A company makes an item, or multiple items, and their finances look great. The finances fall apart. People dig into the books and find the company had stopped focusing on making money from making the items they were supposedly in business to sell.
Instead, the company had started making money from fancy footwork in their finances.
Fancy Financial Footwork in digital currency miners
The first place I heard about this recently was in Nathaniel Whitmore’s podcast The Breakdown with NLW. It’s a CoinDesk podcast, the specific episode is “Where Bitcoin Mining goes from here” from January 8 2023. In that episode Whitmore refers to the January 1 2023 CoinDesk article “What Will It Take for Bitcoin Mining Companies to Survive in 2023?” by George Kaloudis.
Before going on, I know bitcoin and crypto currency are controversial topics for many people.
The principle still applies. If a company makes money not from selling the things they claim to be making for a profit, but instead from playing financial games, something is deeply wrong. Kaloudis attributes bitcoin miners sitting on bitcoin and playing financial games to make money to two conditions: the price of the good supposedly being produced is increasing, and the cost of capital is low.
Fancy Financial Footwork in GE, which used to make physical things
I suppose General Electric’s financial arm had similar excuses in the 2000’s, but what excuse did GE’s top management have?
The second podcast I’m going to link is Jim Grant’s Grant’s Current Yield podcast. The episode is “Destruction of Value” from January 19 2023. Grant and his co-hosts interviewed William D. Cohan about his book Power Failure: The Rise and Fall of an American Icon.
General Electric (more precisely the General Electric which existed for most of its history and made many types of machines and physical goods) and Bitcoin are about as far apart as anything technical I can think of. Grant’s Interest Rate Observer and CoinDesk are probably as far apart as any two nonfiction publications I can think of.
Yet, the conversations were similar. Cohan had found that General Electric was more focused on GE Finance than the other parts of GE which made things. It was easier to make money from money than to make money from jet engines and whatever else GE made.
Large amounts of GE’s profits were coming from their finance arm. They financed an astounding amount in commercial paper markets. At one point, before things started crashing in 2007, they were one of the largest issuers of commercial paper.
This has nothing to do with the physical goods GE was once known for making. At the time of the Grant’s Current Yield episode, Cohan said GE is still breaking down into two or three smaller subsidiaries.
Why I am writing about this.
I use this blog to write about people using technology. There’s technology I use, and some of that I write about. I write about people who talk to me about using technology. I’ve written about people who ask me for recommendations on which technology I think they should use.
The theme I keep coming back to is the user of technology being honest with themselves. What do they want to do? Why do they want to do that? How are they planning on doing that? What results have they gotten in the past? What results are they hoping to get in future? And what results are they actually getting in the present?
It’s when people are not honest with themselves that I see the biggest problems with their use of technology. And it’s when people are not honest with themselves or others that I see the biggest problems in their lives in general.
Making money from moving money around is fundamentally different from making things and selling those things. As Cohan mentioned in the Grant’s Current Yield episode, making money from money is regulated in very different ways from making money from making things. A company which does one while saying they do the other is being dishonest at some level. And it will cause problems.