Tuesday, April 7, 2015

CLA$$ Discrimination

Lately, due to the drama of certain mainstream events, there is so much talk of "racial" discrimination. Yet there are SO MANY other forms of discrimination to consider: age, gender, marital status, lifestyle choices, sexual orientation and my favorite of all: class discrimination (I do so enjoy a good segue from mainstream popular fodder into the topical realm of these annals).

Class discrimination is a form of discrimination which the little people and Giants alike do seem to readily accept as the "natural order of things". We even refer to our tastes as "discriminating" when it comes to the acquisition of them, as in an "acquired taste". The little people do so aspire to reach above their class, and we offer them debt to that end, and they accept that, as do we all. For now.

But the greatest form of discrimination to be understood here is the discrimination between debt held as an asset, vs. debt held as a liability.

You see, my friends, only the lending class (and I use this term in the broadest sense) get to hold debt on their balance sheets as a wealth asset, whereas the little people hold debt as an obligatory liability. Is there a flaw in my thinking here? Let us see...

You may say that banks are able to hold debt as an asset because they have the capital to cover that debt - to which I would say, "Really ??!!" As we understand the nature of debt in this modern era of aging debt, and the derivatives that attempt to hedge those obligations, this is simply not the case, as the lessons of Enron, AIG, Lehman, MF Global (et cetera, ad nauseum) clearly prove.

You may then say that a little person or "shrimp" has a nice house and a nice car, courtesy of the credit offered. And the repayment of those credits/debts are obligations which must be fulfilled over time, since his or her capital was either insufficient, or simply not deployed to purchase those assets immediately and in full. But what if that shrimp holds 50 ounces of bullion grade gold? Who is in the better position long term, the lender or the debtor?

This is where the anti-fractional-reserve-banking zealots begin their lament. But fractional lending, though it is indeed totally out of control today, was perfectly acceptable when adhered to under banking best practices (whatever THEY were) of the past. Remember this, because fractional lending is never going completely away in all forms for as long as human beings walk the earth.

The larger, and much more sinister, issue in this matter of class discrimination, is that the average "investor" (a very special "class") has been rendered unable to tell the difference between the two. This is how the (age-old??) question emerges such that it is asked, "Who is smarter? Credit or Equity Investors"?

Well, frankly ... this is not the right question to ask. But the fact that it IS asked, shows us how well the banking class has managed investor behaviour. And this is perhaps one of greatest feats of behavioural economics ever covertly orchestrated by the lender class, through which to discriminate against the creditor class. "The hand that gives is above the hand that takes."

But what is truly given? And by what rights? What has been taken? And by what means?
If this post leaves you with more questions than answers, then good - that is my intent. But think about that holder of 50 ounces of gold.

Your answer today to the questions above will be different tomorrow.

For greater guidance, may I suggest one of my favorites?


  1. What is credit investor? Does credit investor means lender?
    I confess I am a benefactor of fractional reserve banking. I bought most of my real estates before 2000 and my tenants paid the mortgages. However, I'm lucky that I live in NYC. If I lived in Detroit, I would likely be bankrupted by now.
    I am going to think about this post, it does leave me with more questions than answers.

  2. A credit investor is typically a bond investor, or an investor in any form of debt (credit and debt being synonymous). An equity investor is in stocks or real estate. Where I'm leading you (and I'm glad it got you thinking) is to the hopeless entaglements between the two, and the link at the end of post will take you there.

    If you're a real estate investor, that post will be very relevant for you ...
    Thanks for your comment and have a great day in the BIG APPLE !!