The Lexwerks

A Favorable View of Money

In the wake of the so-called Financial Crisis*, the “Money is debt” meme started up again.  And the problem with this meme is that even if it used to be accurate, it isn’t really accurate any longer and what people are complaining about at the seemingly-invariable end of the educational videos is that there is no longer a standard level or rate of debt to control money, such that money and debt are out of control.  But it is inaccurate because people with money cannot simply call in their debts and get paid off — there is nothing to simply be paid off with.  Compare having $100 to having $100 of bonds: the bonds you can sell and get roughly $100, but what does selling $100 get you?  Unless you encounter somebody very bad at math, it will get you $100.

But that’s not wholly accurate because most people buy and sell goods and services, not money per se.  So $100 is worth “a hundred dollars worth of goods and services.”  And how much is that really?  Well, it depends on the market value of a dollar, which really depends on which market you’re trying to spend it in.

At this point, I propose a mental paradigm shift: money is a just a serialized mark of social favor.  Thus, people with money are not so much holding the debt of society, but rather holding the perception of indebtedness of a society that owes them an increasingly huge favor.  And this, I think, explains three odd things about money:

First, it explains part of the reason why rich people insist on getting richer: it is impossible to know how big of a favor you’re going to need in return for your life of successful service to society until it’s time to call it in — so when you’re good at building up that favor, you should totally continue to build up that favor.  But additionally, and more importantly, there are all of the rich people who are rich because they’re assholes and not because they’ve been doing as much good for society as You have, and certainly society is going to owe You a bigger favor than it owes them, right?  When you’ve got a generation that looks at Donald Trump as the business celebrity, it’s pretty easy to come to the conclusion that if you do anything good with your life, then society will owe you a bigger favor that it owes him.

This, in turn, suggests that executives will continue to raise their salaries while ignoring the struggles of the laboring class underneath them: while society owes the leaders favor, it only owes the workers daily wages.  Many workers — whether under the influence of talk radio or Calvinist-karmic religion (possibly both) — seem to agree with this as it is what they signed up for without recognizing that a day’s wages aren’t a day’s wages if they can’t live on them and/or if they’re not even a moment’s wages for the “favored” people of society.  This puts them in the strange spot of defending absurdly low wages while relying on government entitlement programs which are necessary specifically because people aren’t being paid a living wage.  So, note to Congressman Ron Paul (whom I would love to have as a grandpa chatting on a porch swing over coffee): society needs to be able to hold and maintain a reasonable expectation that any actual employment is gainful employment before we can eliminate governmental social entitlements.

Second, the state of favor is why people with money are opposed to having it redistributed.  Really, it shouldn’t matter — except catastrophically as I’ll discuss under “third” — because people who aren’t living economically sustainable lives will simply become indebted to the people with money again, if not further, after every hand-out.  (If this hasn’t occurred to you yet, go read TLP’s quick thoughts on the subject.)  So there would be no impact to this if money were just money and if the system were just the system.  But it’s not — the people who are earning social favor want to keep their social favor and not see it transferred to ill-favored people, especially not through some anonymous government office that makes it seem like progressive taxation’s redistribution of social favor from the rich to the poor is because the poor somehow deserve it: from the point of view of the wealthy, they don’t deserve it, that’s why they’re poor, QED.  (Conversely, but by similar circular reasoning, the rich have earned and thus deserve their riches and all the favors they expect society to do for them regardless of how little they pay their subordinates.)  To clarify, if money were just tangible debt then the rich might be more willing to accept that the poor will simply always be in debt to them, but if money carries intangible favor with it then transfers of wealth from the favored to the unfavored is greeted as grand larceny.

On a brief tangent, I certainly seem to be talking about an economy where valuable goods and services are created and consumed, which really doesn’t describe America so much anymore.  Much of our economic top-end is controlled by finance institutions, with their profits being shaved through microsecond-sized transactions which cause valuations to freak out without necessarily — and perhaps necessarily without — actually creating any value.  They collect money for their corporation and the corporation rains its favor down down upon the employees and thus people in finance make more money than I do.  (I’m not so much jealous of their pay as I wish they’d clarify how they’re bringing value to the market instead of just trying to yank each other’s chains.  As an investor I’m starting to get the impression that investors are soooo last century and I am therefore a chump, which seems to be what John Bogle thinks is horribly wrong with Wall Street today.)

Third, we’re going to briefly return to the definition of money.  Pop quiz: if person A has 20 trillion dollars and persons B through Z (representing the rest of society) have 0 dollars, how much money does person A have?  Answer: none at all because as soon as the rest of society had to exchange goods and services without the benefit of money, the papers formerly known as money became worthless.  The serialized social favor they were supposed to convey became un-serializable.  And this should be why people who are rich and holding all the social favor should be fine with sharing with the unfortunate: people need to remember what it feels like to be favored in order to give the favor “due” to the rich when the rich call in their favors.  This already happens even without government intervention in the form of credit cards.  While the practice of giving credit cards to everybody and their dog has declined since 2008, the point behind crediting social favor to people isn’t entirely based on their ability to repay, but making them have to try to repay, usually by providing goods and services to people more-favored.  Student loans for college regardless of what the student intends to do with their life certainly appear to be in a similar vein, but moving back towards the form of traditional debt (at least for the government-guaranteed loans).

What the rich people miss when they look at the quantity of dollars that are their (volatile) net worth from day to day is that money is just a social lubricant — much like coffee or wine or cocaine, depending on which party you attend — and the great money-moving party may come to a halt if all of the money gets stuck in very few coffers so general society has to go back to a wildly inefficient system of begging, borrowing, bartering, and exchanging actual favors instead of serialized favors.  And if we get to that point (and I hope we don’t) then the people who have been investing heavily in gold may find that gold is less edible and therefore less favorable than, oh say, potatoes to a bunch of people who went from a currency of metal to paper to electrons before everything fell apart.  Quite simply, the only inherent value in any currency is that it is serialized and if it isn’t valuable while serialized then it’s pretty much worthless.  (At this point I have to observe that the financial education encoded in Terry Pratchett’s Making Money is quite good, even if the rest of the book is more silly than satire.)

This isn’t really that huge of a paradigm shift: people are used to feeling intangibly indebted to somebody that they’d owe a favor to, it just shifts money and wealth from being a quantifiable value to being a value that’s less quantifiable and probably more accurate after you’ve considered inflation and shifts in the underlying market.

So the last thing I’d like to talk about is why the estate tax is a good thing, and that is “Society doesn’t owe your kid any favors.”  Really, isn’t that effectively what first-generation wealth grows up hearing and in turn repeats to their children: “you have to work hard because society doesn’t owe you any favors”?  And, frankly, if you didn’t do your kid the favor of setting them up for life (because “big enough to set up for life” is the size of estates that gets taxed) while you were alive, then why should we confer upon said offspring the favor that you couldn’t bother to?

Note: If grandma ever reads this, I may find myself booted out of her will — so be it.  I’m old enough and economically successful enough now (with many thanks to the favors given previously by earlier generations who were alive when they did it) that I don’t need relatives, beloved or otherwise, to die so I can plunder them.  Similarly, my parents may — as may most of the baby-boomed generation — well be on the cusp of retirement before any hypothetical inheritance comes to them, which warrants observing that retirement planning shouldn’t be contingent on somebody else’s timely demise (noting also that dad has not planned his retirement contingent on anybody’s demise).  Similarly, I expect that the people who can eat healthier and take more maintenance drugs will increase their lifespans to the point where I fully expect to be a curmudgeonly retired misanthrope before my parents die, and thus have precious little necessity for any inheritance they might leave me.  If this assessment of the situation has come across as horribly morbid, then I would advise against reading Albert Brooks’ 2030 because it’s got a whole lot of vision of what happens when society ages like this — and a few particularly keen insights, too — even if the overall composition of it is torturous. Really, do publishers even try to edit fiction authors anymore?

That said, I wouldn’t push for a blanket estate tax: not everything is a liquid asset subject to evaporation.  But if you look at the debts that can evaporate when people die destitute — which should irk the rich to no end if they actually care about the money, but generally passing on ill-favor just seems mean spirited — and then reverse the flow on it we can start to visualize how things might change.  Let’s start by nullifying bonds.  If retired people are living on income-oriented mutual funds that are heavily invested in government and corporate bonds — that is, debts — which are nullified when the bond-holder dies, then we might see governments and corporations carrying less debt and paying interest on less debt (though the debt nullification would have to actually go through the brokers and not merely line their coffers).  Mutual funds can be sold as investments and the proceeds taxed with the rest of the estate’s cash holdings — quite heavily, as far as I’m concerned.  Actual stock holdings, however, ideally should represent partial ownership of a corporation — I’d like to see a litmus test here of whether they represented actual ownership or mere investment, but certainly they might be passed on with a cost basis to the next generation of $0 (such that if they’re sold, they get taxed as pure profit).  Similarly, a family business or real estate could be passed along as “cost basis $0″ and not taxed until/unless it left the family.

The guiding line of that structure is to shake out the investments that were made to generate serialized social favor, putting substantial governmental (and thus societal) favor on the ownership of — not just investment or mere speculation in — properties, dividing the two categories rather clearly, and then getting public policy out of the transfer of private property from one generation to the next.  The net effect would be that people who want to avoid the Death Tax have to invest heavily in owning, not just being rich, and their inheritors will also have to maintain that ownership in order to avoid substantial taxation.

If you’re opposed to the Death Tax on general principle and thus unswayed by this policy suggestion — and completely ignoring that increasing quantities of people won’t inherit anything and won’t inherit anything until they’re retired, much less inherit any tax liabilities with their inheritance — let’s ask a couple of successful capitalists what they think of the situation:

[T]he idea of passing wealth from generation to generation so that hundreds of your descendants can command the resources of other people simply because they came from the right womb flies in the face of a meritocratic society.  –Warren Buffett


[T]he man who dies rich dies disgraced. –Andrew Carnegie

But put simply, I love my parents and grandparents as much as I can already and would rather have them be proud of my success and the what-I-hope-qualifies-as good I’m doing with it than claim an inheritance from their passing.

* — I refer to it as the “so-called Financial Crisis” because “the democratization of credit” was all a valuation scam to make people feel more favored than they actually were.  That said, the earned entitlement has apparently cloyed its way into the American mind — and that link is not an endorsement.  The odd tangent that I’m not going to get into here is reading the valuation of money as a level of societal favor that executives demand for directing the societal mindshare of their brand, regardless of how badly they abuse and debase that brand — see also Shell’s stunning book Cheap.