The lifecycle of capital follows a wide-ranging succession. It is imagined, produced, consumed, and destroyed. How exactly this all takes place involves varying and infinite undulations.
One generation may produce wealth. While the next generation burns through it. Various facets of a person’s capabilities, understanding, industry, and character can determine if they’re producers or consumers. The most determinant facet of this, however, is how one approaches their unique circumstances.
The July 21, 2014, edition of Forbes Magazine documented the Stroh family’s methodical rise and swift disappearance from the beer brewing business. The print edition of the article titled, How to Blow $9 Billion, began with the following summation:
“It took the Stroh family over a century to build the largest private beer fortune in America. And it took just a few bad decisions to lose the entire thing.”
What worked for the Stroh family was taking a long time horizon. Wealth was built by incrementally acquiring and growing a loyal and devoted regional customer base. What didn’t work for the Stroh family was its debt financed acquisitions of Schaefer and Schlitz, and the costly bid to become a national brand.
By the 1980s, Stroh had gotten too big for his britches. One early morning, with little marketing budget left over after servicing debt and operating costs, a valuable insight came to CEO Peter Stroh: Acquiring national customers is expensive. What’s more, unlike regional customers, national customers are fickle.
Within a decade the 150 year old Stroh family beer business was sold off at fire sale prices. We mention the capital lifecycle of Stroh, as an example. Our interest today is not the experience of Stroh, per se. Rather, we’re interested in wealth.
Where does it comes from? How is it accumulated? And how it is destroyed?
Here at the Economic Prism we like to keep things real simple. Thus, what follows, is an attempt to simplify things for our own elementary edification…
How Wealth is Produced, Accumulated, and Destroyed
As we understand it, when a depositor makes a deposit he is, in essence, lending money to the bank. But what does the money represent?
If the deposit is earned money, it represents something of equal value produced by the depositor’s labors. The deposit also represents something the depositor would rather save than consume.
For example, the deposit could represent a coffee table. In this regard, there are only a few things to do with a surplus coffee table. You could store it for your own future use. You could trade it with a neighbor for something of equal value.
In each of these instances, there’s no increase in capital. The coffee table remains a coffee table. Nothing more. Nothing less.
Alternatively, you could sell the coffee table for money. If you then stuff the money in your mattress, you have the equivalent of one coffee table. Again, there’s been no increase in capital.
But suppose you deposit the money at your bank and leave it there at interest. You would’ve loaned the bank your surplus labor in the value of a coffee table. And the interest paid represents the beginning of an increase in capital.
Now consider that after your deposit, an enterprising carpenter, who’s without tools and materials, borrows your deposits from the bank to buy a table saw, doweling jigs, and red oak lumber. These tools and materials represent your coffee table.
But with these tools and materials, the carpenter gets to work and makes three coffee tables. One he keeps for himself. The other two he sells.
With the earnings of one of the coffee tables he repays the bank the money he borrowed to buy the tools and materials. After that, he still has the proceeds of the third coffee table, which is profit. Then, instead of spending this profit, he saves it. He deposits it in the bank at interest.
Now the bank has the capital of two coffee tables. In addition, the carpenter still owns the tools. All from one surplus coffee table to begin with.
Through this process wealth has been produced and accumulated. And more wealth can be produced and accumulated in this manner, provided the labor is not lost. Yet just as wealth has been produced and accumulated, it can also be consumed and destroyed…
Now suppose a third man comes and borrows all of the money that the carpenter had deposited. But instead of investing it in his own labor and ingenuity, he uses it to make an ill-advised speculation on shares of General Electric. The borrowed money, for both the lender and borrower, represents a loss. Specifically, in this instance, the loss is equivalent to the amount of labor necessary to produce two coffee tables.
Still, in this example, the loss is limited. The borrower learns a valuable lesson from the school of hard knocks. The lender can likely write it off without much effect.
Real wealth destruction, however, the sort that most inhabitants of the globe – including you – are subject to, is a whole different ballgame…
The Zealous Pursuit of State Sponsored Wealth Destruction
Remember, the value in money is in what it represents. Every dollar of actual money should be derived from a dollar’s worth of wealth that has been produced. Every dollar of credit multiplied upon that money should imply a dollar’s worth of wealth that’s in the process of being created.
This is how wealth creation should work in a world where money is sound, budgets are balanced, and bankers stand behind their loans. The present world, however, rarely works as expected. Through policies of state sponsored wealth destruction, wealth is extracted from those who created it and then set on fire with systematic efficiency.
This is accomplished through fake money, deficit spending, and central bank manipulation of credit markets. The results are an unending assortment of gross distortions, misallocations, debt pileups and losses. Moreover, the average wage earner – those who work hard, save money, and pay their way in life – don’t stand an honest man’s chance.
You see, within the system of fake money, big deficits, and central bank intervention, money is continually debased, That is, the relationship to the wealth that money represents is degraded. The money’s buying power is impaired. The labor that earned the money is diminished. The time it took to accumulate it is stolen.
When a government pursues largescale, state sponsored counterfeiting operations…when it issues bogus money – money that has no definite relation to any form of wealth that’s been produced – what comes next is well known. There’s progressive inflation of consumer and/or asset prices, which can only be halted by a central bank engineered financial disaster.
Federal Reserve increases to the federal funds rate in 1980 snuffed out the rampant consumer price inflation of the 1970s. Fed rate increases also pricked the asset bubbles of 1987, 2000, and 2008. Fed rate increases are also in the process of pricking today’s asset bubbles.
Yet this week Fed Chair Jerome Powell dithered. If you recall, President Trump wants lower interest rates and higher asset prices. The S&P 500 index is how he measures his success as President. He’s publicly hammered on Powell over his position.
On Wednesday, Powell demonstrated his spine’s made of silly putty, and that he’ll bend under Trump’s repeated hammer swings. While giving a speech at the Economic Club of New York he mentioned that the federal funds rate was “just below” the neutral level. In other words, the Fed may be nearing the conclusion of its rate increasing cycle. Following Powell’s remarks, the S&P 500 jumped up nearly 2 percent.
More importantly, should Powell continue the zealous pursuit of monetary policy where the federal funds rate is below the rate of consumer price inflation, he may birth an attack of state sponsored wealth destruction that Americans haven’t experienced in nearly 40 years. In the end, the savings of a lifetime’s worth of labors, reconverted to money, may not be enough to buy a gumball.
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