The Biggest Scandal of the Decade
Big banks often pride themselves on being essential capitalist institutions.
But today, the big banks are mostly guaranteed by governments. They are effectively nationalized. They are “too big to fail.”
Most of their income no longer comes from direct lending to businesses. Such lending is the classic role of banks. But it is intrinsically limited to what businesses can profitably invest.
Most banking profits now stem from derivative castles in the sky with no obvious limits — a hypertrophy of finance that enriches bankers without promoting learning and growth.
Of course, in league with the Fed, this activity may create money. But at the same time, it actually depletes wealth.
It’s what I call the “scandal of money”— this hypertrophy of finance.
In short, banks can take as much as 40% of all the profits in the economy while the rest of the economy shrinks — crippled by government guarantees and money.
This is not real economic growth.
As I’ve covered before, growth is learning — and learning is the accumulation of new knowledge, not the exercise of government power to print money.
Learning is Essential to Wealth
Evidence of the power of learning is what business consultants and economists call the “learning curve.” For most of my professional life I have been studying learning curves.
For instance, my book Wealth and Poverty — which presented the philosophy of supply side economics — explained and celebrated the Laffer curve.
That is, economist Art Laffer’s demonstration that lower tax rates usually bring more revenues to the government than high tax rates do.
By the way, for this and other contributions, President Trump recently awarded Art Laffer a richly deserved Presidential Medal of Freedom.
How do lower taxes bring in more revenue? By unleashing the learning curves that result from entrepreneurs making creative investments rather than creative schemes of tax avoidance.
Well, as I put it in my book, “High tax rates do not redistribute incomes. They redistribute tax payers — from productive jobs and investments onto golf courses and tropical beaches, from factories and offices into tax shelters and foreign tax havens.”
Let’s look at that another way…
Rather than spreading wealth among the masses, high taxes redistribute tax payers from the entrepreneurial creation of new assets… into hoarding and speculating in existing assets. From paying taxes into avoiding taxes.
From high-tax states and countries… to low-tax states and countries.
From learning curves and Laffer curves… into the offices of tax lawyers and accountants.
High tax rates protect existing wealth and punish new wealth.
As Laffer showed, predatory governments divert people from serving others into protecting their own rear ends.
You won’t make your million dollars that way. (Unless maybe you are a Kardashian, your rear end isn’t worth it.)
Now, at the time I wrote the book, these ideas seemed to strike a chord…
Finding Your Million-Dollar Learning Curve
In the ‘80s, nearly everyone was reading Wealth and Poverty.
It became a worldwide bestseller. At its peak it reached #3 on the New York Times list. For six months it was #1 book in France.
President Reagan read it, too, and made me his most quoted living author.
But of all the calls and letters I received, none was more fateful than my call from Bill Bain.
Bain told me the learning curve ordains that with every doubling of total units sold, unit costs decline by between 20% and 30%. He said his firm and his previous firm (Bruce Henderson’s Boston Consulting Group) had documented learning curves across every industry in the economy.
Everywhere you looked in a capitalist economy, you could find learning curves — in chicken breasts and trucking miles, in transistors on chips and insurance policies contracted, in potato chips and eggs, and lines of software code.
This is not a coincidence.
All economic growth is learning. If you are going to get your million, you are going to learn a lot.
At least a million dollars’ worth.
Don’t worry. I’m here to help.
That will be the purpose of this Daily Prophecy — to engage you in an adventure in building knowledge, through your own learning curve and mine. We will be exploring investment ideas around the globe based on surprising new knowledge.
This kind of learning makes life an adventure in new ideas and new value. Let’s embark on it together.
Editor, Gilder’s Daily Prophecy