Is Financial Repression Here to Stay?
JUN 24, 2015
The Capitalist as the Ultimate Philanthropist
The Ford Foundation vows to fight inequality but will have a hard time beating Henry’s example.
By Andy Kessler
June 24, 2015 7:12 p.m. ET
Photo: Getty Images
On June 11, the $11 billion Ford Foundation announced that it will pour its resources—about $500 million in giving a year—into fighting inequality. “We are talking about inequality in all its forms—in influence, access, agency, resources, and respect,” Darren Walker, the charity’s president, wrote in a letter.
Oh, the irony. I won’t join the public intellectuals having hissy fits over how people choose to give away their money, beyond being annoyed that since the Ford Foundation is tax-exempt, we’re all subsidizing it. Here’s the real problem: The foundation is getting exactly backward what its namesake, Henry Ford, understood. Society benefits from making, not giving.
The bulk of the Ford Foundation’s assets came when it received 88% of the nonvoting shares in the Ford Motor F 1.37 % Company, most after Henry Ford died in 1947. Ford hated inheritance taxes, then a punitive 70%. In 1956 Ford Motor went public at $3.2 billion. Most of the shares sold were from the Ford Foundation, about a quarter of its holdings. The foundation’s charter stated the money should go “for scientific, educational and charitable purposes, all for the public welfare.” How times have changed.
This story matters because people have lost sight of where foundations got the money they’re donating. Ford Motor was worth $3 billion 60 years ago because it was profitable and investors had high expectations, not because the company raised wages to $5 an hour, a popular myth.
Ford Motor was profitable because Henry Ford created scalable assembly lines, reduced the cost of the Model T to under $300, and sold 15 million of them.
Model Ts made millions of businesses and workers more productive and created that “public welfare” that the Ford Foundation struggles to achieve. Ford Motor created wealth for society, as well as for Henry Ford, and you can’t do the latter without the former.
Think about it: No one would invest $300 in a Ford unless he thought that he could make at least that much using it—to deliver milk, to get to work, whatever. At least 15 million drivers made that choice, and the rest of Americans benefited from cheaper milk and Corn Flakes. In other words, the Ford Motor company increased living standards, and as a result its owner became fabulously wealthy. This may have increased the perception of inequality, yet everyone was better off.
A company’s profits are the minimum value of the work it does for you and for society. Google, GOOG -0.49 % to take another example, generates huge profits. CEO Larry Page has an estimated net worth of $30 billion. But Google offers you a valuable service, and society benefits to the tune of trillions, yes trillions, of dollars in commerce that happens thanks to Google searches, mail and maps. Similarly, an iPhone 6 is worth a heck of a lot more than $600; you can hail a car, trade stocks, call your mom, all without being chained to a desk.
Everyone should stop focusing on an entrepreneur’s wealth and instead focus on the value the customers gained from his products. I can’t dig for oil, let alone frack, but I am happy to pay Exxon XOM -0.46 % a premium for my high-test gas. Collectively, we are richer because of Exxon. So inequality is not a bug of capitalism; it’s a feature.
The Ford Foundation plans to focus on six areas of inequality: civic engagement and government; creativity and free expression; gender, ethnic and racial justice; inclusive economics; Internet freedom; and youth opportunity and learning. Hard to argue against all that namby pamby. But none are productive, none drive profits, and none will achieve the huge leaps in public welfare that Henry Ford pulled off so long ago.
At the end of the day, there are only four things you can do with your money: You can spend it, pay it to the IRS, give it away or reinvest it. Consumption is on the receiving end of productivity—furthering personal instead of public welfare. Government spending is by definition not productive, as you realize every time you step into a DMV. Same goes for charitable giving—no profit means no measure of value or productivity.
And so the most productive thing someone can do with his money—the only thing that will increase living standards—is invest. If the Ford or Clinton foundations really wanted to help society, they’d work on lowering barriers to business formation and cutting the regulatory chains that inhibit productive hiring in the U.S. and globally. But what fun is that? Better to boast about reducing inequality, public welfare be damned.
Mr. Kessler, a former hedge-fund manager, is the author of “Eat People” (Portfolio, 2011).
June 25, 2015 6:30 am
Shadow lending crackdown looms over China’s stock market
“The price of funds has increased, the flow has shrunk, and transaction structures are getting more complicated,” says a Chongqing-based shadow banker who provides grey-market loans to stock investors.
“We’re no longer in a growth period. It’s more like, feed the addiction until you die, earn fast money. No one treats this as their main career.”
China officially launched margin trading by securities brokerages as a pilot project in 2010. It expanded the programme in 2012 with the creation of the China Securities Finance Corp, established by the state-backed stock exchanges specifically to provide funds for brokerages to lend to clients.
In the murky world of grey-market margin lending, however, few rules apply. Leverage can reach 5:1 or higher, and there are no limits on which shares investors can bet on.
“The flourishing of financial markets has caused ‘ersatz fixed income’ products that invest in secondary markets to become the preferred target for wealth management funds.”
There is no reliable data on “umbrella trusts” — the most prevalent structure — but Haitong estimates that between Rmb500bn and Rmb1tn in margin lending from trust companies has flowed into the stock market.
With a touch of financial alchemy, trusts transform an equity investment into a structured product that yields a fixed return — that is, unless something goes wrong.
In the case of umbrella trusts, banks purchase the senior tranche, which guarantees a fixed return. They then slice up this tranche and distribute it to clients as WMPs.
Hedge funds, brokerages and other institutions subscribe to the subordinate tranche, which absorbs the first losses from stock investments but also enjoys all profits once the senior tranche holders have received their fixed return.
Subordinate-tranche investors are effectively borrowing money from senior tranche-holders to make leveraged stock bets. The interest that subordinate tranche-holders pay on the margin loans comprises the fixed returns paid to the senior tranche.
If institutional investors were the only ones making leveraged bets outside the standard margin trading framework, analysts say the risk would still be relatively limited. In reality, other types of investors are also accessing margin finance through umbrella trusts and similar channels.
A universe of so called “fund matching” companies, known in Chinese as peizi, has sprung up over the past year to provide margin funding to virtually anyone who asks. Officially registered as consulting companies, these groups also subscribe to the subordinate tranche of umbrella trusts.
FIREWORKS WATCH IN EARLY JULY FOR THE FEDERAL RESERVE
By Jon Hilsenrath
Thursday, June 25, 2015
Fed watchers can mark their calendars with the following dates: July 2, July 8 and July 15. During that span of 13 days next month, the Labor Department will release its next jobs report, minutes of the Fed’s last policy meeting will be released and Fed Chairwoman Janet Yellen will begin two days of testimony presenting the central bank’s semiannual report to Congress. The sequence of events could provide the makings for important disclosures on the central banking beat.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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