CAF Note: We were discussing the Pope’s current dilemma with the Vatican bank – to launder or not launder? The Solari team and I decided to revisit the fundamental economics of conceding the high margin businesses to your enemies. After our discussion, I thought it would be good to revisit my old description from Narco Dollars from Beginners that I published in 2001. This story is at the heart of the fundamental economics throughout the news today.
The Economics of Production:
Sam and Dave Do Boat Loads of White Agricultural Substances
Okay, let’s start at ground zero. It is 1947, and World War I I is over. America is ready to go back to work to build the corporate economy. We are in New Orleans on the docks.
Two boats pull into the docks. The first boat is full of a white agricultural product grown in Latin America called sugar. The owner of the cargo, lets call him Sam, sells his boat load of white agricultural substance to the sugar wholesaler on the docks for how much money?
Ok, so let’s say that Sam sells his entire boatload of sugar to the sugar wholesaler on the docks for X dollars.
Now, after Sam pays his workers and all his costs of growing and transporting the sugar, and after he and his wife spend the weekend in New Orleans and he pays himself a bonus and buys some new harvest equipment and pays his taxes, how much cash does he have left to deposit into his bank account? Or, another way of saying this is: What is Sam’s net cash margin on his sugar business?
Well, it depends on how lucky and hard working and smart Sam is, but let’s say that Sam has worked his proverbial you know what off and he makes around 5-10 percent. Sam the sugar man has a 5-10 percent cash profit margin. Let’s call Sam’s margin S for slim or SLIM PERCENTAGE.
Back on the docks, the second boat—an exact replica of the boat carrying Sam’s sugar—is a boat carrying Dave’s white agricultural product called drugs. In those days this was more likely to be heroin, these days more likely to be cocaine. Whatever the precise species, the planting, harvesting and production of this white agricultural substance, Dave’s drugs, are remarkably like Sam’s sugar.
Ok, so if Sam the sugar man sold his sugar to the sugar wholesaler for X dollars, how much will Dave the drug man sell his drugs to the drug wholesaler for? Well, where Sam is getting pennies, Dave is getting bills. If Sam had sales of X dollars, let say that Dave had sales of 50-100 times X. Dave may carry the same amount of white stuff in a boat but from a financial point of view, Dave the drug man has a lot more “sales per boat” than Sam the sugar man.
Now, after Dave pays his workers and all his costs of growing and transporting the drugs, and after he and his wife spend the weekend in New Orleans and he pays himself a bonus and buys some new harvest and radar equipment and spends what he needs on bribes and bonuses to a few enforcement and intelligence operatives and retainers to his several law firms, how much cash does he have left to deposit into his bank account? Or, another way of saying this is what is Dave’s net cash margin on his drug business?
It’s also going to be a multiple of Sam’s margin, right? Maybe it will be 20 percent or 30 percent or more? Let’s call it B for Big, or BIG PERCENTAGE. Dave the drug man has a much bigger “cash profit per boat” than Sam the sugar man. Part of that is, of course, once Dave has set up his money laundering schemes, even after a 4-10 percent take for the money laundering fees, it’s fair to say his tax rate of 0 percent is lower than Sam’s tax rate. While it is expensive to set up all the many schemes Dave might use to launder his money, once you do it you can save a lot avoiding some or all of the IRS’s take.
Look at your estimate of Sam and Dave’s sales and profits. Now answer for yourself the following questions.
Who is going to get laid more, Sam or Dave?
Who is going to be more popular with the local bankers, Sam or Dave?
Who is going to have a bigger stock market portfolio with a large investment house, Sam or Dave?
Who is going to donate more money to political campaigns, Sam or Dave?
Whose wife is going to be bigger in the local charities, Sam or Dave’s?
Whose companies will have more prestigous law firms on retainer, Sam or Dave’s?
Who is going to buy the other’s company first, Sam or Dave? Is Dave the drug man going to buy Sam the sugar man’s company, or is Sam the sugar man going to buy Dave the drug man’s company?
When they want to buy the other’s company, will the bankers, lawyers and investment houses and politicians back Sam the sugar man or Dave the drug man?
Whose son or grandson has a better chance of getting into Harvard or getting a job offer at Goldman Sachs, Sam or Dave’s?
Don’t listen to me. And don’t listen to Peter Jennings, Dan Rather or Tom Brokaw. Who do you think pays their salaries? Who owns the companies they work for? Sam or Dave?
Don’t listen to anyone else. Think about the numbers and listen to your heart. What do you believe?
There is very little about how the money works on the drug trade that you cannot know for yourself by coming to grips with the economics over a fifty year period of Sam and Dave and their boat loads of white agricultural substance. It is the magic of compound interest.
As one of my former partners used to say, “Cash flow is more important than your mother.”
