The Next Exploit

The rich and influential have spent all of history exploiting situations at the expense of everyone else. Often, that ‘everyone else’ includes other rich and influential. We’d like to believe this is a condition of the modern world or even just the Western world – it’s not. Regardless of religious or political landscape, the powerful have always done everything to remain just that.

In America, the same has been true since the founding. A quick Google search will show you as many examples as you can stomach. Real estate and labor were traditional exploits. As the world has ‘progressed’, so too has the range of exploitable situations. American history, unless you wish to research a bit (which most don’t), tends to paint a picture of inequality being a recent problem. It’s not, of course. From land to railroad barons (railroad stocks collapsing caused a depression in the late 1800’s that dwarfed the Great Depression), the wealthy have found ways to exploit most everything.

The first exploit to truly affect American citizens in large numbers was the railroad stock speculation bubble. There was nothing special about this exploit – all exploits follow the same pattern. An arbitrage situation is created or discovered, then through collusion it’s exploited. In the case of railroad stocks, as the railroad exploded in importance across the world and new companies struggled to survive and expand, they began to offer stock. Wealthy investors bought stock to fuel growth, then sold stock to realize profits. That is never enough.

Investors are folks looking for more reward and along the way accept more risk. Speculators are those simply betting on the outcome of an investment. The next step of the exploit is investors becoming speculators.

Now, investors buy stock on margin – obtaining loans from banks in order to leverage their investment and increase the profit. The borrowed money flows into the markets, raising prices further. It becomes a cycle, higher prices drive more investment, more investment drives more leverage. In normal times, investors can have as little as 10-20% in real money invested. The rest is the public’s money, loaned from banks. During bubbles, however, that leverage can increase to as much as 100-1. The speculators have as little as $1 invested for every $100 worth of investment. In the case of the 1873 crash, the investments were railroad stocks.

Where does that other $99 come from? You – the worker depositing your hard-earned money into the bank to keep it safe – and earn a little interest along the way.

When customers deposit their money into a bank, the bank then lends that money to borrowers. The bank pays depositors interest derived from the loan payments. The bank charges, if they wish to remain in business, more from the borrowers than they pay to the lenders – the depositors. The difference becomes the bank’s profit. Provided the banks makes prudent loans, the depositors can go in and get their money back out and everyone is better off.

In bubbles, banks make loans that are not prudent. They risk the depositor’s money on riskier and riskier investments. That continues till the bubble bursts.

In the 1873-79 railroad stock collapse and the 1929 general stock market collapse, leverage was often over that 100-1 mark. Speculators had one dollar of their own money invested and 100 of the bank’s dollars. That is, the depositor’s dollars. The mom and dad who worked every day and kept their earnings in the bank instead of the mattress had unknowingly lent speculators money to buy stock. When prices are only buoyed by the existence of another buyer, investing becomes pure speculation. As soon as the buyers decide prices are too high, the entire exploit falls apart.

It’s often said that something is only as valuable as long as there is someone who wants to buy it. That is the truth. Few items have true intrinsic value: food, shelter and, where needed, warmth. Gold means nothing if no one wants gold. If faced with eating or a gold ring, food becomes valuable. Gold becomes a metal. Most stocks do have an intrinsic value. The railroad stocks had locomotives and track and cars and real estate. The problem was that the intrinsic value was far less than the speculative value.

Investors add together the intrinsic value of the investment (that part of the price supported by something tangible) to a future value. The future value is what they expect the value of the investment to grow to over time. That is the idea of investing – buy low, sell high. Buying a railroad stock of a growing railroad is an investment.

Speculators take a growing – not always, witness the internet bubble of the late 90’s for an exception – and add ‘buzz’. That buzz moves the price of the investment up much quicker than just the intrinsic and time values alone. Speculators aren’t investing – they are betting.

The result in 1873 was the complete meltdown of the worldwide economy. Insomuch as they had joined the world economy, countries that had money invested in US stocks lost much of their value. The depression created lasted over 6 years and put millions on the street. The stock market exploit repeats every other generation or so. 1929 and the Great Depression. 1990’s and the aforementioned internet bubble.

But stocks aren’t the only exploit. Arbitragers are always seeking that next exploit. That difference between what something is selling for and what they can sell it for. Since the 1980’s, those exploits have included commodities like food, lumber and of course, the grandaddy of them all, oil. The result is higher prices for every consumer and massive increases of wealth for speculators. Enron created a ‘market’ for electricity and, to a lesser extent and impact, internet carrying capacity. The electricity market never worked, but it did result in many markets deregulating prices, resulting in vastly increased prices to the consumer and destroying the once-safe haven of utility stocks. That, in turn, has resulted in utilities, previously heavily restricted and regulated, speculating and investing in exploits rather than in infrastructure.

The big exploit that nearly caused the world to fail was the housing bubble. Investors, then speculators took that safe haven of home ownership and used it to not only increase housing prices, but convince the world to spend trillions of consumer goods. Governments got into speculation at the behest of firms like Goldman Sachs, Bank of America and Charles Schwab. They created speculation vehicles that did no more than speculate on other speculations! Apparently believing their own hype, firms like AIG created insurance products insuring that speculators wouldn’t lose their bets when the whole thing exploded.

The result was the devastation of the collapse of 2008. Entire countries failed. Greece, Iceland and Ireland all found themselves insolvent. The US and EU began programs of spending taxpayer money to bailout institutions that were ‘too big to fail’. Companies that should have known better but bet and created bets on other bets and then leveraged those bets – all with mom and dad’s retirement and junior’s college money. Families weren’t too big to fail and did so in enormous numbers. Millions lost homes, retirement funds and lives. Jobs left. The world is still feeling the effects and will for generations.

Despite an attempt to ‘return to normal’, in other words restart the housing bubble, most markets have not and never will recover. For the first time in US history, owning real estate has been a losing proposition for many over the past ten years. The rich? Oh, they were bailed out by the rest. Some $80,000 was borrowed from each and every American family to bail out the corporations that also bankrupted those same families. Incredible.

Looking back, each exploit bubble increased the effect felt on the world when the bubble burst. Countries that never before had put themselves in debt are now negotiating the debt they incurred in the housing bubble so that their great-great-grandkids will still be paying off the result. Paying off the government debt that occurred when the government gave money to the corporations that caused the whole thing.

So what’s the next exploit? What will the rich find to bet on? Most of our necessities are already priced at the max consumers can stand, so those are played out. Housing is regulated by lending and banks aren’t lending to house buyers without a lot of security. Water? Don’t kid yourself – most of the water is already ‘owned’ by someone. Try capturing the water falling on your property and keeping it for you in many states. You’ll find that’s not your water. A car dealer in Utah set up rain capture systems to use to wash his cars. The state sued and forced him to release that water. Keep in mind that the same government that approved and gave him the permits to build the system then told him he couldn’t use it.

Air? Every day deals are made between government and polluters over how much, when and where they can pollute. So they are already making deals on your air.

Think about it. What will, what CAN the wealthy exploit next?

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~ by Mad Prophet on January 31, 2016.

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