Taking a Haircut:  the Goofiness of Current Investment Strategies
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Taking a Haircut: the Goofiness of Current Investment Strategies • Posted: Dec 06, 2011 09:56:17Comments WelcomeVote CoolPhotoblogsPurchase a PrintShare

Worries over mounting debt and debtor's abilities to pay are, for the most part, a preoccupation of lenders, those folks with money to invest. They worry they won't get their money back, and if they do, that their return on investment, i.e. interest earned, will have been eroded by inflation. Their objective is to see their money pile grow, and in doing so feel ever more secure in efforts to insulate themselves from want. Their soul measure of success is profit beyond inflation. Their primary fear is "taking a haircut". They do not want their money pile to shrink.

The thing about money, though, is that it's worthless unless in circulation, being used as legal tender in trades for goods and services. Gather all the money there is into a corner or lock it away in a vault, and it's worthless. People who don't have it will just ignore that it ever existed and establish a different currency. So, even if an investor is never forced to "take a haircut" and successfully accumulates a huge pile of cash, there is no guarantee that cash will continue to be worth anything. With respect to the objective of securing one's self from want, the endeavor to profit personally from lending to one's fellows is essentially goofy because there is no way to actually achieve success. Further, from a debtor's point of view, borrowed money may, in deed, inspire and spur productive activity. But a debtor measuring success in the same terms as lenders, i.e. in terms of profit above costs and inflation, is essentially playing the same goofy game. And neither set of books makes any attempt at all to account for the costs to society and the environment for activities facilitated by borrowed money, i.e. increases in ranks of the disgruntled poor and undermining of the ecosystem.

The point is, there are other ways to measure success. And it's interesting to note that the Chinese seem to be in the process of setting the example for the rest of us. The AP reported last week that the Chinese have proposed investing in efforts to rebuild America's infrastructure, i.e. its bridges and highways. Given that few other news outlets seem to have picked up on that announcement, one can only assume most were confused by it. I mean, were the Chinese proposing to buy our roads and bridges? Is their "devious" plan to toll us into subservience?? No, it appears, instead, they have begun to recognize that their accumulation of cash and treasury obligations may, in the end, be worth nothing if not used to stimulate U.S. economic activity which, in turn, will result in greater demand for goods and services their own economy produces. In other words, they have begun to measure success not by the size of their money pile, but by the utility and opportunity it affords their citizenry.

Bravo China!! A definite step away from goofy. May the rest of us please take note.

Now, if only this new way to think about investment would begin to take realistic account of the consequences to the ecosystems upon which we all depend.

Wednesday, February 10th, 2010