contract rider that no invoices for off-contract goods or services will be accepted without a PO that all contracted suppliers must sign, as this will severely limit how many unexpected invoices show up
  • use data mining and machine learning to identify potential fraud as the same receipt submitted 3 times two months apart, or patterns of the same no-receipt charges, or duplicate billings for the same service months apart will be immediately identified as suspect, for example
  • keep up on fraudulent statistics and schemes and identify methods to enable the quick identification thereof before new fraud methods and attempts cost the organization too much money

But whatever you do, don’t target employees and treat them like criminals. If you treat them like criminals, they will become criminals. Create good procedures and processes for invoices and payments, install solutions where it is easier to follow the procedures and processes than ignore them, and make it about cost control, not fraud prevention, and you’ll find that fraud just isn’t as much of a concern. (Fraudsters choose easy targets.)

Economic Sustentation 05: Currency Conservation

As we have previously indicated, there is no salvation, at least not now. It’s only going to get hotter, and the best you can do for now is survive. But survival will be easier if you know what to do, or at least know what you might try, so, in this post, and the posts that follow in this series, we will present some of the options at your disposal, starting with currency (conservation).

So how can you protect against the currency fluctuations that can cause you significant economic damnation?

As indicated in our original damnation post, one preventative measure you can take is to determine the Purchasing Power Parity (PPP) of a currency to determine whether it is undervalued, and likely to rise, or overvalued, and likely to fall, and base your total cost of ownership models not on the current value against your base currency but the expected (average) value over the course of the contract.

But of course, this is not enough to predict every fluctuation in currency as some currencies rise and fall as the result of significant investment being pushed into a country (because of low wages, energy costs, etc.), being pulled out (because of new, burdensome, tax laws, etc.), or political actions that cause boycotts of goods from a certain country, or even trade embargoes. The latter situations can cause currencies to rapidly rise or fall seemingly overnight. So what can you do?

First, whenever possible, try to buy in the standard, or preferred, currency of the organization, and, in particular, the currency that most of the customers are paying in. If the organization is being paid in US dollars, then it should, whenever possible, try to buy in US dollars. This even eliminates (potentially costly) exchange fees from the picture.

Second, if this is not possible, because demand exceeds supply and the supplier has more negotiating leverage or the customers are buying in a currency that is not the preferred currency of the organization going forward, try to negotiate discounts as a result of currency strength increases against a major currency or gold. If the supplier suddenly has considerably more buying power from their dollar and their customers have considerably less, then it might be in the best interest of the supplier, especially if it is producing its goods from raw materials bought in a different market using a weaker currency, to pass on a bit of savings to its customers that might otherwise have to default on a contract or risk bankruptcy otherwise. It won’t always be possible, but if your organization is a major customer whose absence would be felt financially by the supplier, it’s worth a try.

Third, if you have to deal with multiple currencies, keep investments in multiple currencies so that trades can be made at strategic times to allow the profits in the currency trades to cover the increased costs of an unexpected rise in the currency required to pay a supplier. While the currency markets aren’t a zero sum game, generally speaking, value lost in one market always appears in another. And while SI realizes that, in the eyes of an economist this is a gross simplification, economics and trade works because, at any one time, there is a fixed amount of GDP in the world and a fixed value of a currency related to that GDP. Thus, at any point in time, value is conserved just like energy is conserved in our universe under thermodynamic laws.

There’s no silver bullet, but there’s enough lead that, if properly sprayed, will get the job done.