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Author Topic: How The Rich Help Us
Michael Hardner
rabble-rouser
Babbler # 2595

posted 20 November 2002 12:47 PM      Profile for Michael Hardner   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
The rich. The upper crust. The toffs. The ruling classes. The oppressors. Our betters. The family compact.

They're always with us - zooming by in their Italian sports cars, sipping champagne at glitzy charity dinners, or just shutting down factories in our small towns then blasting off in their high-powered private jets.

Yes, the glamorous and beloved rich folk, objects of perpetual fascination... always hanging around us like a glittering carrot at the end of a stick, reminding us that we are just one lottery win away from joining them in their deservedly plush lifestyle. Sigh.

Seriously, though, how do the financial outlays of the super-rich affect our economy ? Obviously their money gets into the economy through taxes and through various forms of direct investment, but how does it work ?

I figure that there are a lot of smart people on Babble who can explain this to us.

This quote from Dr. C is a good starting point:

quote:
Because bond purchases and bank account savings are more intimately connected to investment than the stock market, these have the beneficial effect of connecting savings more closely to investment, which is one of the key drivers of economic growth.
Yes, I know the Keynesians place a priority on investment rather than savings, but you can't ignore savings altogether since they complement and reinforce each other.

So, let's say I'm super-rich. I have $100 million lying around. If I put it into the bank or buy government bonds, does the money go into the economy more quickly than if I just start a new company with that money ? Or does it leveradge more economic activity ?


From: Toronto | Registered: May 2002  |  IP: Logged
DrConway
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Babbler # 490

posted 20 November 2002 01:17 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
Starting a new company qualifies as investment as well. It is more efficient than you putting the money into a bank account or new bond purchases and letting the dough sort of percolate through instead of zooming it in with a laser beam, as it were.

The reason I spoke of bank accounts and bonds is that if you're a rich guy and you don't want to take a lot of risks, what do you do? You go for the guaranteed return. Boom. So someone still uses your money to eventually stimulate real production, but it takes longer.

On the other hand, ploinking the money into a bank account could have deleterious side effects if the money so loaned is borrowed for speculation, or for the stock market (is there a difference? ), so that the direct-startup pathway is even more economically efficient from the viewpoint of stimulating real production of goods and services.

On a scale from least efficient to most efficient in terms of real jobs making real things or doing real services, the stock market and speculative land flips get a zero. Direct business startups or venture capital into new businesses get a 10, while upgrades of plant and equipment to improve production probably get an 8. Bank accounts and new bond purchases (which recirculate your money) get around a 5 due to lag times and so on and so forth.

You can readily see that at the high end of the scale the real economy is favored, while at the low end of the scale the paper economy is favored.

[ November 20, 2002: Message edited by: DrConway ]


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
Michael Hardner
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Babbler # 2595

posted 20 November 2002 01:35 PM      Profile for Michael Hardner   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Dr. Conway, I'm beginning to understand now...

So the so-called internet bubble of recent years was a bit of both, then.

There was stock market speculation and gambling involved, but there were also real companies being started, using real equipment, buildings, and paying real paycheques.


From: Toronto | Registered: May 2002  |  IP: Logged
DrConway
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Babbler # 490

posted 20 November 2002 06:52 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
You could well say that. The Red Hat IPO is a perfect example of a real business getting sidetracked by easy riches in the casino known as the stock market. Who made out like bandits? Whoever bought in at the IPO and unloaded the stock on the sucke- uh, wishful buyers at the peak of about $150 per share.

However, venture capitalists did in fact sink money into direct business startups, and while a number of them failed, some are still going strong. Amazon.com gets a lot of flak for never having made a profit in its existence, but it's still around, which means that the guy who owns it thinks the rate of return will eventually go positive. I believe their books department does indeed post a profit, but backing in the other divisions such as DVDs and so on make the whole thing lose money.

It is also to be noted that the dot-com bubble of the 1990s also caused telecomms companies to massively overinvest in bandwidth, so that the contruction of fiber-optic wire vastly outpaced the need for it. This oversupply is being remedied as new companies purchase segments of this bandwidth for their own use, so we shall see positive benefits from this in the years to come.


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
Michael Hardner
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Babbler # 2595

posted 20 November 2002 07:02 PM      Profile for Michael Hardner   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Does the government track statistics on where investment money comes from ?

It would be interesting to see how these numbers fluctuate with time...


From: Toronto | Registered: May 2002  |  IP: Logged
DrConway
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posted 20 November 2002 07:09 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
The national accounts will give a partial answer, since investment (in the economic sense) is calculated in GDP. It would be broken down into private and government investment, and you can get this from StatsCan.

As for the stock market investment, since share prices change over time a more useful measure is how many shares are held, and by whom. For example, so-called "institutional" investors such as pension funds and the like have gained some prominence as they have sought higher rates of return in the stock market.

I think you would tend to find that the composition of ownership of shares, while changing over time, still allocates the biggest block of shares to families or individuals who are quite wealthy. The Bronfmans and Seagram's come to mind as examples.


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged

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