8

Much of what we offer here is not new. It our experience that Modern Finance does not always keep the choices clearly separated, and precisely articulated. For too many, money and savings and investment become a jumbled-up mess that they cannot tease apart.

Mostly here, we are just teasing apart the different threads, to make it easier to see what our different choices are, and to understand how and why they are different.

The Capitalisms exist because, as people, we learn in order to earn, and earn in order to spend currently, and to save, for later. It’s what we do. It’s how we prosper.

Personal prosperity requires sufficient savings to provide for our various needs. These include:

• caring for our own larger or later spending needs
• caring for others
• contributing to the public health, the public safety and the public welfare
• managing our money
• putting our money to work, making more money, opportunistically and idiosyncratically
• programmatically providing certainty against certain of life’s uncertainties.

Caring For Own Own Larger or Later Spending Needs

This is what most people probably think of when they think of savings. We all “save up” for things; and put money aside “for a rainy day”. These can be major purchases, like buying a first home, or a summer home; or they can be major life events, like college, and weddings.

This may well constitute the bulk of “savings” in many personal and household budgets.

It is money that is taken out of the stream of commerce for a while. It may, or may not become capital available for investment during the interim when it is not circulating back into commerce.

Caring For Others

Many personal and household budgets include allowances for donations, to one’s church, or to support a favorite cause. Wealthier families will make larger donations. Very wealthy families will make sizable contributions to existing endowments, for their church or their alma mater, or to establish a foundation of their own, to make grants to support their favorite causes.

Many smaller donations of this kind do remain in the stream of commercial cash flows, being used by their recipients to meet their ordinary and necessary expenses of being. Larger donations often add to, or become the core, of endowments – for education, for religion, for the humanities or for humanitarian programs. When they do, they leave the flow of commerce, and serve the functions of capital.

Contributing to the Public Health, Public Safety and Public Welfare

We are talking here about taxes to government, to fund spending by government.

Many people will feel that taxes are not really “savings” because they are not technically voluntary. When a government assesses a tax, we are required by law to pay it. To some, that feels like compulsion, and can feel oppressive. Most accept it as a necessary way to pay for social services that are not easily funded through commercial exchanges, of things for money. Examples include the cost of lawmaking, the cost of law enforcement, and the cost of the court system. More modern examples include municipal fire and emergency services, roads and bridges, the interstate highway system and a portfolio of social safety nets, although these can be quite controversial within some populations. The cost of war, of course, is the paradigmatic example of a social service that cannot be effectively funded through commercial exchanges.

As with donations, taxes sometimes remain in the flow of commerce, as governmental agencies and authorities use current tax receipts to pay the current costs of current government, but taxes can also leave the flow of commerce to become capital for investment . As we will see, Taxing & Spending is one of The Six Capitalisms, and is an important part of how enterprise gets financed in almost every community.

Managing Our Money

Most people earn in money, spend in money and save in money. Money is really just a number. So we have to keep count of our numbers: how much we earn, how much we spend, how much we save; what we invest in, and what we earn on our investments. Money is also a negotiable instrument. It is THE ultimate negotiable instrument, in that it can be legally transfer through a simple physical giving. Possession is all it take to have the legal power to spend money. So, it is necessary to safeguard our money, especially any savings we have accumulated, and to manage transfers that we make to spend or invest.

Putting Our Money to Work, Making More Money

As people accumulate savings in excess of current spending needs, whether through our own initiative or by gift or inheritance, we begin to think about putting that money to work, making more money, by investing it as capital in visionary leaders of creative enterprises who will use our savings, contributed as capital, to generate cash flows through commercial exchanges within a social contract with popular choice, and share that cash flow with us, in exchange for their use of our savings as capital in their enterprise.

Certainty Against Life’s Uncertainties

All saving is in some measure action to provide ourselves with some measure of certainty against certain of life’s uncertainties. We “put something aside for a rainy day”. We play the lottery, or invest in enterprise in hopes of “striking it rich, so we don’t have to worry about money any more”. For many of us, the biggest, and most anxiety-inducing of those uncertainties relate to life itself: what if we die too? what if we live too long?

Over the course of history, humanity has evolved The Six Capitalisms, each focused on meeting, particularly well, one of these savings needs by aggregating savings from many different individuals sharing the same savings need, and deploying those aggregations as capital invested in enterprising visions that align with the shared purpose of those aggregated savings, each speaking its own language of Finance, as the language of money.

Purpose for Saving	Form of Capitalism	Value in Enterprise	Language of Finance/Money
caring for own	Family & Friends	IMPACT	Patronage
caring for others	Church & Philanthropy	MISSION	Grants
public health, safety & welfare	Taxing & Spending	POLICY	Contracts and Subsidies
managing money	Banking & Lending	PROFITS	Credit and Collateral Values
using money to make money	Exchanges & Funds	GROWTH	Speculation
programmatically providing certainty against certain of life’s uncertainties	Pensions & Endowments	PEACE	negotiated agreement on prioritizing cash flows

Caring for our own with Family & Friends, patronizing enterprise for IMPACT

Savings we accumulate to provide for our own future spending needs, generally, and those of our own household, extended family and personal friends, can make use of multiple forms of Finance. Some may be held in cash, ready to hand to meet emergency expenses, or placed in a bank, for safekeeping, while also available for emergencies. Larger amounts may be pooled with the savings of other family members or friends, to invest directly in enterprises, using that money to make more money, directly. Wealthy families often invest in this way, in family businesses, in the business of friends or more speculatively, in businesses of visionary leaders they meet through social networks, such as the Angel Networks that have become popular within the Start-up communities, especially in the United States.

This is the most flexible of all the forms of Finance, the most flexible of the Capitalisms. It is able to make use of all the different enterprise design technologies, including negotiated agreement cash flow sharing, lending and securitization for speculation. It is also the personal. Investment decisions are made for IMPACT that aligns with the personal values of the persons who make up the Family & Friends grouping that is making the investment. Because it is personal, it is also exclusive: it is open only to family members and their friends. And it is accountable only to those family members and friends.

Caring for others through Church & Philanthropy, making grants for MISSION

Many enterprises get organized to aggregate surpluses that we save as individuals, and give to others who we feel need and deserve our help. Religion is a big part of this social structure of caring for others. Many give all or most of what we save from our own spending for this purpose to our Church, for their use in doing the right thing, and spreading their own Mission. Others make more secular contributions to humanistic foundations that champion various causes that inspire us. And there are many who give to schools and universities that they admire or otherwise feel an affinity for.

Some of this giving remains in the flow of commerce, used by Church & Philanthropy to meet their own current spending needs, or to give currently in furtherance of their Mission. Some gets accumulated inside endowments that are invested to generate cash flows that provide, or supplement, current cash for operating expenses and Mission giving.

Contributing to Public Health, Public Safety and Public Welfare through Taxing & Spending, on POLICY

Some may argue that paying taxes is not saving. And there are many contexts in which that characterization would fit well. For our purposes, exploring Finance as the language on money, it works well to see Taxing & Spending as a form of Finance, a social structure for aggregating savings from individuals, and deploying those aggregations as investment in enterprise.

Those “savings” are, of course, compelled by law. They are not voluntary or discretionary. Good government will spend wisely and spread the tax burden fairly; bad government, not so much. Ultimately, all government is accountable to its people, whether through peaceful means, at the ballot box, or less peaceful means, at the barricades.

In either case, Government, in its Taxing & Spending functions, is an important social structure of Finance for circulating surpluses, well or not so well. Each of us, as taxpayers, participates in that function.

Managing Money through Banking & Lending, in pursuit of PROFIT

Money is a fact of modern life, and money has to be managed. We have to keep track of it. We have to keep it safe. We have to use to pay for the things we need and want to live well and pursue our own personal happiness.

Banks aggregate savings by providing these services: safekeeping, accounting, and payments to others.

Banks deploy these aggregations as loans to people and enterprises that help us manage temporary mismatches in our own personal or enterprise cash inflow and outflow dynamics. We borrow today, when we don’t have the cash, and repay the borrowing, with interest, later, when we have earned surpluses at some future date. If we borrow wisely. If we borrow unwisely, we will spend today what we don’t earn until tomorrow, leaving us with less to spend tomorrow.

Banks collect interest on loans they make against the credit and collateral of borrowers, and use that interest, in part, to pay interest, in turn, on individual savings held on deposit.

In this way, Banking & Lending empowers individual savers to use the money they save to make more money. Through the power of compounding, of earning interest that remains on deposit to earn more interest, over time, even small savings can grow to become large sums of money for spending later.

Opportunistically and Idiosyncratically Putting Money to Work Making More Money through Exchanges & Funds, speculating on GROWTH

Money we save because it is truly surplus to our current spending and purposeful saving choices, or to accumulate over time to fund a large and special purchase, can be put to work making more money – sometimes a lot more money, not always over a terribly long period of time – by speculating on shares over the Exchanges, directly or through Funds.

The paradigm is Corporate Finance. This involves commercial enterprises being owned by corporations as a legal form of ownership for investment that divides corporate ownership into a large number of equal shares which can be bought and sold as commodities, in small lots or large trading blocks, opportunistically, idiosyncratically and anonymously, for a market trading price.

Corporate law does not require corporations to grow. Corporate Finance does.

The pattern is that all or most of the cash flow that flows through an incorporated enterprise is retained inside the corporation, and used to grow the bureacracy that manages that enterprise, and the cash flows that flow through that bureaucracy. As cash flows flowing through a corporate bureaucracy grow, and the bureaucracy that manages those cash flows grow with them, the market clearing price for ownership shares in that bureaucracy does up. Buyers who bought at one price can become sellers at a higher price, as new buyers buy in, expecting, in their turn, to become sellers to yet more new buyers at yet higher market clearing prices.

We, as individuals, can participate in these markets by buying shares when we have some savings available for investment, and selling those shares, for a hoped-for higher price, when we need that money back, to spend on something else (or if we choose to make a different choice to invest in a different corporation with different growth prospects).

This allows us, as individuals with relatively small amounts of savings available for investment for relatively short – and sometimes suddenly cut short – periods of time to participate, indirectly, as investors in large scale, long-lived industrial or other mass market enterprises that we otherwise could not invest in directly.

Programmatically Providing Certainty Against Certain of Life’s Uncertainties through Insurance, Pensions & Foundations, negotiating agreements on prioritizing cash flows for PEACE

Actuarial risk pools for insurance and retirement are proven reliable social structures for providing certainty against the uncertainties of dying too soon (insurance) or living too long (retirement pensions). Each pool uses the science of statistics, the mathematics of probabilities and the Laws of Large Numbers to transform the unpredictability of when any one of us, individually, will finally draw our last breath into a flow of predictable claims from a statistically significant pool of statistically similar individuals. We each pay in based on average experience, and take out based on our own actual experience, but at the level of the pool pay-ins and pay-outs are both done on averages across the entire population of pool participants.

Except that “Houston, we have a problem.”

In order to reliable deliver predictable certainties on a statistical basis, the integrity of the statistical assumptions has to be maintained. And in one case, the case of pensions, that is not the case today.

The problem is that back in 1972, Wall Street convinced the legal community that it was time to revisit, revise and update the legal standards of fiduciary prudence that regulate the exercise of fiduciary discretion by the superfiduciary stewards of society’s superfunds. In our thesis, society’s superfunds include actuarial risk pools for insurance and retirement, as well as school/university and charitable/foundation endowments and sovereign wealth funds.

For historical reasons, however, investing by insurance risk pools is not regulated (at least in the United States) by the common law of fiduciary duty; also, sovereign wealth funds are not technically fiduciary funds, because they are owned by a sovereign government, and so accountable only to the standards of performance the sovereign chooses to impost upon itself relative to their investment.

So, our thesis focuses mostly on Pensions & Endowments, as superfiduciary superfunds governed by the laws of fiduciary prudence.

And this part of our thesis zeroes in particularly on Pensions, because as actuarial risk pools, pensions must make certain assumptions about cash flow contributions from investment earnings. And those assumptions today are not really being met.

Although Endowments are Superfiduciary Superfunds governed by the laws of fiduciary prudence, they are not actually actuarial risk pools. They are really just really, really big savings accounts set aside for very specific purposes. So, while the problems that are causing pensions not to earn their actuarially assumed minimum cash flows are also impairing the potential for generosity of Endowments, they do not necessarily represent an existential threat to their continued existence, or the continued pursuit of their endowment MISSION. If they earn less, they have to spend less. But, at lease in theory, they can still spend meaningfully.

For pensions, the problem is existentially life-threatening, because if their cash flows from investment do not meet their actuarially assumed minimums, the pool will shrink, and eventually fail.

The reason pensions face this existential threat today is that back in 1972, Wall Street convinced them that if they invested in the stock market on a balance portfolio basis, they could earn, on average, over time, about 10%. After allowing for portfolio management costs, that meant an actuarial assumption of investment earnings in the 7.5-8% range would be prudent, and increasingly plans were priced accordingly.

For a time, this looked like it was working, but then we had the Dot Com Bubble of the 1990s and the Great Recession of 2008, during which many, many pension funds suffered substantial losses on their investments, and have been frantically struggling to catch up, experimenting with more and more aggressive trading strategies in hopes of rebuilding their pools to statistically sufficient size. Some are doing better than others. Many are not doing very well at all.

Then there is this problem. History shows that booms on Wall Street always, sooner or later, go bust on Main Street, with catastrophic consequences for enterprise and investment. What makes us think the current boom on Wall Street is not also eventually going to go bust on Main Street? And when it does, how will that affect an already pension structure?

More importantly, why are we even doing this? Given the structural instability of the Wall Street social structure for investing through speculation, why are we investing our pensions – or our Endowments, or, indeed, any of our Superfiduciary Superfunds – on Wall Street at all?

Significantly, insurance risk pools, at least in the US, for the most part do not invest through speculation on Wall Street. The reasons why are instructive as to the current problems we have with Pensions, and how those problems can be solved.