Monday, February 23, 2015

The Royal Scam, Revisited

What exactly is the Royal Scam?  It means different things to different people.

Most people in America fall within a range of what we call "middle class."  If you ask people where they sit, most will say "middle class" as they either are strivers trying to make it there, or they are upper-middle class who don't want to appear to be overly rich.

The median household income in America is about $51,000.   Average is about $63,000.    Yea, some folks make twice, or even three times that amount.   But since they blow it all on fancier cars and houses, and pay more taxes, often they have the same or similar disposable income as someone closer to the mean.

Even people working minimum-wage jobs, if they qualify for every government program they qualify for, can end up having a pretty middle-class lifestyle, as I have noted before.

In other words, our society is awfully egalitarian at a certain level.

There are, of course, two groups who fall outside the middle-class.  Both are fairly small groups.

The very, very poor is a pretty small group, because poverty line or not, it is really hard to be utterly broke in a country where your very existence entitles you to money every month.   Unless, of course, you are an illegal immigrant.

The other group is the very, very rich - those 1%'ers that we are all supposed to hate, as the media told us to hate them (along with Police Officers this year.  Last year it was Immigrants.  Year before, Muslims, who's up next year?).

These folks not only make a lot of money they have a lot of money.  And that is the difference between the upper middle class and the truly rich.

The upper middle class guy makes $100,000 or even $200,000 a year, but is living "paycheck to paycheck" and can't seem to get ahead.   Not many of us feel sorry for him.

The really rich guy has millions in the bank and how much he makes is more a function of how much he needs to spend on his personal upkeep, than any function of his income.   In other words, his income is what he takes out of his business, not some paycheck he gets from someone else's.

How did the really rich guy get really rich?   Well, some start out with a head start.   The Koch brothers started out with millions - and made Billions from them.  They have two other brothers, however, who were content to just spend their millions and not multiply them.

Others, like Sam Walton, scrimp and save and throw everything they have into a business, sacrificing every comfort, and get fabulously wealthy.   For people like that, making money becomes an obsession, and the creature comforts in life are secondary.  Not surprisingly, they tend to make a lot of money.

For most of us, however, we are interested in the creature comforts.  We think of wealth in terms of things - mansions and fancy cars and private jets and yachts.   And yes, once you make Billions, you can buy that sort of thing and not blink an eye.

The problem is, for us little people, the temptation is to "have a taste" of the good life.   We want a fancy house.   Maybe it isn't a mansion, but it is a mini-mansion, and that's almost as good!   And maybe we can't afford a Bentley, or even a 7-series BMW.  But we can swing the payments on a 323i 4-door and pretend we are going places.

And of course a big yacht is out of the picture, but we can swing the loan on a 35 or even 40 foot Sea Ray or Meridian - or so we think.   And while we are not rock stars, we can qualify for a loan on a Rock Star Bus Motorhome.   The monthly payments are so low, low, low!

So we anesthetize ourselves in life.   We are not going to be rock stars or the next Steve Jobs, or famous attorneys arguing cases before the Supreme Court (and pulling in million-dollar salaries in the 200-man firm).   We won't be the famous doctor at the Mayo clinic.  We won't be Warren Buffet or a Wall-Street Tycoon.  We won't be rap stars or professional athletes.  And that's OK.  Not everyone can be famous.

But.... we can have a taste of their bling.  All for a low, low price and e-z monthly payments, if you'll just sign here.

And that, in short, is the Royal Scam.

In my previous posting about Fake Status, the idea was ricocheting around my head for a while, and I started to see the pieces coalesce in my brain.  Everything I have written about here for the last few years, all coming together, forming a unified body, a whole, a complete map of how it all works.

You see, we entrap oursleves as middle-class people.   We decide to "treat ourselves" with take-out pizza, or reward ourselves at the ripe old age of 28 (for a lifetime's hard work!) with a $3000 mountain bike.   Why not?  We "deserve it" - and as one young woman told me, "Why should I eat beans just to see my bank account increase?"

Why indeed?

You see, that is a choice in life - a choice freely made.   A choice whether to be wealthy or to just spend it all and have-it-all now.   And most of us choose the latter.   In fact, we borrow more and more money to have more now, and then act as victims in our lives when the bills come due.

When I was a young hot-shot lawyer, flying out to Silicon Valley every month, I would visit companies to take invention disclosures.  During the tech downturn of 1995, I felt like an undertaker sometimes - visiting companies that were clearly shuttering.  I would take the disclosure from an inventor who would probably be laid off within a month - which is why the company sent me.  Get the Intellectual Property and then turn the lights out.

And during lunch, the said same young Engineer would proudly show me the new Acrua he leased.  Such a smart young man to be able to understand Integrated Circuit Design, but yet unable to add up a column of numbers.   I was in his shoes once - or more than once.

Other friends told me of opportunities they had to join Silicon Valley start-ups.   "Join us!" their friends would cry, "The pay is nothing, but you'll get stock options up the ying-yang, and when we do an IPO, you'll be a millionaire!"

Sadly, my friends told me that had to turn down these opportunities - with companies that are now famous names you have heard of - because they were saddled with mortgage debt, credit card debt, and car payments.

I never had a chance to join a silicon valley start-up.   But when I saw the Real Estate market tank in 1989, I thought to myself that there were some bargains to be had out there.  And for a brief moment I looked at buying a "look at me!" mini-mansion, but decided instead to keep my 1100 sq. ft. two-bedroom, one bath house, and use my income to finance investment properties instead.

If I had stressed myself financially to buy the mini-mansion, I would probably be broke right now - underwater and foreclosed upon, like so many of my friends and neighbors.  You can't make money from things you buy for your own use.

Similarly, when a friend told me he wanted to start a bank - and offered me founders shares in the company, I jumped on it.   I only wish I had more to invest - as the stock more than quintupled in price and cranked out hefty dividends as well.

That is the basic bargain you make.   Opportunity will come knocking in your life.   A sweet deal will appear, and if you have cash and low debts, you can take advantage of it.   If you are financially stressed to have a lot of "things" then deals like that will escape you.

Could the poor or lower-middle-class get rich this way?   Likely not.   But if they didn't spend money on check cashing stores and payday loans, they could certainly live better lives than they do.   But in poor neighborhoods, the desire for luxury goods is the strongest, which is why you see more old used Mercedes and BMWs in the ghetto than anywhere else - and fancy clothes, bling rims, hair styles, and the like.

The middle class - and the upper middle class - have the opportunity to dynastic wealth in their lifetimes.   But few chose to do so, but instead buy the goods that give them the appearance of real wealth.  And in doing so, they are entrapped.

This is the Royal Scam.   It's how the rich get rich and why our middle-class is shrinking.

Today, more than ever, middle-class people feel entitled to new cars, cell phones, large televisions, 500 channels of cable, a computer in every room - and so on.   We have tons and tons of "stuff" that our ancestors never had.   Robotic vacuum cleaners and $1000 front-load washers.

And the funny thing is, when you point this out to people, they get defensive.   Their expensive toys aren't all that expensive.   They're actually saving money!   And they believe this, as they add more and more technology to their lives.

But what they are giving up, is the ability to really accumulate wealth.   Oh, sure, they throw a few bucks into the 401(k) plan, and they are "on target" to retirement, or as the mountain bike girl said, "I'll just work until I'm 70!"   Really?  See any 70-year-old Engineers where you work?

I have no complaints, of course.  It is a Royal Scam, but it is one that anyone can see if they look hard enough.   It is not a secret conspiracy on some Illuminati website.   It is out in the open for everyone - but you have to be willing to see it.

I didn't want to think about that - from an early age.   I made a lot of money in my lifetime, and spent most of it on what, in retrospect, were pretty stupid things.  Cars, boats, motorcycles, houses, and other "big ticket" items of course.  But also junk food, poorly made clothes, drinks in bars, and other stuff that, well, I could have done without or done with a lot less of.

So, the guy who figures this out, and puts that hundreds of dollars a month that I spent on beer and pot and cable television, into an investment account - am I jealous of him?   Do I resent him for being an "evil 1%'er?"

No, not really.   And no, I really don't think I'm entitled to any of his money.   He should pay, of course, his fair share of taxes to support our society.   What that amount is, we can debate.   But the idea of punishing people for making sacrifices that I chose not to make?   No.

Of course, in any society, there will be those who float to the top of the cesspool on inherited wealth or some nefarious scheme that gets them there when they shouldn't have.   And yea, it is "unfair" that crooks and con-artists get ahead.   But a funny thing, con artists require someone to con - and it is the plebes like you and me who willingly give them our money.

And beyond the con artists are the legitimate businesses that are pretty much cons.   You get a high-interest rate credit card and then the bank bends you over.  Or you borrow too much on a poorly made mini-mansion using a loan whose terms on their face are onerous.  Or you sign your life away to student loans and get an unmarketable degree.   You then protest Wall Street and complain you were taken.  But were you really?

Yes, these are part of the Royal Scam.   You were fleeced.  But you were willingly fleeced.   I was too, before I wised up and stopped looking for bad bargains like that.   I never signed an ARM loan if I could help it.  And certainly not a "toxic" arm or something stupid.   I gave up on high interest rate credit cards.  And I buckled down and paid off those damn student loans.

It is an amazing system, if you think about it.   And figuring all of this out - very late in life - has been illuminating.   I wrote this blog to set down my ideas, mostly so I could read them and reinforce them in my own mind.

A few others have read them and offered encouragement, suggestions, or corrections.

Most others just ignored this blog, or tried to shout it down.   And this, I realized, is to be expected.   Most folks want to take the blue pill - go back to the Matrix and have everything the way it was before - and all their toys.   They don't want to hear ugly truths.

When I was in my 20's, I wanted, but never had.  I wanted fancy cars and fancy motorcycles and fancy boats.  But like most 20-somethings, I had an economy car and a secondhand bike, and I didn't really take good care of either.

It is ironic, you get old, and you can afford your "dream car".   I would have killed people to have the M Roadster now parked in my garage.   But like my neighbor who has a Corvette, we both are finding that the dream cars of our youth are awfully hard to get in and out of, when you are over 50.  And they are loud and noisy and not very comfortable.   You get older and you realize a quiet smooth ride and lower operating costs have their merits.   Youth is wasted on the young.   Sports cars are wasted on the old!  At least we can afford the insurance.

I am lucky in that I survived the Royal Scam relatively intact.   I have a little money left over to live a comfortable retirement.   However, it could have been much worse.   Most of my peers are still looking at another decade of commuting to work, just to be able to fund their retirements.   And maybe some will work longer.   They claim they like the work, but hey, 30 years of anything gets to be old hat after a while.

So there you have it.   But it doesn't change anything.   You can try to tell a 20-something this, and they simply won't listen.  A kid who thinks scissors doors on a Dodge Neon is a good investment isn't going to listen to you.   He will do the same dumb things we all did at that age.

Well, not all of them.   Out there is a young Warren Buffet or Sam Walton, who has a fire in his belly and a burning desire to get ahead.   And those folks likely will, too.  And I hope they make a Billion bucks, too.

I really do.

The full album, if you want a trip down memory lane.  Trip being the operative word.

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