GuidoWorld

Borrowed Wealth

July 30, 2007 on 10:04 pm | In General |

Before I go onto my prediction of where are economic structure is headed, I thought I’d take a few moment to review and emphasize how much we overestimate the positive role capitalism has played in the US wealth accumulation.

Let’s look at a some of the non-capitalistic aspects of wealth generation which played a factor in our growth in the standard of living of most Americans. First we benefited from the discovery and use of electricity and the use of oil. We were fortunate to have a relatively pristine land with amazing resource wealth, which included huge virgin forests, coal, oil, natural gas and fresh water. Unlike we had no political and few language boundaries.

We were fortunate to be a rising empire at the center of life changing technologies such as the light bulb, telegraph, railroad, radio, car, airplane, TV, computer, nuclear energy, etc. While Europe and Asia were ripped apart by war and conflict we were far from the destruction and participated in their conflicts on our terms. We lent money to the aging powers who were trying to hold on to their past, and gained handsome wealth from being in the position of power at the world war’s end.

Our life expectancy surged from medical discoveries and public health policies (which were more socialistic rather than capitalistic) likewise public education. The US was able to include the new technologies into the infrastructure of cities as they were being built, as opposed to Europe who often had difficulty introducing new technology into infrastructures that had existed for centuries.

All of these advantages allowed us to become an empire. Once an empire we enjoyed the spoils of the victor. We were able to supplement our resource and monetary wealth by tapping into the resources and labor power of the entire globe.

Yet, despite all of these factors we started to find it difficult to maintain and improve upon our wealth. As our nation become less frontier and more developed territory we started to face some of the problems of other industrial nations. Soon our growth become dependent on using the resources and labor of other nations. Our economic dominance increasingly relied on global financial and military dominance. Our economic prowess became increasingly dependent on using resources at faster and faster rates.

At the beginning we were fat and we lent to the lean, now we borrow at a pace which is as unprecedented as was our wealth. We use resources that probably should have lasted hundreds of years in a couple of decades. We use the resources of other nation’s as if they are our own. We borrow money, goods, labor and resources from almost every nation on the globe.

At some point in time one has to wonder when borrowing is a sign of poverty and not wealth. At some point in time the borrowing from the future has to damage not only the future but the present. Here are some statistics that seem to indicate that we may have reached that point. Not only is our borrowing deluding us to overestimate the wealth of our nation and the benefits and superiority of capitalism, but it is deluding us into thinking we our currently wealthy when we are not.

At the website bullnotbull.com I read this article written by Robert Prechtor in April of this year.

Today, much of the public has switched to so‑called hedge funds (a misnomer). Bridgewater estimates that the average hedge fund in January had 250 percent of its deposits invested. This month the WSJ reports funds with ratios as high as 13 times. How can hedge funds invest way more money than they have? They borrow the rest from banks and investment firms, using their investment holdings as collateral. So they are heavily leveraged. And this is only part of the picture. Much of the money invested in hedge funds in the first place is borrowed. Some investors take out mortgages to get money to put into hedge funds. Some investment firms borrow heavily from banks and brokers to invest in hedge funds.

This passage describes how obscene our borrowing has become. It also alludes to how common this practice is and to how basic it is in how we do business. Anyone who borrows 13 times what they have is going to look wealthier than they really are. Anyone who lends money to such an entity when the collateral itself is mostly borrowed is economically insane.

Yet, that is where we are. That is the veneer by which our society continues to look wealthy. That is the method by which record “profits” are currently generated in our society. The question is where is this all headed?

My next post will pose my theory on where this is all headed.

Jim Guido