The following essay is about the economic system of the world today. One of my readers who approves of the contents refers to "economic wargame" as a metaphor. Much as I appreciate his approval, I disagree that it is a metaphor. This is the real deal. Let me give you a metaphorical overview of my presentation.
The global economy is a giant multilevel, multiplayer chess game. It is however, being played in the dark. The powers that be, have the overhead lights switched off. To have any chance you need a flashlight, and that would still leave the problems of learning the rules and developing your skills. It seems most people only have a vague idea that some game is going on. I hope this essay can be a candle, for ye who curse the darkness.
This equation defines the Net National Product (NNP). It is equated to Gross National Product (GNP) minus Depreciation of CAPital goods (Dcap). The trouble with this equation is that depreciation of durable consumer goods is missing. Random House defines depreciation thusly:
1. a decrease in value due to wear and tear, decay, decline in price, etc.
2. U.S. such a decrease as allowed in computing the value of property for tax purposes.
The fourth edition of Macroeconomics by Robert J. Barro of Harvard University defines depreciation as:
The wearing out of CAPITAL goods over time, often expressed as a fraction of the stock of capital.
When a car rental company buys automobiles, it contri- butes to the GNP and therefore NNP. The same applies to cars purchased by consumers. However, as consumer autos deteriorate over the years the depreciation is ignored, while that of capital goods is registered on the income tax forms of businesses. Although economists have no direct method of obtaining Depreciation of Consumer goods (Dcon), to pretend it doesn't exist when it must be a rather large amount is absurd. How many billions of dollars worth of cars, refrigerators, stoves, air-conditioners, etc., etc. have American consumers trashed since the end of World War II? So the equation should be:
Our economists are pulling a "Bill Clinton" on us. Limiting the definition of depreciation in a way that makes economic losses to the average man disappear into space.
We live in a culture that has used complex machines for 300 years. The first patent on a steam machine, number 356, was issued in 1698. Engineers can test, measure and specify the failure rate of mechanical and electronic devices. A graph of the failure rate over time of a machine follows a pattern known as a bathtub curve.
\ Infant Mortality _-~ \ _-~ wear \ Useful Life _____-~ out \__----------------~~~~~~~~~~~~~~ period MTBF time ------->The curve gets its name from the obvious similarity to the cross-section of a bathtub cut lengthwise up the middle. It starts with a high failure rate dropping rapidly to a minimum. This is when the machine is new and has a high probability of manufacturing defects. The failures during this time are similar to birth defects and are also known as infant mortality. The low point on the curve is where the device is least unreliable and the Mean Time Between Failure (MTBF) is computed. The failure rate remains low for an extended period then rises quickly when the device begins to wear out.
So what does the failure rate of machines have to do with depreciation of durable consumer goods? In classical economics it is common to assume that consumers are rational, possibly for simplicity's sake. But how can rational decisions be made with incomplete information? The only consumer products for which I have ever seen MTBF data are disk drives for computers. Since computers have been primarily used in businesses and losing data from hard disks causes serious problems, supplying reliability data on hard drives is traditional. Where is the reliability data on other consumer products? What about cars, televisions, VCR's? How are we supposed to make these rational decisions? The best information I've seen is in Consumer Reports. They show graphs of failure rates by brand name based on surveys of subscribers. They do not give break-downs by model within brand and usually only cover about eight brands of a product type. Are manufacturers trying to maximize the useful life of their products? If not, are they engaged in planned depreciation, usually called planned obsoles- ence?
In 1937 engineers at Lockheed began designing a new fighter plane. In January 1939 the first P-38 took to the air for testing to begin eliminating design flaws. The P-38 Lightning began service in WWII in April '42, it had two supercharged 1400 horsepower, counter rotating engines, a cruising speed of 350 mph, a maximum of 414 mph and a ceiling of 44,000 feet. The German's nicknamed it "The Fork-tailed Devil". A squadron of Lightnings shot down Admiral Yamamoto over the Pacific in 1943.
Another child of Lockheed was conceived in 1958. It became the SR-71 Blackbird, a spy plane instead of a war plane. Its maximum speed is still classified but is acknowledged as being capable of 2350 mph at 80,000 feet.
If engineers were capable of these feats 60 and 40 years ago, how can yearly variations in machines that roll along the ground at less than 100 mph possibly be exciting. Going into debt to buy useless variations in automobiles is economic insanity. Retooling factories to make parts that are shaped differently but not technologically different increases the cost and therefore the price of consumer products. From 1908 to the mid 1920's the Ford Motor Company made the same machine, the Model T. When introduced the Model T sold for $850. By the time it was discontinued in the mid '20's the price was less than $300 and 15,000,000 had been manufactured. If the engineering capability that designed the Lightning had been combined with manufacturing philosophy that produced the Model T to manufacture cars in the '50's, how good a car, at how low a price could have been sold by 1960?
In an economic wargame society it is necessary to know how to keep score and the tactics of the enemy. An individual's wealth is indicated by his or her net worth. Net worth is assets minus liabilities. Assets are anything which can be assigned a monetary value that can be realized by selling the item. Liabilities are debts which have to be paid eventually. So maximizing assets and minimizing liabilities are basic objectives. However, all assets are not created equal. Some assets maintain or even increase their value over time while others leak like a sieve. If an asset is so expensive one has to go into debt to purchase it, then it is important to know how long the asset lasts; how rapidly it depreciates. Financial advisors tell us that a home is the most expensive purchase that most Americans ever make, followed by automobiles. Hopefully the value of ones home will increase but the value of a car can only decrease. By not supplying reliability and durability data on their products auto makers are leaving consumers in the dark and engaging in information hiding.
If auto manufacturers produced lower cost, longer lasting cars by eliminating useless design and brand variations (Chevys and Pontiacs are both by General Motors), then the savings on cars could be applied to home mortgages. A $100,000 mortgage over 30 years at 8% will ultimately cost $264,153.60, that's $164,153 in interest alone. By paying an additional amount each month a mortgagee can reduce the total interest paid and eliminate years of payments.
Regular Payment: $733.76 Total Interest: $164,153.60
Extra Amount.... #....Approx....Total Amount of .. Added Each Pmt.. Pmt.. Yr..Mo....Interest..Saved $.... 0.00.... 360.. 30.. 0.... $........0.00 50.00.... 287.. 23..11........ 39,907.13 100.00.... 242.. 20.. 2........ 62,458.66 150.00 ....212.. 17.. 8........ 77,433.46 200.00 ....189.. 15.. 9........ 88,262.94Paying an extra $200/mo. nearly cuts the time in debt in half while saving $88,000 in interest. But the money for that extra payment has to come from somewhere. Cars and credit cards are two possibilities.
In 1983 I read a letter that a bank sent to its stockholders. The bank informed its owners that it encouraged the customers to take as long as possible to pay back their loans. This will of course maximize the time over which interest is charged, thereby maximizing the dividends to the stockholders. My bank recently sent me a credit card bill of $0.00 even though it should have been over $100. Their explanation was:
"There is no minimum payment due because last month's payment exceeded the minimum payment due. Your normal payment schedule will resume next month. Finance charges will continue to accrue if the new balance is not paid in full by the due date."
They're content to charge me interest while "graciously" allowing me to "save" money by not paying them one month. Apparently I'm paying them faster than they would prefer. Making minimum payments on credit cards means being in debt for years and paying 2 to 3 times the purchase price for everything bought with the cards.
There is no limit to how dumb consumers are expected to be, some company named Providian keeps sending me an application for a Visa "Classic". It has a $500 limit, 23.99% interest, a $49 application fee, a $59 annual fee and they have the NERVE to say it's a limited time offer. It's the third time I've gotten the offer, I don't see how it could get worse in the future. If some fool were to take this offer and make minimum payments of 3% per month with this interest rate of 2% per month that would amount to approximately $180 + $49 + $59 = $288 paid in the first year and still leave a bill of $440. How many dummies do they find every month?
Buying "assets" that depreciate rapidly with credit cards is screwing oneself coming and going, and the stockholders get to laugh all the way to the bank.
In the mid-1940's John von Neumann, a Hungarian-American mathematician, began inventing and applying game theory to economics. This "game theory" seems to be stuck in academic never-never land and is rarely mentioned in the real world. Lester Thurow, an MIT economist, made implications about it in his book, "The Zero-Sum Society". A zero-sum game is one in which every gain by a "winner" is matched by an equivalent loss by a "loser". A bank's stockholders may be winners while the credit card customers could be losers. One man's liability is another man's asset. The global economic wargame is virtually inescapable. If most worker/consumers don't know how to keep score it is a good bet there are going to be a lot of losers. According to one web site 50% of Americans have a net worth of less than $10,000. Two independent sources claim that more than 60% of the people that get bill consolidation loans to eliminate high interest debt, proceed to charge up their credit cards again.
The Bible says:
The rich rule over the poor, and the borrower is the slave of the lender. Proverbs 22:7
This bluntly states the power that wealth gives to those who possess it. To increase this power banks send out millions of "slave" cards anually. The famous statement, "Freedom requires constant vigilance" is usually assumed to apply to political freedom but it is even more applicable to economics. Having to make rent or mortgage payments every month and possibly credit card payments means maintaining a source of income, usually a job. Wargames are inherently unstable. Companies get bought, companies go out of business, jobs can be lost.
Our educators constantly talk about preparing students for the workforce though businessmen regularly complain about potential employees not being sufficiently skilled. Our colleges eagerly promote statistics which indicate that higher education leads to higher salaries. That's fine for the income side of the equation but how much attention is devoted to the expense side? How many high-school graduates know what net worth is, or understand amortization schedules? What good does it do if our educators only create competent employees who then get fleeced of their hard earned cash? Or could it be that our educators are another set of fleecers? I once saw a TV program which interviewed people who told employers they had college degrees but had actually lied. Many of them worked for years, got raises and promotions. What do you need to know to pretend you have a degree in psychology, or history, or english literature? Spend a few months reading some decent books and who'll know the difference? Was it 60 Minutes? I can't recall. Of course this was years ago and cheap computers and telecommunication have probably made verification of education much easier. This may not work today. Could it be I'm getting too cynical?... ...Nahh!
I'm getting tired of typing so before signing off I'll just suggest doing a little web browsing to check stuff for yourself, like von Neumann and game theory and P-38 Lightnings. You might check out a few books too:
The Screwing of the Average Man by David Hapgood out of print but still locatable
Your Money or Your Life by Joe Dominguez and Vicki Robin too pollyannaish but has its priorities straight
Mastering the Art of War translated & edited Thomas Cleary more detailed than the following, get this first
The Art of War by Sun Tzu translated Thomas Cleary wargamers training manual, time tested
So, to misquote that Vulcan that never explained what it meant to prosper, "Live long and good luck in the economic wargame". No, that's no good, Vulcans don't believe in luck. Make that, "Live long and use killer tactics (in the economic wargame)".
If you approve of the contents of this essay, feel free to copy, email or otherwise distribute.
The truth is a virus, spread the contagion.