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Ear to the Ground

How to Be a Billionaire

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Posted on Feb 1, 2011
Giorgio Monteforti (CC-BY)

All you have to do to be a billionaire is to have an idea. John A. Paulson had an idea, and in 2010 his idea made him $5 billion. His idea was to buy gold. If only you had that idea, you would have made billions too, because the price of gold increased by 30 percent in 2010. You, on other hand, put your money, all $17,000 of it, into Apple stock instead. That stock went up by only 68 percent, and about you, naturally, they did not write in the papers, because your idea was not even half as good: All you made was $11,560. 

Now, if you had Paulson’s idea and invested $17 billion in gold instead of $17,000 in Apple, you would have had $5 billion too.

Moshe Adler teaches economics at Columbia University and at the Harry Van Arsdale Center for Labor Studies at Empire State College. He is the author of “Economics for the Rest of Us: Debunking the Science That Makes Life Dismal” (The New Press, 2010).

New York Times:

Mr. Paulson, a hedge fund manager who sprang to fame when the housing market collapsed, personally made about $5 billion in 2010, according to two investors in his company.

How? Mr. Paulson bought gold — lots of it. His firm, Paulson & Company, owns securities that represent the rough equivalent of 96 metric tons of the metal.

Read more

—Posted by Moshe Adler.

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By Barbara Robbins, August 1, 2011 at 2:42 am Link to this comment

I agree with Gmonst. A person with half a billion can certainly live happy for the rest of his or hers life. It would also be enough to feed the hungry, giving others clean water as well as shelter the homeless. There are so many things you could actually do with that much money.

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By ed-d, July 29, 2011 at 3:24 am Link to this comment
(Unregistered commenter)

Mr Moshe being a universitY teacher should be the first one to know that if we
had all invested in gold as paulson, then paulson’s returns wouldnt be as
astronomical as theY are/were - simplY remembering simple economics of supplY
and demand( and with this i rest mY case)
This is not a business model offcourse as others have pointed out and is at best
speculative and untenable

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Lafayette's avatar

By Lafayette, February 4, 2011 at 4:55 pm Link to this comment

So…your problem with Paulson STILL comes down to:

He’s capable of making $5 billion in a year and you are not, therefore he should not be allowed to.

Simplistic nonsense. It’s not about me, it’s not about Paulson and it’s not even about you. It’s about Income Fairness for all of us.

There is no problem with making $5B. The problem arises from not paying fair taxes on that amount.

What part of Income Unfairness do you not understand?

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By Inherit The Wind, February 3, 2011 at 12:19 pm Link to this comment

So…your problem with Paulson STILL comes down to:

He’s capable of making $5 billion in a year and you are not, therefore he should not be allowed to.

And, if Steve Jobs, with his iPhones and iPads can make $5 billion in a year, selling folks something they want, you have a problem with that too? I don’t, and I can’t STAND Apple products!  But other people love them so all power to them!

I’ve never understood why someone with as much as Paulson wants more.

But OTOH, I never understand why people resent someone who played by the rules getting so much.

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By Lafayette, February 3, 2011 at 6:55 am Link to this comment

RAMPANT CAPITALISM

This is a story of the “rags to riches” type—except that its about “riches to riches”. And it is so pathetically American.

The American Dream: How can I become rich?

How can I become one of that privileged few who get up in the morning and don’t know what to do with their lives? They tried for the Golden Ring on the merry-go-round of life.  And got it!!!!!!

America does not need to make heroes out of the Paulsons or the Buffets or the Gates of this world. They are part of the problem and not the solution. Why?

Because they instill in our population a role-model image counterproductive for society. We cannot all become rich, but we all contribute to those who do and by their riches constitute a privileged class (see here) with an inordinate share of the wealth of this nation.

How would Paulson have made his without speculators bidding up the price of gold whilst a cartel keeps production in check so as to create a relatively tight commercial market in the metal? Still, it is unimportant to diminish the business acumen of the Paulsons of our world. It IS important however to put it into proper moral prospective. That is: Regardless of their astuteness, was the return not disproportionately too much for one individual?

Have we a right to ask the question, “How much is too much?” I say we do have that right, because we all contribute to the winner’s ability to succeed.

Nobody can generate those riches alone on a deserted island. They need societies with functioning market economies. And just who make up such market economies? Many, many people just like you and me - for whom therefore a warped distribution of income is a Social Injustice.

Yes, totalitarian communism is vanquished, dead and buried. But, no, Rampant Capitalism is not necessarily the victor. The real loser is the American middle-class, who have gone absolutely nowhere in terms of personal enrichment. Household incomes have remained relatively stagnant over the past quarter of a century (see here, BLS figures) with a measly CGR of 0.62% per year for a quarter of a century!

Thus, my question: Whilst a comparatively minuscule few (as a percentage of the population) are able to amass riches beyond imagination, is it morally correct that the remainder stagnate economically?

POST SCRIPTUM: Social Justice

Ours is a collective nation sharing both the Rights and Responsibilities of a Free Democracy. That should mean rationally that since all citizens contribute to the wealth generated, whilst they cannot share it equally (nor should they), neither should they share it hugely inequitably.

That can only come about by raising the marginal tax rates on both earned incomes and capital gains.

Such inordinate wealth, however earned, is of no great economic utility. How much of it will be used for investment purposes that help expand consumption by enhancing employment? Most of it, I venture, wont.

If taxed, I know what our government could do with the revenues. Plenty towards bringing about Social Justice in our country and creating jobs to achieve that objective.

Our socioeconomic heroes are unsung. They will never be featured in the pages of Forbes Magazine. They are members of the lower- and middle-classes who can no longer get onto the Economic Escalator to a better life. They are stuck in stasis - not going forward and slipping backwards.

Their aspirations and needs are smaller than Mr. Paulson’s reveries. But a lot more important to the well-being of this nation.

And economists should not be focusing on the Paulson Breed of Golden Boys, but on the unnoticed leading banal lives, ordinary people simply trying to keep their heads above water.

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By Inherit The Wind, February 2, 2011 at 7:25 pm Link to this comment

DPC:
Why is playing by the rules and not bending or breaking them important?

Can’t figure it out?

Because far, FAR more damage was done to us by the rule-benders and rule-breakers.

I have a hard time condemning a hedge fund manager who bet against the derivatives crowd, instead of joining the feeding frenzy.

You’re just pissed because he’s ungodly rich, and you’re not.

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de profundis clamavi's avatar

By de profundis clamavi, February 2, 2011 at 5:14 pm Link to this comment

So what if Paulson “plays by the rules”? It all depends on who’s writing the rules, and for whose benefit.

Who do you think writes our rules nowadays, such as the rule that hedge fund managers are taxed on their profit share, or carried interest, in hedge funds as if they were investors realizing capital gain, when in fact they never have any personal capital at risk most of the time?

Answer: Wall Street CEOs, through their control of campaign finance and their armies of Washington lobbyists, have been re-structuring our rules in their favor for the past 35 years or so. 

Here’s how it works: the fund manager buys a “limited partnership share” for about 1/100 or even 1/1000 of the cost of an investor’s partnerhship share. The managers’ partnership share, although supported by a neglible proportion of the total partnership capital, is entitled to a partnership share of a negotiated proportion, commonly 20%, of the total gains of the fund. This is called “carried interest”. Because the hedge fund manager actually invested a tiny amount of money in the partnership, the gains flowing to his carried interest are treated as capital gains, not ordinary income. If you’ve been paying attention for the last 30 years or so, the rate of federal income tax on “long term capital gain” has steadily been reduced, so now it is only 15%.

That is how venture capital and hedge fund managers get taxed at a rate of 15% on most of their remuneration, while their secretaries and security guards have to pay at the higher marginal rates for ordinary income.

“Playing by the rules” doesn’t automatically make something ethically just and right. If Attila the Hun or Caligula or perhaps Simon Legree is writing the rules, the rules are simply going to amount to codified injustice. That is the state of our Union today.

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By Inherit The Wind, February 2, 2011 at 4:23 pm Link to this comment

John Paulson is not Henry Paulson.  He is not Bernie Maddoff, he is not Ken Lay, he is not the head of AIG, Goldman, Sachs, Chase, BofA, or ANY of those banks and corporations who cheated and planned to cheat to benefit their investors knowing damn well it would hurt ordinary people.

John Paulson didn’t do any of those things.  He just made a shit-load of money playing by the rules.  There are abusers of the system and the rules that have a far more negative effect on all of us.

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By Kanomi Blake, February 2, 2011 at 3:22 pm Link to this comment

Looks like a lot of commenters are missing the point, which is more like you have to have money to make money and there’s no such thing as a level playing field, not even remote.

That said, I’d agree with Inherit the Wind. So far as the rules exist, this Paulson seems to compete within them, betting against corrupt housing bubble chicanery and criminal currency manipulations and flat out lies of a dead broken, lying political class and Fed, who are destroying savers and killing the future.

It’s not a “small” speculator like him who is rigging the markets Golden Sachs style, filling the Administrations with their cronies, rigging the health care debate to get guaranteed profits, engaging in blatant war profiteering, etc.

Of course speculators should still be taxed triple what ordinary income is taxed at, instead of the disgusting reverse we have now.

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By bill anderson, February 2, 2011 at 2:36 pm Link to this comment
(Unregistered commenter)

Paulson, 30% up in gold. Not so good, he missed 98% increase in pallidium.

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By de profundis clamavi, February 2, 2011 at 2:09 pm Link to this comment

Uh, Mr Adler, Sir,

You’re holding up Mr Paulson as somebody you seem to think we all should admire, and you imply that we could all emulate him, if we only had the “ideas” he does. You sound more than a little bit like Ayn Rand to me. 

Mr Paulson had a whole lot of money with which to speculate. Most of us don’t. What’s more, as a hedge fund manager, most of the money Paulson gambles with is not his own. If he wins, he wins big via his “carried interest”, but if he loses, he just tells his investors, “Sorry”.

Speculating in commodities, stock, property and derivatives is hardly a new “idea”; in fact, I would hesitate to characterize it as an “idea” at all.

Steve Jobs had an idea - the personal computer. Henry Ford had an idea - the working man’s car. Alexander Graham Bell had an idea - the telephone. Ideas like these actually change something about the way people live, in a way that is sufficiently attractive to them to become a commercial success.

Speculators don’t change anything, except themselves, from rich to richer. Mr Paulson’s “idea” to put money in gold last year did no good for anybody except him.

Mr Adler, you should take a look around you, and if you did you might notice that the mindset which idolizes and glorifies people who produce nothing but profit for themselves, at the expense of the prosperity of the vast majority of people, is rapidly going out of fashion.

“Greed is Good” Gordon Gecko said in the 80s film “Wall Street”.

We’ve seen that movie played out in real life a couple hundred times too many over the last 25 years or so.

We’re ready for a new screenplay, a new “idea” for America, if you will.

But that idea probably doesn’t include you, or Mr Paulson.

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By Gmonst, February 2, 2011 at 2:03 pm Link to this comment

I agree with you ITW, I don’t see what this article is about other than informing us a super rich guy did really well last year.  I don’t begrudge the wealthy making more wealth.  I don’t hate that there are super rich people out there.  There doesn’t seem to be anything nefarious in Paulson’s actions. 

I do sometimes wonder what kind of wonderful things could be done for the planet if a few of these ultra-wealthy folks got together and decided to really be charitable.  Not the kind of charity that invests charity funds in businesses that they are already invested in so the charity actually equals profit as the primary motive.  Instead, if these folks would decide that half a billion is probably more than enough to live on for the rest of their life, and so will just take that and put the rest toward feeding the hungry, getting clean water to those that need it, sheltering the homeless, etc.  I bet a lot of good could be done.  I don’t hate them because they don’t but I sometimes wonder what if they did.

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By Jaded Prole, February 2, 2011 at 10:47 am Link to this comment

The Gold buying frenzy is a scam and takes a lot of up front money. Given the reality of climate change, it is far wiser to stock up on grains, seeds and pallets of canned food. Food prices are rising faster than gold prices and will continue to rise as drought, floods and crop failure lead to famine. You can’t eat gold.

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By bob, February 2, 2011 at 4:22 am Link to this comment
(Unregistered commenter)

Why didn’t you mention that Paulson is the insider who profited handsomely from the sub-prime mortgages?

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By Inherit The Wind, February 2, 2011 at 12:52 am Link to this comment

OK. He didn’t invest in derivatives, he bet against them.
He didn’t buy the Republican bullshit about how the economy should work but instead invested in the eternal hedge, gold.
He didn’t play with his investors’ money while moving his own to other devices.
He put his own money right out there to risk with his investors’.
The BULK of his pay-day was made on his investment of his own money.
The rest was paid at the agreed-upon rate for successful performance: 20% of the gain.

Sure, he’s filthy-rich. Sure his funds did it via speculation.

But I’m still not sure I see the problem here. If more investment managers and billionaires were as smart as Mr. Paulson, NOBODY would have bought into the crazy derivative market and we wouldn’t be in this financial disaster.

What am I missing?

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By jltnol, February 1, 2011 at 11:25 pm Link to this comment
(Unregistered commenter)

But Mr. Paulson started with a LOT more than $17,000.00!

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By Big B, February 1, 2011 at 9:18 pm Link to this comment

Eat the rich (the poor are tough and stringy)

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