your use of the word “manager” suggests to me you are still fixating on the idea of an agent who merely passes on the investment money from the lender to the borrower & takes a handling fee. although i did deal with that situation & showed that this too could be a wealth-creating activity, i had explicitly moved on from that scenario when i talked about pooling your money.
if you and other investors open accounts in the fsp, leaving lending decisions up to the fsp, it then lends money from the overall pool in a variety of enterprises, including the pumpkin farm. if the pumpkin farm loses money but the other investements pay off well, the fsp may lose some money but
a. it is likely to take a hit to its profit without passing off the loss to the investors and
b. even in the worse case scenario where the losses by the fsp are so great that the investors suffer, this loss is spread around all the investors
so you can see that the fsp is taking some of the risk for you, and also gives you the advantage of sharing your risk with the other investors.

Give me a real example where the Wealth Manager actually creates wealth, as opposed to being an intermediary, through delivery of a financial, as opposed to agency, service.

indeed in one of my first examples i pointed out that financial services can be provided with no agency whatsoever.
i pointed out that any voluntary trade increases wealth & it is the case with money too: if you lend some of your money (directly, no agent) to someone with a sharper preference than yourself for money now rather than money later, they can pay you some interest in the future & you’re both better off.

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“What do you propose as the structure and constitutional ‘must haves’ of the new World Bank. (Clearly the old one would have to go as it is a manifestation of the American Empire, which is about to collapse).”

If I were to favour a world trading currency, I’d take inspiration from John Maynard Keynes and his ingenious proposal during the Bretton Woods Conference in 1944 where the Allies met to discuss the design of the new economic order after the War.

His solution was the ICU, a new central bank of central banks, which would issue the bancor currency to be used for trade.

Its no wonder that the United States favoured the option of the dollar being the reserve currency for the world.

“Assume an enterprise within a poor country borrows $100 million short-term from a U.S. bank, paying 20 percent interest. Following the prudential guideline that countries should maintain reserves equal to the short-term dollar denominated debt, the government then -if it doesn’t want to face the threat of an imminent crisis-must add $100 million to its reserves by buying $100 million worth of T-bills, paying 5 percent interest. There is, in fact, no net flow of funds from the United States to the developing country as a result of the loan; it is simply a wash. But the U.S. bank charges much more for the $100 million it sends than the U.S. government gives for the $100 million it receives. There is a net transfer of $15 million transfer to the United States. ”
Joseph Stigliz “Making Globalisation Work”.

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“Hey, they’re trying to do that in Europe aren’t they? Didn’t I see though that there are some members of the EU that refuse to give up control of their currency, and so still have all the fun of the market?”

Instead its a group of unelected and unaccountable bankers that are manipuhttp://www.rcci.net/globalizacion/2002/fg261.htmlating the monetary system, in the interests of the capitalist class.

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FINALLY Andrew

Your logic fails, in that your comment . . . .

“if on the other hand you had not paid a fsp to simply transfer your money to a specific recipient but had pooled your money in the fsp along with other investors (e.g. put it in an account) & they had lent money to the pumpkin farm, there is a sharing of risk in that transaction.”

does nopt hold water. The money lent to the pumpkin farm would ALL have gone, and we would all have lost money – though the manager would have made even higher fees.

Now. Just for fun. Give me a real example where the Wealth Manager actually creates wealth, as opposed to being an intermediary, through delivery of a financial, as opposed to agency, service.

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Ouch
Andrew
I did noptice that, and tried to ignore it.
You see, such an approach would take at least two generations to achieve, as the propensity for politicians to want to ‘control’ their economies by manipulation of economic levers is well known, and that couldn’t be allowed in a global currency environment.
Imagine a situation where there was no reserve bank and the government couldn’t manipulate interest rates; wouldn’t that be an interesting world.
Hey, they’re trying to do that in Europe aren’t they? Didn’t I see though that there are some members of the EU that refuse to give up control of their currency, and so still have all the fun of the market?
What the heck. Let’s go for it. What do you propose as the structure and constitutional ‘must haves’ of the new World Bank. (Clearly the old one would have to go as it is a manifestation of the American Empire, which is about to collapse).

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wrt currency futures you will notice from above that my preference is for a global currency, that would be even better than different currencies supported by a currency futures market

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strings even before the switch to fiat currency there was not a “sound” currency if your standard is perfection. most currencies are sound enough & the evidence is that they’ve worked extremely well for the most part.

you might point to specific services or practices within the financial services industry as not wealth-creating, but the point remains that financial services can be wealth creating. as i said above, you could point to any other industry as including some practices which don’t enhance our collective welfare but that doesn’t mean all the activities represented by that industry are worthless. take manufacturing. since some businesses manufacture weapons which kill or maim people are you going to say that manufacturing doesn’t & can’t create wealth?
having said that, your specific example – currency futures, is another example of a financial service which does create wealth in general. as you point out, individual businesses can enhance the security of their returns, & the fact that most of them choose to do it through financial service providers (fsp) as intermediaries instead of trying to locate counterparts in the other countries who want to engage in the reciprocal bet, which is still entirely their option, suggests that they get the job done more efficiently through the fsp.

in my pumpkin analogy i didn’t suggest you went through a money manager, but if you had, it would have been your choice to do so because of what they could add in value to the transaction. alternatively your doppelganger might have travelled to the distant location carrying the investment funds with you. when the investment failed, the train driver who carried you would still keep their money that you paid when you got on the train. or if you had sent a courier, they would already be paid regardless of the future success or failure of your investment. or if you had bought some stationery with which to run your business & your business then failed, the stationery would stay paid-for. the fact that you don’t always spread your risks out to all your suppliers is a feature of any industry you might deal with, not just the fsp industry.
and it is not just in a business transaction that this applies. you might send a couple of $100 notes back home to your dear old mum, then she gets mugged & the money stolen – you don’t then get a refund from the post office for the money you spent on stamps!
if on the other hand you had not paid a fsp to simply transfer your money to a specific recipient but had pooled your money in the fsp along with other investors (e.g. put it in an account) & they had lent money to the pumpkin farm, there is a sharing of risk in that transaction.

as for the issue of buying vs renting, & selection of contractors etc etc, that’s neither here nor there in a debate about the ability of the financial services industry to contribute to wealth creation.

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STH
THank you
S

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Oh dear Andrew. Here we go again. You’re trying to convert a capitalist to capitalism using all the wrong examples.

Lets start with your end point! ….
“the provision of a sound currency is a valuable service”
Can you point me to a sound currency please? As far as I can see, there hasn’t been a ‘sound’ currency since the promissory note was removed from specie. Certainly it was believed for years that the US dollar was a ‘sound’ currency, but we can all see the folly in that. To a currency market trader, ‘sound’ is something that might, at best, last a day or two, but only if it is to their advantage.

Now lest’s revisit the concept of financial services creating value, and take, as a for instance, the currency futures market. In this bastion of financial services, people make bets on what the future value of a currency will be; even better, they use no ‘money’ to do it, as the trade, the premium and the ‘transaction’ value are all settled at a future date.

The stated purpose of futures markets is to enable businesses to lock in the price in local currency of international trade at the time the trade is entered into. (see the charter of the Chicago FM.) There are, however, many people whose only ‘job’ is to trade in that market on a minute by minute basis to make profits for their employers. Again, they create no wealth, nor overall value, as they are, again, just clipping tickets and hoping it all comes out on the plus side in the end and gets them their million dollar bonus. That transfers wealth to them, and their employer, but doesn’t create anything in sum of all wealth.

In your pumpkin patch analogy there is something of a flaw again. If, as you would (I think) suggest, I placed the investment (doesn’t matter where) through an “Investment Manager”, they would have clipped the tickety as the money passed through their hands from me to the farmer. Then, low and behold, I lose the money (again, it doesn’t matter which one I invested in); yes, the investment manager is richer, I am poorer. Hmmmmmm. maybe I’d better buy the farm instead, that way I have a capital asset, as opposed to a cashflow risk, in my portfolio.

Speaking of assets and cash-flow. I was invited, together with my partners in a major accounting firm, to invest in a forrest development back in 1992. The offer made to us was that we pay out, on a phased basis over 22 years, to develop from scratch a forrest in the Hawkes Bay area. After pouring over the ‘offer’ document, we found that the land was going to be bought by the ‘wealth management’ company that was proposing the deal to us, and we would rent it at a variable annual cost fixed every three years as well as pay a management company to look after the planting, pruning and general husbandry of the forrest. There was a high annual cost in the early years, as the land was stripped of existing foliage, fenced, roaded, planeted, etc. We decided that we should ignore the offer of the wealth manager, and went to our bank to arrange a mortgage ourselves. We then went to a forrestry management company in Gisborne and asked if they knew of any land for sale that could be turned into a forrest under their management. They came up with a sizable section, and we proceeded to do a deal with them and the bank. So far, we have made more out of the land that we expect to make out of the wood, with more to come. The bottom line, we have created wealth for ourselves through adding more value to the land that the cost of management, raw materials and husbandry. We have husbanded wealth for our children (pet rocks, whatevers) through buying rather than renting the land (funnily enough, the cost of buying has been much less than the cost of renting so we’ve also saved cash-flow). I say husbanding because the replacement cost is the same as the selling price, so no value or wealth has actually been created by what we have done unless the land is sold and no similar investment made; however, the next generation, if they don’t sell, will be able top create more wealth from forrestry than we hacve because they will own the capital asset, the cleared, roaded and fenced land.

Bottom line of my real example. The ‘wealth manager’ wanted to take our money and make himself wealthy with it by having us pay for land to which he would acquire the title. Again, I prefer elimination of the leech (middleman) who adds no value and creates no wealth, but clips as big a chunk of the ticket as they can.

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Andrew you are right that the finance idustry does facilitate the creation of wealth through providing an indirect good that everyone will accept, confidant that they’ll be able to exchange it for something that they desire, but the unfortunate thing is that the fiat based fractional reserve banking system is fraudulent where the State has usurped the sovereinty of its people by providing a de jure exclusive monopoly to create credit (money) to the private banking industry. The Reserve Bank has admited that only 3% of the money supply is in the form of tangible currency (coins and notes) and the rest in composed of debt to private banking enterprises.

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yes strings there is always risk in any investment opportunity but you do not have any reason to suppose that the more lucrative investment in my hypothetical example was more risky than the less lucrative one.
as with your previous hypothetical example you’ve chosen to depict only the environment with a financial sector as one in which an investment can go wrong or perform below expectation, but there’s no basis for this.
i’m going to go with another analogy, hold tight…
you have a sum to invest & decide to put it into pumpkin growing. you assess all the market gardens you can reach with a reasonable amount of travel, namely all those around your locality, & invest in the one you consider to have the best production opportunities. then a drought wipes out the entire national pumpkin crop & you lose your money.
meanwhile your doppelganger lives in a universe where a telecommunications network exists. this person assesses not only gardens in their locality, but those far away, & invests in a more distant one with better soil. then a drought destroys the national pumpkin crop & the doppelganger loses their money.

now who lost the most money? whose investment was the most risky?
the answer is neither. the only difference is that the telecommunications network created a more efficient market allowing investment in an enterprise with higher expected return. investment was shifted from low productivity areas to high productivity areas – creating wealth.
that is also what a financial services industry does.

you are probably aware that there is said to be a correlation between risk & expected return for investments, and that might be why you are imputing higher risk to the better opportunities in my hypothetical examples. that correlation only applies in an efficient market. it doesn’t apply to the new & better investment opportunities becoming available as market efficiency improves.

money managers do take risks – loan defaults occur, and this usually comes out of the pockets of the owners of the financial institutions – unless things get so bad that they can’t meet all their own obligations to those who lent them money.
so the borrower bears some risk, the institution bears some, and the lender bears some. the intermediary has actually taken some of the risk from the lender & borrower (& some of the return on investment).
there’s no need for them to say thank you, as they are providing a service. if the borrower & lender don’t like it, they can try to find each other without the institution’s help (which does still occur).

i accept your argument that there are some questionable practices within some institutions, but i expect this could happen in any industry. you can no more say that the provision of a financial service is in general not a wealth-creating transaction just because some of them aren’t, than you could say that the supply of automobiles is not wealth creating in general because some people sell stolen cars.

yes the currency market can go wrong too, but this only underlines how the provision of a sound currency is a valuable service! again, things can go wrong in markets for other commodities too.

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“I find it strange that you can measure wealth using fiat currency since the real value of the currency is zero. Under a fractional reserve lending system the money you hold is someone else’s debt obligation.”

Thats precisely why the world is in such a perilous state. The fact that people measure wealth in mere objects. It happens irrespective of what the medium of exchange is. People will hold anything as a store of value as long as it is perceived to be more valuable relative to other comparable commodies that others want. The advantage of money is that it has low carrying costs and can earn a return due to interest charges on loans. When you deposit money in a bank you’re effectively buying someones debt obligations as you rightly pointed out.

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I find it strange that you can measure wealth using fiat currency since the real value of the currency is zero. Under a fractional reserve lending system the money you hold is someone else’s debt obligation.

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“have an investment opportunity which would yield them a return”

an interesting concept is in the word “would”

This suggests an absence of risk. The more correct term would be “might”, at that point I want to know the risk of might not, and to see what premium I will receive for taking that risk.

The point (as I see it) is that ‘money managers’ do not take risks, they clip the ticket irrespective of the result and don’t even say thank you.

Many ‘advisors’ are, in fact, agents for money managers, and are compensated for the amount of money they give to the money maker, not the amount the ‘customer’ gets back.

Similarly, the actual money managers are paid based on the amount of money they make FOR THEIR EMPLOYER, not for the customer. Hence, these people are less than adventurous in what they do. Particularly in this country, there are almost no VC funds. There are Angels, who take their own money and help innovators get their ideas off the ground, and few angels will put money in a money manager’s hands.

Finally, currency, an interesting and changing specie. It used to be that ‘currency’ was a promisory note, today it’s not, it is just a way of counting value for exchange. (As you brilliantly illustrated.) WHich is why, whenever there is a danger of major disruption peopole go out and take currency and exchange it for THINGS that have real value, like gold, diamonds, oil, water, food, etc. As the Germans learned at the end of the second world war, if you’ve got chocolate it’s worth as many wheelbarrow loads of currency as you want.

Happy daze

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we can think even more fundamentally than the lending and borrowing of money.

if i have an item which i value a little & you value a lot, while you have one i value a lot & you value a little, a trade will make us better off!
you might like to think that the items are things valued by the coveting parties because they match their particular skill sets to be able to make something new out of them so that you can point to an act of work – of making something more valueable out of something less valuable – as underlying the wealth creation (e.g. i have some clay & you’re a better modeller than me, while you have some wood & i’m a better carpenter than you) but this is not a necessary factor, since strictly speaking, any transaction resulting in both parties being better off has created wealth, hence any voluntary trade is wealth creation regardless of whether the parties do any work on the stuff they acquired by trade.

now suppose i have something which i value at $x & you value it at $xr
meanwhile you have something which you value at $xy and i value it at $xyr (assume y & r >1)
if y > r we have a problem – a trade would result in an increase in overall value, but you are not going to relinquish your item because you consider it worth more than my item which i would trade for it, even though we still each consider the other person’s item worth more than its current owner considers it!
maybe i could rummage through my belongings finding other stuff i could give up to induce you into the trade, or maybe we could both go off trying to find other people who can trade your item for other things they have which we both want, allowing you to use some of them to buy my item & to keep the rest to make up the difference in values!
this could get very complicated given a whole lot of permutations of various items & various people with different assessments of their value.
then someone comes along & supplies us all with….
a currency!
that’s a financial service & it facilitates all kinds of beneficial, wealth creating trade!

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if a telephone company laid a new cable or launched a new sattelite, you would admit that wealth had been created, because you could point to the physical, material asset. yet a telephone company is merely an intermediary to the communications between two or more other parties, who are better off by being able to come together efficiently.
if you build a human network of finance professionals, you have still created wealth, allowing those in need of financial services to come together efficiently.
this is an apposite analogy given the convergence between the telecommunications & financial industries – eftpos, telephone & internet banking, the use of 0900 numbers to make donations, direct credits & debits- a significant volume of telecommunications traffic is financial transactions.
if you had to travel around the countryside, stopping at farms & cottages for your food & manufactures, this would be very inefficient, & if someone built a market place, this would create wealth by increasing the efficiency of the trade process. again you could point to the cobbles in the market square, the benches here & there for dickering to take place at & contracts to be drawn up, the booths for refreshment vendors & the stables for the dray animals when they come to market & you could say that there are physical assets involved in this wealth creation, but this is what financial services institutions do, they create a market place.

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huh, i guess there’s a length limit or something. ignore that last post because it cuts out the middle portion of what i wrote.
read from hereon:

suppose you have a sum of money, & an investment opportunity which will yield you a return of $x.
now suppose another person has no money, but they have an investment opportunity which would yield them a return of $(x + |d|) on that sum of money if they had it.
clearly there’s an opportunity for you to lend the money to that person for an interest payment of $(x + (|n|<|d|)) & you’re both better off, you are better off by $|n| & the other person is better off by $|d – n|.

you are each providing the other a financial service: you are providing liquidity for their investment, they are providing you lucrative storage for your money.

as you see wealth has been created – you’re both better off – so perhaps you wish to argue that while financial services create wealth, an intermediary in the supply of financial services merely skims off a portion of that wealth for itself.

in fact the intermediary (a financial institution) brings the two parties together when they might never have heard of each other.
the intermediary also facilitates the pooling of funds from numerous investors, and it facilitates the spreading of the investments across numerous investments. investors & investees are able to choose from a range of options optimizing their risk/return profile to their particular wants & needs, they are able to lend & borrow for different terms because of the pooling of the funds.
if you did not believe that the intermediary can do the job of providing financial services more efficiently (create wealth) than you and the other parties to the transaction could, you would not use the intermediary – you can still seek out your own private individual borrowers or lenders.

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it is another day, strings, & furthermore, it’s the day on which i’m going to show you how financial services create wealth!

suppose you have a sum of money, & an investment opportunity which will yield you a return of $x.
now suppose another person has no money, but they have an investment opportunity which would yield them a return of $(x + |d|) on that sum of money if they had it.
clearly there’s an opportunity for you to lend the money to that person for an interest payment of $(x + (|n|1)
if y > r we have a problem – a trade would result in an increase in overall value, but you are not going to relinquish your item because you consider it worth more than my item which i would trade for it, even though we still each consider the other person’s item worth more than its current owner considers it!
maybe i could rummage through my belongings finding other stuff i could give up to induce you into the trade, or maybe we could both go off trying to find other people who can trade your item for other things they have which we both want, allowing you to use some of them to buy my item & to keep the rest to make up the difference in values!
this could get very complicated given a whole lot of permutations of various items & various people with different assessments of their value.
then someone comes along & supplies us all with….
a currency!
that’s a financial service & it facilitates all kinds of beneficial, wealth creating trade!

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I still don’t see how clipping the ticket creates wealth, as opposed to redistributes it, but hey, it’s another day, have a good one

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Strings Says:
May 27th, 2008 at 4:27 pm

Erm, I’m lost there Andrew.

you sure are lol
i think what your lengthy scenario was supposed to be saying is that sometimes in a financial services environment a bad decision & a bad investment can be made.
well so it can in the absence of financial services too. nevertheless the existence of financial services improves the overall running of the economy & hence contributes to wealth creation – for the overall economy.
making a choice between different financial service providers is up to you of course, so you can find the one you consider most suitable, whether it be for the risk you’ve assessed to be involved, or the potential returns or other reasons, & you’ve made a quite valid choice to use the government as your financial services provider. good for you.

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