One day the U.S. will have a financial reckoning. I have a feeling that when this happens, a lot of people will be surprised. Most people who save for their retirement rely on nice printed figures from their banks or investment advisor, telling them how wealthy they are. However, these sorts of numbers are more ephemeral than most people realize.
Let me tell you a mythical story about Bill. Let’s say Bill’s neighbor George is running a Ponzi scheme. Not knowing that it is a Ponzi scheme, Bill puts money into it. George gives Bill a statement each month, telling how much Bill’s wealth is growing. Bill knows some other people invested in this “fund”, who have successfully pulled their money out for a profit. Therefore, Bill invests his money into it. Let’s say Bill put in $1,000 a year ago. The statement George gave Bill last month says his money has increased to $1,500!
Here’s the question – does Bill actually have $1,500, or do he have a sheet of paper which tells him that you have $1,500?
Now let’s say Bill take his statement to the bank, and asks for a loan, and pledges the $1,500 in the George’s Ponzi scheme as collateral. The bank agrees (since they also don’t know it is a Ponzi scheme), and loans Bill $1,500. Now, let’s say that Bill’s neighbor tells him that something great is happening, so he better invest more now before the value shoots through the roof. So Bill takes the $1,500 from the bank, and reinvests it with George. The next month, George gives Bill a statement that shows that his new $1,500 investment has grown to $2,000 in a single month!
So, at this point, how much money does Bill think he has?
- He put in $1,000 at the start
- He made $500
- He used the investment as collateral for a loan of $1500
- He invested the $1,500
- He made another $500 on the new investment
So, Bill think that he has $4,500 in assets, offset by $1,500 in loans – so, a total of $3,000 from an original investment of $1,000. So, when Bill’s wife asks you how much he has in savings, Bill respond that he has $3,000.
Now, let’s say that tomorrow George is arrested, and his Ponzi scheme is discovered. It turns out that he was only keeping enough money to pay people who asked to withdraw, and spending the rest. He only had $5,000 in assets, but 100 investors. That means, each of them receive $50.
Now what does Bill’s account look like?
Well, now, instead of having $4,500 in assets, he only has $50. However, Bill still has the $1,500 loan. So, instead of having a nest egg of $3,000, he owes the bank $1,500, and only has $50 to pay it off. This is what a financial day of reckoning looks like.
So here is my question – at what point did Bill lose his money? My answer – when he put it in someone else’s hands.
Paper investment works when a society is moral and dutiful. When people put honoring their word above their own comfort, paper investment can work wonders, as it removes much of the burden of keeping and preserving wealth, and offloads it to people who are better at it. Unfortunately, that isn’t our society today. We live in a fully-pornified culture – anything at all to satiate what I want now. This is true of everything from TV to healthcare. I want it now, immediately. Oh, my obligations to you? No, I want what’s mine, and I’ll give you what I owe you only if I must. And this behavior is enabled and supported by the government going into debt every year, and the federal reserve continually printing money to support it all.
So what’s the solution?
It’s okay to have investment in paper assets, but realize that they are just part of a Ponzi scheme. In fact, even the money you have in your wallet is part of the same. Let’s say that you kept all of your money hidden in your mattress. Let’s say you saved $100,000 over 10 years. Well, with a 3% inflation rate, your money would only be worth $75,000. If inflation is at 10%, it would only be worth $30,000. If we have a real financial reckoning, you might as well have spent the money.
Here’s the deal – we have money so that later when we need things we can buy them. However, since the people behind the money system aren’t doing their job, we need to buy the things now, and buy them in such a way that they are usable later. Stored food, home capital assets, seeds, land (that you actually own, keep, and use), and valuables (jewelry, gold, silver). You need things that won’t go poof when the financial system does. A lot of people will one day find that the fortune that they thought they saved doesn’t really exist. They will think that it all disappeared the day they found out about it in the news. However, just like George’s Ponzi scheme, the truth is that the money was lost long before they found out about it. They were just fooled by the nice-looking monthly statements.
Stay tuned to read part 2 of this series, where we will go deeper into building long-term wealth today.