In Framing 1 and Framing 2, and Wealth and Power 1 and Wealth and Power 2, we discussed the false conflation, primarily, of income and wealth. The State, Church, School, Charity series covered these concepts further, explaining, in conjunction with the Tax Theft series, the ways in which modern banking systems frame the issue of power in terms of illusory wealth. Equal time could be devoted to the concept of voting as power, democracy as power, employment as power, or internet access as power, in the sense of the impotent nature of any of these vis-à-vis actual power, e.g., the ability of the Bank, or better put (or, more science-fictionally put solely for purposes of illustration, if you prefer), Jenome, to alter the world.
The schemata of voting is easy to understand: voting is showy but worthless, in the sense that a vote, or a million votes, is diluted by the total available pool of votes, which is controlled by more factors than can be listed here, among them the pedagogical zeitgeists of available voters; the pedagogically-concomitant potency of direct and subtle cultural messaging; the supposedly innubile weight of party tradition and geographical sectioning; the secret polling and inevitability-molding, and open financial encouraging to participate in certain ways; and, of course, the counting of the votes. Controlling any one of these facets of democracy, or many of the other related ones not here listed, makes and has made democracy, and the proverbial vote, a farce.
Less vulnerable to common understanding, but still relatively simple, is the nature of financial markets. Recursively permissive civic nationalism, occasionally expressed as rahowa and occasionally as milquetoast environmentalism, again and again brings financial ecology to question, but the underlying financial structures remain too complex for broad understanding. The general sense of "I'm being screwed" persists in the face of what are actually simple mathematics; nonetheless, distractions can be made to abound, and a combination of bred and nurtured pragmatism and intragenerationally-focused future time orientation prevents resistance even among groups able to contemplate the precise nature of the maze.
Taxes are a quixotically evil addition to these other schemata, patently unfair at any given time, yet capable, by their nature, of evolving to malevolently conform to any given financial regime. The current inherent absurdities in the U.S. have been amply covered in the prior series, but their most noxious current and future culmination as yet is found in the authorized charity. Like the rest of the thievery discussed previously, the soul-crushing lying and cosmic burglary of charity has been amply referenced; suffice it to say again that buying a starving child a sandwich is not deductible, whereas buying an HDTV for the lobby of a nonprofit veterinary office is.
Protege Partners' bet with Warren Buffett, referenced here, provides an excellent specimen of one of the internal functions of our financial system that is less easily understood than votes, taxes, and media access: corporate control. If you don't care to follow the links, or already know but need a refresher, it's the one where Buffett, perhaps the loftiest centripetal asshole available to 21st century Terran lore--because, unlike "Bill Gates," Buffett does not even feel a need to lie about having made something--bet the hedge fund managers that an index fund would outperform a hedge fund over ten years. Although Buffett is dramatically winning the bet, Berkshire Hathaway "itself" (as though it deserves an itself) has failed to outperform the same S&P 500 metric which is beating Protege Partners (several hundred other air quotes have been removed liberally from this entire post, in keeping with the local parlance).
The bet itself illuminates many of the issues we've examined earlier, particularly media, money, and taxation. A lot, lot, lot of people know about the bet. Why? Because with a jobless recovery and a housing bubble and several expensive wars, the financial press, and even (sic) the normal press, was more concerned with celebritized success than any theoretical function of a democratic press. To be fair, "the financial press" really has nothing to discuss except celebrity; well before the bet was made, chimpanzees had out-picked experts in the market, and index funds had consistently been beating actively managed ones. Before index funds formally existed, available data showed that index funds always would have won such bets, except that hindsight can give financial liars leeway to claim they would have invested in only the handful of things that achieved ___________.
By publicizing the bet, the media has driven advertising, and capital, to the respective players, which is to say, the respective players have constructed a giant advertising maneuver in the manner of reality television, whereby their "We are investors" message is disseminated as sensation, rather than just junk mail. Whether you buy the Coke or the Pepsi, the house will win, which is the nature of stock markets that index funds partially reveal.
Regarding taxation, note where the winnings from the "bet" will go: to pre-selected charities. The million dollars "lost," then, will be fully deductible, and not merely as advertising for an investment strategy, but as advertising for the pure-hearted and giving nature of the bulging ticks. Cast against a ~40% federal rate and a varying state rate (smidgens of which ordinary income will be paid by Buffett and/or Protege Partners, compared to their so-called capital gains and other so-called income), the $500K deduction makes the advertising investment an even sweeter deal for the loser.
The money funneled to a pre-selected charity will, similarly, benefit both winner and loser. If you're not sure how, read Part 6 of the State, Church, School, Charity series. There is no losing in this bet, even if everyone pays and even if the non-deductibility of the proceeds gains deliberately released publicity. (When you fill out your taxes this year, remember that you are contributing extra to make up for Buffett and/or the Protege Partners' state and federal charitable deductions.)
An even more puzzling issue, to many, is the nature of the victory. Aside from the publicity and deductions, and the ability to buy a closer relationship with Warren Buffett--more valuable, perhaps, than the latter two benefits, although the specifics of how are being concealed--why would Protege Partners make such a theoretically foolish bet? Of course they know that their emotional salesmanship, which reams the occasional un-connected investor into paying higher fees, will produce lower returns than chimpanzees pressing random buttons, even the chimpanzees at Standard and Poor's. Some level of their jobs involves convincing a set of morons to buy hedge funds; weren't they worried that another centennial public exposure of their business model might have negative consequences for them, or at least for their junior partners who might still be around once it was time to pay the bet?
Why do managed funds really exist, is the question? There is a marketing aspect, and a weak-consumer-needing-reassurance aspect, but for the imaginarily-rich people themselves, why do they pay for hedge funds?
Aggregated Idiocy and Social Need. Managed funds offer connected traders a way to be paid extremely high fees for managing institutional investments, which decisions are made based on a more significant type of power, namely, positions in deep corporate and deep government. Much money gets poured into managed funds in order that it may be fleeced. The harried ad-men, the offices, the secretaries, the books, the articles, the seminars: these redundant and/or unnecessary costs are necessary to manifest the impression of presence, and to cover the lack of actual presence, that must necessarily occur in surreal societies. But-for the existence of worthless mediators, there would be no stock market, ergo no index funds.
Index funds are, of course, managed funds in their own way, with greater and/or subsidiary levels of individual or institution promoting them. DJ's and S&P's, and the interrelationships between the NYSE and the SEC, create a set of designations similar to the ways in which news becomes news by being formally addressed by the news. The outsider-stochastic qualities of "the market" depend on an illusion of randomness bolstered by the downfall of inherent meaning, akin to capitalistic forms of economy or evolution. The bet in this case supported the business of both Buffett and Protege Partners (the latter entifying themselves so the inevitable loss wouldn't cotton to the continuing partners, if any) by displaying real blood (the deductible million) in a fixed match (the seemingly-stupid bet).
More telling, better illuminated by Buffett's own inability to defeat the index with Berkshire Hathaway, is the issue of why any of these dunces at all are trying to invest. From a distance, Buffett appears to be either the realist's pragmatic market hero, in contrast to Protege, when in fact he's running his own bitterly expensive managed fund and, like Protege, failing to beat a simple index. Since he and Protege both knew it would turn out that way at the beginning, why is Buffett losing a larger bet with the open market when he could have dumped everything into Vanguard and earned more?
The power that comes from publicly-traded stock is, like the power that comes from dollars or historical fact, dependent upon relative worth and deception. All large investments were once hedge funds; the colonial endeavors that began once Jenome had taken Europe were not open to what would now be called "average investors," for everyone was not encouraged or authorized to become a partial owner in a joint-stock company funding a ship to the Indies. The resulting payoff of these funds was not in the dividends officially distributed to investors, or even the capital gains finagled to them in a tax-advantaged transaction, but in the latent and mostly invisible rewards attributed to the public, e.g., ownership over legal structures, ergo human and land development, and tax farms, in the New World, and the amplification of abilities to refine productive biomasses through citizenships and war. Even as a dunce-front, Ferdinand's payoff for Columbus was not "herbs and spices," however lucrative the ultimate numbers would have worked out to be, but in vesting (sic) his genetic legacy with some degree of control over Central America and western South America. (Similarly, Trump's numerical wealth pales in comparison to the genetic investments he has made. Any given building, brand, or currency-denominated asset is, relative to his insider grandchildren, nothing.)
Specifically-managed funds, such as "hedge funds" or "Berkshire Hathaway," differ from all permitted funds, such as "index funds," in the sense that permitted funds represent mass authorization to raise money by lending investors an appearance of ownership, while specifically-managed funds exist to facilitate truer approaches to power. Not power that most can access--otherwise, they are, like all non-majority shares of businesses, a potentially beneficial tithing process with numbing characteristics, or, conversely, an anaesthetic with potentially beneficial characteristics. The failure of specifically-managed funds to outperform all permitted funds, combined with the seemingly puzzling persistence of specifically-managed funds, is, like a political party, one of many indications of the purposeful powerlessness of citizen-options. In the case of Berkshire Hathaway and Protege Partners, why make less money in a specifically predictive fund than make far more money in a purportedly random one? To whit, because of the power of controlling shares.
Buffett is something of an Oprah, a Harry Potter, a Paris Hilton, or a Donald Trump: an iconic infotainment persona existing to establish the permissibly believable. His public mockery of the managed fund encourages people to view company owners as productive in some fashion--because he keeps Berkshire Hathaway even though it would be more profitable not to--while the same act of mockery encourages people to believe in the randomness of the stock market, ergo why are so many rich insiders failing to beat it? Why indeed. Controlling shares in corporations, as exercised by fund managers--both "index" and "hedge"--create substantial formal, and invisible, wealth, and, more importantly, create substantial power. Like the seeming selflessness of states, churches, schools, and charities, the unseen power exercised through publicly-responsible or wealth-averse organizations far exceeds the trumpeted public wealth which outsiders perceive as controlling the world.
Posit Company, Inc., a major international firm, which has its board primarily selected by a small number of investing funds, other corporations which own it directly or indirectly, and various other lingering ghosts/legal fictions: public and private foundations, trusts, and governments. Those entities, through the control of 50.01% of Company, Inc.'s shares, exercise 100% of its power. $50.01 million of power becomes $100.00 million of power, and so forth: power to choose officer appointment and compensation, public image, donations, locations of expenditures, et cetera. If an investment produces a public 20% return and a private 150% return over, say, eight years, it is far superior to an investment that produces only a public 60% return over eight years.
Consider: Bill invests $10 million in an index fund with a fee of 0.05%, while Jacob's advisers charge him 2% to invest $10 million on his behalf in the Elite Premium Fund. Eight years later, Bill's investment is worth $16 million, while Jacob's is worth $12.4 million. Bill laughs at how unpredictable the market is, and at how foolish Jacob is for not understanding economics. During that eight year period, however, Jacob's investment (which Jacob wouldn't fully comprehend until he reached his mid-fifties, if ever) altered the course of several international businesses and governments, beginning projects in regions where some of Jacob's cousins lived, and employing seven of them for $400K yearly consulting jobs. Jacob's parents' own closely-held business employed preferred government hirees in clumsily pretending to landscape a park and associated roadway and parking lot in a nearby metropolitan area, burning through $4 million in county funds. Jacob's fund managers work with other fund managers whom they know very well, who work with many of Jacob's parents' friends' funds, together arranging the preprinting of chairperson nomination sheets and appointing directors to various corporate boards from among Jacob's parents' friends' friends, with total salaries of $60 million. The associated funds, with capitalization in said corporations of a little over 50%, bear $35 million of these unnecessary administrative costs, while the remaining blind shareholders pay $25 million. The $35 million is reinvested in similar funds, ensuring a secure future for Jacob's children, while during their tenure, the administrators exercise control over the economic lives of millions of Jacob's social competitors, including the children of Bill and his friends. Some lucky Bills will be publicly rewarded, and made into financial celebrities, as figureheads of success.
For the remainder, though--the more realistic one hundred Bills who invested $100K each in "the market"--their 60% gain, while far superior to what they would have gained by becoming net-losing junior suckers in the Elite Premium Fund, will represent a less forceful robbery than they might have otherwise experienced, had they stored cash, saved at the bank, or started a small business which attempted to compete against national chains. Those who believe that they, or Buffett, have discovered some exploit, and marvel at the stupidity of such wealthy people who buy expensive funds, are only part right: certain wealthy but subsidiary investors are indeed being fleeced by liars who predict worse than monkeys, but their aspirations to become part of true power, by controlling via hedge funds, are as pitifully unrealistic as Bill's belief that he's playing a fair game where patience and deliberation win in the long run.
The Bill who saves his way to a trigger amount--say, a dozen million--is, if his geno plans properly, able to become the family that owns a couple car dealerships in town, junior donor to the local political machine, and grantor of state-representative status to a child or two, with potential intermarriage into a powerful regional line and, eventually, service as a mid-level philanthropist or ambassadorial post. The ultimate reward to hard saving is one's grand- or great-grandchildren entering the level of intergenerational higher-tier lapdog appointeeship. The benefits are nothing to be dismissed, but by then the creatures receiving them are televised images.
The so-called political benefits of corporate control are more difficult to price than mere sinecures. If Bush II's bubbling of the housing market causes a depression, Bush II later bounces back, numerically speaking, but because of the relative value of money, his gain is far greater than investments show. The relative gain--the increased power wealth can exert over increasingly desperate people--is profound, but the invisible gain--the unspoken layer of relationships, favors, crushed competitors, and darker plans--can only be surmised in (Terran) retrospect.
When we see the soulless scions cavalierly losing imaginary money, we're reminded of how the game is rigged. The latter phrase is most often used in reference to the rich getting richer, while in fact, the opposite is the case: richness is, itself, as nobility once was, a layer of deception between subjects and rulers. The general inability to conceive of complex, genetic, reciprocal, inter-generational relationships and obligations, proves even a subsidiarily complex system--namely, of illusory finance--to be as empty as a movie or a vote. This world is, in truth, a material meritocracy, wherein those groups best able to conceive of, and consistently employ, such complex relationships, are able to dominate less capable groups through the lifelong unspoken doublethink of instinctive participation in such ventures. And in that way, it is fair.