The Right to Profits

Since the dawn of civilization, we have been driven to increase our
standard of living. It is a natural inclination. Why would any reasonable
person accept poverty as a way of life? So just what are profits and how
do we gain it?

In every economic system, the basic item of value is labor. The more
accomplished the laborer, the greater the value. The problem arose with
the lack of a medium of exchange. Humans needed a way to bank the profits
of their labor and a mechanism for transporting it. A sack of grain had
value based upon the labor and cost to produce it. Initially the few sacks
of grain surplus to the family's needs could be bartered. Ah, but as is
the way of technology and labor, some farmers produced far more grain than
they could barter locally. What the system needed was a medium of
exchange. Hence the rise of precious metals as money. It was durable,
compact and scarce.

As the city-state came into being, gold was needed for the treasury. To
gain the gold, a tried and proven technique was utilized; war. Might makes
right. This led to another resource requirement, bronze. The city-state
needed bronze to make swords for their troops. The troops traditionally
used plunder as payment for their services aka labor. Here is the general
scenario:

City-state A needs gold to fill its treasury. City-state B has some. A
claims B affronted them and demands tribute. B says go to hell. War
ensues. A wins and cleans out the treasury of B, troops plunder the
civilians and under orders, seizes all the bronze for their arms
merchants. The profits go to the government and the arms merchants. The
people shouldered the costs by levies on their production of goods to
support their troops.

If ma and pa were lucky, one of their boys returned home with some bauble.
Most either died or spent the plunder on wine, women and song.

As the city-state gained in wealth and achieved empire status, more
resources passed through the merchant class. Recall that the basic unit of
value is labor. Labor effects production. Produce is inventory. Ooooh, I'm
gonna step on your foot, but I don't care. Inventory has no value until
the money changes hands. You can't eat swords, baubles or gold. Inventory
must be traded for necessities or luxuries. The merchant class traded a
medium of exchange for trade goods and took profits on each trade.
However, not all merchants had the inventory or gold to fund their
enterprise. Enter the financier. In return for granting a loan to the
merchant, the financier gained an interest in the merchant's goods or in
other words, a share of the profits.

Fast forward to the industrial age. Labor still creates value, but lacks
the inventory of tools and raw materials to produce. The factory owner
supplies the required assets and takes an interest in the laborer's skill.
Hence, the factory owner provides inventory. The products go to the
merchants for resale and the financier provides the gold to both the
factory owner and the merchant. Wars continue, but plunder is now stripped
from the soldier and passed to the entrepreneurial class aka financier. The
financier might not know squat about rubber production, but they know how
to hire the required laborers.

Luck and isolation brought us to the age of consumerism. Gold was replaced
by fiat currency. Otherwise, little changed since the latter days of the
hunter-gatherer societies. A new beast entered the picture, taxation.
Where levies were accepted during war, taxation needed no conflict. The
mantra of the empire was progress. National highway systems, airports and
a plethora of investments in the national infrastructure. Value remained a
constant, but fiat currency provided wealth accumulation by the middle
class.

Wealth demands investments to counter the effects of inflation.
---------------------------------------
In any growing population, inflation of the money supply is a necessity.
Here is why: If there are 100 workers in the labor force and 100 units of
payment, they each earn 1 unit. The next year, there are 102 workers, but
still the 100 units of payment. You tell the workers that they have to
take a pay cut. I ain't.
---------------------------------------
So we are forced to accept inflation, but we aren't forced to accept
deterioration of purchasing power. We invest. The more skilled have
greater investment choices. Those with the least are conned into insurance
under the guise of responsibility to family even after death. Many of the
early insurance programs permitted borrowing on your policy.

The labor movement spawned another evil step-child known as pension plans.
This is just old age insurance. Then our ever benevolent government had a
better idea, the 401k program. Effectively, you could create your own old
age insurance program. Homes became an investment, a nest egg for the
future.

The problems became acute. Every transaction required a financial gnome
who skimmed off a percentage. Every skim provides tax dollars. Insurance
companies required something to invest their money in. As the monies
collected required a future payout, risk had to be minimized. First it was
the broad based portfolio with some treasury notes. But, the corporate
fiduciary responsibility is to maximize the stockholders return. Enter
some risky investments.

With clever investment strategies, risk could be managed and profits
maximized. The greater the profits, the larger the investment pool gets.
More money to invest demands market manipulation. Enter the world of
futures. Initially the purpose was supposed to be securing raw materials
for future production. The world of investors saw this as a way to turn a
profit buying and selling a piece of paper with no intention of taking
delivery.

The futures market became the infant derivatives market. Risk could be
managed by insurance. Insurance is the most basic derivative. In simplish,
derivatives are anything derived from an actual trade of a tangible. The
derivative is an intangible.

Returning to the more affluent middle class, houses, 401k and other
investments became the norm. Buying a home was the way of stating to the
world that you had arrived. The world of investment only too happy to
help(?) make it happen. At first, it was your word and a handshake, but
soon it became credit scores, insurance and second mortgages. When the
more affluent had homes, investment opportunities started to slack off.

Enter the sub-prime loan programs. Risk increased, but could be managed by
pooling the assets and selling shares of the pool to investors. Pitch in
some insurance to cover any potential risk and we can eliminate moral
hazard.
---------------------------------------
Moral hazard is nothing more than risk of capital investment. In the past,
moral hazard was minimized by due diligence aka in-depth research of the
investment.
---------------------------------------
These pools of assets became the Collateralized Debt Obligations (CDO)of
today. The insurance; Credit Default Swaps (CDS). Both fall into the
category of derivatives. There exists no tangible asset to transfer
between the parties in a default occurs. The investor and the insurance
company don't hold the mortgage papers.

So where the hell am I going with this? Remember the empire? The so-called
managers have gotten addicted to tax revenues. Spend some here and secure
future votes. A wise manager needing votes will spend the money where they
can secure the most votes for minimum dollars. Others will spend it where
they can secure future funding for re-election. The empire needs money to
grow and happy taxpayers to retain those in power.

History is replete with examples of money being equated with power. Some
people have the determination, skill and luck to create wealth. Some
attempt the short-cut of crime to achieve it. The real scoundrels find a
way to manage the funds of others; either by investments or taxation.

So what happens if this paper house of derivatives fails. From near the
top down, investment losses means fewer dollars to invest, fewer dollars
for investment mean less inventory, less inventory means fewer needs for
labor and returning to the top, far less tax revenue and election day rout
for the incumbent. History shows many cases of the rout becoming a purge.

As you might recall, the title is "The Right to Profits." In order to
maintain tax revenues, the investment vehicles MUST be profitable. Hence,
the right to (maintain) profits must be guaranteed by the government. "To
big to fail" was coined by our benevolent government with we the people
underwriting failures.
----------------------------------------
It falls to each person to evaluate their perceived reality, determine
their own objectives, develop the strategy to achieve the objective and
engage the tactics they feel best suits their nature and capabilities.