I believe all the QE that is been going on is a serious misallocation of capital. As the “fresh” printed currency comes in the hands of the large companies and top 1% of the world first and so they profit the most in buying back their own shares and real estate driving up the price of the assets even more before they dump it on the work slaves rest 99% of the population… It’s pure theft and makes the world even more unequal in a rapid pace.
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The dot-com bubble: Investors in the early 2000’s started speculating around lots of internet projects and companies, internet was a recent invention back then. Investors were really bullish in this projects and some just FOMOed in. Some of these projects had people investing in them just because they were apparently going to go big, but some didn’t even have a real business behind and most of the investor capital was spent in marketing to continue this cycle.
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I believe that investment of the big Construction companies like MJM Projects Pty Ltd in australia,in 2012-2018 which many other huge construction companies got involved in the property bubble,Could be a example of Mlainvestment,
As December 2018,sydney and Melbourne along with some regional major cities have experienced price declines of up to 10 percent over the year, with a further 10-20 percent forecast in the near future.
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This year in Bulgaria, the government purchased 30k BGN (~17.9k USD) for the development of a web site and mobile application to inform people what are the prices of umbrellas and deck chairs on different beaches and how busy are they. Guess what, Google Play says that the app has been downloaded ‘more than 10 times’. And the site has no more than 10k visitors for the whole summer season (if we are to trust what the government says). This is a huge misallocation of capital since this money come from citizens’ pockets through taxes. And most people would doubt if all the money went to the developers of this nonsense. Pretty sure that some part of it went straight to the pockets of these clowns that run the ministry of tourism. Shame.
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Using the example of pets.com was a huge malinvestment starting because there was not a proper consumer analisis done as well as the prices they were selling their products was not been consequent with the price they were paying for the production of the items.
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lets take MCI. If some of you remember they broke up the phone monopoly with Bell Atlantic who had control off all the telephone line system. After winning in court and breaking the Bell Atlantic monopoly MCI became the trend setter in communications and as a result many other communications companies emerged.
Years later MCI decided to invest and partner with World Com. The only problem is that World Com was committing fraud and cooking the books, long story short. One main down fall is that MCI didn’t investigate the books and company background all too well. As a result, the authorities fined what was then MCIWorldCom millions forcing them to have to shut down.
The discovery of the fraud World Com committed showed a huge miss-allocations funds going straight to the CEO’s as they robbed from the customers and the company. I’n addition were overly charging customers fees and taxes that were not reported.
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There are many real estate projects issued by developers that sell off plan homes, take peoples money and vanish. That is Malinvestment.
Infrastructure projects that are funded internationally, putting the country and the people in debt commitment to the lender, the project gets half way done and the contractor stops. The people carry the burden. Malinvestment.
Companies issuing bonds and failing to honor them, that is Malinvestment.
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Investing in the US dollar meets the definition of a malinvestment. Historically, there is no form of fiat currency that has not gone to zero. Purchasing power of the dollar has gone down greatly after it was no longer backed by gold. The current increase in money printing will continue to weaken the purchasing power of the dollar over a long period of time. The US dollar will lose it’s value compared to gold or bitcoin.
A malinvestment to me would be blockbuster it had over 1 billion in debt and filed for bankruptcy but was brought out of bankruptcy for 350 million. It had the chance to buy Netflix for 50 million before they filed for bankruptcy but didn’t. Was also delisted from the NYSE but was still getting investments right up to the delisting.
Research an investment (could be a public company, private company, government agency, infrastructure project, etc) that you believe meets the definition of a malinvestment (past or present) and argue why you think it’s a misallocation of capital (3-5 sentences).
Ans: I think investing in fiat currency meets the definition of a malinvestment. Historically, there is no form of fiat currency that has not gone to zero. It ALWAYS has collapsed! For example, the purchasing power of the dollar has gone down significantly after it was no longer backed by gold beginning in 1971. The current practice of creating money out of thin air will continue to weaken the purchasing power of the dollar over a long period of time. The US dollar will lose it’s value compared to gold or bitcoin and I am afraid will be worth nothing in the long run. Savers will be losers for real!!
Malinvestment: putting money in savings account against current money printing policy.
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Croatia is a full of bad investment, in one sentence whole new country was a fraud and now we can notice all the consequences of this big Croatian projects, one of them is a big chain of supermarkets, so the government allow couple of tycoons to take an enormous amount of credit from the Russian bank, after 20 years the supermarket were making business without positive results and to save the supermarkets we had to return the credit to Russian banks , but as the company did not have liquidity Croatia had to give some fresh water source to Russians , so now we lost our precious water (not the mention that water should not be on the stock market and sadly it is). It is a misallocation of the capital because never ever they made a good investment plan and it was surely possible that the project could be done without taking the credits from the Russian banks. They could easily start with one shop and grow as the market demand grew.
I would say Bitconnect. Bitconnect has attracted many customers with good marketing strategy and promises of high yields in a short time. Some of these were paid out via a trading bot, but in the end it turned out to be a ponzi scheme.
US Military Spending. Too much money is going into the Military at a time where there are very few wars even going on. Yes, supplying the Military with enough funds to keep it operational is needed, but why so much? The US defence spending is higher than the following 10 countries combined, four of which are US allies. While the % of GDP spent on the military is 3.4 (which seems to not be that much) that amount in US$ is kind of shocking. Almost 750 billion US$ is being spent on the US Military. That is more than a third of the world’s total.
A malinvestment that has taken place since the 2008 crisis and the free money loaned to large corporations such as Apple is that they use the money to repurchase their own stock and therefore sending the stock’s price into bubble territory. On a market decline, the retail investors and pension funds are the only losers when companies start dumping their own stock. it is basically a pump and dump scheme.
I learned about OneCoin in another course:
https://www.youtube.com/watch?v=mTCG5jrr4uY
I think this is a good example of a mal-investment because it is a pyramid scheme that pretends to be a cryptocurrency.
I think currently we are in a time we’re in a time where probably a lot of malinvestment is taking place due to the pandemic. Probably the bailout of the airlines could be considered as one. Let’s take KLM-Airfrance as an example. There is no real outlook on airtravel being restored to the level it was before. Yet these huge companies are being kept afloat by pumping in a lot of money where probably there is no economic viability.
I think Lufthansa requested to first go bankrupt and then get financial aid to restart instead of being bailed out. Perhaps that is a better way forward.
Also in Japan there are a lot of zombie companies due to past bailouts, I read somewhere.
Gordon Browns decision to sell half of Britians gold reserves has been called “The worst financial decision of all time” (The independent, 2019,[https://www.independent.co.uk/voices/gordon-brown-gold-reserves-sold-economy-analysis-financial-bullion-a8909611.html ])
He had no credentials for the job of chancellor, no finance experience and this led to him selling for historic lows and he announced the sale well in advance, including the volume to be sold as a consequence the market was front run, a huge tactical error and malinvestment. Furthermore the logic behind the sale was that we had somehow entered a time when safe haven assets where not important, since that time gold prices have increased 5x proving this assumption to be deeply flawed.
In the UK our local council received government funding as part of COVID plans to implement road traffic reduction schemes which basically involved closing a large number of roads in our area to encourage people to walk, cycle, exercise more and to reduce pollution. In principle this is a nice idea but during public consultations there was an overwhelmingly negative response from local residents but because they had the budget they just did it anyway. Now there’s traffic jams on all the main roads, more pollution from longer journeys and various petitions being submitted to get rid of them. It was a solution trying to find a problem.
The US Housing bubble of the early 2010s initially came about through the demolition of unoccupied houses in Detroit, in a response to decreasing population density.
Shortly afterwards, due to the projected cost of demolishing around 10,000 deteriorating properties in Dayton, Ohio, (about $14,000 per home), financial assistance from the Federal Neighbourhood Stabilization Program was sought out, as the city couldn’t afford it.
However, only about 15% of the derelict houses were processed with the support from the NSP ($28 million), and Dayton City officials calculated that they would need an additional $30 million to complete the process.
We can consider this to be a malinvestment, as this was happening during a crisis of homelessness in America – instead of tearing down empty buildings, they could have been given to the homeless, and those funds could instead have been used to support their rehabilitation into society, as well as their re-entry into the job market via training programmes.