Do people know what they are worth? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 8 October 2012
Do people know what they are worth? A  A  A

Paris, France

The Dow hit a new nominal high on Friday.

Money is what we use to measure past, present and future. It is what we have to show for our years of work. And it is what we need to pay for the things we want in the future. It is how we measure what we're 'worth.'

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You work all your life and you're worth say $1 million. And then, the feds just print up $40,000 million...or more...just like that. They then give it to the people who are close to them...the people they bail out...the people who speculate in stocks...people make campaign contributions...and people who make fighter jets.

This effect - of giving out the new money to the politically-favored groups closest to the feds - was discovered more than 2 centuries ago, by Robert Cantillon. It's known as the 'Cantillon Effect.'

It undermines faith in the whole system, past and present. Suddenly people don't know what they're worth. The auto parts distributor who worked his whole life, saved a million dollars, and put it in a saving account at the bank, now finds his banker neighbors - who speculated on banking shares - are worth twice as much as he is. He looks ahead; he wonders what will happen next.

And here's the latest report on how it works from the New York Times:

Bank Executives Cash In As Market Rises

The banks were bailed out by the feds. The rescue program, TARP, included provisions limiting cash bonuses. So the bank execs took stock instead...then, valued at low levels. According to the report, the bankers - the 5 top execs at each of the 18 largest publicly traded financial institutions -- got $142 million worth of stock.

But wait. Even though they'd brought their companies to the brink of extinction, they didn't actually take a dime less in compensation. They simply switched the cash bonuses they were owed to stock options, valued at the low prices of the crash era.

Then, the Fed also went to work to make sure the banks made beaucoup money - taking their bad investments off their hands at par...lending them cash at record low interest rates and generally tilting the playing field in their direction.

Four years later, that stock is now worth $457 million. Nice profit, heh? But while the story is told by the NYT with all the numbers and details, the paper misses the plot. It says the bank execs were the beneficiaries of "lucky timing."

Ha, ha, ha... lucky? You call $1.2 trillion in Fed stimulus 'luck?' You call the $700 billion TARP program 'luck?'

Well, it's amazing how lucky you get when you have the Fed giving you money!

We call it what is really is - cheating. It's what happens when the feds fiddle the financial system. Money - created not made - is up for grabs. And who grabs most? Those closest to the source - the insiders. The more loot the feds distribute the more the insiders get. The rich get richer.

Dylan Grice:

The credit inflation analog to the Cantillon effect has played out perfectly in recent decades. Central banks provided cheap money to banks, the cheap money artificially inflated asset prices, artificially inflated asset prices made anyone connected to those assets rich. As we became a nation of speculators, those riches were achieved at everyone else's expense, and - everyone else - has now realized what has happened and is understandable enraged as Keynes explained, Those to whom the system brings windfalls ..... are the object of the hatred.

Everyone hates bankers. And for good reason. They're cheating. They're insiders who are benefiting most from the feds' foolish money-printing.

If the bankers had gotten what they deserved, instead of getting options and bonuses, they would have gone broke. Then, we'd see what they were really worth. They could have picked up the pieces, creating new and better financial companies. And today, we'd have wiser...more honest bankers...and better banks too. We'd also have a more honest financial system.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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3 Responses to "Do people know what they are worth?"


Nov 3, 2012

Yes. What you both commented is true.
However there is a concept in India named as "Nidhi" . These companies are working on the principles of Mutuality but not like present day Mutual Funds all over the world.
Simply Just like Democracy, these companies are
For the Members
By the Members
To the Members.
one among the Best nidhi company I know is Town Benefit Fund(Kumbakonam) Limited.


Rajiv Phadke

Oct 9, 2012

I fully agree with Bill & Shivaramkrishnan. But I think that bankers are not the only beneficiaries of this state sponsored & funded loot. Owners of all large businesses have gained from Govt largesse across the world and at all times in history...Political Rulers, Arms Producers/Armed Forces, Money Bags and Religious Leaders, have always connived to keep the poor people poor and used the middle classes to do the dirty work by offering the carrot of growth..... I wonder who, what or how, will this age old and often unethical exploitation of the vast majority of humanity by the elites, will end ?? I like Bill's candid and incisive analysis and hope that he/others like him are able to drive a change....Current debate in the US Presidential elections is not addressing the above core issue, which is causing most of the global economic problems !!



Oct 8, 2012

The `Cantillon Effect' was discovered two centuries before by Richard Cantillon and not Robert Cantillon, as per Wikipedia.

The Bank is fed by way of QE and the Bankers are fed by the politically favored groups but who will favor or feed the small retail investor or trader who loses to these manipulators and robbers.

Today, I am one of the victims to these Banks and Bankers. Will anybody favor or feed me to survive as an investor or a trader. Honest Banker and honest financial system is a far cry given the poor transparency of world economy. It still favors only the rich and powerful.

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