stockholders.com

Of course the opposite of “making money” is “losing money.”

According to a dictionary, losing is : (i) failing to win or (ii) to suffer deprivation of.

One loses money when, as in the case of General Motors, if you add up all the costs of producing your product and add up all the proceeds of selling all of the product you produce, there is more in the former basket and less in the latter basket.

Congratulations, you lost money. No, it was not an accident, as the word lost implies.. It was unintentional in the sense that no one sets out to lose money. It was a bad business idea, a bad plan, bad execution, poor cost control, etc. The things that capitalism require for you to make money were lacking. You did not add to the collective store of value possessed by the human race by making yourself rich (the profit part of making money) nor by benefiting your customers (the inevitable result of competition). You simply consumed value.

Today GM and Chrysler consume value. They spend more making their product then the sale of their product brings on the open marketplace. They destroy value, they lose money.

I was sad because my writings did not lead to a single person making a comment. Then I clicked on one of the control panels of this site in WordPress and discovered that over six thousand persons submitted comments. The problem is, looking quickly at those six thousand comments, it seems the vast majority are spam. If I read the six thousand, maybe a dozen are thoughtful human responses. Naw, deleted. StrongBad rules

Every one of us knows how painful it is to spend less, If you made and spent X dollars last week and make X minus 100 dollars this week, it is very painful to cut back on the things you spend money on. It may even be as painful as heron withdrawal.

No surprise that when a government entity like the State of New Jersey or the Department of Education is faced with cutbacks causing pure unadulterated pain, the powers that be sadly conclude that between a cutback in their spending and a tax raise, a tax raise is required and inevitable. Sadly

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If you ask me to name the proudest distinction of Americans, I would choose–because it contains all the others–the fact that they were the people who created the phrase ‘to make money.’ No other language or nation had ever used these words before; men had always thought of wealth as a static quantity–to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were the first to understand that wealth has to be created. The words ‘to make money’ hold the essence of human morality.

If I created a business, say a shoe factory, I would need to buy the things I need to produce shoes on the open market. I would need to rent office and factory space. I would need to hire workers. I would need to pay lawyers and government officials. I might need to borrow money or sell shares in my enterprise to have the cash to make it all happen.

If, after I have spent all the money needed to produce shoes, I can sell the shoes that I produced for more money than they cost me to make, I made money. I took a certain amount of money, mixed it in an alchemists carafe and poured out more money.

How do I know my production was worth more than my consumption? I freely traded on an open market. Anyone else could have rented my production and office space by bidding a dollar more than I did. Anyone else can rent similar space at near equal prices. My employees voluntarily worked for my wages. Anyone else can hire similar employees at similar wages. Everything I took out of the economy was voluntarily offered to me in exchange for my money. My product, shoes, were offered for purchase. No one was required to buy at the price I offered. Every customer thought that the shoes bought were worth more than the dollars paid for them. So I bought a pile of goods and services at the fair market rate, which package could have been bought by any other person, and produced something that is objectively worth more than the cost to me of producing it. I made money.

You can see this most clearly when the value added is most dramatic. When Picasso buys pigment and canvas, most people realize that what he produces will be worth more than the ingredients. Yet Dell and Boeing do the same thing. I can purchase anything Dell can (maybe they get a discounted for large purchases but that is part of the fair market price) but probably I cannot produce as much value with my purchases.

Metaphor is applying the attributes of one thing directly to a different thing. This differs from simile. In smile, one contends that the attributes of one thing are similar in significant ways to the attributes of another thing. A simile might read: “a good book is like a meal to an avid reader.” It expresses a degree of relatedness. If we wish to express a greater degree of relatedness, indeed congruity, we drop the word “like.” “A good book is a meal to an avid reader.” A metaphor is the expression of identity, clearly false. No reader can live on books alone. It is poetic speech. When a happily married man says “my wife is an angel” we understand what he means.

Metaphor is used to make more clear (”in one fell swoop”) or to urge others to treat one thing as if it were another (”this is my body and blood”). Metaphor is compact; it is an argument in a sentence. Shakespeare said: “The lunatic, the lover, and the poet. Are of imagination all compact.” All deal in metaphor.

When the people with power say that their spending will “jumpstart the economy” of course there is no literal car to jumpstart. There is an attempt to apply an ordinary life experience to a complex international economic system and convince you, as well as themselves, that pretending an economy is a car with a bad battery will provide insight into how to get things back to gushing growth, soon.

It is clear that the Secretary of the Treasury is dealing with metaphor because he says “we must jumpstart the economy,” he does not say “we must inject money into key institutions so that the economy will react like a car with a bad battery and start firing on the electrical power of its alternator.”

Why is one thing like the other? Why is the economy of the US like a car with a bad battery that will come to roaring life once a few volts are applied to the terminals. The back story for this metaphor runs something like this. If the government gives lots of people a shot of money to spend, or the government spends lots of money itself, goods and services will fly off the shelves. Sellers who are sitting around pouncing on the few customers who stray in will suddenly have lots of sales. Their inventory will go down causing them to order more supply. The factories will get more orders causing them to ramp up production and call people back to work. New workers will have full pockets of money and add to the buying themselves, causing more shelves to run dry causing more orders and more production, “und so weiter.”

Why did things grind to a halt? I guess if you pushed the question someone would say, “People were borrowing lots of money. As long as homes and oil and materials and everything was going up in price, borrowing to buy things was a pretty good game. One day people started realizing prices were just too high relative to their income, debt suddenly looked foolish, oil started dropping, everything started dropping, borrowing to buy anything was suddenly disfavored. Everyone stopped borrowing to buy assets. No consumer demand, less sales, layoffs, contraction, depression. The loss of jobs causes less spending which in turn causes more jobs to be lost; a feedback cycle.

There is another way to look at an economy. That way is using the metaphor of the farm. Suppose a farmer only grows corn. At harvest, good season or bad, he sets some corn aside to consume and he sets some corn aside for next year’s seed. The more corn consumed the less corn seed.

Now if a farmer has a bad year no one would tell him to consume more of his diminished corn and forgo planting the full field for next year. No, that advice requires an economy. Suppose there are ten farmers and five grow corn and five grow wheat. Wheat farmers trade some wheat for corn to consume and corn farmers trade some corn for wheat to consume. Both keep some of their own products for consumption and for next year’s seed. Corn farmers have a terrible year. There is less corn for the corn farmers to consume, trade and apply as seed. Wheat farmers cannot trade any wheat away for corn as no corn farmers are buying wheat. There is a dearth of corn demand and a dearth of wheat demand, because no one can afford to buy much of either. Now, would one advise the farmers to apply more of their collectively poor harvest to seeding next year’s field, or to trading for the other product?

What the current economic consensus seems to be is that the government should issue script allowing corn farmers to buy wheat on a future promise of corn. Then there will be more demand for wheat and when the wheat farmers have the ability to sell wheat, they will also buy corn. The farmers will have reason to produce more of both crops next year. How will they produce more next year when this year’s joint crop was bad and, due to script issuance, a larger share than normal of the bad crop went to consumption then to seed? That is where the “jumpstart” or the “priming the pump” metaphors are silent. If we apply more of everything to consumption, where will the investment for more production come from?

Every good and service in our economy can be classified as investment or consumption. If it meets a human want or need directly it is consumption. If it is used to produce another good or service which in turn or eventually meets a human want or need it is investment. When Detroit buys a welding robot it is clearly investment. When I buy a car it is consumption.

Why do we have recessions? In the Seed Corn metaphor, we simply applied too much of our resources to consumption during the good times or made the wrong investments. We built too many houses, particularly large, expensive houses. Why did we do that? Well the government seems to have decided that building and selling houses is better than building and selling machine tools. Housing has a tax break allowing unlimited capital gain on your home to be realized by you tax free. That could be a million dollars tax free and you can get your hands on the tax free money before you sell your house by a mortgage loan. Housing has a government guarantied corporation that buys mortgages in the secondary market. Machine tool loans are not nearly so liquid. More houses were consumed and more investment went into goods and services that produced housing. This is a misapplication of resources. It causes distortions in the market.

Today the distortions are obvious and rectifying. When you have a lot of newly useless tools (investment) and lots of nearly useless innovatory (homes), painful adjustments are underway. People who invested and people who bought are going to get wiped out. What does the government propose to do? Preserve the distortions and misallocations with the money that would otherwise move to productive purposes.

Today I listened to an audio tape by a couple very famous academic lecturers about Renascence literature. I got the tape from our local library. To purchase it would have been quite expensive. The lecturers taught at Brown and Princeton and Yale and etc. They were the established authorities at least at the time of making the tapes, maybe about ten years ago.

The problem in the Renascence was that the medieval world order was breaking down. Smart people knew that. The discovery of antiquity (Greek and Roman thought) challenged Christan conceptions.

There was great respect for reason and the idea that the individual man was the measure of all things, At the same time there was a great recognition that sense data was unreliable, that people had great powers of self deception, that the bright and the true did not always triumph in human affairs. Erasmus turned everything that we thought we knew into shadows and vanity. Cervantes said that the fictional interior world kept us going and made our lives possible.

Today, no one knows anything of that. Today, science, literature, even mathematics is about politics, as it was in the Soviet. A new dark ages.

I do not call myself a conservative, I call myself a “child of the Enlightenment” or a supporter of the Enlightenment,

Why should people who rent and people who thought that no down payment neg-amortization liar loans were not for them, subsidize people who bought real estate through iffy loans? Why is the government jumping in to favor one group at the expense of others?

Calling them “homeowners” is nice and wells up a reserve of emotion, but many purchasers were real estate speculators hoping to make a big return, others were buying more house than they needed or wanted because they thought that appreciation would give them out sized returns, others were foolish.

Should the non-foolish pay for the mistakes of the foolish? Should the renter pay for the loss of a real estate speculator? Should the prudent pay for the loss of the imprudent?

Bailout 2008 passed in its second, even less attractive, form. I have expressed my opinion here and in comments on other blogs that the bailout was bad. Of course, I meant that it is bad policy because the effects will be more bad than good, or that in balance there will be more bad results than good results.

Let me try to formalize my objections somewhat. They fall in two broad categories. One is the etymology of the policy. Where did it come from? Why is it what it is? Two is the likely consequences of the policy. Will it free up liquidity? If people believe that how valid is their belief? How will bailed out institutions behave in the future? What does the bailout reveal about our ability to face harsh realities?

Now I am not an expert on economics or financial policy. I have an undergraduate degree in Philosophy, a law degree, some experience in law related to finance on Wall Street, and some experience with my own business. However, I believe that any reasonably intelligent person can understand financial policy issues such as this. It depends on how you confront the problem.

Over the dinner table my daughter often asks a couple questions about Aristotle or Nietzsche, or a school of philosophy. I can usually dredge up a couple facts about their beliefs. Once she blurted out “How can you remember all that? I can hardly remember what we went over in class yesterday.” I was flattered but I do not have a good memory. I had integrated a philosophical map. I drew longitude and latitude lines through the raw data. It all fit into a somewhat larger scheme. Just as if somehow told you an island you would be visiting was in the Caribbean, you could deduce from your knowledge of geography that the official language was not going to be Swedish. For her, most of what she was learning were arbitrary facts. “X” espoused “Y”. Enough of those and it is hard to remember what was told yesterday. If you know that an idealist would have a very hard time supporting utilitarianism, a vague memory of a philosophy triggers a cascade of related facts. It is the relation that makes it possible to remember many facts. One thing follows from another, so to speak.

Now I know that we have been in a serial bubble economy for several years. The millennium bubble was caused by an influx of dollars to counteract any possible problems of the digital turnover from 1999 to 2000, when many devices stored dates in two decimal places. Then there was the dot com bubble. When that deflated, the government stopped the effects by expanding leverage in financial institutions that flowed into real estate [mal] investment. Now finality the real estate bubble, the largest of them all, is deflating and the good ol government of the good ol US of A is trying to stand athwart the tide and prevent this bubble from deflating.

There are many good arguments in support of their present action, not the least of which is this major credit contraction threatens the destruction of many financial entities because of the growth of derivatives and swaps. Tight money prevents one entity from honoring its commitments which causes a domino effect due to the many swap ands derivative transactions written. Ultimately a bubble has to keep inflating exponentially or deflate. It is hopeless at this point for the US Treasury to try to prop up the housing bubble. No matter where the money is applied it will be insufficient. Our taxpayers dollars going down the drain.

If by any chance the Treasury managed to re-inflate a bubble economy, in minutes some asset class would start appreciating (collectibles, gold, oil, anything) and the next big unwind would be even more painful - because the bubble would be fueled not only by stupidly created debt, but by the trillions of dollars the US Treasury is willing to apply in the spirit of absolute panic.

This bubble must deflate. It is stupid to talk about maintaining homeowners equity when their home is unaffordable for them and for all potential buyers. Every cent Paulson is spending will be lost to asset value deflation and will have it be repaid by your children or yourself out of your retirement savings.

Is it not a conflict of interest for the govenment to take equity stakes in financial institutions that are heavily regulated by the government? Already the bailout bill has a reiteration that the SEC has discretion to relax mark to market rules to favor such banks.

This blog is all about me.

Everything I do here is to make me feel better about myself, or is my misguided attempt to influence someone, anyone, to believe the things that I want them to. The reason I want to make them believe what I want them to is I want to influence them to action that I desire.

So you should know something about me.

I am an entrepreneur. I built an Internet business from nothing to something that supports me well.

I was a lawyer with experience in finance. I worked in a firm in lower Manhattan that would legitimately be included in the term “Wall Street law firm.” I served as lawyer in deals involving hundreds of millions of dollars. When I flew into some minor city like Minneapolis, I was greeted as the New York lawyer; as in “the New York lawyer is finally here.” When I arrived in Michigan I overheard the line workers say, “the suits have arrived, the company is being sold”. They were often right.

I went to one of the top ten law schools in the country. I did very well. Before that I was an underachiever. I was lower half of the class in a high school so undistinguished that the guidance counselors told me not one student from the beginning of time ever gained a slot in Princeton.

My high school record was dismal. I went to a third or forth rate college. I went out into the world and worked for stupid people. I was smarter than the people I worked for but I had very badly worked the system. Poor grades in a poor high school and a nothing college leads to a pretty sad job. I suffered for six years.

Then I went to law school (a field I had a natural advantage in as I thought like a lawyer). I could not get into one of the top ten national law schools as my college transcript was poor. My first try applications were to the big name schools only; they all rejected me. The second try a year later, my near perfect LSAT and years out of school helped me get into a good regional school. I ended up in the top ten students at the end of the first year. I transferred to a bigger name national law school. I ended up on Wall Street and was quite proud of myself.

I have no formal training in economics or finance, other than an undergrad course. Of course neither does Obama or McCain.