Wednesday, August 8, 2012

Destroying the Wealth of Nations


(Note: I don’t believe wealth reside in nations, but in individuals.  However, I couldn’t resist this play on words….)

I have often considered the wealth destruction occurring in the West.  I have humbly attempted to consider this with the perspective of 500 years, not just the last five years since the real estate crisis became the straw that only signified the breaking of the camel’s back.

For this perspective, one must take a view beyond the United States – one should consider Europe.  Walk through any town and you will see buildings dating from the fifteenth century.  In any region there will be churches and monasteries that go back 1000 years or more.  There are dozens if not hundreds of universities that trace their origins to the time of Columbus or before.

I think of wealth not just on a balance sheet, but wealth in terms of culture, accumulated wisdom and knowledge, the captured savings of time.

What has become painfully visible in the last five years is the physical destruction of that wealth – if this hasn’t been clear before, it must be obvious to even the most obtuse observer that wealth is being destroyed today.

Wealth does not flow from government deficits.  Wealth does not flow from the printing press (or the digital equivalent) controlled by central bankers.  Wealth does not come from legislatures in Brussels, Paris, or Berlin.  Certainly, wealth does not flow from the fountain of Washington, DC.  Yet, increasingly over the years – and at an accelerated pace in the last several years – control has been exercised from these locations.  To the extent this control has been exercised, it is clear that wealth has been destroyed.

I think about the accumulated wealth of the West over the centuries, and today I come across this article:

Monte dei Paschi di Siena, the world's oldest bank, took five centuries to accumulate its wealth -- and three years to gamble it away. Its fall from grace is a disaster for its home city of Siena, which relied on distributed profits from the bank. Now the picturesque Tuscan city is trying to come to terms with the new reality.

I don’t know anything about the bank.  I don’t know anything about Siena.  However I read this quote and it speaks directly to the thoughts I have had regarding the wealth destruction of the west.

In retrospect, the bank's fall from grace can be dated to 2007. It was a time of mergers, and it was widely believed that small banks no longer stood a chance on the global financial markets -- not even a bank like MPS, which has been in business since 1472 and was lending money when Columbus was still learning how to sail.

Is it fair to date the “fall from grace” to 2007?  Certainly, this was when the cracks of Bear Stearns and Northern Rock were exposed.  But was this the beginning of the cracks?

There are so many possible dates one can select as the beginning of the fall from grace.  Many choices are valid.  However, it seems one certain time period is that of 1913 / 1914 – not that I suggest this is the beginning, but it is certainly when the bend in the line took its most dramatic turn.

In its most absolute sense, Europe turned to eat its own.  Certainly there had been wars throughout Europe before this, but none as devastating as the Great War.  Until this time, no war was more destructive of life and wealth as this war – nothing came close.

That the United States entered this conflict, despite a long-standing desire of its citizens to stay out of foreign conflict, would pay dividends of the negative kind in the coming decades.  It was only the first step in what would be even further wealth destruction of the west in the next Great War.  I do not intend to connect all of the dots in the case of the United States entering the world stage – suffice it to say for this day that I believe that U.S. entry into the first war was one step in ensuring greater centralization and state control throughout the west.  History has certainly proven this out.

Underlying this in the U.S. was the enabling technology of central banking, introduced in 1913.  This institution insured that financing such a massive wealth-destroying endeavor would be possible – and outside the purview of the legislature and of the taxpaying citizens.  Absent this institution, it would have been impossible for the United States to play its part in this wealth destruction.

The line tracing wealth creation, while certainly being bent toward a lower slope beforehand, was dealt its devastating blow in 1913 / 1914.  At this time, the line was bent permanently – from this point forward the pace of wealth creation would slow and eventually reverse.  This has certainly proven to be the case – beginning about 40 years ago wealth creation seems to have plateaued, and stayed flat or gone into reverse since then.

As I said, I think about this often – how much wealth was created in the West that it has taken one hundred years of persistent effort to destroy it.  And it is being destroyed.

The story of this bank in Siena is to me but a symbol.  Walk through any monastery or university town in Europe.  Read the works of Locke, Bastiat, or Jefferson.  Consider the weight of stored wealth – not only financial, but cultural and philosophical.  It has taken at least the last one hundred years of consistent effort to make the cracks visible. 

It is not a small game when wealth is consciously destroyed.  It speaks to the magnitude of wealth created that some portion of it has still survived after one hundred years of profound abuse.

Perhaps once we have gone through this episode, some portion of this accumulated wealth will have survived – and enough to offer a foundation for the proper rebuilding on a foundation that is far more free. 

This is certainly my expectation.

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