PrintNovember 20, 2010
Fools and Their Money
"For the love of money is the root of all evil," declares the Bible in Timothy 6:10. It's unfashionable to quote the Bible these days, at least in intellectual circles, where belief in a supreme being has been reduced to Santa Claus and Tooth Fairy sneering.
To be sure, the Bible, when it gets a little too elliptical and a little too allegorical, can leave one scratching one's head. But when the circumlocutions are dropped, the Bible can get it very right: The Ten Commandments are timeless because they are succinct, demanding, and obvious. No new-age passive-aggressive-man fidgeting here.
"For the love of money" is equally decisive, so perhaps the Bible should have left well enough alone -- embellishment being the enemy of clarity. The King James version adds, "which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows" to the preamble. The Bible got it right; the subtext works.
Note the Bible's use of the word "money," not "wealth." The two are not synonymous. John D. Rockefeller's goal was to extract and distribute oil as cheaply and widely as possible; Henry Ford's goal was to supply an automobile to the everyman; Sam Walton's goal was to perfect selling duds and suds. Money was the byproduct, not the prize, though in the end, all three earned vast sums of money.
Wealth should always be the prize, because when money is the prize, history has proven the Bible right -- evil and many sorrows really do lurk in the shadows. Poor myopic Vasco Núñez de Balboa performed an admirable service -- mapping the Isthmus of Panama -- but he did so only because he was following rumors of a sea of gold. Balboa wanted immediate money gratification at the cost of inflation to his countrymen.
If Balboa had been less interested in stealing from the citizenry and his native hosts and more interested in serving them by forging trading relationships, he would have lorded it over a vast fortune. Panama was, and is, rich in copper, mahogany, coffee, and sugarcane -- all goods Balboa's countrymen coveted. Instead, Balboa antagonized everyone and suffered unnecessary sorrow; that is, if one suffers sorrow when one's head and body go in divergent directions.
Similar tales of monetary woe abound in more contemporary epochs. The California gold rush of the mid-nineteenth century was mostly a financial disaster for those doing the rushing. Some gold-seekers scratched a modest profit. Most, especially those arriving later to the bacchanalia, wound up broke. The real wealth was created providing goods and services -- food, tools, clothing (Levi Strauss), boarding, booze, and sex -- to the foragers.
Today's stock exchanges offer a more convenient avenue for losing money. The major reputable gold miners listed on the New York Stock are mostly middling investments, even with gold prices reaching for the heavens. (There's a reason for this apparent paradox: marginal costs tend to keep pace with marginal revenue.) Meanwhile, the piddling, speculative varieties, many listed on the AMEX, cannot rise above low single-digit prices.
Don't blame gold; it's only money, even if it is desirable money at that, thanks to its marketability, divisibility, high per-unit value, stability, immunity to political corruption, and durability. Nevertheless, the products and services we exchange on the market create the wealth. Money -- gold included -- is simply the intermediary.
Many beg to differ, believing money is the source of wealth -- hence the continued fetish with money supply, money exchanges, central banking, and the unholy quest for monetary alchemy.
Central bankers are able to avoid the perils and costs of exploration and mining. With the push of a button, a central banker can conjure an unlimited amount of money into existence. Unfortunately, the love affair with easy, politically controlled, artificially constrained money has produced more evil and sorrow than Bible scriveners, Balboa, the forty-niners, and Canadian gold-ming investors could have imagined. The biggest money-fueled booms and busts -- internet and housing -- to ever darken the world's economies occurred within the span of a mere decade. Trillions of dollars of malinvestment produced untold sorrow and were the root of more than a few very evil business practices.
Nevertheless, we continue to confuse money with wealth. The confusion descends from the ancient and ineradicable mercantilist notion that money trade surpluses equal greater wealth accumulation. Inept economists ignore the distinction between the two primary trade accounts -- the current account and the capital account. The former consists of goods and services exchanged. The latter consists of foreign direct investment, such as the purchase or construction of machinery, buildings, or even whole manufacturing plants plus foreign purchases of stocks, bonds, and currencies.
There's no need for confusion: BMW sells an American software entrepreneur an $80,000 650i manufactured in Dingolfing, Germany. The transaction translates to an immediate $80,000 American trade deficit with Germany. But so what? The American software entrepreneur now owns a lump of steel, leather, rubber, silicon, and a myriad of other tangible, tactile components valued at $80,000. BMW owns a stack of paper with no intrinsic value except that bestowed upon it by the U.S. government. If the gold standard were enforced, BMW would at least own an asset with intrinsic value, not an asset whose value is dictated by a manufactured confidence and vacillates accordingly.
Would a barter exchange be preferable? If the exchange comprised $80,000 worth of software for one 650i, then the trade deficit would appear less worrisome to those whose stock-in-trade is worry. But what if BMW didn't want $80,000 worth of software? The software entrepreneur would need to trade his software for a product BMW desired in the quantity BMW desired. Inject the intermediation of money into the equation, and protectionist dander flies, yet all the money did was enable a wealth-generating trade -- the very bedrock of civilization -- to occur. Money did not distribute wealth to BMW, nor steal wealth from software entrepreneur. The mercantilists will argue to the contrary by focusing on the plus $80,000 in the German bank account and the minus $80,000 in the American bank account.
We should be so lucky. If foreigners were to equate money with wealth, then the United States would be in the enviable position of simply printing dollars and exchanging them for goods and services. But unlike central bankers, politicians, and sundry interventionist economists of some notoriety, most of us are too realistic. BMW will take the $80,0000 and buy something produced in America; invest in American capital, perhaps in its South Carolina plant; or exchange dollars for euros from someone who will invest in or buy American production.
This love of money is motivating many countries, with the United States leading the charge, to destroy vast stores of savings and value in order to imbue the appearance of prosperity. Unsustainable investment and consumption and inflation-swollen imaginary wealth guarantee that many more sorrowful days lie ahead.
Stephen Mauzy is a CFA charterholder, a financial writer, and principal of S.P. Mauzy & Associates. He can be reached at steve@spmauzyandassociates.com.
