Here's how Capitalism works

From top-down

• There are entities with balance sheets (to make it simple just think "bank accounts"), that hold tens or hundreds of billions of dollars of "assets"
• These entities are often sovereign wealth funds (a nation-state's or populace's funds), pension funds, or large tech and oil giants
• They allocate and divvy up their investment portfolio across various asset classes (debt, commodities, equities, both public and private)
• As that investment capital is deployed, some of that will go directly into equities and ETFs and some will go to fund managers (hedge funds, private equity funds, venture capital funds, debt funds, etc.)
• Many of these fund managers are compensated on a pretty standard 2% annual management fee on assets under management (AUM) and 20% on carry (or part of the upside if money is made from investments beyond the principal invested)
• Outside the partners and portfolio managers, there are associates and others who primarily make their income by salary (rather than equity upside)
• These "salary workers" are more trading their time for money, while the "equity workers" are more trading their time for equity upside (i.e. they hold or own a % of a business which could generate revenues of more than costs of operating, thus generating cash flows that can be on balance sheet or in a bank account owned by the entity to be distributed out to shareholders via dividends or stock buybacks)
• Often "equity workers" will call the shots or hire managers for the most material decisions of a business (a thing that attempts to make more money than it spends, thus accruing more capital) while the "salary workers" are learning and handling the less material decisions
  • Note that there is not a clean distinction between equity and salary workers since if someone buys and hold stock or an ETF, they are technically now a distanced equity worker benefitting from salary workers
    • For the purposes of communication we draw this distinction since often equity workers are rewarded for the skill of allocation while salary workers are rewarded for "doing" things efficiently
• Since "equity workers" own a % of the upside of the integral of the delta between the revenue cash inflows and cost cash outflows discounted by the discount rate of future cash flows (roughly known as a discounted cash flow or DCF), they are proportionally awarded for "good" decisions made in the present that lead to more cash flows in the piggy bank or distributed to the stock holders in the future
• Since there are various "stock entities" that are both traded in public markets and traded less liquidly in private markets, capitalism creates a way for investors and shareholders and business owners (all holding stock) to share risk (invested time and capital) for future returns
• An easy way to think of this is like a horse race, where each stock entity is a different horse, and the race is based on market capitaliation
• There's some more nuance and complexity (like stock issuances and price per share), but generally that's an easy way to make something that could seem abstract, to be a little more concrete
• This method of sharing risk-return is an evolved form of feudalism toward shareholder tribal maximization
• Since board members often have fiduciary responsibilities to ensure the officers are prioritizing shareholder value maximization, each "equity business horse" (comprised of many people all coordinating to figure out how to increase value, or in other words, future cash flows that increase the piggy bank or increase distributions to shareholders)...
  • Capitalism, is a method for creating an "even playing field" for horses to compete in the free market to offer goods and services that are bought by the market of consumers or businesses...
  • Leading to cash flows...
  • Leading to stock tickers going up or down depending on relative comparables to other similar horses (e.g. tech companies offering similar security solutions) based on market buys and sells
• This capitalistic system - which has evolved from Enlightenment era, the Romans, Genghis Khan, whaling expenditions, the Dutch India company, the Medici, and the Industrial Age - took on more and more complex and sophisticated forms of rule of law, financial instruments, banking, lending, and ways to "create new horses, fund those horses, coordinate people around these horses, and bet on which horses will win"
  • As Yuval Harari points out in his book Sapiens, humans have outperformed other species with the ability to imagine stories to coordinate collective human activity toward ever more complex forms of imagination, coordination, and creation
• The shared stories around entities which people could coordinate around with aligned incentives on a level playing field, where the entities that could produce and sell the most valued goods (as evidenced by consumers or businesses handing over capital for the goods in free markets) for the least cost, created a wealth of prosperity in the forms of more goods available for markets to purchase

So what went wrong?

From bottom-up

• On the journey of human's trading human time for capital, let's begin first with a newborn baby
• A newborn baby enters the world and lives in the most idyllic of circumstances (if the parents are not struggling), where the baby can cry, and care and nurturing shows up in the form of food, cleaning, shelter, and more
• The baby has no responsibilities and the baby is not expected to sell labor and time to help produce "the most goods for least cost"
• As the baby grows up, the baby is shuttled around various school, social, and recreation influences, all the while learning how to participate in the world
• The baby is compared and contrasted against other babies-to-be-humans across various aptitude classes link math, languages, sports, etc.
• Many of these leading toward the baby eventually going to further schooling, often to specialize in a field of academic studies that may lead to entering the workforce and contributing economic activity in return for compensation
• Most times, human workers (if they've been trained and educated well enough to be selected in the job market) are compensated with cash for time (referenced above as "salary workers")
• They may choose to create a new business or see if they can manage others' time and money (such as a business owner or fund) to work as an "equity worker"; however that often requires learning many different and new skills
• If they join a "stock entity" (a corporation analogized to a horse in a horse race against other stock corporations), then often there will be a form of hiearchical management where the "equity workers" are directing and managing the "salary workers" to ultimately generate more future cash flows
• The "stock entity" horses which outperform relative to their comparable peers, will likely have outperformed due to better decisions or coordination to what eventually leads to more cash flows
• In the process of "salary workers" and "equity workers" working together, they often learn from each other, and there are no real "barriers" between them; in fact, many workers at tech companies receive both salary and options or RSU grants (which offers a blended approach)

So what went wrong?

• In the above described versions of top-down and bottom-up capitalism
  • Where capital flows downwards from larger bases of capital to smaller pools of capital to be managed and allocated efficiently so the best "performers" (horses winning the race) are disproportionately rewarded
  • And where humans flow upwards learning the "tools of the trades" competing in the job market in exchange for capital and coordinating together to compete against other "entities" to see if they an outperform other comparable producers of goods

Something changed ...

• After 1971 when the US moved the US dollar off the gold standard (meaning the fiat currency would no longer be backed by gold) thus removing any limiting factors to print more US dollars, we began a gradual transition from Capitalism to Fiatism that is now coming to a head

What is Fiatism?

Who Wins in Printing Money?

• Just like Capitalism is a competition to see who or what can accrue the most capital on a level playing field (where free market actors choose who to pay for what, and ultimately see who is paid the most), Fiatism is a competition to see who can print the most money
  • Since fiat nations care about relative fiat peer performance above all, particularly for the number one position for being able to print lots of money and spend on military more than the next 10 nation-states combined and then whenever something happens you can say "well I have more guns, ships, and nukes"
  • Fiat nations also know that having more guns and nukes means you can set the rules of the game and that the economic productivity and technological superiority leads to being able to set the rules in the future (which also depends on printing and allocating money today)
  • Since fiat nations want to compete into perpetuity against each other to continue to jockey for numero uno and setting the rules of the game
  • The humans all must sit and watch as more and more money is printed and allocated
  • Printing is accretive to the printer and dilutive to the holders
  • This is not that different from watching Godzilla and King Kong fight and the humans needing to continue to build again and again amongst the wreckage, except they don't show that part in the movies

To describe fiat printing, in as concrete and simple terms as possible, consider the following:

• Imagine you and your friend Joe are on an island together, just you two to start
• You can fish well and Joe can hunt well
• So you catch some fish and Joe catches some rabbits
• Sometimes you want some rabbit and Joe wants some fish
• So you begin to figure how to barter and trade 2 fish for 1 rabbit (often based on how difficult or scarce it is to procure the item and what each trading party thinks are the relative trade value between the two items)
• Eventually, you decide to just say a fish is worth 10 seashells and a rabbit is worth 20 seashells
• So instead, you now can sell to Joe 4 fish for 40 seashells, and then trade 20 seashells for a rabbit in the future
• So you and Joe are happy and have created a two-person flourishing trading economy
• However, imagine Margot joins the island, and she figures out how to create seashells out of nothing!
• So soon, Margot creates 1000s of seashells and trades them for all the fish and rabbits, so now you and Joe have only seashells and nothing to eat
• If you and Joe continue to spend all your time producing fish and rabbit and giving them to Margot in exchange for Margot's infinite seashells, you will spend your entire life doing so

In essence, you are a slave to Margot's seashell printing because it costs her nothing, it costs you and Joe your lives

No More Level Playing Field

So what went wrong?

Capitalism is now converting into Fiatism, where things that are bought and sold, can be bought and sold by others with money printers.

There is no more level playing field.