The Form of Money

Capital Structure Flaw of Corporations

mammon — Wed, 18 Nov 2009 08:05:00 -0900

INTRODUCTION

The stock market provides an opportunity for investors of all sizes to participate in the ownership of corporations. The premise for purchasing the stock of a corporation is to obtain equity or owner rates of return on the investment plus the eventual return of the original investment. Question: when and how does a publicly traded corporation plan to repay the original investment?

CORPORATE INVESTMENT

Generally, a corporation identifies an investment opportunity and issues stock to fund the investment. The investment, such as machinery, has a useful life expectancy. The investor who purchases the stock expects to get a targeted return on the investment plus the recovery of the original investment.

As so far described, the issuance of stock has been tied to a specific investment. In practice, the issuance of stock is blended into the overall corporate ownership and is not tied to a specific investment. The stockholder participates in many investments by the corporation. Regardless, the funds received from stock issuance are used to make specific investments by the corporation.

THE ABERRATION

The corporation uses the proceeds from stock issuance to make an investment, such as machinery, and someday that investment will eventually reach the end of its useful life. When that investment expires, the corporation should retire the originally issued stock. If not, the stock remains on the balance sheet expecting equity rates of returns to be serviced by an expired investment.

Corporations occasionally buy back its own stock, usually to be reissued at a later date, but rarely to "retire" the stock based on an expired investment. A corporation may issue stock to pay down existing debt; however, this is counter to conventional capital theory since equity money has higher ROR expectations than borrowed money. On the other hand, borrowed money has an enforceable due date for repayment and equity money does not.

As more stock is issued for other investments, the cash flow to service the expected returns on recently issued stock must also service stock returns issued for past investments whose useful life has expired. This is equivalent to continually borrowing money to pay interest due.

Hence, a corporation that does not retire stock is a type of pyramid scheme. All pyramid schemes have a compounding period and interest rate. A lower interest rate and a longer compounding period merely flattens the pyramid and takes longer to play out. In bankruptcy proceedings, the stockholder is last in line to make a claim, and the well is usually dry by the time the stockholder steps up to the bucket.

PERPETUAL GROWTH

Stock collapse is prevented by "perpetual growth." As long as the corporation can maintain compounding growth, the event where the returns on current investments can no longer service a disproportionately large equity base can be pushed into the future, but not indefinitely.

SUMMARY

The issue is not whether "growth" is a flawed concept. Growth itself is a vague term that has a wide variety of meanings from individual to individual and is generally viewed as "a good thing"; however, the emphasis of compounding growth as a national economic policy measured by the Dow Jones Average or Gross National Product may not encompass all the desired attributes of growth.

An investor wants to recover his equity before investment failure; hence, the search for the greater fool, the greater fool being the investor who buys the stock of a corporation just as perpetual growth slows or ceases. The public stock market is the most opportune market to find the last buyers, hence the greatest fools.

When a corporation's stock declines, an investor's losses can be offset with gains in other corporations using a diversified corporate portfolio. When an industry starts to decline, an investor's losses can be offset with gains in other industries using a diversified industry portfolio. The diversified portfolio is insurance that the investor will only be fooled part of the time.

CONCLUSION

Ever-increasing growth, as measured by compounding interest concepts, is an inherent flaw embedded in the corporate and debt structure. Collapse is inevitable.

Alternate Forms of Money

mammon — Mon, 16 Nov 2009 08:56:00 -0900

Form of Money Series

The acceptance of alternate forms of money is the path of least resistance, an alternative to conflict. One may speculate on alternate forms of money. Recall, any commodity can be money. As an example, let’s consider electricity as an alternate form of money. Electricity is a primary societal need. Everybody is wired to electricity. To not have electricity would severely disrupt society. The intrinsic value of an electrical unit, measured in kilowatts, is uniform and measurable. One root of all comparative valuation could be a kilowatt.

Since the storage capacity of electricity is negligible, the extraction rate of electricity equals its consumption rate. For the most part, what’s produced is consumed immediately. Though the extraction rate and the consumption rate may increase, they increase proportionately. As long as the storage capacity of electricity is negligible, the result is a zero growth rate of money. A zero growth rate does not facilitate the application of interest. Society will restructure itself to accommodate a zero growth form of money.

Oil, natural gas, coal, nuclear, and hydro are the predominate sources of energy used in the production of electricity. Solar, wind, and bio are ancillary energy sources. Oil, natural gas, and coal are finite resources with extremely low replenishment rates. The relationship of a kilowatt with its energy source would become primary societal knowledge. To ‘save money’ would be to save electricity, perhaps enough to eliminate the need for nuclear and foreign fossil fuels immediately.

The immediate source of money would be the utility serving the local power grid. In California, PG&E would be the utility for Northern California and Socal Edison would be the utility for Southern California. The production of electricity comes from many sources contracted with the utility; however, the distribution of electricity is centralized and controlled by the utility. The management of money would go from global to regional while still maintaining a global form of money. Eventually and perhaps quickly, more independent ways to produce electricity would be creatively found.

From there, the logistical details of how an actual transaction occurs using electricity as a form of money becomes academic. It takes a lot of people to run the utility and they have needs like everyone else i.e., the basis of trade with others. The rest is accounting.

The same analysis can be applied to other alternate forms of money.

Social Groups and Money

mammon — Sun, 15 Nov 2009 17:36:00 -0900

Form of Money Series

Those who control, or are perceived to control, the societal form of money walk a perilous line. On one hand, they are highly compensated and enjoy luxuries afforded to few. On the other hand, if the skewed distribution of wealth causes intolerable stress for many others, then those perceived to control the societal form of money may suffer the wrath of a Market correction.

Albert Speer: His Battle with Truth by Gitta Sereny

"You have to think," Dr. Huphauer said, "that multiplying that ‘seven million unemployed’ figure by a conservative three to include families, there were then about twenty million people in need, with no unemployment insurance and only the most minimal social security benefits. When the earlier catastrophe, the inflation, struck, when a loaf of bread cost a million marks and butter and meat ceased to exist for millions of people, they grew to hate - really hate - anyone who had money, thereby exacerbating the already profoundly resented class system."

Tagging a specific social group that has been significantly woven into a society and then yanking that group from the fabric will tear the society significantly. All societal members will suffer the tear, rippling through generations.

When the societal form of money does not function well for many, those who maintain wealth are perceived by the others to be privileged and conspirators. When monetary stress becomes critical, the simplistic tagging of all wealthy people prevails.

The History of Money by Jack Weatherford, 1997

Everyone seemed to be looking for a scapegoat to take the blame for the calamitous monetary and economic fallout of the era. In each country, politicians attacked the wealthy class or some particular segment of it - the aristocrats and landed peasants in Russia and the Armenians in Turkey, for example, or the Jews in Germany. Perhaps in an effort to counter the hostility directed toward them, the richest of the plutocrats began performing massive and highly publicized works of charity.

Privilege (Random House Dictionary):

a right, immunity, or benefit enjoyed only by a person beyond the advantages of most: the privileges of the very rich.

Conspiracy (Random House Dictionary):

1. the act of conspiring. 2. an evil, unlawful, treacherous, or surreptitious plan formulated in secret by two or more persons; plot. 3. a combination of persons for a secret, unlawful, or evil purpose.

Instead, monetary frustrations should be focused towards eliminating flawed monetary concepts as root causes of monetary stress and cyclical conflict. A monetary collapse is a window of opportunity to make progress towards a more perfect Market.

Interest, Usury, and Religion

mammon — Sat, 14 Nov 2009 09:03:00 -0900

Form of Money Series

Usury (Random House Dictionary)

1. the lending or practice of lending money at an exorbitant interest. 2. The exorbitant amount or rate of interest, esp. in excess of the legal rate.

Usury (Dictionary of Cultural Literacy)

The practice of charging more than the legal interest rate.

Law separates interest and usury by defining what is exorbitant. From a mathematical perspective, the determination is arbitrary. Interest and usury are conceptually synonymous. The difference between interest and usury is an arbitrary legal determination with no basis in mathematics.

Deuteronomy XXIII:19 (Old Testament)

Thou shalt not lend upon usury to the brother; usury on money, usury of victuals, usury of anything that is lent upon usury:

Deuteronomy XXIII:20 (Old Testament)

Unto a stranger thou mayest lend upon a stranger; but unto thy brother thou shalt not lend upon usury...

Deuteronomy was a base of morality for Hebrew tribesman. Usury could be applied to a stranger, but not to a brother. For some, usury was viewed as a weapon to be used against an enemy who could not be defeated in direct confrontation.

De Tobia by St. Ambrose (340-397)

From him, it says there, demand usury, whom you rightly desire to harm, against whom weapons are lawfully carried. Upon him usury is legally imposed. On him whom you cannot easily conquer in war, you can quickly take vengeance with the hundredth. From him exact usury whom it would not be a crime to kill. He fights without a weapon who demands usury: he who revenges himself upon an enemy, who is an interest collector from his foe, fights without a sword. Therefore, where there is the right of war, there also is the right of usury.

As the argument goes, the New Testament proclamation of universal brotherhood negated the use of usury in any circumstance.

The Idea of Usury by Benjamin N. Nelson, Princeton University Press, 1949

St. Jerome (340-420) contended that the prohibition of usury among brother in Deuteronomy had been universalized by the Prophets and the New Testament. There was, in short, no scriptural warrant for taking usury from anyone.

Though usury was a banned practice, it still crept into society and propagated itself.

Religion and the Rise of Capitalism by R. H. Tawney, Oxford, 1922

The Papacy was, in a sense, the greatest financial institution of the Middle Ages. The abuses which were a trickle in the thirteenth century were a torrent in the fifteenth. The papacy might denounce usurers, but, as the center of the most highly organized administrative system of the age, receiving remittances all over Europe, and receiving them in money at a time when the revenues of other Governments still included personal services and payments in kind, it could not dispense with them.

The Idea of Usury by Benjamin N. Nelson, Princeton University Press, 1949

In fifteenth-century Italy, economic expediencies completely overshadowed moral philosophy as a force in the propagation of Christian Universalism. By 1509, eighty-seven banks had been set up in Italy with papal approval despite insistent pleas of traditionalist theologians, chiefly Augustinians and Dominicans, that the interest charges taken by the monti were contrary to all tradition, natural and Divine law, and subversive of Christian brotherhood.

Religious scholars began to question the Roman papacy as the sole path to spiritual enlightenment.

The History of the Modern World by Palmer and Colton, 1995

Germany in the fourteenth century produced a series of mystics. The essence of mysticism lay in the belief, or experience, that the individual soul could in perfect solitude commune directly with God. The mystic had no need of reason, nor of words, nor of joining with other people in open worship, nor even sacraments administered by the priests - or even of the church. The mystics did not rebel against the church; they accepted its pattern of salvation; but at bottom they offered, to those would follow, a deeper religion in which the church as a social institution had no place. All social institutions, in fact, were transcended in mysticism by the individual soul; and on this doctrine, both profound and socially disruptive, Martin Luther was later to draw.

Considering Germany’s economic condition in the fourteenth century, Luther’s opinion upon usury, a fundamental mechanism of money having a biblical reference, was relevant. During this period, Luther stood forth as the spokesman of the German nation against "usurious" extortions of the Roman Church. All Germany, he charged, was being exhausted by usury. In 1524, the peasants of Germany revolted. Luther’s convictions were shaken by the peasants’ violent methods of retaliations.

The History of the Modern World by Palmer and Colton

Luther repudiated all connection with the peasants, called them filthy swine, and urged the princes to suppress them by sword. The peasants were unmercifully put down, but popular unrest continued to stir the country, expressing itself, in a religious age, in various forms of extreme religious frenzy.

Neither interest nor usury were eradicated.

Jesus Casting out the Money-Changers, by Carl Heinrich Bloch, 1834 – 1890

Another Religious Perspective

The Koran, the Holy Text of Islam delivered by the seventh century prophet Muhammad, also mentions usury.

The Glorious Qur’an, Translation by Marmaduke Pickthall

Surah II - 275

Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permitteth trading and forbiddeth usury. He unto whom an admonition from his Lord cometh, and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him who returneth (to Usury) - such are rightful owners of Fire. They will abide therein.

Surah II - 276

Allah hath blighted usury and made almsgiving fruitful. Allah loveth not the impious and guilty.

Surah II - 278

O ye who believe! Observe your duty to Allah, and give up what remaineth (due to you) for usury, if ye are (in truth) believers.

Surah III - 130

O we who believe! Devour not usury, doubling and quadrupling (the sum lent). Observe your duty to Allah, that ye may be successful.

Surah XXX - 39

That which ye give in usury in order that it may increase on (other) people’s property hath no increase with Allah; but that which ye give in charity, seeking Allah’s countenance, hath increase manifold.

Today, the use of usury remains a source of contention within the Islamic world and amongst religions.

Osama bin Laden:

You are the nation that permits Usury, which has been forbidden by all the religions. Yet you build your economy and investments on Usury.

Civilizations and Usury

mammon — Fri, 13 Nov 2009 08:46:00 -0900

Form of Money Series

A History of Interest Rates by Sidney Homer, Rutgers University Press, 1963

Credit is sometimes considered a modern device or even a modern vice. It is true that a few new credit forms have been developed in our century and statistics reflecting the growth of the volume of credit during recent decades are impressive. But a glance through the pages of financial history will dispel the notion of novelty. Credit was in general use in ancient and medieval times. Credit long antedated industry, banking and even coinage; it probably antedated primitive forms of money.

For example, about 1800 B.C., Hammurabi, a king of the first dynasty of ancient Babylonia, gave his people their earliest formal code of laws. A number of chief provisions of this code regulated the relation of debtor to creditor. The maximum rate of interest was set at 33 1/3% per annum for loans of grain repayable in kind, and at 20% per annum for loans of silver by weight.

Twelve hundred years later, around 600 B.C., the legal history of classical Greece began with the laws of Solon. Drastic reforms were then called for by an economic crisis in Athens stemming in part from excessive debt and widespread personal slavery for debt.

The Romans also began their legal history with a body of laws regulating credit. This, too, was forced by a crisis characterized by excessive debt.

These three examples from the earliest days of historic Babylon, Greece and Rome are enough to support the conclusion that credit at interest was widespread enough to create major political problems before the emergence of written history.

Usury, or interest, was fundamental to driving the economic growth of these great civilizations and to their eventual epochal collapse.