Per Pogo: “We have found the enemy and he is us.”

Martin Luther said “Give me the child, and I will give you the man!” If the child sees the old rules abandoned, he will grow to be one who plays by new rules, or by no rules. From parent to child and also from the environment the child grows up in, comes a concept of how the world works. Sadly though, his concept is usually formed encompassing a very short period of time. Long-term awareness of the workings of man are not grasped by the multitudes. “Those who forget history, (or do not learn it) are doomed to repeat it.”

The current fashion of investing and spending with abandon has occurred before, but never to such a great extent by such a large percentage of society. In this century there have been several peaks of economic ‘prosperity’. Some, such as the post-war boom of the forties were built on real production, whereas the prosperity of the Roaring Twenties and the mid-Seventies were built on ‘wealth transfer bubbles’.

Economists fail to educate people on the underlying realities, mainly because they get buried in such factors as the money supply, debt, credit and governmental control. They lose sight of fundamentals that are as immutable as the laws of gravity. The concept of wealth is not clear to contemporary society. Unrecognized is the fact that wealth is either garnered by creating product for exchange or is obtained by transference. The difference between these has become blurred beyond all recognition. That phenomenon is not new. It was the tangle Ayn Rand was trying to unravel in Francisco’s speech beginning with. “You cannot ‘make’money.”

The question, “What is money?” has been a principal topic on this Forum. I am referring here to money in the form of legal tender. The failure to understand what money is, comes in part from the failure to realize what it is not. Money is not a thing; it is a right. Specifically, a banknote is a purchasing right issued by a government. It entitles its holder to acquire goods and services. It is issued in exchange for the delivery of goods and services as earnings or in return for future delivery and interest, in the case of a loan. Or, it can be transferred from one to another via trade. It is in the activity of trade that money takes on the apparency of being a thing, a commodity to be obtained, rather than a record of production and entitlement.

What becomes lost is the reality that, regardless of how much money one or all has, the goods and services obtainable are ultimately only created by production. This is the state of a society when, to obtain money, it becomes immersed in the activity of trading rather than producing. In trade, the wealth must come from someone else. For every trader’s profit there must eventually be another trader’s loss. Even if the man in Atlanta knew this, he was a member of a society that believes that it’s the other girl who gets pregnant, the other guy who causes it, the other driver who can’t hold his liquor, and the other criminal who gets caught. Naturally, it’s the other guy who loses in the Market. But of course that’s also what the other guy thinks. If millions are made in day trading, then millions must be lost in it. Why should it surprise anyone that someone dropped $500,000, while thousands of day-traders are ‘making’ money at the same time?

In the Forties and Fifties, there were performances in schools and summer camps of a play called “The Monkey’s Paw.” It’s a story of an older couple who come to possess a talisman that will grant them three wishes. Naturally, their first wish is for a large sum of money. The next day, the constable appears at their door to inform them that their son has been killed in a violent auto accident. The insurance money is exactly the amount they wanted. Simple lesson: Money can not appear out of thin air. It must represent some past, present or future activity. Money is how man divvies’ up the quantitative production of society. That play should be part of lesson #1 in any course in economics.

(I suppose I’d better pause here and tell the other two wishes. They next wish him back to life, and he appears in the doorway, grotesquely broken and disfigured from the accident, whereupon they immediately use their last wish to send him back to the grave. There are all sorts of ways to apply this parable to the present moment, I would think. )

So how did our society arrive at this dynamic moment in economic history?

I think it got started in the inflationary investment boom of the Seventies. By that time the lack of the work ethic was being lamented. Of course, it was always “the other guy” that had the problem. A sense of entitlement had permeated the land. Others owed their work. Individuals began to see themselves as deserving more. As a larger percentage of economic product provided goods beyond the need for survival, there was a far greater amount of goods to be distributed in exchange for money obtained from others. In 18th century France, this activity also resulted in the production of guillotines.

In the mid seventies, we were visiting relatives in the Bay Area. They were engaging in the popular and lucrative activity of buying a home, renting it out to cover the payments and then shortly thereafter selling it at a substantial profit. We were still immersed in the 60′s philosophy – working with our hands and producing real product for our money. Still guilty of the youthful sin of lecturing our elders, we admonished them about the lack of morality in their activity. They, being environmentally and socially conscious Berkeleyites, agreed with the truth of what we were saying, but they asked us, “What should we do, just watch it go by?”

Well, watching it go by was not what anyone was doing. The typical talk at social gatherings became various versions of “Buy something that appreciates, on credit, and pay it back with cheaper dollars.” When the flow of discretionary capital into tangibles triggered exorbitant interest rates, money moved back into banks and bonds. Just as, once a tiger gets a taste of human flesh, he becomes a man eater, the taste had been awakened for the hip and savvy investor to trade for money.

Simultaneous with the development of the nonproductive reward phenomena was the growth of the viewpoint, “I am the center of the universe.” It started in the early fifties when psychiatrists blamed the actions of criminals on their unhappy childhoods. Then several decades of the Me generation came along, and at the same time children were being raised to perceive the world as what they saw on television. Art became life, and affluence became what the smart obtained at the expense of the foolish. Marriage became something that failed because your mate did not live up to your entitled expectations. No one was any longer responsible for anything that happened to them.

The final nails that would be used for the coffins of the Columbine students and the Atlanta brokers were forged by the expansion of the “Your Fault” syndrome into the courtrooms of the land. No longer was it just “Sue the bastards!” It was, “Sue the money-owners!” If no one is responsible for what happens to themselves, than obviously someone else is.

This year in schools and brokerage houses, two insane viewpoints converged. Esteem and wealth are not earned. You are owed them. If people do not deliver what they owe you, than you make them pay.

The zenith of the monetary excess is also upon us. It is certain that the Atlanta event has focused attention on the mechanics of the unearned money game. Part of this week’s market decline, I’m sure, can be attributed to the element of sobriety induced by that event. But that is just helping to bring the inevitable to an earlier conclusion.

“Invest and spend;” that’s exactly what this Market and the economy is composed off. The books of the economy have a gigantic double entry. Investors ‘save’ their money in stocks, but in reality that money is the spending money that has already fueled the great economic boom. The money appears in the bank accounts of the stock sellers, while being perceived as being ‘owned’ by the stock buyers. A basic law of economics could be written. “One dollar cannot occupy two pockets at the same time.”

Legal tender is a receipt for goods not yet delivered. The delivery is, of course dependent on faith that banknotes will remain the agreed-upon form for recording production rights.

The securities and recorded credits around the globe have increased in declared value, to far more product than has been created. Transferring wealth between nations, mega-entities and individuals, has blind-sided most people to the quantitative truth of the global economic wealth. That being that an unprecedented percentage of it is a derived future promise (i.e. derivative.) Paper’s unsustainable promissory commitment and the unsustainable economic boom created by just-in-time production are shortly going to result in a lot of broken promises. Stocks, bonds and other securities, are promises of money. Bank notes are a present time via for money. But for absolute, guaranteed money, there is only Gold.

Gold has been disfavored in terms of the legal tender of the world, but that does not negate its senior value. Using and abusing gold for the purpose of profiting on it as a trading vehicle has altered people’s perception of its intrinsic value.

In the final analysis, is or isn’t, is far more important than large or small! In terms of liquid assets, when the game of financial musical chairs comes to its next halt, the only seats in the house may be those made of Gold