28 November 2012

5% (part 1 of 3)

Martin Luther couldn’t have foreseen some of the effects of his 95 Theses. Mind you, it was Jean Calvin, in the “Protestant Rome” of Geneva who gets the credit (or perhaps that should be blame) for one of the most far-reaching.

Calvin believed in the value of hard work, as a route to salvation; and also believed that money as capital should work. Previously, “usury”, the lending of money for interest, was a sin; Calvin approved of it. In his time, usury didn’t have the connotation of extortionate or excessive interest.
Be that as it may, the question is “what is a reasonable rate of interest”? Calvin thought that 5% was reasonable, and in the 17th century in England the maximum allowable was 10%. You could extrapolate this to “what is a reasonable rate for my labour”.

Then there wouldn’t have been any income tax, and the idea of inflation wasn’t such a topic as it is today. Now, we expect to have to pay income tax on the interest, and we see the “real value” devalued; it can be hard to keep the value of the capital intact. Quite recently in the UK, unearned income carried an extra penalty of 15% above the top rate of tax, which itself was 83%; you might think that a tax rate of 98% was extortionate. And you wouldn’t be surprised that it made capital gains, which weren’t originally taxed, more popular.

Despite all this, a rate of 5% seems reasonable to me, even though it’s difficult to achieve today. My capital is, at least in theory, available to an entrepreneur or capitalist to use to make or produce “stuff” or to provide “services”, and to pay me interest periodically, often annually. And the capitalist has his/her costs of production, and will want to set aside “reserves” to allow future development, and to tide themselves through setbacks, recessions and trading anomalies. And capitalism is what ultimately, provides the wealth of a country, not the government, though governments may need to intervene to provide a stimulus.

For some, 5% simply isn’t enough; it will double your capital (ignoring taxes etc) in about 14 years, but this is just too slow. These people are in the “get rich quick” group of financiers, and not just “get rich quick” but also “get very, very rich”. And yet there are limits to the “natural growth” of an economy; getting very rich, very quickly can’t be done through conventional investments. One way to do it is through “trading”; originally, this market allowed companies to buy or sell “stuff” in advance of their needs, in an effort to smooth and regulate their cash flow. But “trading” became an end in itself; it was no more than gambling. And lest you think that this is a moral invective against gambling, it isn’t. But, remember, in gambling, nothing is produced, there is a single pot of capital, and “luck” decides who wins and who looses. And in real casinos, the odds are always in favour of the “bank”. So in “casino” trading, if you make a profit, someone else makes a loss — and some of the losses that have come before the courts are staggering.

There’s a name for this sort of activity: greed.

And I haven’t mentioned companies that shuffle their profits around, to minimise their tax exposure; or multi-national companies that trade amongst themselves, at prices to suit themselves; or why Switzerland is a major centre for coffee and copper trading when neither of these commodities enters or leaves the country. Nor have I mentioned those individuals who hide their assets from the tax man, using machinations that may well be illegal; nor the corruption which seems rife in developing countries whose elite’s main aim seems to be to enrich themselves; nor the vast increases in managerial salaries and perks when the workers’ pay remains static or even falls; or even the bonuses for managers when the company is failing.

And there’s more than just greed to all this: inequality. And inequality is far, far more than just a word. For starters, it breeds poverty.

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