Tuesday, May 17, 2016

New Wealth Creation…a Bust

Makers and Takers: The Rise of Finance and the Fall of American Business – Rana Foroohar (Crown Business)

Wealth creation used to be accomplished by taking raw materials and honing and crafting them into an item that not only had a greater value than the sum of the parts, but also had some desirability to make it sellable in exchange for money. This was the basic premise behind manufacturing.

Today, wealth creation is achieved by coming up with a seemingly silly idea, like say renting out room in your house or offering rides in your personal car in exchange for money, and then selling someone that there is value in your idea so they will invest in your “business”. Once you find enough of these folks to buy in then you roll it out an IPO and voila you are a billionaire! Later when people have an H. L Mencken wake up call, (you know the guy who said “no one ever went broke underestimating the intelligence of the American people) and your “company” goes up in smoke, you can laugh all the way to the bank.
As Time Magazine economic columnist Rana Foroohar details in her new book Makers and Takers: The Rise of Finance and the Fall of American Business, we have moved to a system of financial instruments, manipulation and gambling as a source of wealth creation.

That shift, has spawned startups who have done/created nothing, other than a buzz of future greatness and some gaudy valuations with loads of zeros at the end. That has also spawned the economic bubble and the never ending boom and bust cycles.

While Foroohar spends plenty of ink lamenting the lack of government action to rein in some of this high flying wagering; the simple fact is that both parties have turned a blind eye to so much of this shenanigans that banks, financial institutions and most businesses have moved to take advantage of the process that has been put in place. In the long run it is the average guy and gal that ends up paying the price.

Foroohar details the fact that cash fat, Apple, sitting on some $145 Billion in banks, went out to borrow $17 billion, not for some R & D on a new innovation, but as part of a stock buyback plan to boost sagging share prices. Why borrow you ask? Because the cost of the interest rates on the borrowed money was less than the cost of the taxes levied to re-patriot the money back into the states and the value bump in stock prices exceeds those costs and makes investors happy happy.

This is truly one of the biggest issues facing our economy, as businesses keep money on the sidelines, avoiding steep corporate tax rates, rather than putting the money to work and creating jobs and wealth here at home.

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