Saturday, February 28, 2015

The Casino Economy

What is the Casino Economy?  And has it taken over America?

When I was working at the Gawdawful Lawfirm, they were busy doing "dot com" startups, in the late 1990's and early 2000's.   It was a heady time, as everyone, it seemed, was making a lot of money.

But as an Engineer (owning a calculator) I couldn't understand how these companies made any dough.   We would do these "Equity Placement" deals, lining up small dot-com startups with angel investors.   At the celebratory champagne party, we would have the founders of the company sign off on our seven-figure bill - after a few glasses of champagne, of course.   As one of the partners in the firm told me, "Once they are drunk on the capital funding and the booze, get them to sign off on the bill, before reality sets in".

So the law firm made money that way.  But what about these companies?  And the investors?   Well, a lot of them lost money, to be sure.   But I realized that later on, many "cashed out" when the company "went public" with an IPO - and I have explained before how that works.

They sell 5% of the company, create a marketable equity that can be traded, and then sell off their shares (slowly, over time) and cash out.  The company, which never made any money anyway, eventually fails, and takes out the shareholders, suppliers, customers, and sometimes even low-level employees.   Such is the story of

And it struck me then that this sort of shenanigans wasn't "business" in the traditional sense.   My traditional clients all actually made things, whether they were television set-top decoders or semiconductor chips or whatever.   They hired people, built factories, and took raw materials and made them into something of increased value.

This new kind of "business" was some different kind of animal.   Nothing of value was being created, and in fact, usually the point of these companies was destruction.  They flared on the horizon for a brief time, and then burned out, leaving wreckage and debris in their wake.   They often ruined the lives of the people who interacted with them - the retail shareholders, employees who invested in the pension plans, the suppliers who sold  on credit - and so on.

And they really added nothing to the economy.  They did not create wealth in the traditional sense of taking raw materials and labor and creating something of greater value from it.   Rather, they just took other people's money and gave it to themselves.   It was not economics at work here, just re-arrangement of wealth.   Making a lot of people a little poorer so that a very few could be a lot richer.

And aiding and abetting these folks was an army of lawyers and institutions, who set up these deals and were also on hand to take them apart.  I decided I didn't want to be a part of this sort of nonsense.

It was - and is - a form of the Casino Economy that we have today.

While living in depressed (and depressing) Central New York, I read in the paper that the Mayor of Auburn, NY was trying to have a disused Bombardier factory turned into an Indian Casino.   The factory, not long ago, was used to rehabilitate subway cars.   They took old subway cars, added new materials and labor, and created something worth more than the combination of the constitute parts.  They created real wealth.  And in the past, Auburn had a number of such factories (as did most of Central New York) and today, most of them are gone - or struggling to hang on.

And the attitude of the Mayor of Auburn is one reason why.  He believed that a Casino was a viable way of creating wealth in the community.   He never was bright enough to figure out that Casinos don't generate wealth.   Sure, during construction, a few jobs might be created to take an old factory site, add labor and materials, to make it something worth more (a Casino).   But once up and operating, it would not really create any sustainable wealth in the community - just a few crappy service jobs for a few croupiers, dealers, bartenders and waitresses.  You can't build an economy on bars.  And that is all a Casino is, essentially a huge bar.

But worse than that, it is merely a way of moving money around - taking small amounts of money from a lot of people - through gambling - and giving it to a few people at the top.   It is not creating wealth, but merely rearranging it.

And sadly, it seems our economy is devolving into a Casino Economy - literally or figuratively.   As I noted before, it seems that most Americans live within 30 minutes of one sort of Casino or another - whether it is a tribal reservation, a gambling boat, or whatever.  Even the government has its hand in the mess, with lotteries of one sort or another.

But worse than that, it seems the regular economy is devolving into one giant casino.  The name of the game today is to rip-off the consumer, not sell him goods of increased value.   The idea is to get the consumer addicted, to food, to drugs, to liquor, cable TV, the smart phone, whatever, so that they will feel that they need this stuff like it was oxygen and they will suffocate without it.

The financial channels and news websites talk about "the economy" in terms of what new IPO you should "invest" in - by placing your bet and hoping that you will "win".   The idea of investing in a company that takes raw material and labor and combines them to produce products that are worth more than their constituent parts is, of course, not even discussed.   Dividends?  Who cares about dividends?

Sadly, the small investor, who watches five hours of television a night, falls for this sort of nonsense, lock, stock, and barrel.   They watch the shouting guy and think, "Gee, that must be how you get ahead in the world, by picking the right stock, and watching it go up by 1000%!  All I need to do is buy the right stocks!   And certainly, I am the only one who is watching the shouting guy, and thus his stock tips won't be picked up by several million other people!"

No, really.  People really think this way.   They think that a "stock tip" announced on television and known to millions of viewers, is some sort of "inside track" on secret knowledge on how to "win" at investing.

It is akin to these folks who sell "systems" to winning at the slots, or blackjack, or whatever.  It is, in short, gambling.

The small investor - the poor investor - the dumb investor (they are one and the same) does stupid things with what little money they have.   They buy gold at $1500 an ounce, because Glenn Beck told them to, and everyone knows that Glenn Beck is never wrong about anything.   They buy whatever stock is mentioned in the press, even though the huge gains are all behind us now.   The buy what is trendy, what is topical, what is a "sure thing" to go up, because"everyone is talking about it".

They buy a mini-mansion on a funny mortgage, because the TeeVee said "everyone is making money in Real Estate!"

They are just plain gambling.

And when they lose it all, they get pissed off.   Someone took their money.   But they won't admit that no one actually "took" the money, but rather they willingly gave it away on ill-conceived schemes and strategies.   They put money in a slot machines - figuratively or literally - and lost it all.

And this is not by accident.   The people at the top of our economic pyramid make a lot of money from the economic weaknesses of the people on the very bottom (or near the bottom).   These are the folks who rake in the dough at check-cashing stores or payday loans.   These are the people doing IPOs to sell off a fraction of a company for hundreds of millions of dollars to the "little people" who do stupid things like throw $500 at a new IPO, figuring "what have I got to lose?"  (Answer:  $500).

The secret to getting ahead, once again, is no real secret.   The answer is to stop gambling and stop calling your gambling investing.   The idea that you can leverage yourself to wealth by placing a bet on a a stock, a commodity, or a roulette wheel, and then hitting it big, is very flawed.   Not only are the odds long, the game is fixed.