|
Page 9 of 82
What to Make of Wealth
March 18, 2009
"I'm not talking about rich, I'm talking about wealth... I'm not talking about Shaq [multi-millionaire basketball player Shaquille O'Neal], I'm talking about the guy who signs his checks." Thus spoke comedian Chris Rock.
This recession has seen the wealthy take the hardest hit in several generations. The world is in a wealth destruction spiral. According to the Federal Reserve, the total net worth of American households in 2008 fell by almost 18%. That's over $11 trillion dollars, or approximately 1 full year of economic activity in the US (or the next three largest world economies combined). Most of this is related to the fall in real estate prices, as well as the stock market collapse (approximately 50% of Americans own shares). People felt rich, but it turns out they weren't wealthy.
In the dictionary, rich and wealthy are pretty much synonyms, but we all know the difference. "Rich" is what happens when life throws you a bone; when you are 7 feet tall and an athletic prodigy, or when you're simply in the right place at the right time and able to take advantage of an opportunity. "Wealthy" is when your wherewithal is backed by things like "assets". Lose a leg if you are a rich athlete and your hard-won money risks being siphoned off into friends-and-family get-rich-quick schemes. Being wealthy means asset diversification and the ability to live off your "rents" no matter how many limbs your body is missing. Rock: "Wealth is something that's passed down from generation to generation ... rich is something you can lose in a crazy summer with a drug habit."
As wealth guru Robert Kiyosaki (author of the ubiquitous "Rich Dad, Poor Dad") points out, there is a fundamental difference between living day-to-day off of your ability to do a job, and having assets that produce money for you. By this definition, even highly successful professionals are not "wealthy". A surgeon who spends all of her money on McMansions and BMWs does not transfer wealth to her children. A landscaper who sets up a business with partners and a steady clientele can look forward to leaving his progeny a source of wealth.
Perhaps Kiyosaki's most important insight is that people should look at their economic lives in terms of a balance sheet. Assets are those things that can generate income, while liabilities are those that generate expenses. There is a big difference between going into debt in order to buy a big house for yourself and putting that money into a duplex that you then rent for more than the cost of its mortgage. Kiyosaki is not against spending, but he is against spending more than what your assets (not you) produce. The challenge is to avoid creating an expensive lifestyle before you are really able to afford it.
Collectively, that is what happened before the wealth implosion put paid to people's expectations. It was a consumer-driven shock. In 1982, Mexico had a government-spending shock when President López Portillo overleveraged the country's major asset at the time, the oil industry. Different actors, same result.
Wealth creation requires a certain degree of risk tolerance. But, in the words of former Secretary Rumsfeld, this risk should be a "known unknown". If it's a rumsfeldian "uknown unknown", panic ensues. Economic stimulus means that the government becomes investor of last resort as it tries to "pick winners". But true wealth creation comes about through private sector innovation and increases in labor productivity.
Future sources of great wealth are gestating as we speak and they are probably not the same ones as before the recession. Much investment banking wealth on Wall Street, for example, will not return. But Joseph Schumpeter's "creative destruction" will catalyze the transfer of resources from sunset to sunrise industries, and the US economy will reinvent itself (something it does incredibly well).
As for Mexico, oil wealth will either be phased out (better), or it will run out. And another important source of income for Mexico, workers' remittances, is bound to fall further. The devaluation of the peso has at least revived opportunities in manufacturing, while tourism can still be a tremendous source of wealth creation if and when Mexico gets its security act together. But our long term problem has more to do with a lack of education, drive and imagination.
Wealth creation is a human construct that is based on creativity. It is a concept that requires adapting to change. Many Mexicans and xenophobic, protectionist Americans share a profound distrust of change, which is a little like fighting the rotation of the Earth. Change is inevitable and, with talent, it can actually be desireable. That makes fear the biggest obstacle to a wealth-creating recovery.
For the latest thought-provoking article by Agustin Barrios Gomez please go to our Opinion Column page
Return to top
|
