Real Wealth versus Derivative Wealth

Real Wealth is land, mineral resources, productive plants, durable goods, and human production creating the productive capacity of a nation.  Titles and stock certificates represent direct ownership of real wealth and is equivalent to real wealth.

Money (paper) wealth is debt which includes are forms of contracts which includes bonds, notes, loans, deposits, life insurance,, and pension obligations.  Money wealth does not represent the direct ownership of any real asset.  However it does represent an interest in  real assets of the direct owners.  The wealth of a nation is not increased when paper wealth is increased but the existing wealth is only inflated in terms of prices.

If people have confidence in paper assets, they will continue to buy paper assets.  But once they lose confidence, they will convert their paper assets to real wealth.  When this happens, interest rates on debt rise dramatically to lure asset holders back.  Greek 10 year notes are 30% while U.S. 10 year notes are 2%.  The market has lost confidence in Greece’s paper assets.

When paper wealth grows beyond the ability to absorb it with debt, the central bank’s goal is to depreciate the value of the paper wealth back to manageable levels by a continuous inflation.  

Exponential change (accelerating change) is on its way.  Growth requires energy in large amounts and there is no new scalable energy source out there.  As the energy costs increase due to greater scarcity and cost of extraction, complex systems will become simpler. and so will our lifestyles.

We fool ourselves at our peril.  Thinking that the future will simply be a continuation of the last 40 years is denial of the seriousness of the situation.  As the complex system breaks down, the rules will be changed.  Politicians will throw anyone under the bus to keep his or her job and lifestyle.

If you can’t accurately assess the risks, be careful about how you invest.  Futures and options risks have risen dramatically with the demise of MF Global.  Beware, you may not be insulated from the fallout of the risk-taking decisions of those connected at the top.  The insiders will pull their money first leaving the rest of us looking up at the undersides of the infamous bus.

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