Narco-Dollars For Dummies (Part 2)
How The Money Works In The Illicit Drug TradePart 2 in a 13 Part Series
First published in the Narco News Bulletin
See also... PART 1 - The Real Deal: Narco-Dollars For Dummies
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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 II 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."
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Many Boatloads Later
It's more than fifty years now since the boats transporting Sam and Dave's white agricultural products docked in New
Orleans. I don't know what the Narco National Product (Solari's term for that portion of the GNP coming from narco
dollars) was in 1947, but lets say it was a billion dollars or less. Today, the Narco National Product that number is
estimated to be about $400 billion globally and about $150 billion plus in the United States.
It helps to look at the business globally as the United States is the world leader in global money laundering. According
to the Department of Justice, the US launders between $500 billion - $1 trillion annually. I have little idea what
percentage of that is narco dollars, but it is probably safe to assume that at least $100-200 billion relates to US drug
import-exports and retail trade.
Ok, so let's think about how much Sam and Dave have in accumulated profits in their bank and brokerage accounts.
Let's assume that the US narco national product in 1947 was $1 billion and it has grown to about $150 billion today.
Assume a straight line of growth from $1 billion to $150 billion, so the business grows about $3 billion a year and then
tops out at $150 billion as the Solari Index has bottomed out at or near 0 percent. America is about as stoned on
illegal drugs as it can get, and growth in controlled "Schedule II" substances has moved to Ritalin and other
cocaine-like drugs for kids that government programs and health insurance will now finance.
Let's take the BIG PERCENT margin that we estimated for Dave the drug man's net cash margin. Let's say that every year
from 1947 through 2001, that the cash flow sales available for reinvestment from drug profits grew by $3 billion a year,
throwing off that number times BIG PERCENT. Okay, assume that the reinvested profit grew at the compound growth rate of
the Standard & Poor's 500 as it got reinvested along the way.
That amount is an estimate for the equity owned and controlled by those who have profited in the drug trade. Total narco
dollars. How much money is that? I made an Excel spread-sheet once to estimate total narco capital in the economy.
My numbers showed` that Dave the drug man had bought up not only Sam's companies, but ---if you throw in other organized
crime cash flows----a controlling position in about most everything on the New York Stock Exchange.
When you think about it, this analysis make sense. The folks with the BIG PERCENT --- big cash margin ---- would end up
rich and in power and the guys working their you-know-what off for SLIM PERCENT --- a low cash margin --- would end up
working for them.
(continues...)
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...come back tomorrow for Part 3 of Narco-Dollars for Dummies...
- AUTHOR NOTE: Catherine Austin Fitts, author of Scoop's "The Real Deal" column, is a former managing director and
member of the board of directors of Dillon Read & Co, Inc, a former Assistant Secretary of Housing-Federal Housing Commissioner in the first Bush Administration, and the
former President of The Hamilton Securities Group, Inc. She is the President of Solari, Inc, an investment advisory
firm. Solari provides risk management services to investors through Sanders Research Associates in London.
Anti©opyright Solari 2002