Multi Level Money 20 comments

12 Nov 2004 @ 23:45, by Flemming Funch I've never exactly liked multi-level marketing (MLM). Well, half of the time I hate it. It too often looks like being conned into shelling out a few hundred dollars for some supply of diet pills or something, and then you need to convince all your friends to sign up under you and get really excited about it. But then again, I like the idea of having thousands of people in my network who'll provide me with a continuous residual income. So, if I could do that without having to force my friends to buy some overpriced vitamins they don't want, I might change my mind. At times it had seemed very attractive. I've known or met people who've done extremely well with MLM, and obviously, to see those folks who've done best can inspire a lot of other people. Like, I remember this event at the house of one of the top Herbalife people. Larry something. He had made 65 million dollars at the time. So it was a recruitment event in the basement disco of his Beverly Hills mansion. There were at least 500 people. It has ostrich feathers on the wall. His couple of Ferraris and Lamborghinis were strategically parked out front. Well, he seemed like a nice guy too. And they put on quite a show. Seemed like those vitamins cured cancer and just about anything else. And lots of previously normal little folks had great success stories to tell about how well they'd done on marketing it. However inspiring it was, I didn't sign up more than maybe one or two people, who didn't do anything with it. My family ate the vitamins for a year or so, which was perfectly fine, albeit a little expensive. And, statistically speaking, that's how it goes for most people who sign up in an MLM. They think it sounds great at first. They imagine themselves making 10s of thousands in residual income every month. They find the money for the starter package somewhere. And that's usually how far they get. Because they don't know how to be as inspiring as the people who hooked them on to it. And because their friends aren't really interested, and they don't know how to reach anybody else who is. Even at those times when I temporarily thought it was a great idea, I've had moral qualms about the pyramid nature of it. I mean, obviously the scheme is in the shape of a pyramid. People sign up under somebody else, becoming part of their down-line. And the money they spend to join or to buy products is what goes to fund the people higher up. But you can pretty easily see it as a pyramid where a few people at the top are doing really well, some of them becoming millionaires, being able to tell great success stories. And the further we go down in the pyramid, the more dull it looks. At the bottom are people who paid money for nothing, or there are people who work at actually selling the product it all was about. Seems like there will have to be a great many loosers to fund a few winners. But then it just struck me. This is really very similar to how a capitalist economy works. Most people haven't thought of it that way, but it is really structured as a pyramid scheme too. Except for that it is so complicated and cleverly done that it pretty much can keep going indefinitely, without anybody really noticing. A capitalist economy works in part on the expectation that one can make investments that produce returns. I.e. you give something out and you get more back. Like, an investor invests in a company, or a bank gives a loan, and they want it back with interest. So the company does a bunch of things that does the same thing. They put the money into things that give more money back. I.e. they pass the buck to somebody else, in order to get a return for themselves and the people behind them. And so forth, through numerous steps. It is really inherently the same idea as a pyramid scheme. And at the bottom of the pyramid you find the people who do the actual work, or who buy the products. And they generally get less back than they put out. I.e. they work hard and get paid less than what it is worth, in order to finance that the people higher up in the scheme get their returns. Which produces our typical societal arrangement where a small percentage of people are doing really well, and the majority of people are just getting by, stuck in a daily routine. You see it even more clearly in the way money is actually created in the first place. No, it doesn't inherenly come from hard work. It might fund some hard work later, but at its origin it has nothing whatsoever to do with it. A bank creates the money out of thin air, in order to lend it out. The bank has certain limits on how much money it can create, which is in ratio to how much money they currently have as actual deposits. Like, they can create 10 times as much money as what is deposited there. That money doesn't go anywhere. The money that is "lent" out is created as entries in a computer. The bank then puts that money at the disposal of somebody that they expect will be able to pay it back with interest. I.e. to somebody who will turn a profit from some activity, or who'll earn the extra money somewhere else, in order to pay it back. Now, mind you, money can ONLY be created by a bank. Most governments retain the right to create money as well, but currently none of them do. Even most of the money the government borrows is created out of nothing by a bank, and the government needs to pay it back with interest. Now, it shouldn't be very hard to notice that the math is in principle impossible. Certain amounts of money are being created, and more than that needs to come back. Lots more, as interest compounds quickly. In the big picture, that isn't possible. There is no other source of it, so you can't pay more back than what exists. And the truth of the matter is that if all loans in the world were called back this moment, not only would all existing money be used up for that purpose, but there wouldn't be enough. See, in case you missed it, a magical thing that happens when you pay back a loan to a bank is that the money then disappears. It is not that they had been missing it, and now we paid it "back". It didn't exist before they lent it out, and it stops existing after you pay it back. But the interest, which is the bank's profit, will keep existing. The whole thing is based on that the profit, the returns, the extra interest, will come from the next guy in line. You pass the buck, or rather the debt. You start off by owing something, and you make somebody else pay not only that, but enough so that you can keep something, in addition to paying back your source. And if you freeze the whole picture right now, it isn't possible for everybody to be paid. Because there would invevitably be a relatively small number of people that have a lot, or that a lot is owed to, and a whole lot of people that owe it, and can't pay it. The losers at the bottom of the pyramid. But the amazing thing is that it still mostly works. The wheels keep churning. People are busy running businesses and making a living and buying and selling things. And most don't give that whole thing a single though. Those who do best are keenly aware of the magic of compound interest, and spend their efforts on putting their resources where they give the biggest return. But hardly anybody worries about the inherent impossibility in it all. And, actually, it isn't as impossible as I make it out to be, because it is a complex dynamic system, always in motion, which gives it a certain stability that isn't obvious when we take a snapshot. And maybe I'm being a little too harsh about it. I would tend to use that kind of logic to attack the system, to complain about how insane it is, and how it is only designed to make the people at the top very rich, and keep the people at the bottom enslaved in an impossible situation. But we can also look at it different ways, because essentially, seemingly against logic, the system works, and might well keep working for quite a while. It might keep working in part because it is very complex and opaque, so nobody sees through it, and one can maintain one's confidence in the money system. It keeps working also because there are many ways to pass the buck to others. I.e. anybody has the opportunity for investing their capital wisely and getting a return back. And there's actually nothing that stops most everybody from being a business which gains a profit. There's no law that says you have to be the suffering lower rungs of the pyramid. People are there in part because they don't succeed in playing the capitalist game very well, so they just get taken advantage of. But they could play if they learned how. The economy is actually arranged so the money can keep moving indefinitely. The same dollar can be used any number of times. So even though you're providing a profit for somebody higher up in some pyramid, you're free to set up the same type of scheme for yourself, and do something that produces more return than what you put into it. There's no scarcity of pyramid schemes. Or, more kindly, systems that can leverage your investment into much more. And, in-between, money can be passed around any number of times. If the money velocity increases, more people can be paid off of the same money. It isn't all about borrowing and paying back loans, of course. I could earn and spend loads of money without being involved with any loans at all, and without thinking about where the money originally came from. I could just have a well-paying job with a pension plan and feel happy and secure, without directly having to worry about business or where money comes from. But it all still is built on a mechanism of getting returns. Getting more back than you put out. Getting as many people as possible to give you more back than you give them. At least that's the game for those who're playing the game. So, now, a multi-level marketing scheme is not all that different. It is simply more transparent. It is easier to see the pyramid forming within a particular scheme, so easier to have qualms about it, and start thinking it is impossible. It is also easier for it to obviously not work as well, if everybody's in the same pyramid, and there's only a very limited number of products and things to do in it. But there's nothing really that stops such an arrangement from being complex enough that everybody can make profits and keep going indefinitely. Because there can be many different types of businesses, and because money can circulate endlessly, at any kind of speed. My objections about the morality of MLM aren't very different from my qualms about a general capitalist economy. Is it fair that some people get extra money back without directly doing any work for it? Well, if it would only be theoretically possible for a few people to do it, I might not think it is fair. But if it is possible for everybody, then it might be a good thing. It indeed might be possible to keep the balls in the air, and have everybody profit from it, as long as they think as businesses, rather than as consumers and workers. Thinking as an investor or as a business is obviously very different from thinking as a consumer or a worker. The inherent laws of how it works are different. You won't be a good investor if you only think about what work you can do and what stuff you can buy. Somebody who's good at business or at investing is looking for ways they can get their capital and resources to do the most possible work, to give the biggest return. Very different. So, now, I still have a lot of qualms about our money economy and the society it tends to create. But several thoughts: There's apparently no fundamental reason that most participants couldn't do very well even in an economy based on pyramids, or on returns on investment. But they have to all be willing to become business people, rather than workers and consumers There's no big reason why one can't build networks as a sub-set of the bigger economy where the participants do that same thing with each other, and maybe create returns faster than the general economy, and where most people could do well. But, again, they would know how to act as business people. There might well be some possible scheme that works better than pyramid and interest systems, and that inherently would make it more possible for everybody to play. I.e. there's gotta be some kind of constellation of people that can both out-compete the greed-based capitalist system AND provide the leverage to do more with less AND make it actually work for most people. A profit/interest/pyramid based money system can easily out-compete a local money system with a flat structure that only uses currency for exchange for goods and services. But it has a lot of negative characteristics. Lots of effort is wasted. People are forced or tricked into paying for lots of things that aren't useful, and the system leaves most people lost in struggle. That could potentially be different, if everybody just played the system well, and made sure they had good information. But there might be other systems that are more easily playable, ensuring that more people actually will play in them, and thus be more likely to be successful at them. So, I'm looking for a different geometry, I guess. More complex, in a synergetic way. And, in the meantime, I'll try to refrain from feeling bad about concentrating on investing my time and effort for the maximum return.

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Category: Economics, Financing, Banking 

13 Nov 2004 @ 15:10 by rainbowfish : Banks: don't you just LOVE them!
No, neither do I. I can't help noticing that, with the benefit of modern technology, bank transactions have been made so much easier but why is it that money can be taken out of my account instantly, but it takes 5 working days for money paid in to actually be credited to my account?  

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