Daily Times

Admittedly, at first blush, the title appears to be a classic oxymoron; after all, when you are rich, money should be able to buy everything, dilemma included. And let’s not get sucked into the philosophical debate relating to money’s inability to buy true happiness; that particular idiot, not idiom, was invented by the rich to placate the poor. After all, keeping the fools happy is a necessary requirement for the smooth functioning of the class system. Have you ever seen a person unhappily living in the lap of luxury? Imagine the power of these intricately printed pieces of paper that can even buy true democracy.

But before we get to the dilemma part, let’s sift through the static. If you are counting days towards the end of the month to make ends meet, irrespective of your material holdings, you are not rich. If you still dream of buying a luxury car, you are not rich. If you still have to prepare a budget for your next family vacation, you are not rich. If you went out and bought your own sacrificial animal, irrespective of the price tag, you are not rich. If you still dream of buying property for personal use, you are not rich. If you have a single unbranded item in your closet, you are not rich. I hope everyone got the point. There are only two classes in the world, the rich and the rest; hence it was necessary to specifically exclude the pseudo ones. Some of us may be better off that than the rest, but we are still the rest.

The biggest dilemma of the rich is the necessity to achieve compound growth. The rich don’t get sleepless nights over how to pay off mortgages or how to fund college education or the likes. Their biggest nightmare is the inability to reinvest their capital in profitable ventures that give the desired return, preferably over and above inflation. The naive amongst us might simply shrug and retort, how can that be a problem?

To put things in perspective, Amancio Ortega, the founder of the fashion brand Zara who recently removed Bill Gates from the envied position of the world’s richest man, has a $79.5 billion fortune. Compared to that, Pakistan’s external debt and liabilities, according to the State Bank of Pakistan, currently stand at around $73 billion. Detractors will insist that this is synonymous with comparing apples and pineapples; however, if you ignore that noise for a minute and imagine that a nation of 200 million is theoretically indebted to one man, then perhaps you can understand the dilemma of the rich. And it’s not as if we are a safe bet, we have every potential to be a long-term bad debt.

And today there is no limit to the amount of wealth that you can have, at least on paper. There was a time when wealth was measured in the amount of gold or other precious metal that you owned, which was no fun for two reasons. One it limited how rich you could get at the individual level, and secondly, it was a deal breaker for democracy’s survival. When the gold standard, which in essence linked the amount of money a nation could create to the quantity of gold bullion it held, was done away in 1971, it allowed national governments across the globe to create domestic money out of thin air, thereby allowing their politicians to make outrageous promises to voters during election times. And recall last week’s article on democracy’s fatal cycle, the more outrageous the promises, the more likely your chances of winning the election. There can be an argument that the ability to print money spurred development for poor nations and the meek of the world, but that is debatable and hence left for another day.

So in theory, money is infinite, and governments can print as much as they want; this is what gave birth to the diabolical compound interest: money multiplying doing nothing except lying in the bank. The rich’s dilemma, however, is that while money is infinite, the tangible things that money can buy are finite. There is a finite amount of land in this world, a finite amount of precious metals and a finite amount of everything else. Accordingly, if money keeps increasing and things that it can buy are constant, the net result will obviously be inflation — everything will become more expensive.

Recall that the rich require a real return, over and above inflation, to feed their obsession to keep accumulating capital. However, there are obviously limited opportunities in the real economy to invest, and therefore, capital will become speculative. Obviously, banks will not pay the requisite interest if they cannot lend it forward at a higher rate, which is why the world has negative interest rates on deposits. In Pakistan, deposit rates are low since banks have nowhere to lend, and it also suits the government to keep interest rates low since it is itself the biggest borrower.

So what is the solution? The rich invest in land and in stocks, which is what is happening in Pakistan today as well. Land prices are going up every day, and even the threat of taxation has been absorbed as money keeps flowing in this sector. A logical question to ask would be why. It is not that the nature of land has changed or anything else, except that there is more money wanting to buy that land. Same is the story with the stock market, same stocks, and same stock exchange but the index keeps breaking new records every few days. A valid question to ask might be: is the index breaking records because the companies included therein are making more profits? Ab initio this assertion appears doubtful; oil prices are down so the petroleum sector should be churning less profits. Exports are down, and therefore, textile should be at lower profitability. Banking spread is down so banks should be looking at lower profitability. Fertilizer profits are down as well, and at the end, cement alone can’t push the index up. Get the point, the index is rising as a direct consequence of the rich man’s dilemma: continue to reinvest money for a minimum return.

The intent is to discuss the 40,000 leagues over the sea in a coming article, but for the moment, dear readers, if you are still wondering what we have to do with the rich’s dilemma, the answer is simple. Their dilemma results in the nation’s resources getting invested speculatively, and at cross purpose with the national growth objectives. We all end up pursuing quick profits in the stock market and land and think of ourselves as investment gurus. But such investments don’t create employment opportunities, and on the darker side, are not forever. We can either believe that a rising stock market and booming land prices are indicators of a booming economy and will continue rising forever, or take steps to channel the nation’s resources into productive manufacturing ventures that provide jobs, are not speculative and provide long-term stability.

Frankly, for this topic, space limitations were a huge challenge that I admit I have failed to get around; discussion on the labour wage problem was completely sidestepped. The objective all along was to suggest that we need to invest in manufacturing in Pakistan; I only hope somewhere along the line I drove that message home.

The writer is a chartered accountant based in Islamabad, and can be reached at syed.bakhtiyarkazmi@gmail.com