Tuesday, February 24, 2009

How Much Money Should We be Making?

Frugalnomics says that real wealth comes from the transformation of energy, and at the most basic levels - agriculture and crafts, it is fairly easy to work out what wealth is possible. But how do you judge the validity of wealth at levels removed directly from energy transformation?

Firstly, be sure that the wealth has a true energy transformation basis. Look hard at what source of energy or energies underpin the process, map the pathway of this energy up to the stage where your wealth is generated and consider the validity of that process. Don't forget your energy as part of the process - humans are pretty efficient transformers of solar energy through the foods we eat. That sort of covers the moral side of the equation.

Now consider the dollar value - how much money should we be making?

Part of the current financial crisis is due to expectations for excessive returns on investments. Financial packages were developed with promises of now, ridiculously large returns.

So what sort of returns should we expect? Australian Superannuation Funds as a group, have set a annual benchmark return of CPI plus 3% - or roughly 4% due to inflation and 3% for astute investment.

Similar pooled expectations from academic economists consider Inflation plus 4% reasonable.

So anything that offers returns of more than 7-8% per annum must be counting on smoke and mirrors ( or put another way - the cheating of less informed investors ) to generate these returns.

Where does the 3-4% come from? I think it is the sort of return that is derived from human effort - or the natural wealth increase from the transformation of energy by people. ie: this is the sort of return an individual can generate by their own sweat, and it puts executive salaries in a poor light.

Frankly, any management or executive position that is paid more than 4% greater than the staff being managed is being overpaid, as there is no way individual effort, as a manager, can generate more than a 4% increase in wealth.

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