The Decapitalization of America

Main Bay 2
Creative Commons License photo credit: SmithGreg

Kevin Dowd and Martin Hutchinson have a report published by the CATO Institute titled “Easy Money and the Decapitalization of America” which is a succinct account of many of the major strategies used by Wealth Alchemist.  I particularly like their Austrian account of the economic ills created by repeated bubbles:

Federal Reserve monetary policy over the past 15 years or so has produced bubble after bubble, and each bubble (or each group of contemporaneous bubbles) is bigger in aggregate and more damaging than the one that preceded it. Each bubble destroys part of the capital stock by diverting capital into economically unjustified uses — artificially low interest rates make investments appear more profitable than they really are, and this is especially so for investments with long-term horizons: that is, in Austrian terms, there is an artificial lengthening of the investment horizon. These distortions and resulting losses are magnified further once a bubble takes hold and inflicts its damage, too: the end result is a lot of ruined investors and “bubble blight” — massive overcapacity in the sectors affected. This has happened again and again, in one sector after another: tech, real estate, Treasuries, and now financial stocks, junk bonds, and commodities — and the same policy also helps to spawn bubbles overseas, mostly notably in emerging markets right now.

We also have to consider how periods of prolonged low (and often sub-zero) real interest rates have led to sharply reduced saving and, hence, to lower capital accumulation over time. U.S. savings rates have fallen progressively since the early 1980s, falling from nearly 12% to a little over 6% by the end of the decade, bottoming out at 1.4% in 2005. It then recovered somewhat, but even after the shock of 2008, the savings rate rose in 2009 to only 5.9% — well below its long-term average of about 8% — and the most recent data suggests that it is now declining again.

Even without federal budget deficits, it is manifestly obvious that such savings rates are inadequate to provide for the maintenance, let alone growth, of the U.S. capital stock (or, for that matter, its citizens’ desires for a secure retirement): the U.S. economy is effectively eating its own seed-corn. Now add in the impact of federal budget deficits of around 10% of GDP and we see that the deficits alone take up more than the economy’s entire savings, without a penny left over for investment. It then becomes necessary to supply U.S. capital needs by foreign borrowing — hence the persistent and worrying balance of payments deficits — but even this borrowing is not enough. Hence over the long term, low interest rates are decapitalizing the U.S. economy, with damaging long-term implications for its residents’ living standards: in the long run, low interest leads to low saving and capital decline, and they in turn lead to stagnation and eventually to the prospect of declining living standards as America ceases to be a capital- rich economy.

Not to put too fine a point on it, savings have been suppressed for close to two decades, preventing the natural accumulation of capital as baby boomers have drawn closer to retirement, while much of the country’s magnificent and once unmatched capital stock is being poured down a succession of rat holes.

Do read the rest.  Oh, I also very much like their title of their recent book: “Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System”

My 100th Blog Post . . .

Yes, today marks a milestone in my brief blogging foray . . . my 100th blog post.  Time sure flies when you’re having fun 🙂

So, dear readers, lets take  a moment to reflect on the blog itself.  What have you found most interesting . . . or most boring?  Have I touched on themes you would like to see me expand on in the future? What about the format of the blog itself?

Let me know your thoughts in the comments . . . be honest, I can handle it.

Can Technology Keep Wealth Alchemists at Bay?

Wealth Alchemists have done a lot of damage to our economy by encouraging consumption over the accumulation of wealth.  Fortunately, technological shocks have given a needed shot in the arm in favor of wealth.  Today we can produce more goods and services using fewer workers and fewer inputs than in the past.  Thanks to advances in technology, we are able to support increases in consumption and wealth.  Two recent articles caught my eye that beautifully illustrate this process.

The first article isn’t really beautiful, it actually stinks–literally.  It deals with a new process to deal with garbage.  According to the Economist magazine, atomising trash eliminates the need to dump it and generates useful power too.

DISPOSING of household rubbish is not, at first glance, a task that looks amenable to high-tech solutions. But Hilburn Hillestad of Geoplasma, a firm based in Atlanta, Georgia, begs to differ. Burying trash—the usual way of disposing of the stuff—is old-fashioned and polluting. Instead, Geoplasma, part of a conglomerate called the Jacoby Group, proposes to tear it into its constituent atoms with electricity. It is clean. It is modern. And, what is more, it might even be profitable.

For years, some particularly toxic types of waste, such as the sludge from oil refineries, have been destroyed with artificial lightning from electric plasma torches—devices that heat matter to a temperature higher than that of the sun’s surface. Until recently this has been an expensive process, costing as much as $2,000 per tonne of waste, according to SRL Plasma, an Australian firm that has manufactured torches for 13 of the roughly two dozen plants around the world that work this way.

Now, though, costs are coming down. Moreover, it has occurred to people such as Dr Hillestad that the process could be used to generate power as well as consuming it. Appropriately tweaked, the destruction of organic materials (including paper and plastics) by plasma torches produces a mixture of carbon monoxide and hydrogen called syngas. That, in turn, can be burned to generate electricity. Add in the value of the tipping fees that do not have to be paid if rubbish is simply vaporised, plus the fact that energy prices in general are rising, and plasma torches start to look like a plausible alternative to burial.

The second article deals with the application I recently discussed in terms of natural gas–hydraulic fracturing technology–being applied to oil fields in the U.S.  It turns out this technology is working out better than expected and is opening vast new oil fields according to Yahoo News:

A new drilling technique is opening up vast fields of previously out-of-reach oil in the western United States, helping reverse a two-decade decline in domestic production of crude.

Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day — more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.

Wow, so in the near future we may be creating new power from our trash and reducing our dependency on Middle Eastern oil . . . take that Wealth Alchemists.

How to Defeat the Wealth Alchemists

Lawrence W. Reed, president of the Foundation for Economic Education, tells us that we are our own worst enemy when it comes to fixing the Federal deficit.  I think he hits the nail on the head because I too see a disconnect between folks who say they want “freedom” but act in way that is contrary to that very freedom.  Take Social Security/Medicare for instance.  You can explain until you are blue-in-the-face that those programs will either go bankrupt or enslave following generations to dramatically higher taxes.  Yet, among older folks, you’ll more often than not get the same response I’ve heard too many time . . . “I don’t care as long as I get mine.”  That attitude puts a smile on the face of Wealth Alchemists.

Restoring true freedom and defeating the Wealth Alchemists will take hard work.  It will require that we all follow Reed’s seven step plan:

  1. I pledge myself to a lifetime of self-improvement so I can be the model of integrity that friends, family, and acquaintances will want to emulate.
  2. I resolve to keep my hands in my own pockets, to leave others alone unless they threaten me harm, to take responsibility for my own actions and decisions, and to impose no burdens on others that stem from my own poor judgments.
  3. I resolve to show the utmost reverence and respect for the lives, property, and rights of my fellow citizens. I will remember that government money is really my neighbors’ money, so I will not vote to loot them. I will stand on my own two feet, behave like an adult in a free and civil society, and expect the same of my children.
  4. If I need help, I will ask my family, friends, faith network, neighbors, local charities, or even strangers first – and government last.
  5. If I have a “good idea,” I resolve to elicit support for it through peaceful persuasion, not the force of government. I will not ask politicians to foist it on others because I think it’s good for them.
  6. I resolve to help others who genuinely need it by involving myself directly or by supporting those who are providing assistance through charitable institutions. I will not complain about a problem and then insist that government tinker with it at twice the cost and half the effectiveness.
  7. Finally, I resolve that the highest authority in which I place my strongest faith will not be the United States Congress.

Ave Maria

For those folks unfamiliar with Ave Maria, here is a brief history:

The university and town of Ave Maria are a result of the combined vision of Catholic Philanthropist Tom Monaghan and the Barron Collier Company.

Mr. Monaghan, who made his fortune building and eventually selling the Domino’s Pizza chain, had the dream of founding a new Catholic university. He initially founded Ave Maria College near his home in Ypsilanti, Michigan. The first campus could not accommodate future growth so Mr. Monaghan sought to move it to a parcel of land he owned in Ann Arbor, MI. When the town government turned down the necessary zoning variances, he looked for another site for the university in the United States and settled on the Naples, FL area.

The university arranged for temporary facilities in Naples and Mr. Monaghan sought enough land for a permanent home.

His search came to the attention of the Barron Collier Company, a diversified corporation controlled by the founding family of Collier County. The company had large tracts of land west of Naples that it wanted to develop, and had a vision of greater than a typical Florida residential development.

The company approached Mr. Monaghan with an offer: If Ave Maria University would locate to land Barron Collier wished to develop outside Naples, the company would give the university 1,000 acres and build a town around the university.

Mr. Monaghan and the university agreed, and became partners in the development with the goal that the real estate development would eventually become an endowment for the university.

Ave Maria University opened on its temporary campus in the fall of 2003. Construction on the permanent campus and the town of Ave Maria began in 2005. The town officially opened in July, 2007 and the permanent campus welcomed students at the start of the 2007-08 academic year. A private k-12 school, also opened for the 2007-08 academic year as the Ave Maria Grammar and Preparatory School. It was renamed the Rhodora J. Donahue Academy in February, 2009.  The oratory in the town center, perhaps the most recognizable building in Ave Maria, was dedicated in March, 2008, by Bishop Frank Dewane of the Diocese of Venice.

What does this have to do with Wealth Alchemy?  Did you catch this phrase in the history: “. . . Mr. Monaghan sought to move it to a parcel of land he owned in Ann Arbor, MI. When the town government turned down the necessary zoning variances, he looked for another site for the university in the United States and settled on the Naples, FL area.”

Take a look at these aerial photos to see what Ann Arbor, MI said no to when turning down Ave Maria.  In essence, all of the jobs, income and property taxes migrated from Michigan to Florida.  Those folks on the Ann Arbor zoning board were Wealth Alchemists shooing wealth away to another state.  You just can’t make this stuff up.