Looking at finance from a broader and interdependent perspective, it is possible to gain a more meaningful understanding of the system that rules society from a financial perspective. The idea that money follows good ideas and that surplus will try to find a good and profitable use is key to understanding the core principles that rule financial decisions.
Every day we are faced with decisions, financial decisions that have motivations, that drive our actions. Decisions give place to money flows, wherein some form – physical or digital, money exchanges hands and allows the economy to work. Such flows, based on decisions – where the benefit must, or should surpass the costs, have repercussions, consequences that shape us all and the environment that surrounds us. Sometimes, consequences are positive – for example, innovations that bring benefits to the masses. Other times, such consequences come in the form of inequality and disparities that affect us all at a societal level, and as humans at our philosophical core.
In finance, money should not be seen as the value itself, but basically as a facilitator for value to take place. The core and fundamental principle of time value of money, compounding and discounting, gives a simple and powerful framework to guide us to make better decisions and also to a broader understanding on how the system values things. This value is materialised in markets, where some will win, others will lose.
At the end, either we like it or not, it is a zero sum gain – for each winner, there has to be a market counterpart to take the loss.
Nonetheless, for markets to function and allow for efficiency, they need to be as free as possible, with clear rules, where ethic and accountability has to be a core principle. When not, recent history (2007-09) shows us what happens when greed, despite all the signs (especially the Case-Shiller Home Price Index alarming and unsustainable trend on the housing market) overcomes rationality and ethics.
fredgraph
The USA is the perfect example of the consequences of the use of debt without a proper plan to allocate it in an efficient and productive way. The impact of the overextended debt in the US economy and the spillover to society has led to an increasingly and unacceptable gap between the 1% wealthiest individuals and the bottom 90%.
Income Inequality US 2014
Looking at the biggest economy in the world – the US, some valid concerns rise. It seems clear by looking at the country’s balance sheet, that it is a matter of time until the system will collapse. Looking at the balance sheet of the country, there are two frightening numbers that simply aren’t sustainable – the weight of students’ debt on the asset side, and also the $20 trillion debt on the liabilities side (that will soon rise by at least another trillion). It is dangerous for a country to have such a high level of debt, especially when 90% of its’ external debt is in the hands of Saudi Arabia and China. This by itself gives place to certain limitations and might impact decisions that otherwise could put first American interest instead of foreign interest. Regarding the students’ debt ($1.2 trillion), this puts pressure both on the government side (default by borrowers), as also on the people that borrowed that money (limitations on their decision-making process and financial pressure).
As it is, it is not easy to find jobs, especially in an era where technology keeps to develop at an impressive pace, and a significant portion of the current jobs will be replaced by machines and automated processes. How will people pay their debts in such a scenario? We can see that – while the motivations lending to students’ were noble, the repercussions of such a perverse incentive to the economic agents are destiny to have severe consequences.
The future value of such ($1.2 trillion) decisions will have a colossal effect on the US balance sheet as the risk of default is high and will tend to increase in the foreseeable future.
The effects of the weight of this debt on the balance sheet of the US makes us think at a deeper level, and the intuitive conclusion that comes to mind is that the US will have a dark path ahead. Excessive money spent on a failed foreign policy in the middle east (more than $4.4 trillion), lack of investment on infrastructures at home, an excessive amount of private debt of its’ citizens, and an overwhelming income gap between the 1% wealthiest people and the bottom 90%.
graph 3 mm
And let’s not forget the disastrous trading agreements – NAFTA and TPP, that were not made with American interests at heart, what favoured low-cost labour countries at the expense of American jobs. This can be easily observed by massive trade deficits with China, Mexico, Japan and Germany – $365.7 billion, $58.3 billion, $16.9 billion and $15.4 billion respectively. Overall, since the 90s’, that the US has had consistent trade deficits with the rest of the world (in aggregate).
tradedeficits US
Offshoring of core manufacturing activities from Apple (China), Ford (Mexico), Carrier (Mexico) and Nabisco (Mexico) are just examples of bad decisions to the key stakeholders’ of a country – its’ people. The argument that one cannot compete with cheaper labour countries when applied to the US and the ingenuity that for decades has been at its’ core DNA is a flawed argument. Instead, corporate interest and their astute strategy in dealing with Washington politicians, through political donations, have led to decisions by several governmental administrations that favoured corporate interests and left Americans’ behind.
Jane Meyer writes a beautiful and profoundly intellectual challenging book – Dark Money, about how the Koch brothers’ have used their money to influence and gain economic advantages to their businesses, and also to increase their political views influence on the circles of power.
The overall US government myopia in trying to tax excessively their multinationals has led to what is known as corporate inversions. It is estimated that the total value of money stacked overseas from American companies to avoid double taxation is an astronomical figure of $2.5 trillion. The overall consequences and the friction that results in such decisions is an increase in dissatisfaction from Americans’ with their institutions. As the Rothschilds once said:
“Buy when there’s blood in the streets, even if the blood is your own”
This style of pursuing value, allowed to the wealthiest to buy at a discount and hold. This philosophy contributed to the current gap that we see in wealth distribution. On the other hand, the rest of the people are often called to save institutions that are too big to fail, and to see their wealth decrease and wages to be stagnant.
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Looking at the US, such events have given rise to a very divided and polarised country, where its’ prospects for the foreseeable future are not good.
Although America keeps being one of the most innovative countries in the world, with companies like Uber, Tesla and AirBnb at the core of what America has to offer to those that pursue success, I would argue that even innovation is profoundly affected by the current context. There is a tradeoff between innovation and shareholder value. Apple is the perfect example. Although without a doubt a successful company, since the charismatic Steve Jobs died, innovation has been surpassed by the philosophy of maximising returns to shareholders’ – not by innovating and adding value to the future and by doing so increasing the value of the discounted cash flows, and hence the share price, but by pursuing a defensive approach and a more operational lean organization. The proof of that is that has been a lack of real innovation since Tim Cook took office as CEO. The iWatch is not, by any metric, a success and actual disruption, and the rest of the portfolio of products has been slightly and incrementally improved. This says a lot of corporate America today.
How will these companies compete – at some point, without a true and sustainable competitive advantage in the nearby future? In Apple’s case, it has already been caught in its’ core product line (smartphones) by Samsung and Huawei.
I would argue that the US problem is a lack of genuine leadership. Since the 90s’, with Bill Clinton most devastating decision that led to the current situation – NAFTA, followed by George W. Bush decision to invade Iraq based on a lie, and the trillions of US treasury spent afterward, and followed by an ideological myopia of Barack Obama, has led the US, as a nation, to the brink of collapse.
True leadership, that has been at the core of America’s power and influence throughout the decades, and has allowed for innovation, equality and freedom, has been replaced by gross incompetence and the pursuit of interests that contradict the USA’s DNA.
The silent majority – the people, is saying no. Enough is enough. The tool that Americans’, or at least a significant part of them, is using to say no is Donald Trump (and Bernie Sanders’ to some extent). The elites of power have been living in a bubble, as has some of the mainstream media. For the focused observer, with the right data about the country most important economic indicators, and also with a street experience, it was evident that the bubble had to blow up.
Donald Trump announced that he would be running for President of the USA in June 2015. Established politicians, liberal media – CNN, MSNBC, The New York Times, The Washington Post and The Huffington Post, all joked and said that he was dead on arrival. Week after week Trump kept growing, and the argument was that sooner or later we would implode. He didn’t implode and kept getting more support from the people, so the new argument was that he would never get the 1237 bound delegates to get the nomination. Then, when he became the presumptive Republican nominee, the new argument was that he would be smoked in a general election against the ultimate political insider, Hillary Clinton.
Today, polling shows Trump passing ahead in a general election match-up against Clinton (within the margin error). This illustrates myopia and the disconnect that those in power have had towards their constituents.
Americans are unhappy; they firmly believe that the country is going in the wrong direction (between 60-70% share this opinion) and they are using their power – the vote, to say no. It would be the first time in history that a business mogul would be in the White House. There have been marginal cases of citizens from the private sector to take office, but none with Trump’s personality and path.
It is worth mentioning that the US has roughly 11 million illegal immigrants in the country. Such has led to social and economic disruptions and is one of the most political divisiveness drivers in America today.
A once, and for now still a global economic powerhouse, is on an almost unavoidable path to losing power, influence and economic advantage. Without a serious leadership in the US, China will surpass the US very soon, and will keep a sustainable advantage over the US in the 21st century.
This takes me to the key takeaway. Decisions are at the core of human development and are key to determine the success or failure of nations. Nations that have open financial systems and open societies – that indulge free speech and political independence are at the heart of economic expansion and society prosperity. But, when bad decisions in such systems – like it can be observed in the US in the recent history are made, not by favouring its’ core stakeholders’ – the people, but instead favouring private and asymmetric interests, the system as a hole might implode. Unfortunately, that dark path is where the US is going at a fast pace. As Thomas Hobbes so eloquently described it in his book The Leviathan:
“Hell is truth seen too late.”