Capital undergoes a complex lifecycle: it is conceived, produced, utilized, and ultimately, destroyed. Each phase presents varying and intricate dynamics.
Wealth may be generated by one generation, only to be squandered by the next. The ability to create or consume wealth often hinges on an individual’s skills, understanding, drive, and character. However, the most significant determinant of this is how one navigates their unique circumstances.
The July 21, 2014, issue of Forbes Magazine detailed the Stroh family’s gradual ascent and rapid decline in the beer brewing industry. The article, titled How to Blow $9 Billion, begins with a striking summary:
“The Stroh family took over a century to amass the largest private beer fortune in America. Yet it only took a handful of poor decisions to squander it all.”
The Stroh family benefited from a long-term strategy, cultivating a loyal customer base over many years. Their downfall stemmed from debt-fueled acquisitions of Schaefer and Schlitz, coupled with an ambitious goal of achieving national branding.
By the 1980s, Stroh had overstretched itself. One morning, with little remaining in the marketing budget post debt servicing and operational costs, CEO Peter Stroh had an epiphany: securing national customers is a costly endeavor, and they’re often unreliable compared to local patrons.
Within just ten years, the 150-year-old Stroh family business was sold at a steep loss. We reference their journey not merely for its own sake, but to explore the broader concept of wealth.
Where does wealth originate? How is it gathered? And how does it meet its end?
At Economic Prism, we strive to keep our perspective straightforward. Here’s a simplified version of our understanding:
How Wealth is Produced, Accumulated, and Destroyed
When a depositor places money in a bank, they are, in essence, lending it to the institution. But what does that money signify?
If the deposit stems from earned income, it embodies its equivalent value generated by the depositor’s efforts. It also signifies a choice to save rather than consume.
For instance, consider a coffee table. With a surplus table, your options are limited. You might store it for future use or swap it with a neighbor for something of equal worth.
In each case, the capital remains unchanged—just a coffee table, neither more nor less.
If you sell the coffee table for cash and hide the money beneath your mattress, you still possess the equivalent value of your one coffee table—capital remains static.
Yet, if you deposit the cash in a bank earning interest, you’ve effectively lent your labor’s worth represented by the coffee table. The interest you earn indicates the beginning of capital growth.
Now imagine an industrious carpenter with your deposited funds. He borrows from the bank to purchase tools and materials, such as a table saw and red oak lumber—representing your coffee table.
Those tools enable the carpenter to create three coffee tables. He keeps one and sells the other two.
Profiting from one sale, he repays the bank with the borrowed funds and retains the earnings from the third table as profit. Instead of spending it, he deposits this profit back in the bank.
Now, the bank holds the equivalent value of two coffee tables. Moreover, the carpenter retains his tools. Thus, wealth has been both created and accumulated from one initial surplus table.
This process illustrates how wealth can be generated and stored, provided the labor is not wasted. However, it is crucial to remember that wealth can also be consumed and dismantled…
Now consider a third individual who borrows all the funds the carpenter deposited. Unfortunately, rather than investing them in productive endeavors, he foolishly speculates on General Electric shares. This results in a loss of both labor value and capital—equivalent to two coffee tables in our example.
Despite the loss, the borrower may gain valuable insights from this experience, and the lender could mitigate the impact of the loss easily.
Yet, true wealth destruction, the kind that impacts most people around the globe, represents an entirely different scenario…
The Zealous Pursuit of State Sponsored Wealth Destruction
Keep in mind that the value in money lies in what it signifies. Each dollar should represent a dollar’s worth of wealth that has been created. Every dollar of credit exceeding that amount ought to reflect a dollar’s worth of wealth being generated.
This is the ideal framework for wealth creation in a sound financial system with balanced budgets and responsible lending practices. Unfortunately, our current reality often deviates from this model. Through state-sanctioned wealth destruction initiatives, created wealth is extracted from its generators and systematically wasted.
This is executed through artificial currency, excessive borrowing, and central bank manipulation of credit markets. The consequences manifest as myriad distortions, misallocations, accumulating debts, and losses, leaving the average wage earner—those dedicated to hard work, saving, and financial responsibility—at a severe disadvantage.
In this environment of fabricated currency, colossal deficits, and central bank intervention, money constantly loses its value. This degradation weakens the correlation between money and the wealth it represents, diminishing its purchasing power. The labor that created this currency erodes in value. The time invested in accumulating it is compromised.
When governments embark on expansive counterfeiting operations—issuing deceptive currency devoid of any real backing—the results become evident. Inflation affects consumer and asset prices, potentially culminating in a central bank-induced financial crisis.
The Federal Reserve’s interest rate hikes in the early 1980s curtailed the rampant inflation of the prior decade and popped asset bubbles in 1987, 2000, and 2008. Today, this cycle appears to be repeating itself.
Yet recently, Federal Reserve Chair Jerome Powell hesitated. Amid ongoing pressure from President Trump, who advocates for lower interest rates and inflated asset values (defining his presidential success through the S&P 500 index), Powell’s stance seemed to waver.
Speaking at the Economic Club of New York, Powell hinted that the federal funds rate was “just below” neutral, suggesting the end of the rate increases may be approaching. Subsequently, this announcement sent the S&P 500 soaring nearly 2 percent.
More critically, if Powell continues to pursue monetary policies where federal funds rates remain beneath consumer price inflation levels, we risk encountering a magnitude of state-sponsored wealth destruction that Americans haven’t seen in nearly four decades. Ultimately, the lifetime savings accumulated might barely suffice for a gumball.
Sincerely,
MN Gordon
for Economic Prism
Return from The Zealous Pursuit of State Sponsored Collapse to Economic Prism
