Capitalism


A Parable: Life Insurance

In the early 1940s a mother purchased $1050 in insurance for her son. The policies were paid up in 15-20 years. Over that period of time she paid $370 in premiums for the coverage. Had her son died it would have been a good deal. However, the son lived/lives. The cash value of the policies is now $612. Had she put the $370 in an account that just kept up with inflation she would now have $3610. If the son died today she would have lost $3610 - $1050 = $2560. If she chose to cash in the policies she would loose $3610 - $612 = $2998. There was no wrong doing on the part of the company. One must realize that the insurance company is betting the insured will live whereas the person paying the premiums is betting he will die.

Do You Know What it is?

Just Curious!
Do you really understand Capitalism? Provide the best
answer to the questions below.


  1. What are the main components of a capitalistic
    venture?

    1. government, labor, investment
    2. labor, investment
    3. taxes, labor, regulation
    4. invention, engineering, labor, banks

  2. Who are the owners of the company?

    1. Government.
    2. Banks.
    3. The workers
    4. Investors
    5. All of the above

  3. Who are most responsible for the success or
    failure of a venture?

    1. Management, labor, government, regulators
    2. workers, engineers
    3. salesmen, workers, managers
    4. workers, investors

  4. What is profit?

    1. The difference between the cost of producing a
      product and the amount for which it is sold.
    2. The amount that the owners take from the company.
    3. The difference between the income of the venture
      and what it costs to run the venture including taxes.
    4. The amount paid to investors.

  5. Who has the final hiring and firing decisions in a
    venture?

    1. Labor unions.
    2. Managers.
    3. Government.
    4. Employees.
    5. Owners.
    6. All of the above
    7. None of the above

  6. Who are the “workers” in a venture?

    1. Managers
    2. Salesmen
    3. Engineers
    4. Accountants
    5. Production Employees
    6. Support Staff
    7. Maintenance Staff
    8. All of the above
    9. e, f, and g above
    10. i and d above

  7. What is the main reason a venture is started?

    1. To provide jobs
    2. To produce products and/or services
    3. To provide income for investors
    4. To provide tax to government

  8. What amount of profit should a venture
    make?

    1. 6% to unlimited
    2. 0% to 10%
    3. 5% to 25%
    4. 0% to 100%

  9. Who most influences the price of products or
    services?

    1. Managers
    2. Government
    3. Customers
    4. Investors
    5. Workers

  10. What is the role of government in capitalism?

    1. Regulate Operation of Business
    2. Protect businesses from each other, individuals,
      and foreign powers
    3. Collect taxes on operation
    4. None of the above
    5. a. and c. above

  11. Who (ultimately) pays any taxes (corporate
    income, FICA, unemployment, ...) charged to a venture

    1. The venture
    2. The investor
    3. The customer
    4. The government

The answers: 1-b, 2-d, 3-d, 4-c, 5-e, 6-h, 7-c, 8-a,
9-c, 10-b, 11-c
This is a preliminary version of the test. If you wish
to make corrections, or have suggestions to make the test better,
please send me an email at happycat at fbai-usa dot com.


      Inflation Status

      Dec 20, 2012: The Federal Reserve is inflating the money supply by $80 per month, $960 billion per year.  Compared with the M1 money supply, that is 40% per year.  Even if you use the M2 money supply measure that includes loans that is 9.6% per year.  If you are shopping you will see increases in prices like the ones reported by CNN (see below). Did you get a raise this year?  Social Security investors (those put their retirement into a government "LockBox") got a raise. How about 1.4%.  Where is all that money going? Click Here for some items that may be eliminated to indicate that the government is serious about dealing with our economic problems.
        
      June 3, 2011:
      from data obtained from a CNN website (for those who think I only watch Fox).  The article purports to show the reduction of the buying power of the dollar as a result of the treasury expanding the supply at at time they should be contracting the supply.  The data is from commodity prices that directly affect consumer prices and include sugar, coffee, wheat, soybeans, cotton, corn, and gasoline.  I have included gold and silver in the average, but, their change has actually moderated the average rate than exaggerated it, as one might expect from news reports and advertisements. 

      Product Todays Price 1 Year Change



      Sugar/lb 0.23 71.00%
      Wheat/Bushel 774.25 75.99%
      Soybeans/Bushel 1401.25 47.91%
      Coffee/lb 2.70 93.00%
      Cotton/lb 1.64 107.00%
      Corn/Bushel 7.58 115.00%
      Gasoline 2.98 43.00%
      Silver/oz 36.14 102.00%
      Gold/troy oz 1543.00 28.00%

      The average change is 76%!

      For those who don't remember how to do percentages, that means it will cost you an average of $1.76 to purchase the same items today  that you could purchase a year ago for $1.00.  Put another way - your dollar is really worth only, in purchasing power, 56% of what it was just a year ago.

      Updated October 2, 2012


       Report 2006 2012 Change
       M3 $10000 $15000 50%
       M2 $6800 $10000 47%
       M1 $1400$2300
       64%
       Money Supply
       $900 $2100 180%

      So what, you say.  The stock market is up, many of you have gotten raises, and you are reasonably comfortable.  However, realize that the change in the money supply hurts first the people on fixed incomes.  Then it hurts your children because it will cause our creditors, 47% of whom are foreign, to demand higher interest rates when the loans are renewed.  Since almost a half of the revenues go to paying the interest on the loans, it portends a bleak future for our children and grandchildren.

      If you would like more information about the money supply click  here.

      For more on the effects of inflation click http://politico-cat.com/node/31

      No Free Market?

      This article is written in response to an ad for the book "How to Save Capitalism" by Robert B. Reich. The ad presents a cartoon description of the "Free Market" system. The ad is attractive and the use of the cartoons is effective presenting a view of the subject. The cartoons are presented in a way that accurately presents existing conditions.

      However...

      Firstly, the presentation describes only a small portion of the Free Market system, only the relationship of government vs private elements. Where the presentation is true and accurately portrays the issues that exist today, it is not the whole story. Free Markets include such mundane activities as deciding to shop at Walmart or Publix for groceries, and which groceries to buy where; which automobile has the features best suited for the use of a business, professional, and/or family; which doctor to use. Should we use Verizon Wireless phones, or AT&T? Should we shop at a store so we can examine the quality of a product first-hand or order it on-line from Amazon.com? (Some of us are even guilty of examining the product in a store then ordering it on-line). That is the major part of the Free Market system.

      Secondly, he doesn't cover the way wealth is created in a free market. That is the role of the three elements of Idea, Investment, and Labor. Those three are required to produce a product that is desired to improve the lives of enough people that they will trade their wealth to procure the product and return a profit to the investors. Hopefully, the book which I have not read, will. (Having read several articles by Robert B Reich, I confess I may not live long enough to read his book. I much prefer articles from http://www.fee.org)

      Thirdly, his assertion the the free market is created and enforced by government is false. If he really appreciated history or even knew it, he would know the the free market ideas were discovered 400 years ago by philosophers and religious men charged with the task of discovering "natural laws". See this article for this history. http://fee.org/freeman/free-market-economists-400-years-ago/. In fact references are made to certain principles in the Holy Bible. Two references are made in the new testament in the parables of Jesus. One concerning profit (Luke 19:12-26) and the other concerning employer-employee relationships and property ownership(Matthew 20:1-16).

      Fourthly, Reich is true to his belief that progressives and the government should be in charge of the individual and their lives. Using the populist theme that businesses and their cronies in government are responsible for the mess we are in, ignores the fact that voters, often ignorant of how the free market works, put the cronies in office expecting to get freebies that are promised to them. Ignoring Margaret Thatchers gem "The problem with socialism is that you eventually run out of other peoples' money."

      YES! There IS a free market! I still have options available to me when I choose to buy a product. I can still buy gasoline that does not have corn alcohol in it. I can still choose another doctor if the closest one will not see me in two months. One might argue the Communist nations don't have a free market. Cuba probably comes to mind. Russia and China are two that many may mention. If there is not a free market there, why do each of them have a stock market.

      While it is true that the US government was almost successful in destroying the railroad industry by regulating it almost out of business, and it is on the verge of regulating the coal industry out of business, those two examples should demonstrate the ineptness of the government to understand the free market and how it works. But then government doesn't depend on the quality of its products. It just raises taxes to pay for its failures.

      What is a Dollar? Inflation?


      Why do we need to know?

      Normally, we don't.  However, during a contracting economy as we faced in the 1930's and we are now facing, we need to know because of the effects of decisions that our government is making and particularly those of the "Fed" (Federal Reserve) which controls the flow of money.  These decisions will affect our lives in ways that few people living have  experienced.  History may help, but only if we carefully examine what happened as a long term result of policies instituted by the "New Deal" of President Roosevelt.

      Briefly

      This is a simplistic explanation and there are those who would present a much more complicated view.

      At one time the dollar represented the amount of gold held at Ft. Knox divided by the number of dollars in circulation.  At one time, coins, silver and gold, had intrinsic value and they could be exchanged for goods and services without representing anything except what they contained of the precious metals.

      Now the dollar is a certificate roughly representing the net worth of the United States divided by the number of dollars currently in circulation. This removal of the relation of the dollar to gold, known as the "Gold Standard" was removed as late as the Richard Nixon administration.  From that time, the Federal Reserve with its powers that are to a great extent ungovernable by the Federal Government has printed money and been responsible for its relationship to products and services.  The formulas that are used by the Fed and various economists are very complex and will not be discussed here, nor the means used to increase the supply.  The bottom line is that any time the money supply is increased, it becomes less valuable.

      Another factor is confidence in the value of the dollar, particularly internationally.  The dollar has for some time been used as the standard by which other currencies have been measured.  Now, other countries are looking at other currencies on which to measure their own.  One such standard is the "euro" but more likely a new world currency will be created.  Any of these solutions are not good for the United States because an outside entity will control the ability of us to buy from and sell to international markets.  

      How Does It Affect You?

      Many would try to convince you that inflation ultimately doesn't affect you because the dollar is uniformly worth less.  In fact, it may even benefit you.  Let's look at two examples of the effect that inflation may have on you. 

      Looks Good!

      Note that the following table illustrates what  happens is we inflate the money supply, decrease the value of the dollar, by 100%.  Even though this is an extreme example, it is not beyond possibility.  Note that if your debt exceeds your savings, your net worth actually increases, being over double the amount before inflation.  Also note that because you are likely to move from one tax bracket to another your income after federal taxes is less as a percentage of your pay.

      It looks like you are making more! But, in reality your salary is not purchasing any more.

      Inflation Rate 100%
      Item Current Value After Inflation Value



      House 200000 400000
      Furniture 20000 40000
      Car 1 25000 50000
      Car 2 25000 50000
      Savings 100000 100000
      Stock 50000 100000
      Debt -200000 -200000












      Net Worth 220000 540000



      Income 100000 200000
      -Tax 90000 170000

      Note that your net worth, measured in dollars, has increased.  But notice that your income didn't double as you would have expected because you entered a higher tax bracket.  So every thing appears to be better, except you have less disposable income to buy the more expensive products from the market.

      Not  so good!

      So you are one of the frugal ones.  You have worked hard and you have saved your money and kept your debts to a minimum.  You are rewarded by loosing half of what you have saved in addition to paying even a higher percentage of your earnings to the Federal Government. And, your net worth is LESS than double what it was before inflation.


      Inflation Rate 100%
      Item Current Value After Inflation Value



      House 200000 400000
      Furniture 20000 40000
      Car 1 25000 50000
      Car 2 25000 50000
      Savings 200000 200000
      Stock 50000 100000
      Debt -100000 -100000












      Net Worth 420000 740000



      Income 100000 200000
      -Tax 90000 170000

      Do you know how to say "Redistribution of Wealth"?

      The dollars representing the increase of the net worth in the first example must come from some where.  Look at the second example.  THAT is where it comes from!  In order to support  inflation as a means of solving economic problems, one must discard the moral imperative that we were taught "You shall not steal."  By inflation, decreasing the purchasing power of the dollar, wealth is transferred from the frugal who have savings, to those who have debt. 

      And, do you remember the pledge that no one making over $250,000 will see their taxes increase.  All you need to do is devalue the dollar through inflation to increase the tax base making more that $250,000.

      Today, the stock market is showing constant gains.  Our GDP is up 3.5%. Those reports use $ values to show the increase.  How much of that increase is due to the decreased value of the dollar.  Has our gross national product increased? Look at "Why Rulers Aren't Made of Rubber" to see the answer.

      Probably the hardest hit part of our population is our retired.  Many have purchased annuities that promise a fixed income after a certain age.  Those annuities are now worth 1/2 of what they were before inflation after 100% inflation.  And now we have more people that cannot afford insurance and the benefits that they saved for during their working life-time. 

      With more going to the government and to the debtors, there is less available for entrepreneurs to create more jobs and investors to grow companies creating more jobs and wealth for the United States.

      This article probably should have been written as many government and news agencies present information, that is using smaller relations when describing the negative effects on taxpayers and larger numbers when describing larger events.  Like, the dollar decreased to one half of its purchasing and the supply of money was doubled, causing, in the first example, your net worth to increase by 146%.

      Current Status

      If you wish to know the current state of inflation, you may wish to visit "Inflation Status".

      What should we do?

      We should stabilize the dollar by tying it to gold (or some precious metal) again.  There is a limited supply of gold and as such is more stable in value than any currency in the world controlled by political organizations.  Currently, gold is selling at just over $1100 an ounce.  As the Fed prints more money that price will go up.  Note that the price of gold is the first indicator of an inflationary spiral.  In August of 2009 it was selling at less than $1000 an ounce.  November found it selling at $1100 an ounce, an increase of more than 10% in two months.

      We should return to a gold certificate from the current un-backed currency that is now available.  This would guarantee to our citizens that their wealth could not be taken by merely manipulating the supply of the currency. 



      Capitalism isn't that hard to understand

      Really.

      Let’s use buckets to illustrate.

      The actual total wealth of the citizens can be represented as water in a bucket. And an example wealth is $10 trillion.

      First Image

      Let’s say that the water on the left side of the bucket belongs to those who make less than $250,000 and that on the right make $250,000 or more. Let’s say that the government decides to take $1 trillion of the wealth out of the bucket. The level of the wealth goes down. What if we just take it from the side that belongs to side on the right? What happens to the level of the wealth?

      If we assume that the $1 trillion goes to the operation of government, then, regardless of what the government does with the money, it is out of the control of the citizens and restricts their freedom to purchase needs (food, housing, transportation and the like), luxuries (TV sets, houses, gormet foods, eating out, vacations, and cars) and savings (stock investment, bank savings, retirement funds)

      How do we replace the wealth that the government takes out of the bucket? In the United States we depend on the capitalistic system.

      Here are the basics.

      Some one, usually called an entrepreneur, has a idea for a product or service that is of value to a number of other citizens. The entrepreneur, usually using a part of his own wealth, develops the idea and sells it to supporters with the hope that their investment, called capital, in making the product will return to them more money than they invested. That capital pays for the raw materials, tools, initial labor to produce the product and services. Add to that, the labour, and we have a product, and we know how much it costs.


      Next Step —

      The product and services are placed on the market. The gamble is that the purchasers recognize that the product is worth more to them than the wealth that they have in cash. To the entrepreneur, the key is that the product or service is worth more than it costs. He MUST make a profit or go out of business.

      He MUST return the investment plus a dividend to his investors.

      But the important part, the profit ends up as increased wealth for all. And even though the “rich”, who have invested the most in this venture may get the most out of their risk, note that the overall wealth goes up.


      Excessive Profit

      And while we are on the subject of profits, how much profit is excessive profit? First of all it is improper to measure profit merely in the amount of $ as some do when trying to make the case for excessive profit.  You must use a percentage.  A large company is expected to make a larger amount of $ than a small one.  The real measure is in percent (the profit divided by the revenues times 100) to give a good measure of its performance.

      A rule of thumb is that the return on an investment should be higher than an investor can receive from a savings account plus about 5% to attract the investor. For an established company today 6-7% dividend is the minimum return on investment required to be attractive to an investor. Then a 9% profit is reasonable, even if paid to Exxon-Mobile and is in the billions of dollars. And this must be the profit on a years revenues, not just some small period. To put the 9% profit in perspective, in fiscal year ending 2008 Microsoft realized $17,681 million on $60,420 million of revenues or 29% profit. Exxon-Mobile realized $22,570 million on $254,926 million revenues during the first half of the 2008 or 9%.

      Comparatively, who is gouging their customers? Neither.  All that is shown is that Microsoft performed better.  Yet, to hear the news reports, Exxon-Mobile is gouging its customers while Microsoft is not even mentioned.

      The .pdf files listed below give charts showing the flow of wealth in each system. The first, "Capitalism.pdf" shows pure capitalism. The second, "CapitalismWithTaxes.pdf" shows leaks in the system caused by current government taxes on the system.

      As the leaks increase in size, as they have during my life-time, the growth of wealth in our nation is reduced. That is evidenced today by the fact that so many of our citizens have dropped out of the work force because businesses can no longer afford to pay employees enough to cover their expenses and their taxes.

      The third chart, "Socialism.pdf", is the representation of a pure Socialist or Communist economy. Note that there is no growth in such a system. Even Cuba, adhering mostly to this philosophy, must have some capitalism, to survive. However, many of their most talented citizens escape to the United States for opportunities unavailable to them in Cuba.