How To Get “the Money” to Make “the Money”?
In South Korea, the biggest market is “Dong-Dae-Moon Si-Jang”, translated in English, “East Gate Market.” Over there, in a section, there are so many women who sell all kinds of cloth to make women dress or men suit. Young girls who make their own dresses go there, and many mothers buy cloth to make their spouse’s or son’s suit.
Cloth retail sellers here need “the Money” (which is the first one) to buy cloth from company wholesalers, but the tiny-scale retailers can’t get the money from a bank. Here “the money” is the starting “seed capital” in the accounting term.
“The Money” (which is the last one) is “profits” in the accounting term which are the remaining money after paying all expenses such as rents, “daily installments (Dis),” and travel.
What are “DIs”? I knew a lady who lent the Money with a “fair charge,” and allowed paying back piecemeal daily. She was a sort of “shadow small-scale retail credit union.” She collected the Dis every day, sunny, rainy, or snowing, almost 365 days a year!
How To Fit The “East-Gate-Market” Story in Investing?
The funny title consists of three words: 1) The fist and the third look identical but they quite differ in substance. 2) The substances of both change by somewhat delicate economic concepts, 3) magnitudes of both are either lump sum or a stream of money.
The case of “East Gate Market” has only one way from a lump sum which is the original “seed capital” to “Dis” which are a stream of the daily paybacks. Investing as will explained below, on the other hand, both ways either a steam of investments to a lump sum in the accumulation period [AP] or the other way around, from a lump sum to a stream of interests, dividends, and capital gains in Performance Period [PP].
A “Flow” vs. A “Stock”
Milton Friedman explained the dual meanings of money, using two simple accounting items – a profit-and-loss statement and a balance sheet. This is the core concept of his monetary theory:
“The term money has two very different meanings…[One is that] money is a synonym for income or receipts: it refers to a flow, to income or receipts per week or per year…[The other one is that] money refers to an asset, a component of one’s total wealth…Put differently, the first use refers to an item on a profit-and-loss statement, the second to an item on a balance sheet...” (Money Mischief: Episodes in Monetary History Harcourt Brace Jovanovich 1992. page 8. The italics are mine.)
“Income is a flow; it is measured as dollar per unit of time. The quantity of money is a stock, …in the sense of a store of goods or inventory, by contrast with a flow. Nominal cash balances are measured as dollars at a point in time [as in a balance sheet] …Real cash balances…are measured in units of time [as in a profit-and-loss statement].” (Money Mischief page 20. The italics are mine.)
The Accumulation Period (“AP”) vs. The Performing Period (“PP”)
Investing in a long-term time frame has two distinguishable periods: 1) The Accumulation Period (“AP”), and 2) The Performing Period (“PP”):
The AP takes about 7 years, by contributing a relatively small amount of money, and by adding additional money many times. The Dollar Cost Average (DCA) method works nicely for most investors.
If some investors contribute a significant amount of lump sum initially, the AP can be skipped entirely or may take less than 3 years. Let’s assume the 3 years as the lower bound.
As a result, we have the 7 years as the upper bound and the 3 years as the lower bound of AP. The middle of the AP spectrum is the 5 years.
During AP, dividends, interests, and capital gains are reinvested piecemeal, compounded frequently. The whole and patient productive process is the backbone of long-term investing, even though it’s unnoticeable by most investors.
As shown in my various articles in the late 2010s, my Vanguard Mutual-Fund Portfolios, TIAA Intelligent Annuity, and Transamerica Insurance Annuity (via Vanguard) had clearly started their powerful self-growth after about 3-5 years.
A long upswing of the current bull market (started on March 09, 2009), according to my previous article, helped the outstanding performance greatly.
Investors would expect the help of the last leg of the bull for at least a couple of years. Although it would take a longer time now than in the late 2010s, to reach the PP, perhaps, not 2-5 years but around 5.5 years.
Still, it would be a good deal for many investors who are younger than, perhaps, say, 65.
In the case of “East Gate Market,” nevertheless, a perfect case of 100% lump sum (seed capital), skipping the entire AP, so the seed capital immediately yields profits as PP. This is really well-designed by the lady as a former bank worker, to give a vital incentive to the cloth retailers.
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A “Stock” (Asset or Debt) Market vs. A “Flow” (Income or Deficit) Market
Treasuries notes are issued in the Treasury “primary” market where Treasuries are sold to cover any budget deficits. In the Mortgage “primary” market, MBS are issued to finance mortgages. These primary markets are “flow” (or items-on-a-profit-and-loss-statement) markets
The existing Treasury notes or MBS are traded in the “secondary” markets where all accumulated Treasuries and MBS are measured at a point in time.
Think about the relationship between the Treasury “primary” (“flow”) market and the Treasury “secondary” (“stock’) market. Every year the Treasury Department auctions various Treasury notes to finance budget deficits.
The Federal Reserve reported:
“The Federal Reserve’s securities holdings peaked at $8.5 trillion in March 2022.
The Fed can reduce its balance sheet by electing not to reinvest some or all of the principal repaid when securities mature, a practice known as runoff.
The Fed can also sell securities ahead of the maturity date.
Reductions in the Fed’s balance sheet reflect economic gains made possible, in part, by previous Fed asset purchases.
In June 2022, the Fed began reducing its Treasury debt holdings by $30 billion and MBS holdings by $17.5 billion monthly, with plans to double those monthly cuts starting in September.(“How Does the Fed Reduce Its Balance Sheet? How Does the Fed Reduce Its Balance Sheet?
Most investors do not distinguish between 1) $8.5 Trillion in March 2022, and 2) 530 Billion (Treasury) and $17.5 Billion (MBS) clearly. The former is a “stock” while the latter are “flow.” Since the reduction amount $47.5 (=$30+17.5) in June 2022 or $95 in September 2022 are a tiny fraction 0.56% or 1.12% of $8.5 Trillion.
Consequently, selling both bonds from Jun. or Sep. will not impact bond markets significantly, it’s better for long-term investors to buy both bonds as component of their diversified portfolios with equities.
Your well-diversified portfolios will age 5.5 years or longer, your investment passed their AP and proudly enter PP, performing as an automatic growth engine.
“Money” “Makes” “Money”
The title consists three words, starting “M”, and followed 4 letters:
The first “Money” and the last “Money” are identical, but their roles act oppositely each other: In AP, the first Money is “flow” (a Profit-Loss Concept at a point of time) while the last Money is “stock” (a balance-sheet concept during a certain period of time.)
The roles of two money are completely opposite in PP: The role of the first Money is “stock” while the last Money is “flow” which came back the “East Gate Market” setting which the wise lady developed. Again, the fist Money is the seed capital or a matured lump sum, and the last Money is profits or automatic earning distribution.
Conclusion
An acceptable and easy long-term self-managing investment framework, evolved from “East Gate Market” setup, and a basic economic concept (flow vs. stock). Here we found a truth: A common wisdom can be applied both in investing and in a small business.
Theory in economics and a knowhow in business would be found not in a rocket science but very simple common sense.
I would like to urge my dear readers to follow my direction: Avoiding complicated, hard-to-visualized system, instead taking an easy, open, and comfortable way.
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