Getting Something for Nothing Costs

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Created: Monday, 08 August 2011 16:35

Written by Tom Lipp

We all want it, but where can we get it?

Something for nothing. We all want it, but where can we get it? Is it even realistic? Recently I read a quote from Mark Mobius, Executive Chairman of the Templeton Asset Management’s Emerging Markets Group, that another financial crisis is inevitable because causes of the previous one haven’t been resolved.

...another financial crisis is inevitable because causes of the previous one haven’t been resolved.Mobius was addressing the Foreign Correspondent’s club of Japan in Tokyo in response to a question about price swings: “Are derivatives regulated? No. Are you still getting growth in derivatives? Yes.”

Derivatives are financial instruments that derive their value from an underlying security. Let me explain. Derivatives are like pieces of paper with no economic engine, no value in and of themselves. Here’s an example. Let’s say the average Alberta single-family home costs $350,000. If someone wanted to participate in the Alberta real estate market without actually buying a house then he could buy this official-looking piece of paper. He wouldn’t have all the hassle of house maintenance, but might make money in the housing market. Let’s pretend he can buy a piece of paper that says he owns a house even though he actually does not have a house. The value of the paper, a house coupon, is based on the value of something else, namely house prices. Simple. House prices might rise to $400,000. On the other hand, some folks might think that house prices will fall and they might want to buy discounted house coupons for $300,000. Now let’s hire sales agents to promote house coupons and pay them “respectable” commissions. Soon many more people will be very interested in Alberta housing than just the ones living in them.

According to Mobius, as recently reported in Bloomberg, the total value of derivatives in the world exceeds total gross domestic product by a factor of ten. So imagine if there were ten times as many pieces of paper floating around for Alberta housing as there are houses. What would happen to the actual houses if all those papers were suddenly burned? Nothing. Now what would happen to the price of those houses if all those papers were suddenly burned? Who knows? One thing is sure: House prices would swing wildly and likely drop, even though the houses themselves were totally untouched. A spirit of speculation can artificially swing financial markets in either direction.

To some extent those who anticipate a rise in house prices could offset the pressure of those who anticipate a fall. Some people would argue that derivatives serve a necessary function of financial markets. I disagree. I believe that derivatives are born from a spirit of speculation and a greedy desire to get something for nothing. No sweat, no work, no thinking, no effort, but give me something of real value.This spirit of speculation has grown like a deadly cancer...

This spirit of speculation has grown like a deadly cancer, not just in financial markets through the popularization of derivatives, but also in everyday living. Lotteries, which were once illegal in Canada (imagine that) are now being promoted by the very governments that once outlawed them. (Before 1960 and the “immigration” of the Irish Sweepstakes to Canada, lotteries were forbidden. Irish Sweepstakes, named Irish Hospitals’ Sweepstakes in full, was authorized by the Irish government in 1930 to benefit Irish hospitals.)

It gets worse. Even Christian organizations use door prizes, pulling names out of a hat. I usually don’t win but get my hopes up every time a ticket is drawn. It makes me wish I was a door. What ever happened to nurturing the work ethic and encouraging planning and production as a means to get ahead? When I have prizes to give away at a seminar, I prefer to reward the earliest arrival or the ones who ask or answer a question first. I prefer to recognize merit and effort rather than use randomness to decide who gets the candy.

Recently, I went shopping at a large grocery store and found a contest to win $1,000 worth of groceries. Who pays for that prize? I just did, at least for some of it. When the spirit of speculation rather than the drive to be industrious infiltrates even the food chain in grocery stores we have a real problem.

Rather than promoting an entrepreneurial attitude, our culture is actively promoting gambling and get rich quick schemes requiring little or no work. We all enjoy getting something for nothing, but when we think about it, someone had to pay or work for what we got. The global financial crisis will not be solved until we repent of the ‘something for nothing’ attitude.

And let’s not think that the problem lies only in Greece where irresponsible financial behaviour has let to riots in the street. I can’t help but think of Proverbs 13:18: “Poverty and shame will come to him who neglects discipline.” Ouch. I’ve never really liked that word—discipline, but it sure produces good results.