Thursday, April 29, 2010

Edmunds Brave New Wealthy World

John C. Edmunds, Brave New Wealthy World: Winning the Struggle for World Prosperity Prentice Hall Financial Times Press, 2003

Edmunds has precisely the opposite philosophy of this blogger--asset sales are good, the problems in the Third World are due to the fact that their assets are not worth enough, securitization and selling assets is good. In Costa Rica, a car that would be worth $2500 would sell for $500.00 and a house renting for $700.00 would sell for $15,000.00, a coffee farm of 300 acres sold for $4,000 in Nicaragua. But then he described the lack of good title on the farm.

But he described booms in Cambridge, Madrid and Argentina. The last was an internet boom funded by venture capital. The middle one was fueled by asset speculation when Spain joined the European Common Market. Edmunds described the chexck out in a department store where people were buying so many "fancy tools," "ornate light fixutres" that they "could barely carryt heir purchases." "Some of the items were competely frivolous and way overpriced."

"Financial assets pile up more quickly than the phyiscal assets and the output that collateralize them," Financial assets are simply a document (or a computer blip) that one receives when one invests. Historically, they were illiquid, but now they sell. He looks forward to the date when borrowers don't deal with financial institutions, they put their application on the market, and people invest in it directly. Where Dr. Edmund and this blog differ, is that they should not trade. The borrower keeps the financial asset and receives the income represented buy that investor, say a share of a physicians income for their life, when they invest in a medical student's education, or a share in the revenue for the railroad to which they contributed money to build, repair or reconstruct.

He had a straightforward excellent of financial engineering was the government selling an airport. There probably isn't anyone who is both rich enough to buy a whole airport and who would have the interest in managing it. Thus, we need to break down the item into securities. They would have to rely on trusted management, auditors and lawyers. And these little bits of the cost of the airport would be held by savers around the world. But where we differ is that the airport should not be sold. And the municipality would not be able to spend the windfall from the airport wisely--instead they would trade shares of the revenue from the airport which presumably would last a long time the airport for a share of the saver's income for a shorter time, perhaps for the duration of the resurfacing project.

Of course, with an airport there is a part of the expected revenue that one is confident to receive, even if we have another September 11th 2001 incident or an economic slowdown, and there is additional revenue that would come in boom times or if the country gets to host the Olympics. What financial engineering is, is splitting the bond holders get the first part and the stock owners make a profit only when the second part comes in. Individuals needing secure investments buy the bonds and individuals wanting to take a risk buy the stocks. The latter would see the value of their stocks drop close to zero after a second September 11th while the bond holders still get paid--if the financial engineer model holds up and airplane travel doesn't go down still further.

Instead, what do we do, is simply share the revenue directly. The stereotypical retirement investor starts out accepting risks and then sells their investments thirty years later investing it in secure bonds. I see that investor investing early in their life on relative long shots. When some of they morph into revenue generators, e. g. Google that gets twenty three billion in revenues, the investors will take their share and invest it in a more secure firm, e. g. a utility, or lending it to a government in a stable country whose revenue is less likely to gyrate. Those Googles who are still willing to take risks might plow it back into google, assuming its revenues amounts are more volatile.

And we encourage people who deal with airports, e. g. pilots, workers at other airports, to invest a little bit of their retirement savings in this investment. That way, they get to be on the sortition juries when the airport managers have to take a decision.

Samuelson calculated that a countries total financial assets could be two to five times their annual GDP. The United States is at about that level while the emerging market is much smaller. Thus, the financial engineers should securitize assets and investments in the emerging bmarket (for example building This will product tremendous capital gains for the savers in the first world, and a few in the emerging markets, which will finance their retirement. The globalization critics say this is companies relinquishing "their economic sovereignty" so that 300 million retirement investors could passively earn tremendous capital gains.

And the poor people would have their standard of living raised to form a new middle class, earn money, want to invest it for their retirements and buy the securities owned by the aging first world middle class. Financial Planning is not relying on the market in which to sell assets, but accumulating revenues from the real investment.

John Edmunds recognizes that financial systems where banks lend to their friends or family or the Central Bank lends to the dictator's friends are corrupt, don't serve any purpose to the countrie's development, and waste valuable capital and savings! This is obvious. And he illustrates this by reporting many half-finished sky-scrapers in citries such as Manila, Peru and Caracas--politically connected members get loans below the cost of inflation, they half-build a building and then wait for the need for the building before finishing it, earning a profit on the fact that construction costs were more than what they were lent and paid out in interest. And there was the totally fraudulent flour mill in Nicaragua paid for by a loan to the Interamerican Development Bank--and even if the flour mill was built, there was little need as Nicaragua does not produce flour and it ground flour costs about the same as wheat which needs to be milled. But getting rid of corruption is critical, regardless of whether one has capitalism and finance as we have it now, the share economy proposed here, or a strictly socialist or communist regime!

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