Sovereign Finance

Key:

Rob’s comments in italicsDerek’s comments in normal font

Introduction to BlackRock

Our subject today is BlackRock, which is an entity that I have to admit before 2020, I was not aware of. So what is it and what do people need to know?

BlackRock is a fund manager, which essentially means that it takes the aggregate investments of a large number of people or a large number of organizations, who in turn are collecting investments from large numbers of people and buys the stocks and shares and bonds and any other investments they want to make. They claim they are able to do this in a more effective way than those people could do themselves.

BlackRock's Reach and Influence

A large proportion of the capital they are operating is from various US pension funds. Various individual states have pension funds for their government employees. Large corporations have pension funds for their employees. And of course, a lot of people manage their own pensions, either because they're independent professionals or entrepreneurs or business owners, or because they want an additional provision for their old age that they create under their own initiative.

So, as I think we mentioned when we were looking at the way pensions are working out these days, it's essentially an arrangement where over the course of your working life you pay in regular amounts. The income and the capital gains from those investments get reinvested, which in theory, should allow it to grow exponentially to the point where it can produce an income of a similar order of magnitude to your final earnings.

The remarkable thing is the extent of BlackRock’s hold over the entire corporate landscape. If you want to go and buy a fizzy drink, should you be reckless enough to do that, you could buy Coke. Alternatively, of course, you could buy one from its major competitor. When you actually look at the ownership of the shares in Pepsi Cola and you would find that one of the top investors, typically with a high single-figure investment, is BlackRock. If you look at Coca Cola you’ll find the same thing.

Similarly, if you're in the computer world, you might choose Apple or you might choose Microsoft. And then if you look at the ownership of Microsoft and Apple, you'll find that BlackRock is one of the top three shareholders of both of those corporations.

So what are the implications?

One of the buzzwords that you may have come across recently is ESG: environmental, social and governance. These are supposed to be guidelines for running large businesses in such a way as they are responsible and looking after the planet. I think it's highly dubious whether this is just yet another attempt to steal the clothes of the opposition. Having recognized that there's public concern about these matters, this buzzword has been created. The ESG framework was in fact proposed by Larry Fink, who is the founder of BlackRock.

Larry Fink and BlackRock

I'll go a little bit into the history of this, because in itself it is quite extraordinary. Larry Fink was a fund manager at First Boston Bank, and in 1986, he managed to lose $100 million with a mistaken bet on the likely movement of interest rates. You would have thought that would be the end of his career. But two years later, he had managed to put together a series of proposals where he had decided that he could evaluate risks better. He took the proposals for doing that, two of them, which, funnily enough, was called Blackstone Investment Management. He managed to persuade the owners of Blackstone that they should give him a chance to try out his investment. Based on that, they offered him a $5 million line of credit in return for a 50% stake in that particular operation, which was originally a subsidiary of Blackstone. (It wasn't yet called BlackRock.)

By 1992, he'd managed to grow that $5 million up to $17 billion of assets. They decided that this was getting good returns for his investors, which is why they were coming back to him. But it's still a pretty astonishing rate of growth. So at that point they decided to spin it off as a separate company. That's when they called it BlackRock. There was sort of something of an in-joke that BlackRock and Blackstone would be confused between the two of them. By 1994, he was falling out with the owners of Blackstone and they sold their half share for $240 million. That turned out to be a very good deal for Larry Fink and not such a good deal for the ones who sold their shareholding! Seven years later by 1999, BlackRock was now managing $165 billion of funds.

Now they're up to something like $10 trillion. They have a computerized trading system, which is called Aladdin, which they developed. Aladdin is used by many other Wall Street investment firms, and there's a total of $20 trillion that are using the Aladdin software. I think this in itself has a great deal of capacity for systemic weaknesses appearing in the market. If everybody's singing from the same hymn sheet, the price movements are going to be avalanching all in the same direction.

The Scale of BlackRock's Influence

I think it's worth referring back to the episode we did on big numbers as well, just to underscore how big a trillion actually is.

I'll just summarize very briefly so that a million pounds or dollars is the typical lifetime earnings of an average person. If you're happy enough to accept my thumbnail definition of an average person as being the one who earns an average of $25,000 a year. In a working life of 40 years, that comes to a million dollars. So a billion is the lifetime income of 1000 people and a trillion is the lifetime earnings of a million people.

It's quite a big difference.

Yes. And of course, you know, a few other numbers in there to pack this out. Various figures are thrown about for the total wealth in the world. It's somewhere in the high tens of millions. The federal debt of the United States was $33 trillion the last time I looked at it. But in itself that's a revealing characteristic because it shows the amount of funds that are directly or indirectly influenced by BlackRock are of the same order as the entire American state.

BlackRock probably has a much greater GDP than the majority of nation states.

Absolutely, yeah. Incidentally, another interesting fact about Larry Fink is that in 1983, three years prior to his losing their $100 million, Larry Fink originated the concept of collateralized mortgage options. Which was the system for purchasing a large number of mortgages, putting them into various funds which were split into various levels of risk and various levels of return. Of course, this was the financial instrument which was a major contributor to the 2008 financial meltdown.

BlackRock's Future Involvement in Public Projects

An interesting thing I learned this morning. Rachel Reeves, our new Labour Party chancellor of the Exchequer, is talking about managing to invest in the infrastructure of Great Britain by a scheme of public-private partnerships and actually mentioned BlackRock as being likely to be helpful in doing that.

The whole notion of this way of handling public finances is something we should cover in another episode. Anyway, the Labour Party and Gordon Brown years were heavily into public-private partnerships. This has resulted in a lot of rather shoddily built schools and poorly supported hospitals which had cost an entire enormous amount of money and will continue to do so in the future. It was essentially an accounting measure to ostensibly reduce the government borrowing, but of course by having part of it financed, they still finance that with borrowing. But as the government is able to get the best interest rates of anybody raising the same amount of money through some private bond issue is inevitably going to be more expensive.

Then of course, you've got all of the whatever other payments there are to the so-called private investors. It's really more a transfer of taxation into the pockets of financiers. It would be very interesting to watch that space and see how that works out.

What are we arguing then? For people just to be aware of what's going on and have a sort of top-level understanding?

I think that's all I can really offer at the moment. As we've said elsewhere, if you're looking out for your own pension, you want to join up the dots and see who is investing on your behalf, how they're investing and whether BlackRock are involved with this and whether there are alternatives.

At some point, I imagine BlackRock are going to be invited to rebuild Ukraine, Gaza, all of these places. You might not necessarily want your pension going to that end!

Yeah, that is fair comment. And another point to be made is that, of course, BlackRock is heavily invested in all of the arms manufacturers, all of the mining companies, all of the energy companies, all of this great tentacle of capitalist enterprises between them are the real existential threat to the planet.

Are there known resources that people can go and look at to learn more about this?

Well, James Corbett, Corbettreport.com has got several pieces on BlackRock and a very great deal more detail than I've been able to convey in this talk, but that is a very good source.

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Rob’s comments are in italics. Derek’s comments are in normal font.

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Today, our topic is, is money the root of all evil? This is something that I think people probably have heard in different forms, maybe from religion. And I wondered if we could pick apart how this still fits into people's psyche today.

The first thing to say is that the quote, as it stands, "money is the root of all evil," is inaccurate, which is just as well because actually it's nonsensical. I mean, money, as we've seen from other discussions in this podcast, is simply a tool. It's just like any tool that can be used constructively or destructively. Certainly, that's the case with money. And what it is, at the end of the day, just to remind ourselves, is it's a means of trading. In the last analysis, time and effort that I spend for time and effort that somebody else spends, and everything that we buy or sell is a result of some work. At some stage, energy and attention have been put into producing those goods or those services.

And the idea is to track an exchange of those activities. And of course, one of the things is that there are always people trying to game the system and get a free ride and actually get somebody else's work without doing an equivalent value of work themselves. So the next thing to say is that the quote, as it's stated barely there, is inaccurate. It comes from the Bible. But what the Bible actually says is that the love of money is the root of all evil. And perhaps, perhaps evil is not a very fashionable term unless you're strongly religious these days. What do we mean by evil? I think we've all got a fair idea of things that we would say are undoubtedly evil. Anything which causes pain or distress to another human being.

And the most obvious example of that is, of course, warfare. And what warfare is, is simply robbery with violence on a grand scale. That's what it always has been and it always will be, and certainly in a straightforward way. If you go back to the dawn of human societies, you had a ruler of one area, a king or an emperor or a warlord, and if he had covetous eyes on the wealth of neighbours they brought forward to steal it. So certainly the great majority of crimes are motivated by a love of money taking precedence over any other considerations or regard for other people or their welfare.

Value Exchange

It sounds to me like it's taking value without providing value. Obviously warfare is an extreme version of that because you're causing extreme levels of harm, but it's still taking and not giving.

Exactly. So that's certainly one example. If we look at the other challenges that we're facing in the world right now, one of them is obviously the loss of biodiversity, the infliction of various insults on the environment, on the systems of the earth that we depend on. And plainly, a large driver of that is also coming from a love of money and an eclipsing of other considerations.

Kind of a short term approach as well, isn't it?

Yeah, yeah. And then if we look at the phenomenon of corporate life, particularly large scale businesses, international scale businesses, they are institutionally geared to maximising profit. And in fact, this has even led to legal cases, particularly in the United States, to establish that if the directors are not optimising the returns to their shareholders, then they're in breach of fiduciary duty, and therefore they're obligated to do that regardless of any other considerations. If you look at other practices we've got that are not healthy, built-in obsolescence is obviously one of them in all its forms. Whether it's simply things wearing out rapidly and being unserviceable for lack of parts or lack of information or lack of ability to dismantle them and repair them, that plainly is a net negative contribution to our wellbeing. And whilst a driver of that is the love of money, then I think finally, if we look at the health problems that are rampant in most of the developed world, we can see that these result in part from poor diet, poor living practices. They result from, to some degree, poverty. And then as people have become more and more aware, a lot of the measures which are supposed to patch our health up and cure our ailments are either not effective or completely counterproductive.

And once again, I think there's a significant view taking hold that enhancing suits the profits of the pharmaceutical companies for people to remain sick and to be on medications. I don't know what your outlook is, but I've managed to avoid taking medications, except very, very occasionally for my entire life so far, and I'm doing my best to keep it that way.

I think that's a good general policy.

Yeah. So if we were to reinstate money in its role as purely a facilitator of trade between people and we were to operate according to the golden rule principle of not doing things to others that we would not wish to be done to ourselves, it's pretty plain that a lot of the unworkabilities in this world would automatically get taken care of. And so I think we can fairly say that the love of money is, if not the root of all evil, certainly the root behind a substantial number of other evils. But one thing that I would also say is that there is a possible negative consequence of dwelling on that concern about money itself being evil in that certainly at times in my life I have felt that the pursuit of money was, if you like, non-spiritual.

The Negative Consequences of Guilt

And I think a lot of people have guilt around that rather than looking deeper to see what it is, if anything, that one should be guilty for. So I would say that the concern that money might be evil probably has a negative consequence for a lot of people in terms of inhibiting the enthusiasm with which they might otherwise lean towards developing productive and worthwhile businesses.

I think it's worth pointing out that it's possible to do much more good in the world when you're not skint.

I think that's a very good point.

This is what our mentor Perry Marshall talks about a bit as well. I think I'm hearing echoes of his voice.

Absolutely, absolutely. Of course, there's another aspect that beyond a certain point, apart from being an obsessive method of scorekeeping, the acquisition of totally disproportionate amounts of wealth, the billionaires, the scale of things is actually a pursuit not so much of wealth as a thing in itself, but of wealth as an access to power. And probably the most extreme examples we see of that are in the so-called charitable foundations, or philanthropic foundations of extremely rich people. And I think more and more people are coming to see that. The most egregious example probably is Bill Gates. And although he portrays himself as generously and magnanimously giving his wealth away for the benefit of other people, the extraordinary thing is that in the last few years that he's been supposedly making his grand philanthropic gestures, his actual own net worth has actually doubled, gone from 53 million to 114 billion the last time I looked. And so this gives him enormous power. He makes enormous grants to people that you wouldn't expect to be in receipt of charitable funding.

The BBC is one of them, the Guardian newspaper, which was an alternative force in the array of British press, until relatively recently, has received hundreds of millions of pounds from the Bill and Melinda Gates Foundation. And it would be naive to imagine that organisations that are probably in some financial danger otherwise, who have received largess on that scale, are not going to have their reporting skewed by the considerations.

Just on the topic of Bill Gates, he recently has become quite a large investor in farmland in the United States. I was reading a book, actually, about the erosion of our soils, and it commented that in the Roman Empire there was a significant increase in soil erosion when landlords stopped living on the land. And you had absentee landlords who just wanted to extract the most amount of profit. They didn't have any skin in the game in the land itself, because they weren't there. And actually, that's surely what Bill Gates is. He's an absentee landlord.

The ultimate one!

He's the ultimate one, yeah. So surely that's the same thing. And we were talking earlier about these corporations where the directors have been prosecuted for not pursuing the shareholders' interests, but again, they're presumably absent from the day-to-day rulings of the business and the people that the business touches. They're not present, they're not there. So it's this issue of absenteeism that I think structurally enables this love of money to cause so much damage.

It's an interesting point, then, about the monoculture of land, and that being a factor in the possible collapse of the Roman Empire. There are a number of factors there, of course, that it is becoming too resource rich, too resource consumption intensive, and being overstretched with the administration of an empire. One of the factors was certainly that in Roman times, they abandoned what had been a practice in the ancient world of having what were called debt jubilees. This was something that was recommended in the Bible. It was something that Hammurabi decreed, something that a number of ancient kings and emperors prior to the Roman era decreed, because it was inevitable that essentially agriculturalists would incur debt and would occasionally be unable to repay it on time if they had bad harvests and so forth, which resulted in land being transferred to the creditors and increasingly monopolised. And many of the ancient rulers and advisors to rulers realised that this would be destructive to society. And that is, of course, certainly the situation that we have in the world today, where we have this entirely debt-based currency, and this is reaching a point that it can no longer be sustained.

The wisdom that we seem to need to learn actually appears to be old wisdom that we've forgotten and somehow need to relearn and reapply.

I think so, yeah.

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Key: Rob’s comments are in italics. Derek’s comments in normal font.

On last week's call, we did an introduction to micro finances for small businesses and small business owners. We kind of left off the chat by saying, well, as pensions are the main vehicles for building your wealth over your lifetime, it's probably worth knowing how your pension is being invested and maybe having a bit more control over that. I wondered if we could pick up on that thread.

Right, okay, so once again, usual disclaimers. I'm not giving financial advice here, but what I am doing is giving you a bit of educational background into the mechanism, so that when you're discussing things with a so-called financial advisor, you can evaluate what they're saying and see what scope there is for making your own decisions. The arrangements for arriving at a pension are broadly the same as for any other kind of long-term wealth building. Essentially, you're putting money into something that yields a return, and you accumulate those returns into the fund so that it grows exponentially. Over time, it should end up with a capital sum. Then you move from the accumulation phase into the distribution phase, where you use the income to support the lifestyle you want without actively earning it any longer. Many people take this at face value and assume there's some kind of magic involved, but let's look at what's actually going on and how that wealth is generated.

If you go back to what we were talking about in the last call, whether you're running a small business or your household, there are processes whereby wealth is created. For example, a carpenter takes raw materials like planks of wood, works on them, and turns them into chairs, tables, and cupboards. This adds value through his activity and expertise, providing something of higher value that can be sold to cover business outgoings and provide an income.

Multiple Roles in a Small Business

Actually, I'd like to digress for a moment. Many small entrepreneurs don't reflect on the different streams of income they're getting from their business. As far as they're concerned, it's just like a wage. If you're running a one-person business, you've got several roles: you're a worker, a manager, a director, and an owner of the business. In larger enterprises, these roles are distinct individuals.

As a worker, for instance, in the example of the carpenter, you're doing the work, and there should be a going rate for that work. The best way of costing that is an arms-length basis of what you might expect if you were an employee of someone else doing that work, or what you might expect to pay someone you hire to expand your business.

The second role is a manager. The manager decides what needs to be done, sets priorities, and manages time on various tasks involved in running the business, including administration, billing customers, paying suppliers, dealing with taxes, and deciding on investments. The role of a manager typically commands higher pay than a worker.

Directors provide long-term strategy and direction for the business and supervise managers to ensure they're acting in the owners' interests. Finally, as a one-person business, you're the owner, akin to a shareholder. In larger enterprises, capital is pooled from many individuals to set up the business, such as a steelworks, and investors receive a regular income from the profits.

In a small operation like a carpenter's business, the owner would expect some remuneration once it's running at a profit, over and above what they get as a worker, manager, or director. This additional profit can be reinvested to expand the business or taken as a dividend.

Is that clear? Is there anything you want to clarify about what I've said so far?

No, I think we're all good. That makes sense. Relating that to my business, I obviously play all of those roles at the moment.

Capital and Investment

Right. The same applies to a larger operation. Assuming you've got a business that is a going concern, it owns the capital in terms of tangible assets necessary to run it, such as woodworking machinery, tools, and stock. If you're making a profit, you can either reinvest to expand the business or take it as a bonus for personal use.

If you need more capital, it can be sourced from existing owners or through loans. Loans come with fixed interest charges and repayment schedules. When building a pension pot or any long-term asset, you're investing in other businesses, typically through shares or bonds. Bonds provide predictable income and are considered safer investments, assuming the government or company doesn't default.

A bond is simply a note indicating that you have made a loan to that company and the company agrees to repay the loan at a specified future date, with interest.

Self-Invested Pension Plans

If you invest through a pension fund provider, they will extract fees, reducing the amount that accumulates. However, it is possible to do things through a self-invested pension plan, where you take control of investment decisions. This requires understanding company prospects, reading balance sheets, and evaluating investments. Consulting a professional is advisable, but ensure they're acting in your interests.

Is there a point at which it's more worthwhile to manage your own investments, such as having a larger income?

Obviously, this becomes relevant when you have a significant, stable income that covers your needs and generates a surplus. There's an entry requirement of knowledge, but it's doable with the right understanding.

What I'm providing is a big picture of the process behind the scenes, showing what's feasible in terms of returns, overheads, taxation, and reinvestment over time. Some people invest their pensions in commercial property projects, which requires knowledge about what to invest in.

For example, medium-sized businesses might need premises and set up a self-invested pension plan to invest in office space, then pay rent to the pension plan. This way, business expenses contribute to their own pension fund.

How much work and attention might it take to manage these investments? Is it something to check in on every few months?

It's definitely worth knowing the value of your fund at any time. Most plans send annual statements, which people often ignore. Management fees can eat into your funds significantly, with initial payments often going to advisors as commissions.

The Traditional Pension Model

All of this assumes a model where you work until retirement, then live off your pension. Some people may retire with too much or too late, missing out on desired experiences.

At any time, assess what you need for your desired lifestyle. Pension plans have regulations on when you can access funds, often allowing up to 25% as a lump sum, with the rest generating income. Annuities, purchased with pension funds, provide income but often offer disappointing returns due to low interest rates.

Annuities favor insurance companies as they keep the capital upon your death. Alternatively, you could invest in government bonds for steady income, leaving the capital for your heirs. Annuities might offer higher rates, but they assume a predictable lifespan based on large statistical samples.

My only other thought is that pensions seem simpler for salaried employees. Small business owners need to take more control, especially during income peaks, to decide what to do with the excess.

Right, there's more ownership required for small business owners to manage their finances effectively and plan for the future.

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Introduction to Financial Statements

I think we need to look at the three basic forms of financial statements and what they mean for your business and you personally. Understanding these is essential when considering how to deploy your savings to build a nest egg for the future. This helps provide you with an income in later years and freedom from the necessity of working.

The Importance of Understanding Financial Statements

Accounting is generally a topic that many people don't feel enthusiastic about. I didn't either, and I've suffered from that both personally and as a business owner. People often find it arcane and complicated. However, it is crucial to understand these things. It's not rocket science, and there's nothing inherently complex about it. Unfortunately, our education system serves us poorly in this regard. A background understanding of how financial statements work should be part of everyone's education.

Types of Financial Statements

The three types of financial statements are the cash flow report, the profit and loss summary, and the balance sheet. Let's start with an important distinction between stock and flow.

Stock and Flow:

* A stock is how much of something you have.

* A flow is the rate at which that stock is increasing or decreasing.

For example, a supermarket might have a stock of cans of baked beans. The stock is the number of cans they have, while the flow is the number they purchase or sell over time.

Cash Flow Statement

The cash flow statement is a statement of the money coming in and going out, leaving you with a balance. Imagine someone working for a weekly wage in a cash economy. They get their wage packet at the end of the week, increasing their cash stock. As they spend money throughout the week, the stock decreases. The cash flow statement shows this process.

Profit and Loss Statement

The profit and loss statement is also a statement of flow and closely tied to cash flow, but with subtle differences. Most money going out for most people is an expense. Once it's spent, it's gone, like buying food or paying rent. Some purchases, like furniture or a washing machine, become assets. They may have reduced your cash holding, but they’ve been converted into a different type of asset. This brings us to the third type of financial statement: the balance sheet.

Balance Sheet

The balance sheet is where you add up all your assets and subtract your liabilities. This distinguishes it from the profit and loss account. For example, if someone spends all their cash by Wednesday or Thursday but still needs to buy groceries, they might have an arrangement with their local shop to take goods on credit, expecting to pay when their next paycheck arrives.

In the past, middle-class people often ran accounts at local department stores, buying clothes, furniture, and appliances on credit. These accounts were usually settled at the end of each month, although substantial purchases might be spread over several months.

Liabilities appear on the balance sheet too. When you add up all your assets, including any cash on hand, and subtract your liabilities, you're left with your net worth. If that’s negative, you’re technically bankrupt.

Application to Small Business

It's easy to see how this applies to a small business. The nature of the business determines the assets and liabilities. For a resale operation, assets include operational necessities and stock ready for sale. For a manufacturing business, assets include components for production and unsold finished goods. Liabilities might include credit accounts with suppliers, which must be paid off monthly, and accounts receivable from goods sold on credit.

The balance sheet is more like a snapshot at any given time because it doesn’t account for the direction of travel. My balance sheet as a service provider is actually very simple. I don’t have tremendous assets because I’m not reselling goods or similar items.

I (Rob) currently operate my business similarly to the credit line system you described. If a client is in good standing, I allow them to spread a large bill over three to six months. If they stop paying the monthly instalments, the services halt. This method, though it sounds archaic, is still prevalent, especially in B2B transactions.

Cash Flow Statements vs. Profit and Loss

The main distinction between money going out as an expense and acquiring an asset is critical. Expenses, like paying for car insurance or fuel, result in a negative impact on cash flow and profit. These expenses reduce the cash balance without adding any lasting value.

On the other hand, purchasing an asset, like new stock or a computer, doesn't reduce your profit by that amount because you acquire something of value. Paying off a supplier reduces your cash but also reduces your liabilities, thus not impacting the balance sheet by the amount of the cash spent.

If you obtain more stock from a supplier, your assets increase, but it hasn't impacted cash flow if you haven't paid for it yet. This transaction increases your assets and liabilities equally. This complexity goes beyond the simple calculation of money coming in, money going out, and the remaining cash balance.

Closing Thoughts

So, it’s worth pointing out that this applies to you as an individual if you’re trading as a sole trader, but it could also apply to your company if you're trading as a company.

In our next discussion, we’ll delve into investing and how to build an asset over a lifetime to support your pension fund. Understanding financial statements is essential for evaluating companies your pension fund might invest in. These principles help you decide where to invest and understand how fund managers manage your investments.

We’ve done a separate episode about why pensions often aren’t worth as much as you might think. However, pensions are still crucial for wealth management and accumulation.

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(Key: Rob’s comments in italics, Derek’s comments in normal font)

In this episode, we review what's happening in the world right now. We're reaching some sort of endgame with a process that's been ongoing for a long time in economics. We're hitting a wall with the idea of endless economic growth. To maintain stock market prices, which many see as essential, there has to be continuous growth in profits. Historically, this growth was genuine, with more goods and services and increased prosperity for significant segments of the population. But since around the 1990s or the turn of the millennium, this growth has become increasingly artificial.

Image credit: Daniel Foster (Flickr)

Planned Obsolescence and Inflation

We’ve discussed planned obsolescence and the illusion of measuring gross national product by flow rather than the stock of wealth. The system isn’t serving us with rapidly obsolescent products. Instead, it fuels economic growth artificially. For example, products are designed to be less durable and less repairable, necessitating replacements, which increases economic activity but doesn't serve consumers.

I don't think anyone gets really excited about buying a new washing machine, do they?

No, not unless they've succumbed to the illusion that this is what they want. Competition was supposed to improve things, but the ownership of large-scale enterprises is increasingly concentrated, making competition an illusion and leading to unchecked price increases. We've seen this with energy prices, public transport, insurance, food, and housing. Although the inflation of housing purchase prices is faltering, there's an effort to keep it going, which spills over into rental markets with rising rents and evictions.

Shrinkflation and Income Stagnation

There’s been a sneaky inflation in food products by reducing package sizes. For instance, packs of butter and tea have decreased from 250 grams to 200 grams. People face higher costs without corresponding income increases, and this can only continue so long.

Corporate Land Ownership

In the U.S., large corporations and hedge funds buy residential houses and apartments at more attractive loan rates than the average consumer. This trend extends to agricultural land, with figures like Bill Gates owning significant portions.

Yeah, I saw that BlackRock had been buying large amounts of property in Florida and places. Do you have any speculation on why that is?

If I had enormous liquid assets, I'd want to convert them into tangible assets quickly. Agricultural land is one of the most tangible assets available. There might also be an agenda to control food supply, as necessities of life are being squeezed. People have no choice but to seek shelter, buy energy, and transport themselves.

Systemic Unraveling

The system is running out of road. There’s a point where it will unravel, and the system will have to be called to account. This reflects Stein's Law: if something cannot continue indefinitely, it will stop.

Geopolitical Turbulence

The current geopolitical turbulence, with extended warfare and vast resource allocation to conflict, also reflects this. War destroys wealth and resources, which contradicts the goal of increasing global wealth.

Yeah, I'm sure Blackrock will happily go in and reconstruct Ukraine and Gaza and all of these places when the dust settles.

Yes, just to restore things to where they were before. This cycle has been ongoing since World War II, often out of sight and mind, with Western powers arming and training groups that fuel conflicts.

Conclusion

I am just looping back to some of our earlier threads. I definitely, like a lot of my friends have had like mortgages come up for renewal and stuff and the price of their mortgages like double overnight, stuff like this. And this is just going on all the time. And you know, I've got friends who've had pay rises at work and gone on to like more senior roles and consequently they see their kids less. They have more responsibility and they...

Yes, many people experience similar situations. They get pay rises but still have no money left at the end of the month because of rising costs. This can't go on indefinitely.

And this can't go on forever. It can only go on so far.

Indeed. We don't know how this will play out, but it could be ugly. Complex dynamic systems can fade out, crash dramatically, or create novel structures. We must act with integrity and watch how things unfold.

The pendulum will swing back. If we think about the pendulum since the end of the second world war has been swinging one way, it will swing back and it is swinging back. But we're kind of mid swing at the moment.

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Rob’s comments in italic. Derek’s comments in normal font.

Debt in Modern Times

Debt is a major part of today's world, more so than in previous decades. This situation is an outcome of the global financial system's structure, particularly since the dollar came off the gold standard. The decoupling of the world currency system from any objective existence means that all money in circulation is essentially debt owed to someone. This is reflected in banknotes, which used to promise payment in gold but now only promise a nominal amount in currency.

The Nature of Money

Well, that's what it sort of said on the banknote, isn't it? It's like, I promise to pay the bearer the sum of whatever.

Yes, those statements are meaningless now. They used to say, "I promise to pay the bearer on demand the sum of one pound in gold." Even though from 1933 onwards, that wasn't literally true in Britain, it was still printed on the banknotes. Now they just say, "I promise to pay the bearer on demand the sum of 10 pounds or 20 pounds or five pounds," whatever it may be. What are they going to do? Give you another banknote in exchange?

So effectively, any money in existence is something which is owed to somebody else. The money brought into existence when a bank makes a loan goes into the borrower's account or to pay someone else, creating more reserves in the banking system. This allows banks to advance more loans based on reserve requirements. Increased money availability has led to inflation in housing costs and manipulation of interest rates. People become accustomed to paying larger amounts when rates rise, enabling them to bid higher on properties when rates drop.

Student Loans

Also, student loans in principle to invest in your future by paying for an education is arguably a sound thing to do. This of course assumes that you really are going to have a greater earning capacity in the marketplace if you get a university degree. And of course, there's a great many...

That makes sense if you're going to be a doctor, financier, or lawyer. It was very sneaky the way student loans were introduced. When I went to university, not only did we not have to borrow money, but unless your parents were very wealthy, grants covered your fees and living expenses. My father had to contribute a certain amount, but it was enough to live on for the academic year. When student loans were introduced, it was presented as a government scheme with nominal interest rates. Over time, these rates increased significantly, leading many to pay off loans over a lifetime.

The fees, the student fees have gone up a lot as well. Like even since when I first started, like I remember if I'd have got a year later, like the tuition fees would have been three times the amount. And I only did the three-year course. So if you're doing dentistry or something where you might be studying for six years...

Yes, and in the United States, doctors can accrue half a million dollars in debt by the time they qualify, making them effectively indentured servants to the medical industry.

It feels like a trap. It feels like that's kind of deliberate.

Good Debt and Bad Debt

Yes. Is there any situation where this is not entirely pernicious? The title for today's talk was "Good Debt and Bad Debt." We defined capital as a specific type of wealth used to generate more wealth. In the context of small business, for example, a carpentry business requires workshop space, machinery, tools, a van, and initial stock. Different businesses have different capital requirements, but any enterprise needs some assets to operate.

Unless you have the money in savings, you need to acquire it from somewhere. You either get it from an investor who takes ownership of part of the business and a share of the profits, or you borrow it. Most small businesses borrow. For instance, a carpenter might need £20,000 to start. They evaluate their expected profit and how much they can repay while covering interest. This is a sound use of debt.

A business's financing can be examined in terms of debt versus ownership by shareholders and investors. If a business makes 20% profit annually on its capital, borrowing at a lower interest rate increases profitability. This principle, called gearing or leverage, can work both ways. In a bad year, interest payments on borrowed money can result in a net loss. Is that clear?

Yeah, that makes sense, yeah.

That's pretty much what I wanted to say on this topic for now. Is there anything that comes up for you out of what we've said so far?

I don't think, I think debt, so I think pretty much along the lines of what you said, I think debt can be a tool that you can use. Like this was why corporations were created in the first place was to achieve things that you wouldn't be able to personally finance. And you can still use that mechanism. But I think we want to be wary of, you know, a bit like with the student loan situation, getting caught in a sort of debt trap that means that you're probably never gonna clear those debts.

Historical Context of Debt

Yeah. In Daviud Graeber's book Debt: The First 5,000 Years, you'll find references to ancient practices where rulers periodically cancelled debts to keep society functioning. This wasn't out of benevolence but necessity. In the ancient world, primary capital was agricultural land. Smallholder farmers often went into debt and lost their land to more monopolistic holdings. This happened in America during the Great Depression, when small farmers who had borrowed to invest in machinery couldn't service their debts. Banks foreclosed on their properties, consolidating land ownership into the hands of a few large banks and corporate agricultural enterprises.

Land Ownership Today

Land ownership in the UK is also very consolidated, isn't it? I think in particular in Scotland, actually.

Yes. Landholding in the UK has a long history. When William the Conqueror arrived in 1066, he and his knights divided the country among themselves. Many landholdings today still belong to their descendants. Independent landowners are far fewer.

Very good. Okay, well, I think we'll leave this one here. And yeah, we'll speak to everyone next time.

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(Key: Rob’s comments in italics, Derek’s comments in normal font)

Today we're going to cover an introduction to cryptocurrencies, which is a topic that I am excited to learn about. I think there's a lot of people in this boat, either they've dabbled with it or heard about it, or someone else has decided to invest lots of money in it. So, yeah, let's get into it.

The Problem Cryptocurrencies Address

Okay, well, I think the best place to start is what problem cryptocurrencies are attempting to solve, and how well they address those problems. The starting point is that, as we've discussed before, the fiat currencies we use around the world—pounds, dollars, euros—have various drawbacks. The most extreme drawback is that they are constantly subject to inflation, or more bluntly, they are continually debased by the issuing of more and more currency by banks without doing anything for it. Another issue is the complexity and expense involved in exchanging different currencies.

So it's not a level playing field, in other words, is it?

It's not a level playing field. At its most basic level, money is an exchange of value, which ideally should be an honest exchange of work done by one person with work done by another. The problem with fiat currencies is that banks create new money, which can be seen as a form of counterfeiting. Cryptocurrencies, specifically bitcoin, aim to solve this by having a hard limit on the total number of coins that can be created, which helps prevent devaluation through over-issuance.

Bitcoin's Unique Features

I think what you can't argue with is that bitcoin appears to be like the 100-pound gorilla in the marketplace.

It absolutely is. One of its unique features is the hard limit of 21 million Bitcoins, set by its inherent mathematics. Over 19 million have already been mined. Bitcoin's transparency is another feature; the software to generate bitcoins and check transactions is open source. This means anyone with the relevant knowledge can verify the underlying algorithms and their implementation. Many experts have reviewed the code and confirmed its robustness.

The Mining Process and Transaction Verification

Bitcoin mining is akin to gold mining in that it requires effort and energy, which restricts the supply. Initially, mining bitcoins was easy and rewarded miners with 50 Bitcoins per block. This reward halves approximately every four years, reducing the rate at which new bitcoins are created. Now, most of the income for miners comes from transaction fees.

So the further back in the chain it is, the more kind of secure it becomes.

Exactly. Each block in the blockchain contains a compressed summary of thousands of transactions and is linked to the previous block, creating a continuous chain. This makes it extremely difficult to alter past transactions, ensuring the security and integrity of the blockchain.

Cryptography and Public Key Infrastructure

Cryptocurrencies use public key cryptography to secure transactions. Each Bitcoin owner has a private key, which they must keep secret, and a public key, which can be shared. Transactions are signed with the private key and verified with the public key. This method ensures that only the owner can authorize transactions, and the network can verify their authenticity.

Practical Uses and Future Potential

So let's maybe bring this back to the individual business owner who has maybe heard of this. It feels like there's not a huge amount of transactions going on in cryptocurrency.

Well, it's yet another currency. Bitcoin is one of the top ten most exchangeable currencies in the world, making it credible from a foreign exchange standpoint. While much of the currency exchange market is speculative, bitcoin could become significantly used for purchases. The first recorded Bitcoin transaction was in 2010 when someone paid 10,000 Bitcoins for two pizzas. Today, a single bitcoin is worth tens of thousands of dollars, making fractions of bitcoins (satoshis) more practical for everyday transactions.

Surely transacting would require, like, an Internet connection and a device, and there's various barriers there.

Yes, miners need significant computing power, but ordinary users only need a basic device with an Internet connection to send and receive bitcoins. There are also secondary layers like the Lightning Network, which aggregates small transactions to make the system more efficient and practical for everyday use.

Getting Started with Bitcoin

Would you recommend that someone listening maybe just goes through the process and buys 20 or 30 pounds of bitcoin, just to see how it works?

Yes, the best way to learn is to invest a small amount that you can afford to lose. The upside potential is considerable if Bitcoin becomes more widely used for transactions. Research wallet options and consider using one that isn't always connected to the Internet for added security.

I think this has been a good overview. If listeners have questions, there's plenty of different directions we could take this in terms of follow-up discussions. So, yeah, do leave a comment on the substack.

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(Key: Rob’s comments in italics, Derek’s comments in normal font)

Our topic today is pension plans, how they're supposed to work and why they don't.

Historical Context of Pension Plans

Historically, the majority of people had pension plans that were arranged by their employers. There were a few small independent professionals, like solicitors and accountants, who made their own arrangements. The idea, of course, was to provide an income for when you were no longer able to work or no longer wished to work, adequate to support a lifestyle in line with what you had when you were active. The occupational schemes were generally designed to provide you with an income of two-thirds of your final salary when you reached retirement. The idea was that you wouldn't need quite as much as you had throughout your working life because you’d have finished the expenses of bringing up your children and getting them educated. You'd have made your major investments in housing and might have a bit of savings and investments by then anyway. This was functional for a long time, from when these schemes started in the mid-19th century up until about the eighties when they began persuading people to change the arrangements.

The Structure of Pension Plans

Now, the way they work is that over the course of your working life, regular payments were made into a fund, called by various names such as a retirement account or superannuation. Sometimes this was entirely contributed by the worker, and other times there would be a portion that the employer put in. The latter was probably more usual. The individual didn't really notice it because it came out of their pay packet and was more or less invisible to them. So there was a period of accumulation and then a period of distribution. At the moment of retirement, what had been accumulated in the retirement account was used to purchase what they call an annuity.

An annuity is like a life insurance policy in reverse. Instead of paying regular premiums, as with a life insurance policy, and then your survivors getting a payout if you die prematurely, you pay a lump sum to a life insurance company and get a weekly, monthly, quarterly, or yearly payout for as long as you're alive. This is based on statistics of how long people are likely to live post-retirement. If done another way, you could accumulate a fund over your lifetime, buy a safe investment, and live on the income indefinitely. However, with an annuity, you can have a larger income because the insurance company can realize they will get the capital back when the annuity expires on your death.

Changes in Pension Schemes

I was just thinking about the difference between my dad's generation and my generation. My dad worked for Unilever his entire working life, and he retired with a reasonable pension, which was a certain amount of his final salary. That feels like an alien world to me. I have one pension from an employer scheme, which I accepted because they were paying into it as well. When I'm 55, I can take a tax-free allowance and go on holiday with it. That's basically my plan. So I need another way to fund my retirement, which I need to work out. I think a lot of people my age, 20 to 40, are in a similar boat.

That is absolutely the case. When these schemes were introduced, many so-called financial advisors sold them to people, presenting various optimistic projections. For instance, my advisor assumed a 16% annual compound interest rate, which he called conservative. When retirement came, the returns were around 10% of what had been projected. Over the years, the real returns have been much lower than historically, partly due to inflation and understated official inflation figures, and partly due to the amount skimmed off at every level of the operation.

The Erosion of Returns

There’s a transaction fee every time that if you’ve got an amount of money that’s been invested in a pension fund and that’s being invested into various stocks and various bonds, there’s a fee every time that happens, surely.

Exactly. The fund managers pay a fee to stock brokers every time they buy or sell something, draw their own management fees, and the advisor who sold the fund gets a commission. Shockingly, the entire first year's contributions often go to pay the advisor's fee. This is part of the "goo" of the financial system, absorbing much of what you put in.

Modern Pension Options and Advice

For the average 20 to 30-year-old, what would the advice then be? Is it worth having a pension?

For young individuals today, the options are limited. It is vital to make realistic decisions about contributions, aiming for a substantial proportion of your income if possible. Modern options like self-invested personal pensions (SIPPs) allow for more control and potential tax advantages, though they require a higher level of financial literacy and involvement.

Conclusion

Interesting times, indeed.

Yes, indeed. The landscape for retirement planning has drastically changed. Understanding these changes and the new options available is crucial for financial stability in the future. It’s about being proactive, staying informed, and making strategic decisions with the resources available.

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In this episode, Rob and Derek discuss the concepts of wealth and capital, exploring how wealth is created and the role of capital in the economy. They delve into the topic of capitalism and its alternatives, questioning whether the current system is working effectively. The conversation also touches on the role of capital in retirement planning and the challenges faced by pension systems. They explore different types of investments, such as shares and bonds, and how companies generate income through profits. The episode concludes with a discussion on joint stock companies, equity shares, and shareholder meetings. The conversation explores various aspects of capitalism, including executive compensation, capital acquisition for small businesses, different capital structures, and the definition and problems of capitalism. It discusses the historical phases of capitalism, such as feudalism, semi-functional capitalism, and degenerate capitalism. The conversation also touches on opportunities for small-scale enterprise, the illusion of choice in corporate ownership, and the concept of inverted totalitarianism.

In this episode, Rob and Derek discuss the concept of big numbers, such as millions, billions, and trillions. They compare the scale of these numbers and provide visualisations to help understand their magnitude. They also explore the earnings and wealth comparison between different income levels. The conversation delves into examples of big numbers in finance, including the cost of weapons, military expenditure, and global trade, plus the possibility of creating a better world.