Building Wealth, Making Money

Beginning with industrialization, governments sought to expand their economies by replacing the long-term and slow growth modality of capital creation with the faster and more expedient means of debt creation. But as economies expanded, debt ballooned. Over time, as a nation's market expanded at a fairly steady pace (with the occasional downturn and setback), ensuring a commensurate increase in incomes, apparent wealth and living standards, the total debt increased at an exponential rate exceeding by many magnitudes the growth rate of the economy. As a result, at any major downturn and national or regional setback, nations businesses and individuals are left foundering in a sea of debt.

There can be no "fix" to an economy based on debt nor for a business' or individual's debt load unless the "fix" originates from the capital creation side of economic philosophy. However, as capital creation is slow and uneven this solution is unpalatable to nations and peoples accustomed to quick repairs, fast connections and instant gratification. To be told that a solution to debt can be guaranteed, but only after 10 or 20 years of hard work, with very little to show for the first half of that period, people and nations may opt for the more expedient solution of expanding their debt. Although this solution seems to solve the immediate debt, the existing debt doesn't go away, it is merely subsumed within the new debt. This seems to solve the immediate debt situation but in fact only moves the problem to a future date.

There is no solution to a debt crisis using the current model of debt creation. Under this model, current debt never goes away, it is only added to future debt. The only solution to a crisis of debt is debt that provides periodic income in excess of the periodic payments necessary to acquire that debt. Debt based on this new model is based on tangible assets, i.e. hard, fixed assets which cannot be easily dismantled or destroyed.

There are only four asset classes of production. These four classes are land (or real estate), labor, capital (cash), and intellectual property. In the modern era, each of these asset classes bears varying degrees of mortality risk based on the further distinction (subcategory) of that asset category, its location on the planet, competition and the market from which its revenues are derived. No place is absolutely safe; fires, earthquakes floods and storms can destroy a factory, warehouse or subdivision just as surely as war, a terrorist attack, competition or market decline.

Investment in debt is never a safe option. Debt is a soft asset, an intangible or paper asset which can lose value or be destroyed as easily as it was created. Whether the soft asset is student loans, mortgages, commodities, foreign exchange or highly leveraged derivatives, there is no assurance that any investment made today will be secure tomorrow. The characteristic of a soft asset which makes it easy to generate high returns over short periods of time is leverage. However, this leverage of return also leverages the degree of risk. The farther removed an asset is from a hard asset to a soft asset, the more inherent the risk built into the structure of that asset. Although this risk also leverages the potential rate of return, the increase in the return is simply not worth the increased risk as the current real estate crisis, worldwide currency crises, the slow decline of the dollar and international governmental debt crises all attest.

Income generating assets exist in a variety of forms and their return can exceed that of the more familiar debt model based asset vehicles. One of the most popular forms is stock ownership. Although this seems a contradiction in the capital creation concept, it is in fact a core concept; buy assets, not debt, buy ownership, not a promise. With stock, you are buying a piece of the company; when buying a student loan package, you are buying a promise.

Equity in a commercial enterprise is perhaps the easiest, least expensive and lowest risk means of initiating a capital creation strategy. To assure the proper perspective on equity purchases, an investor must view the asset for the periodic income it generates, not the projected cash-in value of the asset at some indeterminate time in the future. Each investor must view the asset as one that they will hold forever and then pass onto their heirs because of the income it generates (and additionally the value it adds to their estate). No investor should view such an asset as one they plan to sell in 10, 20, 30 or 40 years.

Indivduals, businesses and governments must all adopt the long view. This long view rests on a foundation of capital creation. Capital creation is the acquisition of assets which produce periodic, current income in excess of the payments required to purchase that asset.



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