Towards a New Normal

The release of Forbes' annual list of billionaires last week seemed little more than a tired attempt to hawk a few magazines. It tried to create a bit of buzz by ranking a Mexican, Carlos Slim, at the top of the list at $53.5 trillion. Hoped to get America's panties in a bunch trumpeting the fact that Asia was home to more new billionaires than the US and Europe. Endeavoured to convince us the world's economy is turning around heralding the dramatic rise in wealth of the billionaire club, up 500 billion to $3.5 trillion. Guess it's lucky for Forbes that most people really hadn't been paying attention as a quick google search reveals more than a few reactions, from apocalyptic to benign,  fawning to condemning. Somehow they missed Fortune magazine's announcement that Slim was the richest man in the world nearly three years ago, that the West has already sold its future to the East and that the current brand of capitalism is working on the last course of its meal as it devours itself.

In case you missed it, Bill Gates isn't the richest man in the world anymore, nor is Warren Buffet. Gates had topped the list since 1994 then lost the title in 2008 to Buffett only to regain it last year. Neither did too badly last year, both seeing their fortunes grow by over $10 billion. Problem was, the Mexican's grew by $17.5 billion. Carlos Slim Helú's wealth grew from a paltry $35 billion to $53.5 billion in just a year. While the propagandists will peddle the Horatio Alger myth of a self made man whose business savvy has brought him to the pinnacle of power, Slim owes his over the top success to an inheritance head start and insider influence.

Still drinking the Kool-Aid that teaches us that motivation, innovation and education sets one on the pathway to success? Funny enough, Fortune featured at article alongside their rich list which asked "Are You Born to be a Billionaire?" which stresses optimism and risk taking, when in fact one of the best ways to get on Forbes' list is to be like Steve Forbes himself and be born onto it much like the Walton clan of Wal-Mart fame occupying the 12th, 15th, 16th and 18th positions on the list. Sure, you'll find a useful proportion of productive entrepreneurs who have enlarged the economic pie but looking at the rest of the list, one gets a feeling that the invisible hand isn't as important as the silver spoon in determining one's financial fortune.

Still, Slim wasn't granted the advantage of the Waltons, so how did the son of a Lebanese immigrant amass such a fortune in Mexico? Easy. You control the communication industry of not only your country, but an entire region. "Slimlandia" truly blossomed thanks to privatization of the Mexican telecommunications industry in the early 90's, which brought about a monopoly instead of diversity. His purchase of Telmex, facilitated by contributions to then president Carlos Salinas, was the springboard which has led to a Mexican economy that "is highly inefficient, and it is losing its competitive standing vis-à-vis other countries because of people like Slim." Almost every time a phone rings or text message is sent, Carlos pockets pesos from the 92% of subscribers in land-line telephony, while his mobile operator, Telcel, has almost 80% of users in Mexico. Oh, in the past five years his mobile telephone company America Movil has purchased most of the remaining mobile operators across Latin America, becoming the largest mobile service provider in the region. The reward for the people? Some of the highest phone hook up rates in the developing world. America Movil now has 201 million customers from Brazil to the United States. Slim also owns five insurance companies, a Mexican retail chain, a mining company, the Inbursa bank, the Cigatam tobacco factory, the Volaris airline company and the Progidy Internet provider. Oh yeah, chunks of Saks and Sears, plus he lent $250 million to the NY Times at 14% interest plus warrants convertible into 16% of the paper. All together, Slim’s companies have a value of half of the Mexican stock market, 7% of Mexican GDP, while much of the rest of the country gets by on a little over $4 a day per head (54-57 pesos).

Sure, your probably saying to yourself, "Yeah, sounds like Mexico, poor and corrupt, nothing like that happens in the developed world, after all they've got a drug lord on the rich list." Yet one could easily argue that Gates billions are largely thanks to the monopoly position he attained in his industry, but I won't. Or maybe bring up the culture of war that his seen a transfer of wealth measuring in the trillions to defense contractors’ whose growing use of offshore subsidiaries from 2003 to 2008 resulted in the loss of tax revenue and unemployment benefits for workers. How about you take a noble idea, say, granting health care coverage to your people, then twist it into an evil package that will deliver guaranteed profits to the insurance industry? I suppose I could point out that the entire financial industry was given trillions of dollars to keep them afloat in order to hand over billions in compensation to the guys who drove the world economy into the ground, but that would be too easy. How did capitalism become so corrupt?

Unlike the last depression when the gilded fortunes of most plutocrats dropped precipitously, along with the banks the rich have been well taken care of by the system. The government printing presses have been working overtime to maintain the illusion of stability in order to artificially propel stock and resource prices. This has clearly benefited Warren Buffett who has gorged himself on the buffet of buying opportunities that the crisis presented resulting in a $10 billion increase in his wealth. Sure, the "Oracle of Omaha" does his bit allocating wealth through Berkshire Hathaway while taking home a reasonable salary, but what has he produced? One can ask the same of these other 33 hedge fund managers on the list. How did they improve the world?

And who else's wealth is your tax payer money, along with your children's and children's children's children, going to support? Only 16% of the new members of the elite thousand were from the States while Asia added 104 moguls giving them just 14 fewer total than Europe, 234 to 248. The 4th and 5th richest people in the world are now from India, Mukesh Ambani and Lakshimi Mittal moved up from 8th and 7th respectively. Soaring resource prices helped the biggest gainer on the list, as Brazil's Eike Batista saw his wealth increase by $19.5 billion(!) thanks to his mining interests, moving him up to 7th at $27 billion. Russia rounded out the BRIC countries fine performance. As oil and gas prices bounced back, so did oligarch fortunes. Of the 164 returning members to the list, 28 were Russian, giving them a tally of 62 billionaires. Taiwan tripled its number of billionaires to 18 and Turkey more than doubled its own to 28. For the first time China, with 64 billionaires, has the most outside the US whose residents now command 38% of the collective net worth of the world's richest, down from 44% a year ago.

It wasn't until I read the BBC version of the story that my ears pricked up. You see, apparently the latest Forbes list is good news for everyone: "In a sign that the global economy could be improving, the average net worth of the world's billionaires is now $3.5bn, up $500m from last year." You hear that everyone? Yep, it's a good sign for the global economy that the super rich became super richer last year. It was just a year ago that the Beeb was lamenting "Rich list hit by economic crisis". Yesiree Bob, 2009 was a much better year for the world than 2008, a year that saw 332 names wiped off the rich list leaving a measly 793 billionaires who saw their wealth plummet by 23%. Things are much better now as the billionaire list is back in quadruple digits with 1,011 members.

The pursuit of wealth has clearly become an end in itself, with the wealth rankings taking on the importance of an Olympic medal table (yeah Canada, New Zealand or more likely India). Much of the rest of the list is being celebrated and debated over national lines with many cheering their country's inclusion (Finland and Pakistan got their first members) while others lament their nation's totals on the list. National pride seems to be at stake as we're fed the meme that having more billionaires means a better country and world.

Though they've convinced the apologists that this may be true, they couldn't be more wrong. We're seeing the fruits of the system planted by Nixon in which the treadmill of debt allows a nation to sell future generations into indenture in order to buy stuff made by the future slave owners, the price being held low thanks to the artificial peg maintained by the purchase of debt in the first place. Does that make sense (I mean the sentence and the system)? To my way of thinking, a world where hyper-wealth is celebrated has two basic flaws: a system that creates winners also breeds losers to scale, resulting in massive inequality and even more fundamentally, more stuff means more unhappiness.

As it stands, the US and much of the world suffers from more inequality than any time in over 100 years. We're taught to believe in this evil Gilded Age that existed before capitalism kicked in and distributed wealth away from the kings, queens and Rothchilds. Yet today these fat cats do more than throw off the standard deviation of wealth distribution. When a ruling class becomes entrenched it follows that mobility between classes inevitably declines - a lethal ailment for economies. Sadly, the tea partiers will believe it's the government control of the economy that destroys innovation but in reality it's the gilded class and true enough, the government is enabling their control. Funny how those Nordic 'socialist' countries feature much more intergenerational movement than the US (Italy and the UK are even more stagnant).

Whether you invent something or inherit your cash, there is no doubt money is an innovation driver, but 10 digit wealth takes a lot of cream off the top. Could this loss of incentive to move up have led to the decline in median wages in the US between 1998 and 2008? Yet it's facilitated by a tax system that has seen a fall of the highest marginal tax rate from 91% in the 1950's to 28% today (well, the IRS says that the top 400 richest tax filers actually paid a rate of just 16% in 2007 thanks to loopholes, a lower rate than your average Joe). In 1970 the compensation ratio of the top 100 CEOs compared to the average worker was 45 to one. By 2008 it was 1,071 to one. You think they got that much smarter? If given the choice of giving our money to these guys, the banks, the military industrial complex or health care it seems like you would choose door number four, no?  We're sold the fairytale image of the first man from the developing world to become the world's richest along with slumdog billionaires, but they're just replaceable cogs in the machine. It's the machines they operate that control the world's markets, employing armies of lobbyists to influence government, and a network of spies (yes, real spies, CIA, MI5, ex-KGB) in order to maintain their stranglehold on global wealth.

Finally, here's the kicker. More money and more stuff don't make you happier. Building upon the ideas of Thorstein Veblen, who in 1899 coined the term "conspicuous consumption" in his book The Theory of the Leisure Class (google books here), two professors of economics, Curtis Eaton and Mukesh Eswaran, believe they have shown through economic formulas that more things make us less happy. Veblen's work is considered to have been the first critique of consumerism where he argued that our modern division of labour began in tribal times when the "higher-status" group monopolized war and hunting while farming and cooking were considered inferior work. Veblen's ideas were discarded by neoclassical economists as he cast people as irrational creatures who chase after social status without regard to their own happiness, an idea that should be gaining more traction in light of the financial crisis. In the Middletown studies, for example, researchers learned that lower-class families were willing to go without basic necessities such as food or new clothes to maintain a certain level of conspicuous consumption, in particular, car ownership. The concept of conspicuous consumption has been carried forward to this day, and is often used to criticize advertising and to explain why poorer classes have been unable to advance economically. His views on the uselessness of "businessmen" have been adopted in modified form by none other than third-ranked Warren Buffett, who has harshly criticized the growth of practices such as day trading or arbitrage, which makes money solely through abstract means.

Well, according to Eaton and Eswaran it seems our drive to own more stuff is really a sort of zero-sum game, where the owners may feel happier but the rest of us are left feeling worse off. They state that once society reaches a reasonable standard of living and consumption shifts towards the purchase of status symbols with no intrinsic value, average wealth may rise causing people to be richer but unfortunately not happier. Worse yet, as people yearn for more status symbols they have less time or inclination for helping others. This, the authors argue, damages "community and trust", which are vital to an economy because they ensure the smooth running of society. They conclude: "Conspicuous consumption can have an impact not only on people's well-being but also on the growth prospects of the economy." Huh, sounds a little bit like what's ailing the west these days as we mortgage our futures in order to buy more stuff today, thus sacrificing our growth prospects.

Well, seems I've managed to ramble on quite a bit again. As usual though, these arguments will fall upon deaf ears of the true believers as the cognitive dissonance created between reality and their beliefs cause them to fall back on tired, disproven arguments. They'll blame my Karl Marx beard for my socialist rantings or accuse me of tall poppy syndrome while ignoring the words of their idol, Adam Smith who warned:

Of the corruption of our moral sentiments, which is occasioned by this disposition to admire the rich and the great, and to despise or neglect persons of poor and mean condition

There is little question that our current form of capitalism is failing us, while those in positions of power are doing all they can to protect and propagate their wealth. There's a frightening increase in momentum about it as the rich become richer and the poor poorer. In the meantime, panem et circenses will be fed to the masses while ensuring the next generation will be dumber than the last as places like Texas reinvent the history books and Kansas City closes half of its schools. Knowledge is after all nearly as powerful as the dollar.

BRIC-A-BRAC

Sometimes it's tough to take the media filter glasses off. We live in a world where all the important information is brought to us thanks to these internets, pity the fools that have to rely on the idiot box. So how is it that the most obvious of patterns are impossible to discern? The collage painted by the press should allow us to see the world how it really is, yet we miss the most obvious. Self-fulfilling prophecies such as last week's BRIC meeting spring to mind as the media simply brushed over the fact that the 4 nations that make up 43% of the world's population met last week to try to chart a mutually beneficial path through the future. The G8 will meet next month and there will be wall to wall reporting yet a group formed by the prediction of a Wall Street analyst gets swept under the carpet.

Reuters declares: Much-Trumpeted BRIC Summit Ends Quietly. "BRIC" is an acronym for Brazil, Russia, India and China, the world's four major developing countries. Jim O'Neill, global head of economic research at Goldman Sachs, first started the idea of BRIC in 2001. While it's obvious today thanks to the economic growth of these countries, which averaged 10.7% from 2006-8, it was only the idle talk of an analyst predicting the economic world of 2050, when the four countries would together pass the G7 in size. Since then we've watched the US economy lead an implosion of western economic power as these four nations have made strategic manoeuvers to position themselves to be exactly what we knew they'd be, the masters of our world. With Brazil and Russia pumping out the raw resources, China and India will consume the world.

The June 16 summit in the Russian Urals city of Yekaterinburg marked a huge step toward BRIC cooperation as a group. The fact that they have now met formally is story enough, but at the same time, the Russian city hosted another meeting, this a more formal grouping, the SCO, Shanghai Cooperation Organization (China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, with Iran, India, Mongolia and Pakistan as observer states). Even more interestingly, both India and Iran took part at the most senior level as the Indian Prime Minister Manmohan Singh and Iranian president Mahmoud Ahmadinejad attended. Yes, just days after the election in Iran, Mahmoud was there, yet we barely heard a whisper of the meetings as his nation's spiral towards revolution captured our attention along with David Letterman's 14-year old rape inciting. Background buzz as we stumble towards a real new world order.

While BRIC countries account for 15 percent of the $60.7 trillion global economy, China is the world's largest holder of U.S. Treasuries with $767.9 billion while Russia holds around $400 billion in their foreign reserves. More importantly, Russian President Dmitry Medvedev has made proposals on giving a greater role to the International Monetary Fund's Special Drawing Rights that echo ideas from Chinese central bank chief Zhou Xiaochuan. China, Russia and Brazil have pledged to help capitalize the IMF as they seek more influence at the fund. Together, the BRIC have a 15-percent share of the world economy and a 42-percent share of global currency reserves. Last week Brazil and Russia joined China in announcing they would shift some $70 billion (50 billion euros) of reserves into multicurrency bonds issued by the International Monetary Fund. Tiring of the inequity of the system, Brazil, for example is the world's 10th largest economy, but has just 1.38 percent of the IMF board's votes, compared to 2.09 percent for Belgium, an economy one-third the size, they are starting to make noise about changing it.

Navel gazing is far more interesting as it seems more important whether or not Obama, and America, are doing enough, or meddling too much in the Iran election quagmire. The future is just the Heisenberg uncertainty principle at work, que sera, sera, plus there's the Jon and some chick thing to worry about, or Letterman. America has put the BRIC on the path to controlling the world, why would they need to worry about where the road goes? Of course looking forward to the year 2050 involves a myriad of uncertainties, it seems forecasts for when the combined BRIC GDP will pass the G7's are being revised with every new report, from 2050 to 2045 to 2032, sure to change again due to the current financial crisis. Of course they'll be potholes on the road to cooperation, not the least of which will be inter-BRIC conflict, particularly between China and Russia as they vie for dominance in Asia. China announced plans at the SCO summit to give $10 billion of loans to Central Asia, upstaging traditional power Russia whose promises of aid have not been fully delivered amid the financial crisis. But India's economy is projected to be 90% of the US while China will have grown to 130% by the year 2050. Not only will the BRIC dwarf the G7 in global importance, but the N11 (harder to make an acronym for an 11 nation group: Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam. Maybe BEIIKMNPPTV) will rival the economic size of the present elite 7 nations.

Notice how all these numbers assume unlimited resources to achieve growth. There will be a far more interesting chess game played with a more level economic table. China locks up resources in African nations without any of those human rights strings attached. Russia is circling the arctic, winning the new polar race. Markets are necessary too, and the US is sure to remain an important one, making killing the greenback a double edged sword, especially for China. Comments by Russian President Dmitry Medvedev questioning the dollar's role pushed down the U.S. currency by 0.9 percent against other key units, thereby hurting the value of China's investments. Baby steps towards independence from the west and the dollar will be the key word, but they'll add up quicker than you think.