Philip Davis'  Instablog

By Phil at Phil’s Stock World

“The average age of the world’s greatest civilizations has been two hundred years. These nations have progressed through this sequence. From bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance, from abundance to complacency; from complacency to apathy, from apathy to dependence, from dependence back into bondage.” -Professor Joseph Olson

Is America, then, living on borrowed time?  Are we so far past our prime and so into old age as a civilization that we are now senile and oblivious to our present surroundings, causing a danger to ourselves and others?  Do we find ourselves living in the past and repeating the same old tales of our former glories over and over again to anyone who will listen?  Are we barely kept alive by various medications that only stave off conditions that are getting worse every day while still imagining that, if there were a need, we could rise up and be strong again — but not today as there’s rice pudding for desert and we don’t want to miss that!

Well I have news for you – This country isn’t old and it isn’t sick but it has been drugged and it has been beaten down and robbed and I am going to tell you that I not only saw it happen, but I think I got a pretty good look at the 10,000 guys who did it.  It was the top 0.01%!  Who are the top 0,01%?  They are the top 10,000 income earners in the United States of America.  If you THINK you are in the top 0.01%, you are not.  People in the top 10,000 know only KNOW they are in the top 0.01% but they know where they rank as well.  The median ANNUAL income of a person in the top 0.01% is $50,000,0000.  They have $350,000,000 in assets and, since 1978, that is an increase of 550% – how have you done the past 30 years?

Now we are (or used to be) a pretty rich country and the median income of the 118M people who earn enough money to pay income taxes is about $50,000 but the cost of living in the same country as people who earn an average of 976 times more than that is pretty high as well (see “The Dooh Nibor Economy“).  Even worse, The 10,000 paid just $112Bn in taxes last year – that’s just over 20% of their income, while the rest of the country, of course, paid a much higher percentage of their income to make up for the shortfall.  Warren Buffett, the third richest man in the world (behind Gates and Slim) paid 17.7% tax and made a point of checking and found out his employees paid an average of 32.9%.

God bless Buffett becuase he made this point in a speech that was given to 400 of the 10,000, who were gathered at a Hillary Clinton fund raiser in 2007.  It got a little attention at the time but then was swept under the rug – as if that didn’t matter.  But it DOES MATTER and it matters a lot – the life of this country depends on it!  If this were just a case of 10,000 people not paying $100Bn in taxes, maybe we could move on and forget it but it’s not.  US corporations, who are (according to the Supreme Court) also citizens of this country, paid just $300Bn in taxes last year on $6 TRILLION in income (5%).  That’s right, if US corporations simply paid the same amount of tax as Mr. Buffett - that would, by itself, be enough to wipe out our deficit.  But, things have gone decidedly the other way in the past 30 years:

Take GE, for example.  GE has $36Bn in sales and paid $431M in taxes (15% of net profits) in 2009.  They also paid out $9Bn in dividends and over $24Bn in 2008 and 2007 and in 2007 they bought back their own stock but, in those three years, they paid -(NEGATIVE) $900M in taxes!  Are you feeling victimized yet?  Does GE use our infrastructure?  Do they use our public airwaves?  Are they protected by our police?  Is our army out there fighting and dying to protect them?  Do they take money from our government?  Do we educate their employees?  This is the INSANITY of the US tax system.

No wonder they are so anti-change – it’s friggin’ great to be GE and have a 304,000 person company that pays no taxes but pays the top 5 guys in the company $50M in cash and bonuses while getting government bailouts for all the poor decisions they’ve made.  It’s especially great to be GE when you control the media – along with fellow top 0.01%’ers likeRupert Murdoch, Sumner Redstone, Bertelsmann, Time Warner and Disney.  Think about it, all the media you consume, all the information, you get is pretty much controlled by these 6 uber-rich entities.  Don’t you think there’s something wrong with that?

Sadly, most people in the investing class don’t see it.  Generally, if you are the type of person reading a stock market newsletter than you are aspirational and, to some extent at least, you have already worked hard and gotten ahead (or your Dad gave you a bunch of cash) so you believe the system is fair, just like the 100 people who walk out winners from a casino think it’s fair while the 10,000 people who lost that day may feel otherwise.  It’s a big country, we have 300M people and every day one of them is struck by lightning but only one in 5 of those people is killed.  We generate about 240 “luckiest people on earth” every year so it shouldn’t be too surprising to you that we still generate some winners in the great game of Capitalism, not matter how much the odds are stacked against you.  How stacked against you are they?  Let’s play some Poker:

The main problem with the system of distribution of wealth in this country is the TOTAL LACK of distribution.  Of course you don’t see that when you are in the deep end of the distribution pool…  10,000 people make 30% of the income in the United States of America and the next 29.99M people make another 40% and the next 30M people make 12% and THE OTHER 240M people have to fight over the remaining 18%.  This is your idea of fair? Let’s say it’s a poker tournament:

• Table 1 has 10,000 people who have $1M each to play with
• Table 2 (top 10-0.01%) has 30M people who have $433 each to play with
• Table 3 (top 20-10%) has 30M people who have $133 each to play with
• Table 4 (bottom 60%) has 240M people who have $25 each to play with.

What are the chances of someone from the lower tables winning enough money to compete at table 1?  First of all, the only way to advance is to take money away from other players, that should be obvious.  Second of all, even if someone from table 2 accumulates the wealth of 1,000 people(who are knocked down to table 4 or out of the tournament entirely), they are still at a huge disadvantage once they have to move up to table 1 and, of course, what effectively happens is the person from the lower table who accumulates the wealth of his neighbors and takes his winning up to Table One – if often swatted back down to nothing as the more experienced, better funded players at the big table make short work of him.

What’s the net effect?  The money that our lucky/skillful player from the lower tables takes from his fellow players in the lower ranks is either left on Table One and added to their very exclusive wealth or, failing to wipe out the new guy, they may reluctantly make room for another seat at the table and chant “One of us” at the initiation ceremony but, what they WON’T do, UNDER ANY CIRCUMSTANCES, is put that money back into circulation in the lower tables – the tournament just isn’t designed to work that way is it?

Eventually, inevitably, when you design a system like that and you refuse to redistribute the wealth back from top to bottom – there can be only one winner in the end but, as I’ve always said, it’s a long, slow game that grinds away for decades and the money goes up and up the ladder and is a long, painful death for those down below, who don’t even realize what they are losing it all until there’s nothing they can do about it.

The joke of the thing (and believe me it is a joke to The 10,000) is how vociferously the players at table 2 and even table 3 will defend the same system that is working against them.  In part, it’s because they are so close to the main table that they can almost smell the money and, for many, that drives them into a frenzy where nothing else matters but getting to Table One and playing with the big boys for their chance at Fame and Fortune.

Why is that?  Why do we feel that way?  Perhaps it’s because we have an entire culture that emphasizes this behavior from birth.  When was the last time you played a game where your primary objective was to help others?  When is the sidekick, the person who helps a hero, not the joke of the movie?  Have you ever seen Superman build low-income housing or watched Batman feed the homeless?  No, we are trained to fight and win and people who don’t win are left in the dust, not worthy of a second thought other than as a foil for the hero to deliver his catch-phrase to.

The media shapes the way we think, the education system shapes the way we think and THE SYSTEM shapes the way we see the World and there doesn’t have to be a grand conspiracy and secret meetings when a bunch of bullies make up the rules to a playground game.  They know what rules are good for them and they know what rules are bad so they design the games so they can win all the time.  Not most of the time - ALL THE TIME.

Goldman Sachs, JPMorgan Chase, Citigroup AND Morgan Stanley ALL had PERFECT quarters in Q1, not having a single loss in the markets in over 250 combined chances with GS alone making $9.74Bn in trading profits without having a single bad day.  Let’s assume GS was the best of the best and that they hedged so well that they are normally up 7 out of 10 days using their system.  What are the odds of a single firm having 63 consecutive wins, EVEN if they already have a 70% advantage?  ONE IN 5.7 BILLION!  And don’t forget, Q1 was a wild quarter with huge ups and huge downs – yet they were NEVER wrong.  We are blessed, on this planet Earth, with a population of 6 Billion, to be in the company of 4 firms that have pulled this off AT THE SAME TIME.  What will it take to wake people up to this scam?

Americans are so deeply vested in the game of capitalism that they can’t see how it’s been perverted by the top 0.01% to deny the other 99.99% any real chance of winning.  Low taxes on the top 10,000 and corporations (including low “death taxes“) creates a money funnel that pools ridiculous amounts of capital in the hands of very few people.  Rather than using that money to build more wealth and create jobs and grow the economy,  the rich tend to funnel their capital into various schemes that protect and grow their wealth, mainly by exploiting the labor of others – creating systems where they lend money with virtually no risk for usurious interest rates or they participate, as venture capitalists, where they take half a business away for a small sum and contribute nothing.  The more they pool the money, the less opportunity for others to have some and the entrepreneurial spirit of the nation is destroyed.  Inheritance taxes and income taxes on the very wealthy are meant to put the capital back to work in the country where it was created – how is that a bad thing?