Although Schlitz beer has never been particularly appealing, it enjoyed a notable period of popularity, especially when served at the right price and with the right effect—earning it the nickname, “the beer that made Milwaukee famous.”
Between the inception and extinction of capital, there exists a vast and varied journey. The lifecycle of capital typically unfolds through stages of conception, production, consumption, and eventual destruction. The complexity of these dynamics includes countless fluctuations.
One generation might create wealth, while the next may squander it. Numerous factors, including a person’s skills, understanding, diligence, and character, influence whether they become creators or consumers. Yet, the most crucial element remains the individual’s approach to their specific situation.
The July 21, 2014, edition of Forbes Magazine detailed the Stroh family’s calculated ascent and rapid decline in the brewing industry. The article, entitled How to Blow $9 Billion, opened with the striking observation:
“It took the Stroh family over a century to build the largest private beer fortune in America. And it took just a few bad decisions to lose the entire thing.”
The Stroh family succeeded by adopting a long-term perspective. Their wealth was built gradually through developing and maintaining a loyal regional customer base.
However, their downfall stemmed from the desire to ‘go big.’ The debt-fueled acquisitions of Schaefer and Schlitz in the early 1980s, along with the ambitious goal of becoming a national brand, ultimately led to their decline.
By the end of the century, after overextending themselves, the once 150-year-old Stroh family beer business was sold off at drastically reduced prices.
We reference the Stroh family’s capital trajectory as an example. Our primary focus is on the nature of wealth: what generates it, how it accumulates, and why it can vanish. The following sections explore these themes.
Coffee Table Economics
When a person deposits money in a bank, they are effectively lending their resources to that institution. But what does this deposit signify?
If the deposit consists of earned income, it represents value equal to that generated by the depositor’s work. It also symbolizes a choice to save rather than spend immediately.
In practical terms, the deposit could represent anything, even a coffee table. In this scenario, there are limited options for a surplus coffee table: one could either save it for personal use or trade it with someone willing to exchange something of equal value.
In both cases, there’s no increase in capital; the coffee table remains just that—unchanged.
Alternatively, if you sell the coffee table for cash and, say, hide that cash away, you still possess the value of one coffee table, and again, there has been no increase in capital.
However, if you deposit that money into a bank and earn interest, you effectively lend your surplus—even symbolized by a coffee table—to the bank. The interest earned then marks the beginning of capital accumulation.
Now suppose after your deposit, a resourceful carpenter, lacking tools and materials, borrows that money to purchase a table saw, doweling jigs, and red oak lumber. In this case, these materials embody your original coffee table.
The carpenter then creates three coffee tables: keeps one for personal use and sells the other two.
Wealth Accumulation and Destruction
With the earnings from selling the second coffee table, he repays the bank for the initial loan. He is left with the profit from the third table, which he decides to save by depositing it at interest.
The bank now holds the equivalent of two coffee tables in capital, and the carpenter retains ownership of his tools. All of this originated from a single surplus coffee table.
If desired, he can repeat this process indefinitely, potentially incorporating his coffee table business with the state government.
This activity generates and accumulates wealth, with the possibility for further production as long as the labor remains intact.
Yet, just as wealth can be created, it can also be consumed and destroyed.
Imagine a third individual approaches the bank and borrows money that the carpenter has already deposited. Instead of wisely investing it in his own endeavors, he makes a poor investment in shares of WeWork Inc., just before their value plummets by 95 percent.
This scenario results in a loss for both the borrower and the lender—specifically, an equivalent to the labor needed to produce two coffee tables.
Fortunately, in this instance, the loss is manageable. The borrower may learn a hard lesson, while the lender can probably absorb the setback without significant consequences.
However, if such losses were to occur on a larger scale, it would pose a far more serious situation.
Sadly, the narrative of borrowing, speculating, and widespread financial failure has become all too common in our era. We are currently on the verge of a substantial wealth destruction event seldom seen in our lifetime—approximately once a century, or even millennium.
Inverted Debt Pyramids
Fractional reserve banking has always involved a degree of illusion. Bankers pretend to securely hold deposits, while depositors envision their cash safely stored in an accessible vault.
Prudent bankers aim to extend credit primarily to those capable of creating and accumulating wealth, while avoiding dealings with reckless gamblers. In today’s hyper-modern economy, discerning this distinction requires considerable insight.
Modern banking, especially concerning Wall Street, often misaligns anticipated gains with their underlying risks. The proliferation of financial products can obscure actual risks that are both real and significant.
Wall Street banks have mastered the art of confusing assets with liabilities; loans are often securitized as mortgage-backed securities or collateralized loan obligations and marketed as investments.
This intricate paper-shuffling works effectively, provided the circulation of credit stays ahead of debt obligations. Thus, credit can accumulate in an inverted debt pyramid reaching extraordinary heights.
Nonetheless, limits do exist.
Remember, the value of money lies in what it represents. Each dollar in actual currency should correlate with a dollar’s worth of generated wealth. Each dollar of credit extended upon that money should indicate a dollar’s worth of wealth being created, plus interest to offset the lender’s risk.
This illustrates how wealth should ideally accumulate in a world characterized by sound money, balanced budgets, and responsible banking.
Coming Down from Cloud Cuckoo Land
However, in today’s reality, the system rarely operates as one might expect. Due to extreme interventions in credit markets by the Federal Reserve, a constructed illusion of wealth through fake money has accumulated and reached its limits.
This environment, which has taken shape over the past 40 years, is approaching a sudden conclusion. The subsequent chapter will witness the incineration of this fabricated wealth with systematic efficiency.
Bill Bonner of Bonner Private Research recently outlined our trajectory and future direction:
“The fundamental building block for the global financial structure is the US 10-year T-bond. Just yesterday, the real yield, adjusted for inflation, rose to 2.27%. That reflects levels seen in January 2009, shortly after Ben Bernanke initiated his detrimental ultra-low rate policy—misguidedly believing he could improve the economy by manipulating capital costs!”
“Before Bernanke’s departure from rationality, the US financial system at least appeared somewhat stable. It functioned reasonably well, and individuals had a sense of where they stood.”
“In that earlier era, borrowing money came at a cost (positive interest rates), restricting debt to amounts people could realistically manage. However, once the Federal Reserve depressed interest rates below zero in real terms, the floodgates opened. This transformation defined the US financial landscape from 2009 to 2020, a surreal realm where fake capitalists leveraged fake money at distorted interest rates to generate fake profits.”
“When the farce concludes, those profits will vanish.”
The optimal way to avoid falling into cloud cuckoo land is never to venture there in the first place. However, that opportunity has long since passed. Due to the Federal Reserve’s extreme credit interventions, the entire economy has been subjected to a wild and unpredictable ride.
Now, the impending crash and burn return flight, wherein consumers, businesses, and governments face bankruptcy in droves, is upon us.
[Editor’s note: In times like these, unconventional investment strategies are essential. Learn how to safeguard your wealth and financial privacy through the Financial First Aid Kit.]
Sincerely,
MN Gordon
for Economic Prism
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