Illusion and reality, smoke and mirrors – the investment delusion

The Investment Delusion

…………………Let’s start with fundamentals: the nature of wealth. Ask ten people on the street today for a definition of wealth, and dollars will get you doughnuts every one of them will tell you that wealth consists of the possession of plenty of money. That’s what nearly everyone thinks, but they’re quite wrong, and it’s easy enough to show the fallacy.

Imagine that a private jet full of politicians makes an emergency landing on an uninhabited island in the Pacific. Each of the politicians is carrying a briefcase containing $1 million – we’ll be polite and say it’s from campaign contributions. The island has a water supply and enough natural foodstuffs that the politicians don’t have to worry about starving to death. Will the politicians on the island have a standard of living corresponding to their net worth of $1 million each? Of course not; their actual prosperity will be measured by the breadfruit they harvest, the fish they catch, the huts they make, and so on.

Money, in other words, is not wealth. It’s a social mechanism for distributing wealth. It means nothing unless there’s real wealth – actual, nonfinancial goods and services – to back it up. In a healthy market economy, there’s a rough balance between the amount of money in circulation and the amount of real wealth produced annually, and so the confusion between money and wealth can slip by unnoticed. When money and wealth get out of sync with one another, problems sprout.

The economic history of the 19th century offers a good example. The rising industrial economy of the time drove a massive increase in the production of real wealth. Most industrial nations, though, inherited money systems backed by gold reserves that offered few options for expanding the money supply to match the supply of real wealth. The result was a deflationary spiral that brought major economic depressions every couple of decades for most of the century. In response, in the 20th century, nation after nation abandoned the gold standard’s straitjacket and retooled their money systems to meet the needs of an expanding economy.

That’s the context of the present crisis because, in terms of real wealth, we no longer have an expanding economy. The production of real wealth in the world’s industrial nations has been in decline now for decades. Some of the deficit has been made up by importing real wealth from overseas, but not all; compare the lifestyle available to a single salary working class American family in 1969 to the lifestyle available to a similar family today and it’s possible to get a glimpse of just how much impoverishment has taken place over the last forty years.

This impoverishment went unnoticed by most people because the money supply didn’t follow suit. Until the economy came unglued in the second half of 2008, money had never been so abundant or readily available. Some of it got spent on real wealth, which is why real estate and other commodities soared to giddy heights, but most of it was diverted instead into various forms of abstract pseudo-wealth related to money in much the way that money relates to real wealth. Yes, I’m talking about your investments. …………

…………Thus the only investment advice I can offer is to get out of investments altogether, and put your money into something that will actually be useful: training in practical skills that will make you employable in a deindustrializing economy, for example, or extra insulation so you can keep your home livable with less energy. At this point in history, the belief that it’s possible to have your money make your living for you is basically a delusion; it’s likely to be a fairly persistent one, but those who can shake themselves free of it and adjust to life in a radically different economic reality are likely to do better than those who keep on chasing the prospects of an age that is ending around us.

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