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The Investment Delusion

...............Finally, though, there's always somebody who wants to know what investment strategies I recommend. These days, the person who asks that question is usually silver-haired, nicely dressed, and visibly worried. I wish I had a crisp reply for that question, or for that matter, some good advice to offer. I don't, because the question itself embodies a series of fatally flawed assumptions that reach right down to the nature of wealth itself. On its own terms, it's as unanswerable as a question about how to build a working perpetual motion machine.
Yes, someone at my Pantheacon talk asked about investment strategies, and yes, she was silver-haired, nicely dressed, and visibly worried. I fumbled through an answer, but the question deserves more than that, if only because it's on so many minds these days. Thus this week's post. I should caution those of my readers who have investments that they won't like what follows.
Let's start with fundamentals: the nature of wealth. Ask ten people on the street today for a definition of wealth, and dollars will get you doughnuts every one of them will tell you that wealth consists of the possession of plenty of money. That's what nearly everyone thinks, but they're quite wrong, and it's easy enough to show the fallacy.
Imagine that a private jet full of politicians makes an emergency landing on an uninhabited island in the Pacific. Each of the politicians is carrying a briefcase containing $1 million – we'll be polite and say it's from campaign contributions. The island has a water supply and enough natural foodstuffs that the politicians don't have to worry about starving to death. Will the politicians on the island have a standard of living corresponding to their net worth of $1 million each? Of course not; their actual prosperity will be measured by the breadfruit they harvest, the fish they catch, the huts they make, and so on.
Money, in other words, is not wealth. It's a social mechanism for distributing wealth. It means nothing unless there's real wealth – actual, nonfinancial goods and services – to back it up. In a healthy market economy, there's a rough balance between the amount of money in circulation and the amount of real wealth produced annually, and so the confusion between money and wealth can slip by unnoticed. When money and wealth get out of sync with one another, problems sprout.
The economic history of the 19th century offers a good example. The rising industrial economy of the time drove a massive increase in the production of real wealth. Most industrial nations, though, inherited money systems backed by gold reserves that offered few options for expanding the money supply to match the supply of real wealth. The result was a deflationary spiral that brought major economic depressions every couple of decades for most of the century. In response, in the 20th century, nation after nation abandoned the gold standard's straitjacket and retooled their money systems to meet the needs of an expanding economy.
That's the context of the present crisis because, in terms of real wealth, we no longer have an expanding economy. The production of real wealth in the world's industrial nations has been in decline now for decades. Some of the deficit has been made up by importing real wealth from overseas, but not all; compare the lifestyle available to a single salary working class American family in 1969 to the lifestyle available to a similar family today and it's possible to get a glimpse of just how much impoverishment has taken place over the last forty years.
This impoverishment went unnoticed by most people because the money supply didn't follow suit. Until the economy came unglued in the second half of 2008, money had never been so abundant or readily available. Some of it got spent on real wealth, which is why real estate and other commodities soared to giddy heights, but most of it was diverted instead into various forms of abstract pseudo-wealth related to money in much the way that money relates to real wealth. Yes, I'm talking about your investments.
The confusion between money and wealth and the biases imposed by the long economic expansion of industrialism have made it almost impossible to talk sensibly about investments these days. It seems normal to most people that they should be able to invest their money and, as a matter of course, get back more than they put in. This reflects the dynamics of an expanding economy; if the production of real wealth is increasing, investments on average will increase in value over time to match the growth in real wealth, and the payback on investments reflects this. Outside of the special conditions of a growth economy, though, that logic no longer applies.
The long economic expansion of the industrial age has fostered the massive growth of what old-fashioned Marxists used to call a rentier class – a class whose money makes money for them. Even among people who work for a living, the idea of joining the rentier class on retirement, and living comfortably off investments, has become very popular in recent years. The problem, of course, is that the age of industrial expansion is over; it was made possible in the first place only by exponentially increasing the use of fossil fuels and other natural resources; like all exponential growth curves, it faced an inevitable collision with the limits of its environment – and that collision is happening around us right now.
We are thus entering a period of prolonged economic contraction – not a recession, or even a depression, but a change in the fundamental dynamic of the economy. Over the centuries just past, a rising tide of economic growth was interrupted by occasional periods of contraction; over the centuries ahead, the long decline of the industrial economy will doubtless be interrupted by occasional periods of relative prosperity. Just as a rising tide lifts all boats, a falling tide lowers them all, and if the tide goes out far enough, a great many boats will end up high and dry.
The desperate attempt by full-time and part-time members of the rentier class to avoid dealing with this unwelcome reality has had the ironic result of making the situation much worse than it had to be. As actual investments in productive economic activities stopped yielding a noticeable profit, more and more investors sought to make money via a menagerie of exotic financial livestock notable for their complete disconnection from the economy of goods and services. The result was a series of classic speculative bubbles, culminating in the crash of 2008 and the crisis still unfolding around us. In the process, eager investors who might have lost their money slowly over a period of years have, instead, lost it all at once.
Still, in a contracting economy, on average, all investments lose money. This is the hard reality with which all of us will have to deal. This is why, in the twilight years of the Roman world, a complex money economy that made heavy use of credit and investment gave way to purely local economies of barter and customary exchange, in which money played a very minor role and credit was unheard of. It is also why the two great religious movements that rose out of Rome's ruins, Christianity and Islam, both considered lending at interest a mortal sin – though Christianity managed to talk itself out of that useful teaching some centuries ago.
Thus the only investment advice I can offer is to get out of investments altogether, and put your money into something that will actually be useful: training in practical skills that will make you employable in a deindustrializing economy, for example, or extra insulation so you can keep your home livable with less energy. At this point in history, the belief that it's possible to have your money make your living for you is basically a delusion; it's likely to be a fairly persistent one, but those who can shake themselves free of it and adjust to life in a radically different economic reality are likely to do better than those who keep on chasing the prospects of an age that is ending around us.