Blood, Sweat and Tears

Originally published in the Informanté newspaper on Thursday, 21 July, 2016.

Last week, former pyramid scheme Herbalife Ltd had to change the way the company operates and pay a US$ 200 million fine in order to avoid being explicitly labelled a pyramid scheme by the FTC in the United States. Herbalife in future will now have to pay its distributors based on sales, and not on how many new distributors they recruit. "Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered," FTC Chairwoman Edith Ramirez said.

Pyramid schemes are a form of investment fraud that preys on our human propensity not to properly envisage large numbers. The most well-known pyramid scheme is the age old chain letter. We’ve perhaps all see one in our lives, one promising that by sending a minimal amount to the 6 or 10 people on this list, then adding your name to the list, removing the top name and mailing it to the next group of people, you’d make millions in a short time. After all, it sounds so simple. 

N$ 100 is first sent to you by 6 people (N$ 600), then 36 people send you N$ 100 in the second round (N$ 3600), 216 people in the third round (N$ 21 600), 1296 people in the fourth round (N$ 129 6000), 7776 people in the fifth round (N$ 777 600) and finally 46 656 people in the sixth round, netting you a cool N$ 4 665 600. Unfortunately, this explanation misses out on a crucial point. You are most likely not on round 1 of this pyramid scheme.

If you’re starting on round 6, you’re one of the 46 656 people who are now sending out letters. Your group will need to recruit almost 2 billion people by stage 12 to get your money – a third of the world’s population! In fact, by stage 8, almost all of Namibia would have to be recruited! It becomes clear why this is untenable. Pyramid schemes, thus, make a few people at the top of the pyramid rich, at the expense of everyone below them. 

This fact is now widely recognized, and its why multi-level marketing companies, such as Amway and Herbalife, as so cautious to not be labelled pyramid schemes, and why they have to actually sell products and pay commission instead of just receiving money. Of course, their commissions schemes are set up like pyramids just like the example above, which means most of the commission still accrues to those at the top of the pyramid, a fact they are loathe to admit in their recruitment.

But pyramid schemes are simply the second most popular form of an investment scam that preys on our greed, and our wish to get rich quick. At the start of the 19th century, a man named Charles Ponzi started a company and offered investors either a 50% return on their investment in 45 days, or 100% return in 90 days. He claimed that he could achieve this due to postal reply coupons, which would be redeemed in a country at a set value, but purchased in other countries at a discount. 

While this was true, countries had restriction on the volume that could be imported, and Charles Ponzi in fact did NOT use this to generate returns. Each new investor’s money was put in a pool, and if someone wanted to withdraw the money, that was taken from the pool as well. As long as he had enough new investors, he could pay out the old ones, and he built up his credibility using that. Investors eventually simply reinvested immediately, meaning money could just stay in the pool.

This, of course, was doomed to failure to moment that new investors could not cover those who wanted to withdraw. Such schemes are insolvent from the get go, and those running the pool usually dip into this money to fund lavish lifestyles to keep up the impression that the investments are doing quite well. Charles Ponzi took in US$ 15 million in a year, and when investors wanted to cash out, his pool had only N$ 5 million left.

In Africa, we’ve also had our share of Ponzi Schemes. Adriaan Nieuwoudt and his Kubusse is probably the most well-known of these, but in recent times these schemes are usually packaged as ‘secret investment vehicles’ with a ‘magic formula’ that guarantees returns. The Masterbond Group investment Ponzi scheme had a Namibian pensioner shoot himself while on the phone with the liquidators in South Africa when that broke. And more recently, Riaan Potgieter’s suicide when Prowealth’s Ponzi scheme collapsed also comes to mind.

And yet people still fall for these schemes. After South Africa’s Abante Group’s Relative Value Arbitrage Fund Poniz Scheme failed, Herman Pretorius shot his partner Julian Williams before turning the gun on himself. Currently Kobus Kellerman and David Cosgrove’s South African Belvedere Ponzi scheme is also in the midst of collapsing. And this happened even after the high profile implosion of the biggest Ponzi Scheme ever – that of Bernie Madoff. It’s a mighty fall after you’ve swindled investors out of US$ 65 billion.

Why do so many people get taken in by scams such as these? Because we tend to look at people instead of the facts on the ground. These scammers either are or appear to be experts in their field, and appear trustworthy – they’re in good standing at the church, and they look successful. But neither of those are any indication that an investment that is pitched is sound. 

They then go one further – they claim they’re formula or strategy is a secret, and only a select few will be brought into the club. We have a natural need for exclusivity, a need to feel special, and they exploit that. People also tend to get drawn into it because a friend can get them into ‘the opportunity of a lifetime,’ and we tend to trust our friends and peers. After all, if people like me are doing it, someone would have checked it out and seen if there was anything untoward, right? And that’s how Bernie Madoff took US$ 65 billion from his friends and members of his synagogue. 

So how can you prevent yourself from falling for scams like these? Don’t invest emotionally – be dispassionate. Don’t get involved in investments after dramatic changes in your life. Be careful about who you trust with your money – just because someone is well-known at church, or a good friend or coworker, does not mean they have your best interests at heart. See if this person and institution is registered and has information available on public websites and at the regulator. Watch out for these tactics: They tell you that you have a limited time to invest, or that the investment has a 10% or more return without any risk. They say the investment is too complex to explain, or top secret. And their returns year after year is too consistent, regardless of what happens in the market. If it sounds too good to be true, you’re probably being scammed.

It took Warren Buffet 15 years to earn his first million. It took him another 25 years to reach a billion. Bill Gates took 6 years to make his first million, and another 8 to make his first billion. Even our own Quinton van Rooyen built up his wealth over the past 25 years. What they’d all tell you is that becoming rich is not a quick process – in fact, it takes years filled with blood, sweat and tears to get there.

When Prices Go Up

Originally published in the Informanté newspaper on Thursday, 14 July, 2016.

This year, Namibians felt the full force of higher inflation again for the first time in quite a while. Inflation hovered about 3% to 3.3% for most of 2015, before spiking up to an average of 6.5% for the first half of the year. Inflation has become a relative constant in modern times, with most economies and central bank targeting a modest but positive inflation target. But inflation is also the scourge of the working class, reflecting in higher and higher prices that leave most people complaining when it suddenly increases, like it did in Namibia this year.

Inflation is now a fact of life, almost as certain as death and taxes, and while the concept of inflation (prices go up) seems simple, there is a lot hidden behind such a simple concept. Inflation, in fact, exists because we developed the concept of currency. Before the invention of currency, or money, the economy operated as a barter system. 

Imagine Joe, the cattle farmer. He has bred quite a herd of cattle, but a family cannot live of cattle alone. He has to take his cattle to the market to get his mealie meal and mahangu from those farmers. But exchanging one cattle each to Paulus the mahangu farmer and Tomas the maize farmer would give him way more mahangu and maize meal he could store or use, as cattle is worth much more. And what if Paulus and Thomas already have enough cattle to slaughter for their families? They might not want another cattle, leaving Joe up a creek without a paddle. 

This, obviously, would not do. It makes running any sort of business nearly untenable. So early societies developed a method that would ease trade – a store of value for your goods. Beads, ivory and metals were thus used to denote a certain amount of goods – an early form of money. These goods were used because they were rare, and not easily created from scratch. But these first currencies led to the first fraud as well. Fake ivory and beads meant that metals gained the upper hand, and metal began to be weighed, and stamped into coins.

With Archimedes’ discovery of the principle that bears his name, coins could reliably be valued, even if they were shaved, or otherwise debased or tampered with. Economies developed around a tri-metallic system, with gold, silver and copper coins, in decreasing order of value. And here the first vestiges of inflation cropped up. It was suddenly quite profitable to mine gold, silver and copper, since you could then create your own money, and buy goods with it. But since you could potentially mine more gold than the other sectors of the economy produced goods, the value of gold coins would decrease. If there were, for example, 10 000 gold coins in circulation, and 10 000 cattle, each head of cattle would cost 1 gold coin (in our hypothetical 2 good economy). But if someone now mined another 5 000 gold coins this year, but only 2 000 cattle were born, suddenly you had 15 000 gold coins with only 12 000 cattle, and each head of cattle would now cost 1.25 gold coins – 25% inflation in the price!

So metallic currency had a built-in inflation driver – production of the metal. This became especially prevalent in what was called the Price Revolution during the 15th to 17th century in Europe. With the Spanish treasure fleet returning from the new world, the supply of gold and silver increased dramatically, resulting in prices increasing sixfold over 150 years. But it also had another downside – weight and storage. Wholesalers could take in a large amount of coins, which make for a tempting target. Transporting it makes for an even more tempting target. A solution was required.

The invention of the printing press made a solution possible. First invented in China by Pi Sheng in the 11th century, it also allowed for the first paper currency. This revolutionised trading, as the hard metals could now be stored in a secure place (say, a bank) and the paper was notes that delineated the currency stored there to be retrieved after trading, should a trader so wish. By the time Johannes Gutenberg introduced the printing press in Europe, paper notes followed in its wake.

But paper notes had a downside. Since these notes could be produced cheaply and easily, there was nothing stopping those with vaults of gold to issue more paper notes than they had available. And similar to how additional gold would cause inflation, so too would additional paper. After such an occurrence, people would rush to convert their paper to gold, causing a bank run, and more often than not, a bank would collapse, ruining those who did not redeem first.

As I’ve noted in an earlier Theory of Interest, it was one of these that granted central banks the responsibility to maintain a currency’s stability, after a run on the Bank of England in 1797. Thereafter, central banks started to stop allowing paper money to be redeemed for gold in their vaults. But most countries still backed the currencies with gold in their central banks, if only because foreign exchange between currencies would be settled in gold. 

This resulted in some stability to currencies, but ultimately, the era of international trade showed the cracks in this system. With each currency backed by gold, debtor and creditor nations started causing rather large gold debts to be incurred between them, sometimes threatening a nations local gold reserves. When this occurred in the US in 1971, President Richard Nixon unilaterally suspended the US Dollar’s link to gold, and most nations followed. 

Now every nation trades based on paper currency, backed by the credit of their nation. But governments still control the rate of fiat money (as it is now called) production. And this still creates inflationary pressure on currencies. Should a government spend (create money) too much while the economy slows, inflation is sure to spike up. When this is not brought under control, as was the case in Zimbabwe, hyperinflation can be created.

This, of course, is not the whole story behind inflation, but it is why inflation can exist in our modern economies. Hopefully, though, it does give some insight into why Namibia’s government budget was cut, in line with slower growth forecasts alongside higher inflation. While government decisions may sometimes appear opaque, with a little history and insight, much can become clear to almost every citizen.

Have Some Perspective

Originally published in the Informanté newspaper on Thursday, 7 July, 2016.

“Space”, Douglas Adams said, “is big. Really big. You just won't believe how vastly, hugely, mind-bogglingly big it is. I mean, you may think it's a long way down the road to the chemist, but that's just peanuts to space.” And it is, but too often our sense of perspective of how big it really is, is warped by the various models we’ve seen in life, or pictures we’ve seen in textbooks. To see our place in this world, it is perhaps necessary to get a glimpse of where we are, just to gain a measure of perspective.

About a month ago, I employed a device to show how short our lives really are, by compressing the entirety of existence into a year. Space, however, is so big, that this device can’t be used for all of space. Instead, I’ll try to show the vastness of just our solar system, by compressing it into a space perhaps a bit more familiar to us. I’ll place our solar system, to scale, within the borders of Namibia. 

The solar system is comprised of 8 planets, the four inner, rocky planets, and the outer four gas giants. Several more dwarf planets orbit the sun, of which the most well-known is Pluto. But the solar system extends way past the orbits of these planets, and since most of us are not quite as well acquainted with those features of our solar system, I’ve picked an arbitrary limit to our exercise today – the distance the Voyager 1 space probe was at in 1990, when it took the famous ‘Pale Blue Dot’ photograph. 

This implies a scale of about 1 to 8 million. In other words, for every 1 kilometre in Namibia, the solar system has 8 million kilometres. Since Windhoek is almost at the centre of Namibia, let’s place the Sun there. The sun makes up 99.86% of the total mass in the solar system, so perhaps you’d expect it to be big compared to Windhoek, but no. 

If the sun was placed to scale on the Christuskirche in Windhoek, it would be quite large, but it would not even reach the Tintenpalast. It would be a mere 174 meters across, but it’s mass, even if also scaled down by 8 000 000, would be approximately 250 billion billion tons. 

But let us move out from the Sun. The closest planet from the sun, Mercury, is also the smallest planet. On our scale, it would be a mere 7km from Windhoek’s centre, or about at the Lafrenz turn-off if driving northwards. The planet would be a mere 60cm across, or two standard size rulers. 

The next planet on our journey out of the solar system is Venus, the hottest planet in our solar system. If we had continued to drive northwards, it would be at Elisenheim from Windhoek, and about a meter and a half across, or approximately one and a half strides. 

The next planet should be quite familiar to all of you, the planet Terra, colloquially known as Earth. Travelling outwards from Windhoek, it would orbit at about the location of Herbothsblick on the way to the airport. The planet of life and water would be about 1.6 meters across, or about my height. 

Next up, we have the Red Planet, known as Mars. Mars would orbit at about halfway between Windhoek and the Hosea Kutako Airport, entirely inhabited by robots, namely the two Mars Rovers, Opportunity and Curiosity. Mars is quite a bit smaller than Earth, being a mere 85 centimeters across at our scale. 

The four inner planets is comparatively quite close to the sun. But now the distances start to escalate. The biggest planet in our solar system, Jupiter, named after the Roman god of the sky, orbits at a distance just beyond that of Rehoboth from Windhoek. A truly massive planet, Jupiter has a mass of two and half times that of all the other planets combined. At our scale, it would be almost 18 meters across, or about the size of a bus and a half. 

Next on our journey outwards, we encounter Saturn, the least dense planet of the solar system, as well as the most beautiful to behold. A massive cloud of gas, with rings surrounding it, you’d find it orbiting about 20km before Gobabis from Windhoek. The planet itself would be 15 meters across, about a bus and a quarter in size, but its rings would extend from 16.5 meters around it to 47 meters around it. Truly a spectacular sight. 

But now the distances really stretch. Our second to last planet, Uranus, is more than double that distance away. Orbiting at a distance of 360 km from Windhoek according to our scale, it would be between Tsumeb and Grootfontein. Uranus, a blue ice giant, is nevertheless smaller than our previous two planets, and it would measure a mere 6.4 meters across, or about half a bus-length. 

And if you thought that was far, the furthest planet outward from the sun, Neptune, named after the Roman god of the seas, would be orbiting a mere 20km from Rundu around the sun in Windhoek. It is the only planet found not by initial observation, but by mathematical prediction due to the gravitational effects it had on Uranus’s orbit. The furthest planet is still only a 6.2m sphere at our scale, orbiting around the 174m sphere of the sun in Windhoek.

Even further out, is the dwarf planet Pluto, a mere 30cm ruler across, orbiting at the Orange river, our Southernmost border from Windhoek. But the Voyager 1 space probe was even further out, at the equivalent of the Kunene River mouth from Windhoek, when Carl Sagan convinced NASA to turn the spacecraft’s imaging sensors back towards Earth, and take that fateful photo. 

To quote Carl: “We succeeded in taking that picture, and, if you look at it, you see a dot. That's here. That's home. That's us. On it, everyone you ever heard of, every human being who ever lived, lived out their lives. The aggregate of all our joys and sufferings, thousands of confident religions, ideologies and economic doctrines, every hunter and forager, every hero and coward, every creator and destroyer of civilizations, every king and peasant, every young couple in love, every hopeful child, every mother and father, every inventor and explorer, every teacher of morals, every corrupt politician, every superstar, every supreme leader, every saint and sinner in the history of our species, lived there – on a mote of dust, suspended in a sunbeam.”

“The earth is a very small stage in a vast cosmic arena. Think of the rivers of blood spilled by all those generals and emperors so that in glory and in triumph they could become the momentary masters of a fraction of a dot. Think of the endless cruelties visited by the inhabitants of one corner of the dot on scarcely distinguishable inhabitants of some other corner of the dot. How frequent their misunderstandings, how eager they are to kill one another, how fervent their hatreds. Our posturings, our imagined self-importance, the delusion that we have some privileged position in the universe, are challenged by this point of pale light.”

“To my mind, there is perhaps no better demonstration of the folly of human conceits than this distant image of our tiny world. To me, it underscores our responsibility to deal more kindly and compassionately with one another and to preserve and cherish that pale blue dot, the only home we've ever known.”

The Generation War

Originally published in the Informanté newspaper on Thursday, 30 June, 2016.

“The children now love luxury; they have bad manners, contempt for authority; they show disrespect for elders and love chatter in place of exercise. Children are now tyrants, not the servants of their households. They no longer rise when elders enter the room. They contradict their parents, chatter before company, gobble up dainties at the table, cross their legs, and tyrannize their teachers.”

Does this sound familiar? These days it’s quite often that you see similar sentiments from the older generation, but the quote above is not recent. Although frequently attributed to Socrates, it stems from the Cambridge dissertation of Kenneth John Freeman, and although not quite as dated as Socrates, he published it in 1907. 

And yet it still seems appropriate today. When we look at the news, it seems that ‘Youth Activism’ is blamed for everything from the decline of morals and for the riots and demonstrations that seek to upend the status quo. The Youth, they say, has no respect for the proper order of things, and only ‘want, want, want.’

It seems that those making the claims are rather stunningly not recognizing the self-made indictment against their own parenting abilities – after all, the youth did not raise themselves. These same individuals who now decry this in the youth are the same people who taught them that they can be anything – movie stars, rock stars, anything they want to be – and are now confused as to why a generation taught that they’re ‘special’ are now quite disgruntled when they enter the world and find out that when everyone’s special, no one is. 

After all, when you’ve raised your kids to aim high, they’re bound to be disgruntled pumping gas and waiting tables. And perhaps the older generation sees the past with rose-tinted glasses – after all they claim they were always respectful to their elders, etc. And yet in the United States, these same Baby Boomers were the hippie generation – the epitome of counter-culture!

In Namibia, the contrast is even more stark. The older generation were the Revolutionary Generation! They fought against the status quo, in armed conflict, to secure Namibia’s independence. What are the odds that they never instilled these revolutionary values in their own children? How can they thus be surprised that they now, too, rebel against the status quo?

Worldwide, it seems this trend is rising. In the Brexit referendum, the youth voted overwhelmingly to remain, while the older generation was the ones who voted to leave. In the United States presidential primaries, it seems the youth were quite attracted to Bernie Sanders, while the older voters tended to skew towards Donald Trump. 

Over the last decade, it seems that a fundamental shift occurred in the world, and that an intergenerational rivalry arose. While it might seem almost unthinkable, when you dig into the data, you can see why this shift in attitudes occurred. After all, as medical science has advanced, so too has the average life expectancy. And as quality of life has increased for the older members of society, so too has their prospect of working well beyond what used to be the normal retirement age. 

Medical science also reduced infant and maternal mortality, which reduced the size of families. As the cost of childcare has increased, so too has the population growth rate decreased. And that has resulted in a demographic first for the world – the proportion of the old in the population is growing, and soon will exceed the number of children in society. 

In the developed economies, this is already occurring. The victory of the Leave campaign in Britain already shows this. As time goes by, the rest of the world will age as well – even Africa. And while it is not in Africa’s immediate future, we will have to deal with the rest of the world struggling with their own aging problem. In Japan, currently, every ten working age individuals now have to support 4.3 old people, and by 2050, every 10 working age individuals will have to support 7.1 retirees. In the US, every 10 workers now have to support 2.2 retirees, and that will double to 3.7 retirees by 2050.

For the first time in history, demographics is turning the democratic vote from one controlled by the young to one dominated by the old. Upward employment mobility is stagnating due to the retirement age shifting outward. And for a youth who were promised the world, is it any wonder that they feel frustrated? After all, when voting on far-reaching policies such as climate change, you can understand that those who still have 60 years to live on this planet feel disillusioned when their say is overridden by those with only 20 years left to live.  

In a way, this intergenerational war has been fuelled by the mistaken belief that life is fair. The older generation believe that the young must be struggling because they’re not behaving correctly and not working hard enough – after all, in a fair world, upstanding hard workers won’t suffer. They fail to see that their own actions caused the youth’s hardships. The youth, believing as well that their hard work and upstanding nature should have brought them success, still find that they’re struggling, and assume that it must be unfairness from those in power that’s keeping them down, not realising that it’s not the older generation that’s causing their struggle, but rather that the world has changed. As Marcus Cole said, “I used to think it was awful that life was so unfair. Then I thought, 'Wouldn't it be much worse if life *were* fair, and all the terrible things that happen to us come because we actually deserve them?' So now I take great comfort in the general hostility and unfairness of the universe.”

Luckily, here in Namibia, we seem to be blessed with a post-revolutionary government that has reaped the benefits of peace and stability, and learns from the mistakes in the rest of the world. The Harambee Prosperity Plan seems quite prescient in this regard, as the old revolutionaries have seen what happens in other African countries if poverty is not addressed. With they themselves aging, they’ve realised that it is the next generation that needs to provide for them, and set up a plan that will enable the youth to grow prosperous enough to carry the nation going forward. All that is required now, is for the youth to take this olive branch of prosperity and peace that has been handed to them, and grow the country they will inhabit for the next 60 years, lest we suffer the same fate as the rest of the world.