Ask yourself, how are wealth and prosperity created? What are the top 10 attributes of man that is responsible for its creation?

Here is my list. I think the order isn’t important as they are inter-related.

OK, that’s only seven and it’s all I’ve got. You might develop your own list or expand this one. Though, I’m not so interested in pursuing that myself. Still, all of these things are necessary to the success of enterprise.

What is the #1 attribute of man that destroys wealth?

THE EVOLUTION OF ENTERPRISE

Stage #1 Innovation & investment

In parallel to the requirements of innovation described above comes investment in labor (both direct and indirect labor) and capital. Direct labor (R&D, testing, etc.) can be amortized over a finite period of time (as can debt). Indirect labor – the creative part of that innovation process – receives equity; last in line to share the benefits. It is the ambition of labor to provide and receive a lasting benefit. It is the expectation of capital to derive a lasting benefit. It’s an important distinction, but more important still is that the full value of innovation (wealth) comes as a series of flows that can only be realized over the lifetime of the benefit. To cut that lifetime short is to not realize full value. Maximum value is full value or final value (FV). Investment in risk deserves the full potential of that endeavor. Not to be cut short.

Stage #2 Management & exploitation

Almost anybody will tell you that there comes a time when it’s best to avoid the distractions of the innovators and bring in the managers to concentrate on exploiting the benefits. The forward momentum can be maintained more effectively and the long-term value (FV) enhanced. It’s this evolutionary period where the costs are amortized and benefits realized. It’s where cash cows graze. It’s what equity holders wait for, but it is a perilous time in a company’s evolution. It’s a time when management can become complacent. It’s also a time that attracts parasites. Disease.

Stage #3 Parasitic investment & wealth destruction

As an enterprise matures the risks become more well known. If it becomes sufficiently large and liquid it can attract a new kind of capital. Ownership can change. The enterprise can become dominated by institutional investors who’s interest are not aligned with the wealth creators that preceded them. It’s reflected as a difference in horizons. Wealth creators have a long-term full value (FV) view. Parasites see only the net present value (NPV). And NPV is FV discounted to some “discount factor”. Parasitism doesn’t require knowledge. It doesn’t require imagination or innovation. It doesn’t require courage – au contraire. Compassion? Not hardly. It only requires greed and a willingness to discount innovation and wealth creation and move those benefits forward. Much easier! Then managers are forced to accommodate the parasites. Why should we not expect them to become parasites themselves? Out with the managers, in with the greedy.

Don’t be fooled to think parasites have the interests of equity holders at heart. Their interest is the attraction of equity holder capital – to themselves – by suggesting or emphasizing some surreptitious pseudo measure of “investment alpha”. But all “investment alpha” can do, all it can ever do, is to move future flows forward – at a discount. Investment alpha does not create wealth. It does not preserve wealth. It consumes wealth.

Let’s be clear. If the discount factor were 0 then NPV = FV. In real terms there can never be any benefit to the intermediation of funds. Full value and wealth are destroyed in the process of discounting and front loading those flows. Also, one should not forget that money is considered the whole benefit. No intangibles. The hopes and dreams and sacrifices of innovation are sold off for cash. Therefore, it is innovation and wealth creation itself which is discounted and under-compensated.

DUMB MONEY

You! It’s your money they feed on. It’s your savings which you have entrusted them to manage. (Mine too though I’m trying hard to break the habit. Cold turkey is tough.) We’ve always had parasites. We’ve always had temptations. The terrible excesses began during the Reagan administration when “retirement accounts” were initiated and incentives were given to investment at the expense of savings. The resultant cash flows provided the basis for new business models and opportunist money managers to risk Other People’s Money (OPM) rather than to secure savings. It may have seemed like a good idea at the time.

It hasn’t worked. We are making the wrong investments. Misallocating capital. Banks extend credit. They make loans to credit worthy borrowers who can make repayments. Their business is about finding borrowers who have that cash flow and the collateral to insure it. Most important (of paramount importance) is the collateral. They have been loaning money to anybody that would pretend to meet those requirements. (Liar loans, >/=100% loan/equity, etc.) And the “liquid capital markets” are about finding your way onto the S&P AAA list so that your debt can be “securitized” and marketed to 3^rd parties. Over and over again. Same liar loans – different liars. And the parasites take a cut both ways. Nobody seems able to ascertain the value of a business proposal. On top of that our business models are bust. The world is changed. We must find a way to adapt our businesses to that changed world. None of these economic forces that we have been talking about illustrate anything other than the abject failure of our financial system to fund the right investments.

The disease is now deep and endemic. A virulent and aggressive cancer. The infection has become so systemic within us that we accept the consequences without complaining. We assume that it’s right that “shareholders” demand companies be demolished short of their full life in the interest of “shareholder (present) value”. Our Keynesian perma-growth conditioning of always positive interest rates (inflation) is so ingrained within us and our expectation of inflation so “normal” that we can’t even question it. We assume that our money should be worth less tomorrow. Therefore, we assume that NPV should contain some discount factor. We assume a yield curve. Some even assume it makes sense that taxpayers borrow money to give to banks so that it can be borrowed back at interest. Though I admit that last is a stretch for my limited intellect. And it’s all accompanied by a never ending 24/7 drivel of investment Pabulum from either complicit or ignorant media. We’ve all been infected. We need to question our assumptions. The fly in the ointment is that it doesn’t take 80 years for savers to know they are being pillaged and it sends the economy out on the risk ladder. With risk comes failure. When everybody is at high risk the failures get bigger. Eventually it gets too big to fail. Then the paradox.

WHAT YOU CAN DO – SOLUTIONS

Reform cannot be allowed to end with a recapitalization of the very financial system which has squandered our savings. The more fundamental issue is the perverse incentives for investment and consequent misallocation of capital.

The systemically important part of our economy is that which is going to pay the bills tomorrow. That which creates wealth and earnings. Not that which intermediates financial flows. And it is our savings which must be invested in productive endeavors to create that wealth. Ways must be found to circumvent today’s financial intermediaries and make those productive investments ourselves. There is quite frankly a lack of good options. No safe havens. We must create them. We must find ways to take greater control of our own production.

Get smart! Leave the casino. Take your money out of their hands. Starve them of the nutrients they need to survive – your money. Amputate this parasitic growth. Drive a stake through its black rent-seeking, money changer heart.