Politics and economy

Before we start, my core beliefs

Politics will make or break the economy. I will go deep into this today, but before we start I just want to let you know the core beliefs from which my views come from. I am part of the minority who believe that less people with higher quality of education is the correct path for the human race instead of the model of bigger population with lower quality per person. Most of you agree with this, but please keep in mind that by agreeing to this, you also agree to a world that not every person deserves a chance and that the world is headed into an unsustainable spiral of over population.

The example for context

I wanted to write about this ever since the US government pay czar announced that he’s limiting the pay of the top executives at 7 bailed out firms. I laughed because it is the equivalent of the government shooting themselves in the foot. Politicians are hired by the ideals they sell, but when they are in office, their actions are dictated by the population’s rage. The population’s rage is not usually a good thing because on average, we cannot see what needs to be done and the underlying consequences of what we are demanding.

What happens when you do this

Here’s a short version of the money flow in a pay limitation discussed in the headlines.

On the first layer, which is what most of us sees, when you limit top performer’s pay that present itself at the company’s balance as a reduced cost of capital. Which means more profit. Investors are happy, tax payers are happy and everyone’s happy except for the top performers. Since they are rich, it shouldn’t matter.

At the second layer, things aren’t so simple. Banks have two choices about this extra cash, either they keep it in their coffers or they lend it out. Keeping it in their coffers is a bad choice since it doesn’t stimulate the economy so they usually lend it out. However, at the current point in the crisis, the borrowers that are requesting a loan are mostly ones on the brink of bankruptcy and ones with credit score that are equivalent to that of a sub-prime borrower.  Since the government owns your nuts at this moment, you lend to them like you are forced to. Congratulations! You have just taken someone’s hard earned money and created more debt for your population. Bad debt at that too. Not to mention that rich people have a better tendency to spend lavishly in the depressed economy and invest wisely. (unless of course, you are the inherited type, then it’s a 50/50 chance)

On a third level, from the point of view of the top performer it only make sense if your compensation is linked to the amount of revenue you bring. Granted, the current system doesn’t reduce your pay if you fail catastrophically, but limiting the amount of gain effectively put a cap on how much a worker is motivated to earn for the company. Here, you are getting into the gray area where a worker has to weigh the pros and cons of just managing money themselves that has compensations that are equivalent to the gains or work for something that say: “Hey thanks for making us 10 million, but we are only going to compensate you for 1 million of the profit you make”. Keep in mind that these people don’t really have to work and from my experience, only 1% of the traders has the skills and the emotional maturity to consistently make money over a 5 year time span.

Fourth layer, the people who got their pay limited have all left in doves, my approximation is that half of them will defect. And here lies the real kicker. They are going to defect to foreign investment banks, such as credit swiss and HSBC where US government can’t impose limits. Guess what they are going to do there? Make money for foreign firms from American clients and American capitals. Yep, all your profits goes to foreigners from now on, leaving the worst of the under-performers for yourself.

End

In the end, this move is mostly politically motivated. A swift action like this is more a show of force to whip people around. It shows that the government is in control to ease the outrage of the general population.  Real legislations that will correct the problem are usually passed with as little fan fare as possible. Because publicity will only bring oppositions from the industry. The recipients of this whipping isn’t even the right firms that are being lavish on their compensation too. So in essence, they are whipping the wrong person just because the person is ugly. What they need to do is give Golden  Sachs a big lashing. They are the ones giving out $16 Billion in compensation for 3 months of trading.