The Delicate Balancing Act To Protect Wealth Is Full On

We Are Walking A Tightrope

The delicate balancing act to protect wealth is now in full crisis mode. The key players are central banks across the world and the corrupt bankrupt governments they seek to protect. At risk is the global financial system that has served them so well over the decades. For years these so-called guardians of the economy have siphoned wealth away from the many and into the hands of a few. Now unless they can pull a few more rabbits out of their hats rubber may hit the road.

President Donald Trump announced in a White House news conference that he would seek payroll tax relief and other measures to help businesses deal with the coronavirus outbreak. The Associated Press reported Trump said they were discussing “a possible payroll tax cut or relief, substantial relief, very substantial relief, that’s big, that’s a big number,” Administration officials said the White House wasn’t ready to roll out specific economic proposals, CNBC reported. Trump also said he was seeking help for hourly-wage workers to ensure they’re “not going to miss a paycheck” and “don’t get penalized for something that’s not their fault.” These were in reaction to a large market drop as the covid-19 outbreak spread.

President Trump's proposal to cut payroll taxes is targeted at reinforcing investor confidence in the hope it will give markets a reason to rebound. It ignores the fact America's deficit spending is already out of control. An analogy would be for a near-bankrupt parent giving their irresponsible child a raise in their allowance after finding they had been wasting money on lottery tickets. Simply put this does not get to the root of the problem and will just increase the national debt. Other efforts to stimulate the economy may fare no better in their overall effect. It is difficult to envision any program that efficiently gets economic relief to those most hurt by covid-19.

This translates into the idea we once again may be about to test the theory that "this time is different." Like many of those skeptical of the financial house these folks have constructed through new creative and untried methods, I wait and watch. How creative they will be in coming days has yet to be determined. Make no mistake, this is about keeping asset prices high and rising. It has nothing to do with returning markets to the principle of true price discovery which is the bedrock of a free, healthy, and open economic system. Unfortunately, to many people, asset value has become more important than the economy and those in charge of such things have lowered interest rates and printed money to support them.

This has created a false economy. Paper promises and things such as propping up the holding's of  pension funds has become increasingly important in maintaining the illusion there is light at the end of the economic tunnel. While central bankers claim to embrace a goal of 2% inflation they have to be tickled pink they have deceived the masses into believing it has not been achieved. The problem is that the moment people think inflation is on the rise these banks will lose the ability to continue their policies of easy and cheap credit.

If covid-19 does become the catalyst for a long-overdue reset of the global financial system, the amount of real wealth that does escape the crisis will set the bar that determines the rate of inflation or deflation in the coming years. Pensions, annuities, and even investments in stocks and such all fall into the area of paper promises that are often recorded somewhere far from sight as a digital entry on a computer. An enormous amount of wealth has been poured into intangible assets based on the faith they are a safe place to store it.

In the years just before the 2008 financial meltdown, there was a great deal of talk about the "Wealth Effect." In 2007 many economists gave a lot of credit for the strong economy to rising home prices making people feel wealthier. This is because the wealth effect tends to drive consumers towards going forth and confidently buying things, This underlines why protecting asset prices is so important. While many people do not own stock directly many people do indirectly through various saving vehicles or from investing in retirement accounts. Many pension funds are also heavily invested in the markets. A falling market would most likely cause consumers to feel poorer and cause them to reduce spending.

While it may be a stressful exercise it is important to occasionally think about the many or multitudes of places your wealth might vanish into or how it could seep away. Much like a shell game where wealth is transferred in our modern society wealth is always on the move. It zips across borders at the click of a button and just because you deposit it with a local institution does not mean it stays in your community. We saw shades of this decades ago during the savings and loan crisis when huge beautiful buildings were constructed in certain areas from wealth transferred in from other parts of the country. Those areas were the big winners rather than those holding worthless notes when the loans used to build them went into default.

Be Skeptical, Be Cautious, Get Smart!

Wealth and how things are valued is not constant but fungible and constantly changing. wealth comes in many forms, it can be held in the form of paper, promises, or as something more tangible and real such as property or goods. Vessels to store wealth such as IRAs and 401 accounts have grown at a massive rate during the last several decades and were relatively minor players until recently. Currencies, also known as fiat money, are also just IOUs or paper promises.

Today tens of trillions of dollars worth of these IOUs are sitting in offshore banking accounts in places such as the Cayman Islands. Today government and businesses are borrowing hundreds of billions of dollars each year by issuing bonds some that will not return investor's money for decades. Today homes, apartments, and buildings are being built, some poorly constructed, with loans guaranteed more or less by the American people. Today America's national debt is over 23 trillion dollars and is rising. Today currencies such as the euro and yen are even more fundamentally flawed than the dollar.

I could do this a bit longer but I suspect I've made the point. Defining wealth is one thing but it is important to delve into its nature to truly understand just how elusive it can be. I hate to blow a hole in the idea that you can safely tuck your money away in an offshore banking account but I have to ask where all the money deposited in the Caymans really is. Banks do not just sit on deposits and keep them safe. The bottom-line is that it is up to each of us to protect our wealth. The vessels where we store our wealth can be very precarious. Be careful out there and remember that capital preservation is job one.



Footnote; In the past, I have written several pieces about subjects such as writing off the rising amount of bad debt, and how debt is like a mirage moving into the distance, how bad debt is resolved. These are subjects that may soon rise in importance if we move into unstable times. The links to these posts are listed below.
 http://brucewilds.blogspot.com/2015/12/writing-off-rising-amount-of-bad-dept.html
http://brucewilds.blogspot.com/2017/09/how-bad-debt-is-resolved-hint-it-is-not.html