Tuesday, February 2, 2010

The Global Casino

In thinking about the direction that global markets are heading, it occurred to me that they are increasingly operating in an environment very similar to what you see in a casino.

Government needs producers, entrepreneurs, people willing to take risks. These are the people that fund everything else. They are the players. The government is the house. The house always gets a cut. In fact in government, the cut is much bigger than in the casino. Whether you win, lose or draw, you'll pay through license fees, taxes on employees, unemployment insurance, workers compensation, use taxes and other fees. If you win, you pay even more, through income and capital gains taxes.

In a casino, you have the dealer watching the players, someone else watches the dealer. Someone else watches the watcher, and so on. Government is very much the same. There are a myriad of departments, agencies and employees who's ultimate purpose is to monitor the free market players.

Whether it's government or the casino, the system is designed so that the house always wins over time. At least in the casino, you only pay when you lose (and if you play long enough, you always lose). In the market place, you pay to play all the time.

The difference is that in the casino model, players go outside the casino and earn more money, so they can come and play another day. There is no system outside the reach of government where players can accumulate wealth to spend in the marketplace.

We are now in a situation where 50% of the country pays no income tax and the top 1% pays more than the bottom 95%. The number of watchers continues to increase as the pool of players gets smaller. Obviously this is not sustainable. As government seeks to limit risk, it also limits reward. The game becomes less rewarding and less fun. Fewer individuals are interested in playing. At the same time, more and more people are dependent on the house's take. The house keeps promising more while taking in less.

How long can this model continue? Well, I don't see any indications out of Washington or on the world stage that we're going to change direction, so I suppose we're about to find out.

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