Years ago I read a most significant book — "The Rich and the Super-Rich," by Ferdinand Lundberg. What he had to say is very pertinent to our present economic situation.
The first point he made is that wealth is not money. Wealth consists of assets — land, tools, factories and skills. Money is merely a medium of exchange. The difference is important. A truly rich man owns stuff — land, houses, factories, means of transportation. He does not depend on a salary for cash flow. Nelson Rockefeller, for example, once testified before Congress that many years he had no taxable income. He, of course, didn't need it. He owned stuff, and he owed nothing.
The easiest way to understand this difference is to imagine that you are about to be marooned on a deserted island. You are given a choice of one of three cases: one case contains $1 million in gold; another contains $1 million in Federal Reserve notes; and the third case contains tools. Which would you choose? Well, unless you are hopelessly stupid, you'd choose the tools. With the tools, you could create the wealth necessary for survival — shelter and food. Gold and dollars are useless unless there is someone willing to exchange real wealth for them.
Let's look at a guy who has the appearance of being rich. He drives a fancy car, but it is leased; he lives in a big mansion, but he pays a monthly mortgage; he belongs to several private clubs, but he pays dues; he buys pretty much what he wants to buy, but he uses credit cards; and he has a gold-standard health-insurance policy, for which he pays a high monthly premium. What is clear is that this guy is not really rich; he is living off his cash flow. Cut that cash flow and all his appearances of wealth will vanish. Layoffs and bankruptcies cut cash flow.
Another point to keep in mind is that owning stocks is owning paper. Go back to the deserted island. The only use $1 million worth of blue-chip stocks would be is as a fire starter. If you own stocks, you own pieces of paper, and unless you can sell them, they are, in fact, worthless. Remember Enron?
While it's out of the experience of most living Americans, what made the Great Depression so devastating was that it cut cash flows and rendered paper wealth worthless. Many people who thought of themselves as well-off were suddenly impoverished. They lost their jobs. They lost their homes. They lost their investments. They lost most of their possessions. The Great Depression wasn't the first depression to hit the United States, and despite the bunk you hear, it won't be the last.
I would not in a million years pretend to be a financial guru or even an adviser, but believe the ancient wisdom: Get out of debt and stay out. Live within your means. Strive for ownership of tangible assets free of any debt. I cringe every time I see one of these incessant television ads urging people to put a second mortgage on their home. Another bit of ancient wisdom is never borrowing money to purchase a depreciating asset. And remember, even homes and land can become a depreciated asset. In Florida in the late 1920s, land that was selling for $6,000 an acre, a few months later, couldn't attract a buyer at $2 an acre. The value of land, other than as a place to live and to grow food, depends entirely on someone else's willingness and ability to buy it.
We as a nation are living beyond our means. The federal government is in debt. Most state and local governments are in debt (their form of deficit spending is to issue bonds). Most assuredly the American consumer is dangerously in debt. And, finally, the American dollar is losing its purchasing power steadily and daily. Remember, debt is the promise of future income to pay for today's consumption. Nobody is guaranteed a future, much less future income.
George Soros, the billionaire financier, did not oppose the re-election of George Bush because Soros is a left-winger. He opposed Bush's re-election because, as a man who understands finance, he is fearful for the economic future of this country unless we change directions.
When the money-smart folks get scared, us country boys had better pucker up, too. Get out of debt, slam the door in the faces of all salespeople and turn off the TV. I believe a storm is just over the horizon.
November 6, 2004
Charley Reese [send him mail] has been a journalist for 49 years, reporting on everything from sports to politics. From 1969—71, he worked as a campaign staffer for gubernatorial, senatorial and congressional races in several states. He was an editor, assistant to the publisher, and columnist for the Orlando Sentinel from 1971 to 2001. He now writes a syndicated column which is carried on LewRockwell.com. Reese served two years active duty in the U.S. Army as a tank gunner. Write to Charley Reese at P.O. Box 2446, Orlando, FL 32802.
© 2004 by King Features Syndicate, Inc.