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Capitalism and Adam Smith

Adam Smith is considered by many to be the father of Capitalism. His “The Wealth of Nations,” is a seminal book that represents the birth of free-market economics, but it’s not without faults. It lacks proper explanations for pricing, or a theory of value and Smith failed to see the importance of the entrepreneur in breaking up inefficiencies and creating new markets.

The basic definition of Capitalism is: “an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.”

History of Free Market Capitalism

Capitalism came about following feudalism, which took place during medieval Europe. Feudalism was a European system where military service is traded for land. This was the primary economic system in Europe in the 16th and 17th centuries.

Then came about the Dutch East India Company, which was founded in 1602. This was the first public company and marked a shift toward capitalism. The major economists that developed theories surrounding capitalism include Adam Smith and Karl Marx.

Adam Smith theorizes that capitalism is part of natural human behavior that is aligned in trade and commerce. Marxism says that capitalism is an unusual system that could be replaced with a superior system. Marx believes that capitalism is essentially powerful people taking control.

Is Free Market the Same as Capitalism?

A capitalist system and a free market system are both economic environments that are based on the law of supply and demand.

They both are involved in determining the price and production of goods and services. On one hand, capitalism is focused on the creation of wealth and ownership of capital and factors of production, whereas a free market system is focused on the exchange of wealth, or goods and services.

Some key features of capitalism include the competition between companies and owners, private ownership and motivation to generate a profit. In a capitalistic society, the production and pricing of goods and services are determined by the free market, or supply and demand, however, some government regulation may occur. On the other hand, a private owner in a capitalist system can have a monopoly on the market and prevent free competition.

A free-market system is an economic system based solely on demand and supply, and there is little or no government regulation. In a free market system, a buyer and a seller transact freely and only when they voluntarily agree on the price of a good or service.

For example, suppose a seller wants to sell a toy for $5, and a buyer wants to buy that toy for $3. A transaction will occur when the buyer and the seller agree on a price. Because a free-market system is based solely on supply and demand, it leads to free competition in the economy, without any intervention from outside forces.

The problem, as I see it, is the polarization that occurs between the proponents of Capitalism and Socialism. What is see are advantages and disadvantages of both economic systems. Communism has failed since it devolves into authoritarianism and creates the abuse of by the elite which is rails against. Some Socialist leaning countries have successfully provided and excellent standard of living for their citizens. Capitalism has served our country well in many regards, despite the recent decline in purchasing power by our middle class.

My preference is what I have termed “Participative Capitalism” where the vast majority of our citizens participate and benefit from the system. For more detail on this concept please refer you to my Book:

Letter to the Editor of our local Newspaper

Letter to the Editor of our local Newspaper

February 1, 2020

Dear Editor HDT:

I read with considerable interest your reprinting of the editorial from the Adirondack Daily Enterprise (N.Y.) in the January 19, 2020 edition of the HDT. The title of this editorial was “National debt growth is not sustainable.”

All of the statistics cited are true and alarming. However, the situation is even more dire than represented. I would title my concern: “The accelerating growth in national debt and future obligations are out of control.”

One significant measure that we should be tracking is the debt to GDP (Gross Domestic Product) ratio. In 1981 that ratio stood at 31%. Today that same ratio is approaching 107% an increase of almost 3 ½ times in less than 40 years. Our ability to pay what we owe must come from GDP. Our country’s financial condition is highly leveraged and, therefore, more at risk. The trend in increased deficit spending has been consistent, regardless of which political party has been in control.

It is important to note that there is a difference between the “official” national deficit and the “actual” deficit. Currently, the official annual projected deficit for 2020 is reported at $1.052 trillion, but the actual figure is close to $1.3 trillion. Budget elements for “classified” projects, waste, abuse, and fraud are not included in the most commonly reported number.

Where have the fiscal conservatives gone? We used to be able to count on the GOP to keep spending under control. The approved budget in 2019 has resulted in more than a $1 trillion annual deficit while the country is experiencing a decent increase in GDP, currently projected at 2.1% for 2020. We had large deficits in the past, but usually only when the economy was in recession. What is happening in 2019 is unprecedented. The economy was in ok shape before 2016, averaging a growth rate slightly over 2 %. The deficit-financed tax cut increased the growth rate to a bit over 3%, but that was merely a short-term tactic. The impact on the deficit will last for at least another ten years. The rate of growth in the economy is returning to the level of several years before 2016, and some economists are predicting a further slowdown. The growth rate for the 2nd quarter of 2019 was 2.1%, and it was 1.9% in the 3rd quarter.

Almost none of our elected representatives are willing to address this issue. We continue to approve budgets with no regard to the source of income. I am not opposed to a budget deficit. But when our National Debt exceeds our annual GDP, I think it is past time to cut spending, especially while the economy is still reasonably robust.

While the accelerating deficit is alarming, the level of unfunded liabilities is atrocious. Unfunded liabilities are “future” spending commitments that have no revenues targeted to offset these obligations. According to the Treasury Department, total U.S. unfunded liability includes Social Security (along with Medicare Parts A, B, and D), federal debt held by the public, plus federal employee and veteran benefits. This number currently exceeds $122 trillion and is also accelerating. It amounts to over $1 million per family.

What this means is that future generations are facing a bleak economic outlook. We have been approving future obligations is the short term without any concern for the longer-term consequences. It seems like our attitude is to take care of ourselves today and leave it to our descendants to take care of the debt we have created. Does this seem fair to you?

There are reasonable solutions to balancing the Federal budget, but they will impact several industry segments that are reaping significant profits from our spending habits. The amount of political funding provided by these special interest groups will be difficult to combat. I doubt that our current government representation dares to address this issue. My opinion is that we need stricter, effective and enforceable campaign spending limits and senate and congressional term limits. If career politics were replaced by service to the country then our financial condition would improve. It is important to remember that controlling the current budget is only a start. We must also begin to take responsibility for future spending commitments and ensure that there are income sources to meet these obligations.

Income Distribution & the Middle Class

Income Distribution & the Middle Class

How big is the middle class, and how is it defined? ”The Pew Research Center defines the high end of the US middle class as those earning two-thirds to twice the median household income, which was $60,336 in 2017, meaning middle-class Americans were earning about $40,425 to $120,672”  This group represents about 50% of the families in the U.S. “

“A new survey by Northwestern Mutual found that 70 percent of Americans consider themselves middle class. However, a 2015 report from Pew Research Center shows that the middle class has been shrinking over the past four decades and now makes up only 50 percent of the United States’ total population. One reason for this discrepancy might be the fact that wages have been largely flat while costs have gone up, so, in many places, even those making a six-figure income feel like they’re struggling to get by.

Of the survey participants who labeled themselves as middle class, 50 percent earn between $50,000 and $125,000 annually. Although these Americans consider themselves in the middle, the actual dollar amounts needed to qualify as middle class are slightly lower. Pew Research Center defines the range as adults whose annual household income is two-thirds to double the national median, which was $55,775 as of 2016. This would lower the range to $40 to $110,000 That equates to singles making between $24,000 and $72,000 annually are middle class.”

While the top 10% of income families have enough discretionary income to have limited participation in Capitalism, it is the top 1% (the Capitalist Group) that controls wealth. The majority of middle-class families struggle to provide just one annual vacation. We can expect them to little or no participation as owners of capital. Fully 37% of families have incomes below the definition of the middle class, and another 12% have incomes below the poverty level.

Currently, the middle class is the engine that drives our economy. Has this group been benefiting from the economic prosperity of the past 20 years? While GDP has increased from $9.6 trillion to $21.3 trillion (a 120% increase), average wages have only increased by about 10%. Where did all that additional GDP go?