Reality check needed in the age of the demand for and supply of mega-bonuses

Time for a Reality Check Image: Michael Moffa

“Goldman Sachs Bonuses: Bank Paying Staff over $5 Billion for Just Three Months Work” –Huffington Post headline, April 18, 2010

The newly-minted well-suited Harvard M.B.A glances at your confidently steepled fingers while you tout the job perks and your company’s clout. You can’t help thinking that he looks like a cross between an attentive lap dog and lofty Lincoln enthroned in his Washington memorial. You know he is going to segue to the bonus anytime now, and he does.

You rattle off your well-practiced litany of hope, glory and maybes: “In this financial climate….performance-based….double-dip recession…team spirit….rational bonus scheme…signs of recovery…angry Main Street…snooping regulators…blah-blah.”

He suggests a bonus of $1 billion.

Thunderstruck, you ask him to repeat the figure. He does: “$1 billion.” That second bolt from the Hahvahd blueblood momentarily fries and boggles your mind. Incredulous, you confirm what he said. No mistake. That’s what he said.

Uncertain as to whether to laugh or rant, you settle for a quiet question: “How did you arrive at that figure?” He says it’s simple economics: “It’s because of J.P. Morgan, Paul Warburg and the Federal Reserve Act of 1913 that they helped engineer.” Mystified, you ask for more.

He says, “Because legislation in 1913 that authorized the creation of the Federal Reserve not only authorized its consortium of private banks to in effect print money, but also to lend, without risk to themselves, those fiat funds at a specified rate of interest. From their profits, and deducting the Fed’s expenses, they pay the Treasury.” Not quite grasping the point, but sensing there is one, you press for additional details.

He continues: “Under that authorization, the 2008 and ongoing stimulus packages and programs have exponentially expanded the money supply to the point where even the Federal Reserve imposed interest on the U.S. national debt may be impossible to repay.

“For any other country, this would result in runaway inflation because of international discounting, if not outright avoidance, of the currency. But, since the U.S. dollar is the world’s reserve currency and because oil is traded in dollar-denominated petro-deals, that flight from the dollar has not happened.” You say, “…..and?”

Sure of himself, he says, “But it’s about to begin.”You query, “How?”

He responds, “With the Russians, the Chinese and others pushing for an alternative reserve currency or basket of reserve currencies. When that happens, the dollar will collapse, prices here at home will skyrocket, especially the costs of oil and commodities, and everything will become very, very expensive. By the end of my contract year, I expect.”

Still puzzled as you try to hang on by and to this logical thread, you ask, “But why $1 billion?”

Without so much as a Bernanke blink, he replies, “To buy groceries after the hyperinflation starts.” Ah, now you get it. He’s trying to run the Weimar hyperinflation scenario past you.

A history buff yourself, you ponder what he’s laid out, pause and say, “I see. Hyperinflation. Yes, that Weimar German thing with people carting bags of money to and from banks just to buy a loaf of bread or save for one. Awful, just awful. Why, sometimes the bags were stolen and the money was left behind! Yes. I can see the rationale for a $1 billion year-end bonus, given that runaway hyperinflation, as you suggest, will hit us by then. Yes, it seems inevitable. Terrible, but inevitable.

“In fact, I find your argument so compelling and your prediction so certain that I am going to make sure that you get even more than $1 billion as a bonus.”

Taken aback and eager to hear more, he asks, “How?”

Quick as a Wall Street trade, you reply, “We’ll give you the bag instead of the money.”

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