By John Ballard
Years of cafeteria management gave me a somewhat primitive understanding of how business works. Since I didn't climb the corporate ladder my appreciation for middle management was, I must admit, somewhat jaded. Mid-level bosses were often a pain in the ass, especially when they glossed over corporate mistakes or failed to recognize good work on the part of subordinates. And the big shots at the top, all smiles and handshakes whenever you met them, were ultimately responsible for corporate success and fully capable of boosting your ego one day and closing your store the next.
The company could close your store because before the store could open for business a lot of money had to be spent securing the land, building the store, training the staff, etc. The first meal that was served was a very expensive risk, costing somewhere in the neighborhood of several million dollars to serve. That's a lot of money to spend to serve a meal for six or eight dollars. And it takes a lot of those meals to recover those millions. And whatever part of those millions was borrowed added to the cost as interest on that debt, something called debt service. After a certain time if a store is losing money, like the bar tender telling a patron "Sorry, dude, but you've had enough" the company is obligated to close the door.
That about sums up all I know about business. Anything more is smoke. But one reality remained with me every day that I worked: you gotta put out money to make money. There are two kinds of investment (i.e. "putting out money"): operational and capital.
Operational investment is easy to understand. If you don't buy it you can't cook it. And if you don't cook it you can't sell it. And if nobody buys it you lost it. Same goes for payroll, cleaning supplies, utilities, and all the rest, even rent and taxes. Some are controllable, others are not, but all fall under the heading of operational expenses that must be met if the operation is to remain solvent.
Capital investment is also easy to understand but most people tend either to forget that it ever happened or confuse that money with operational expenses. Capital investment is the money put up to start the business. Money used to start a business is called venture capital. Once the business is up and running, further big investments are called capital investments. Confusing capital costs (which are depreciated, as opposed to operational costs, which are expensed -- but that is an accounting issue...) with operational costs is a serious mistake because without capital investment there can be no operational investments or expenses.
Cutting to the chase, this year's elections are heavily burdened as usual with economic angst. Candidates try their best to look, dress and speak as though they were business managers. We have one whose main claim to success is his ability to acquire wealth, enough for himself and anyone who invests with him to leave their financial troubles behind. (The unspoken implication, of course, is that those who don't support him may be up the creek without a paddle if he wins the election. I think that much we can believe.)
(The rest of this post is about capital costs, not operational costs.
Hold that thought.
Operational costs are critical, but without capital investing no amount of operational excellence creates enough value to fill in when capital is needed to proceed. No matter how much money you make with one popcorn machine, if you never get any more machines you will always be limited to what one can do.)
Lost in the discussion is the difference between venture capital and equity capital. Both can be thought of as capital investments, but the difference is that the venture capital is very risky for the investor. If the venture fails, the investment is lost. In many ways it's like that old saying about throwing a party and nobody came.
Equity capital, on the other hand, is less risky.
Equity capitalists are to business what bail bondsmen are to the criminal justice system. They don't deal with new ventures. Their business is dealing with businesses that are in trouble. Whatever they put up first (posting bail) is secured by whatever assets the troubled company has. That "investment" is fairly safe. Unless someone fails the due diligence test, the worst case scenario for the equity capitalist is breaking even.
What we are witnessing in the political arena is a struggle between equity capitalists (Republicans) and venture capitalists (Democrats).
It is no mistake that Bain is NOT a venture capital outfit. They were/are not in the business of starting companies. Their specialty is making companies profitable that are in trouble. Mitt Romney is the perfect candidate to represent his party. LIke "investors" whose personal risk is limited to paper losses the GOP lays claim to all existing assets, refusing to risk anything that might be called venture capital. The terms Keynesian and Austrian are tossed around to make various positions look erudite, but in the end it all comes down to ordinary aversion to risk. And Republicans for whatever reason are at this time totally risk-averse. Like equity capitalists (or bail bondsmen) they want to know ahead of time that anything they risk will be secure -- otherwise they are ready and willing to send out bounty-hunters if necessary to protect or recover their assets.
What is being overlooked is the importance (and return on investment, by the way) of the country's infrastructure. Go back now and look at the difference between operational expenses and capital expenses. The power grid, roads, bridges, and other expensive public investments are not operational expenses, they are capital expenses. Money spent now for infrastructure (unlike emergency funds following floods, fires or tornatoes) is an investment that will be recovered over years and decades. And like an old car the day will come when it, too, will have to be replaced. But in the meantime, the returns on any national capital investment will be coming in for years.
Here are two readings for this morning that have prompted my little essay about money. One has to do with the infrastructure issue -- what I think of a the country's capital investment (categorically different from operational investments). The other is a summary of the various outcomes when whole countries "go broke." We don't have a good vocabulary to discuss issues of "sovereign debt." In may ways the term is ambiguous because there is no global benchmark for either lifestyles or currency. There is simply too much variance from top to bottom. In a world of food shortages, only in America (and some parts of the South Pacific with atypical gene pools) do we find fat poor people. And in South Asia there are people who would be considered homeless in America and have bicycles for transportation who also have cell phones. So with those images in the background, consider these two items.
?Repairing Roads Can End All Kinds of Gridlock
This is about capital investing at the national level, as opposed to operational spending.
The most important single step toward a brighter future is to repair our economy as soon as possible. And one of the surest ways to do so is a large and immediate infrastructure refurbishment program.
This path would not require Republicans to concede the merits of traditional Keynesian stimulus policy. Nor would it require them to abandon their concerns about the national debt. In short, the philosophical foundation for an agreement is already firmly in place.
If it doesn�t happen, the coming political campaign will provide a golden opportunity to learn why. At the inevitable town hall meetings, voters who are tired of gridlock should ask candidates when they think that long-overdue infrastructure repairs should begin. The only defensible answer is �Right now!� Candidates who counsel further delay should be pressed to explain why.
In December 2006, Britain made its final payment of $84 million on a $4.34 billion loan from the U.S. that was made all the way back in 1945. Germany wasn�t the only country to go bankrupt after WWII. This money allowed Britain to stave off its total collapse after devoting almost all its resources to the war for over half a decade.
To put this in perspective, $4.34 billion in 1945 is roughly equivalent to $140 billion today, an amount that was double the size of Britain�s economy at the time.
Had the U.S. not made this loan, the British economy would have been thrown into a tailspin, causing huge implications, not only to the UK, but also to countries around the world.
Today we see a number of nations on the verge of bankruptcy. But what does this mean for our global economy with heightened awareness of every micro-decision, and fluid capital markets that can react to virtually every whim?
To be sure, many countries have gone bankrupt in the past, and many more will default in the future. So who�s next, and what kind of problems will a nation�s insolvency cause?
If you think we are past the point of more country�s going bankrupt, think again.
Most national bankruptcies are like Bernie Madoff on steroids. What once seemed like a good investment suddenly turns into a giant ponzi scheme with the working public footing the bill.
The problems become exacerbated when there are fewer people working and many more retired.
The growing crisis in Greece, Spain, Portugal, and Italy are but the tip of a much larger iceberg.
The question then becomes a matter of how the problems are dealt with.
Do they deteriorate into something tantamount to a civil war, like what happened in Argentina? Or can they be handled in a more civil manner like Iceland?
And how do the modern communication systems we have on the Internet factor into this equation?
Social networks like Twitter and Facebook all heighten awareness, and countries close to collapse have already begun to experience a brain drain, with the most wealthy and talented moving to more stable communities.
In today�s fluid environments, people and resources can react instantly to any adversarial conditions. So if taxes go beyond a certain pain threshold, people will simply fold their tent and move elsewhere.
This second reading is a reminder that what happens in America is not unrelated to what happens in other parts of the world. I'm sorry, Virginia, Santa has a lot more on his plate than just us.
A lot of very smart people can't agree on what will happen when the Greeks leave the Euro (which looks more and more like a fairly sure outcome) or what may happen if Spain and other countries decide to follow.
The price of gas is down thanks to slowdowns in both China and Europe resulting in lower demand. Political types rattling on about Keystone have been marginalized almost to the edge of the birther crowd thanks to the fact that the US now has the biggest oil reserves in 45 years and is a net exporter of refined petroleum products.
There is also a lot to think about with the sparkle fading on the Arab Spring and the horrors unfolding in Syria.
As usual I want to end with words of optimism, but again, nothing comes to mind.
George Soros gave a speech yesterday that has my Twitter feed sparkling with links. Numeerous unrelated sources, but nobody has summarized what he said in simple language. They all agree, however, that whatever it was is important and everyone is supposed to read it.
I haven't read it yet but I will tomorrow when my mind is more clear. Here is the link...