Differing Views of Wealth: How Insiders and Outsiders Approach the World of Money

What’s the latest news? The great battle continues… Dow down 53. Gold up $23.

Up vs. Down

Zombies vs. Producers

Inflation vs. Deflation

The feds vs. the market

Expansion vs. contraction

Centralization vs. decentralization

Bull vs. Bear

And no one knows exactly how it will work out. Some are betting on a ‘recovery’ and a new bull market. Others have put their money in gold or cash…expecting more crises and more calamities.

Mr. Market is determined to deflate the debt bubble. The feds are determined to stop him. One destroys paper credits. The other prints more of them. The outcome is still in doubt.

Another way to look at this great battle — it’s a fight between the outsiders and the insiders. The outsiders are unruly…uncontrollable…and unpredictable. They’re the creative destroyers that Schumpeter was talking about, always finding new ways of doing things…and destroying the old ways. But in their chaotic, wham-bam approach…they actually build wealth.

Every new industry is created by outsiders. Henry Ford was the son of refugees from the Irish potato famine… Steve Jobs was a college dropout…who admired Edwin Land, another college dropout who invented the Polaroid film industry. Silicon chips were developed with money from potato farming.

But once the founders are gone, the insiders take over. Tech companies pass out of the control of the techies and into the control of salesmen and accountants. Business school grads take over. Their goal is not to create new wealth, but to preserve and expand their power, their status, and their wealth. They hire lobbyists to get special favors. They support laws to prevent competition. They favor regulation and licensing to keep out upstarts and give generously to politicians of both parties.

Outsiders create new wealth. Insiders protect and redistribute it — mostly to themselves.

In last week’s news was an interesting item. From John McCormack of The Weekly Standard:

General Electric, one of the largest corporations in America, filed a whopping 57,000-page federal tax return earlier this year but didn’t pay taxes on $14 billion in profits. The return, which was filed electronically, would have been 19 feet high if printed out and stacked.

The fact that GE paid no taxes in 2010 was widely reported earlier this year, but the size of its tax return first came to light when House budget committee chairman Paul Ryan (R, Wisc.) made the case for corporate tax reform at a recent townhall meeting. ”GE was able to utilize all of these various loopholes, all of these various deductions — it’s legal,” Ryan said. Nine billion dollars of GE’s profits came overseas, outside the jurisdiction of US tax law. GE wasn’t taxed on $5 billion in US profits because it utilized numerous deductions and tax credits, including tax breaks for investments in low-income housing, green energy, research and development, as well as depreciation of property.

“I asked the GE tax officer, ‘How long was your tax form?’” Ryan said. “He said, ‘Well, we file electronically, we don’t measure in pages.’” Ryan asked for an estimate, which came back at a stunning 57,000 pages. When Ryan relayed the story at the townhall meeting in Janesville, there were audible gasps from the crowd.

Ken Kies, a tax lawyer who represents GE, confirmed to THE WEEKLY STANDARD the tax return would have been 57,000 pages had it been filed on paper. The size of GE’s tax return has more than doubled in the last five years.

The insiders get tax cuts; the economy gets zombified. GE pays an army of lawyers and tax accountants to dig into the tax system. It strikes gold. The economy gets shafted. GE pays no taxes. The lawyers and accountants — presumably smart gals and guys — spend their time doing zombie work. Society is poorer. But the zombies get their meat.

“Wait a minute,” Elizabeth protested. “The accountants and lawyers aren’t zombies. They’re doing real work, protecting GE…which is a wealth producing business from taxes.”

“Yes…they’re honest, decent workers,” we replied. “Like many government employees. And millions of other people. They’re good people doing bad work. They may be doing it well. They may be diligent and hardworking. But they have been zombified.”

As the economy is taken over by zombies, more and more people are needed to do the zombies’ work — shifting more and more of the economy’s output to the insiders.

The insiders rig the system for their own benefit. The rigs — each one of them a form of price-fixing or central planning — weaken the system. In today’s battle, the insiders fight to protect it.

They do not want failed institutions to disappear. Instead, they want them subsidized.

They don’t want failed regulations eliminated. Instead, they want more regulation.

They don’t want to fire the failed managers; instead, they promote and reward them. Tim Geithner was head of the New York Fed. The biggest debt bubble in history grew right under his nose. Now, he’s got the top financial job in the US — Treasury Secretary. Larry Summers advised the Clinton Administration to encourage more debt, speculation, and leverage; now he’s head of Obama’s team of economic advisors.

And in Europe, the Goldman bunch — who might have been hung for sinking banks, pension funds, and sovereign nations under debt — is brought in to ‘solve’ the crisis they caused. They’ve got their men in the top job in Italy and at the European Central Bank.

The insiders’ goal is simple enough — to keep the money flowing to…well…the insiders!

The outsiders, on the other hand, don’t have a goal. They are like the OWS…or the market itself. Wild, disorganized…with unclear intentions and uncertain beneficiaries. You can’t support them…because you don’t know who they are or what they want. They’re outsiders!

The insiders represent the past. The outsiders represent the future.

And how will it all turn out? In the end, the future will come…whether we like it or not.


Bill Bonner
for The Daily Reckoning

The Daily Reckoning