The government prints new money and causes inflation. Because of inflation, your purchasing power degrades over time for any saved money. If you "invest" your money, then you pay taxes on earnings, even though most of the earnings aren't really earnings on an inflation-adjusted basis. If inflation is 3% and you earn 5%, then more than half of your earnings are phantom earnings, yet you are still taxed on the full 5%. Thus, of the 5% earnings, 1% may go to tax, 3% is lost to inflation, and you really earned a 1% return.
However, in order to make 5% return, or a 2% "real return," one must take risk. There is no risk-free 2% real return investment (TIPS used to be, if you believe that CPI tracks inflation, which I will cover shortly).
The government loves inflation because it means they can borrow money to pay for boondongles, and pay the debt back with money that is worth less. i.e. if inflation is 3% and the government borrows money at 3% (the currently 30-year bond rate), then the government borrowed money for free.
CPI is a rigged number because the government has debt in the form of SS payments and pensions to government employees. The amount payed out is based on CPI-measured inflation. Thus, we experience the principal-agent problem in that the government is the one who calculates inflation, but they are incentivized to calculate it low.
The government benefits from 5% actual inflation because they printed 5% more money (relative to the economic output of the country), and thus their debt is 5% cheaper. However, if they claim 2% inflation, then the amount the government owes to SS and pension recipients is reduced.
So in order to "break even" people are essentially required to invest in stocks since no other alternative exists that would allow someone to break even, after real inflation, and after tax on phantom earnings.
Stocks seem like a good premise, in theory. "Free Market Capitalism" at work. Companies borrow money through issuing stock certificates. The problem is again one of principal-agency where the company is able to extract value from shareholders through corporate boondongles such as private jets and executive compensation. The company may lose money for shareholders, and may even go bankrupt. However, THE EMPLOYEES STILL GET PAID. Payroll is superior debt, and they get paid first. They can do a shitty job and destroy shareholder value, but they get paid. I'm not just talking about executives, either.
One might argue that in a free market, you're free to not invest in poorly running companies. There's a few problems here:
1) FRAUD. The government is supposed to audit and ensure publicly traded companies are reporting accurate numbers. However, on multiple occasions, government auditors have been caught snorting cocaine off a stripper's ass at parties thrown by companies that later were revealed to be reporting fraudulent numbers. In exchange for the huge investment losses that a person experiences due to poor government regulation, a person is entitled to take a loss of $3k per year against their regular income. Thanks, Uncle Sam!
2) TIME/SKILL. It's extremely time consuming to read through 10Ks and interpret them. The average person doesn't know what a 10K is. However, they are penalized by inflation if they don't invest in stocks, so they invest in index funds, which contain poorly run companies as well as fraudulently running companies due to government incompetency.
3) 401k LAWS. In many cases, people are limited to a select few index funds within 401ks. Because the government has created a restricted monopoly through the 401k system, people have no choice but to invest in index funds in many cases. (Of course I believe most people would be better off with index funds, my gripe here is that 401ks should be eliminated and IRAs should have their annual limit raised to the commensurate level).
4) GOVERNMENT REGULATIONS/ARTIFICIAL BARRIERS TO ENTRY. I may actually have the time and skill to read through 10Ks. Suppose I read through the 10Ks of the 3 US cell phone companies that have 90% marketshare, and all 3 clearly waste money and do stupid things. Perhaps they own too many private jets, or pay their CEO too much. These 3 companies have carte blanche to do anything they want because they have an oligopoly. It's not a free-market because competitors can't come into the market because the FCC has created an artificial barrier to entry.
This isn't limited to cell phones either. Due to Dodd-Frank, it's impossible to run a bank with less than $1B in assets. That's a huge barrier to entry. There regulations are so onerous that only a few major players are able to comply. There's a few banks in the US that have huge market share right now. The top 10 financial firms have about 50% market share of the entire country. What if I read their 10Ks and disapprove? Tough shit.
Utilities have a government-mandated monopoloy in their areas. They make up 5% of the total stock market by weight. Don't bother reading their 10Ks because there's literally nothing you can do about it anyway.
Airliners have another government-mandated monopoly. Only so much airport space making it impossible for a new entrant into the market to emerge.
5) COST OF GOVERNMENT REGULATION. As an investor, I'm losing money to pay for government regulation. I don't have exact numbers, but I'd bet 10% to 20% of the return of equities is lost to regulatory costs. Meaning that if I would make 10% in a specific stock, I only make 9% because of costs associated with complying with OSHA, the maternity leave act, SOX. Before you argue that those regulations are "good" first consider how well SOX worked with GS and AIG and Lehman Bros the last few years.
Then explain how a company could get away with treating workers poorly (i.e. not giving maternity benefits) unless they have a monopsony that is created artificially by government regulation? i.e. if there's only a few airlines allowed to operate, it's a monopsony, and they can treat workers like shit. The solution to regulation seems to be more regulation. The solution to problems caused by bigger government is an even bigger government!
6) DOUBLE TAXATION. The companies I invest in get taxed at the corporate level. Then I get taxed again when I sell my stock holdings. This is a double "F-You" because I'm only investing in stocks to avoid losing purchasing power from government-created inflation.
The next related topic is alternatives to stock investing. We could invest in bonds or savings accounts, but we are taxed at our marginal tax level, which makes it harder to even match inflation, on a net basis. Also, the government artificially manipulates rates down as they please to make it so I lose money to inflation invested in these instruments.
The final alternative would be starting your own business. You can invest in yourself, and then you know for sure that there's no waste to corporate boondongles. The problem is all the government regulation has made small-business ownership very difficult. Regulatory compliance typically has a fixed cost. i.e. $10M to hire a specialty consulting firm to file SOX paperwork. If you're a $50M IPO, you'd be wasting 20% of your stock raising money to government compliance. However if you're a $50B IPO like Facebook, it still costs around the same $10M.
The result is only very big companies can afford to comply with regulations, and you have a severe disadvantage when trying to enter the market as a small business.
Coincidentally, 99% of Congressional Lobbying efforts come from multi-national corporations, who secretly do want regulation in order to raise barriers of entry to potential competitors. The other benefit to the multi-nationals is that they get to do profitable crazy bullshit to incite regulation. i.e. let's dump toxic waste into the ocean and save millions in fees. Congress finds out and passes laws that require a $100M insurance policy in the event of toxic waste spill. Now there won't be any new competitors because no small business can afford a $100M insurance policy. The multi-national wins doubly. Congress wins because they get a public "win" to save the environment, and also the multi-nationals put millions into lobbying efforts to make sure the regulation is written as supportively as possible for themselves.
Of course me as a stock investor lose money because now (a) as part-owner of this company, part of my profits now have to go towards regulatory requirements, (b) as a citizen I experienced toxic waste dumped into the environment, and (c) now that the multi-nationals have artificial barriers to entry in their sector, they are more free to waste money on corporate boondongles and extract value from the company with no concern of a new lean-run competitor emerging.
I suppose the final related topic I have is the financial system. Companies like Goldman Sachs are essentially the "house" at a Casino. In order to put money into various financial instruments such as stocks (which is necessary simply to preserve your spending power), you have to fork over trading fees through direct costs (stock trade costs, mutual fund expense ratios, etc) and indirect costs (the small spread on each transaction that the brokerage keeps). These big companies spend millions lobbying Congress each year to keep things favorable to them.
Congress gets to line their pockets with lobbyist money, while they ensure the system continues in favor of themselves (higher taxes, higher inflation) and in favor of multi-national corporations (higher inflation and lower interest rates to force investors to use financial instruments that earn them money, and artificial barriers to entry to avoid competition).
It seems as though everyone wins except the middle class investor.
The upper class 1% wins because they are part of the system. They are the executives extracting value from the publicly traded companies. They are the Congressmen and career politicians getting money from lobbyists.
The lower class wins because they get to suck on the government tit that is filled from free-debt (allowed by inflation) and tax-dollars from phantom earnings of investors. Additionally, the lower class benefits from market shapers such as minimum wage that further impose barriers to entry to small businesses (a small business can't afford to pay someone $8/hour to do an unskilled job, but a big multinational has the ability to move overseas and pay a 3rd world country laborer 10 cents an hour, further creating barriers to entry that protect big business).
My thesis is that the system is rigged against the middle class and there is essentially no way to win except to fall down to the lower class (and get to suck on government tits) or to rise into the upper 1% and screw over the middle class that you were once a part of.
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