When the $400 trillion global credit-asset bubbles all pop, maybe there will only be $100 trillion in wealth sloshing around…
When the $400 trillion global credit-asset bubbles all pop, maybe there will only be $100 trillion in wealth sloshing around.
Getting rich in a bubble economy isn’t that hard as long as you were rich enough to buy assets at the start of the bubble.
For example, some friends bought a modest old house (built 1916, under 1,000 square feet) in the East Bay / San Francisco Bay Area for $135,000 in late 1996.
They invested money and sweat equity in improvements (new heating and wiring, etc.) and sold it for $545,000 in 2004.
Now the house is worth over $1 million.
Official inflation since 1997 is $1 then is now $1.80, so if the value of the house had kept up with inflation the current value would be $250,000.
Studies have found housing tends to gain about 2% net of inflation annually, so with this added in, the house “should be” worth about $325,000.
So the house is worth triple what historical (pre-bubble) valuations would suggest.
The stock and bond markets have yielded similar stellar results over the past 25 years, roughly double the handsome historical expected returns.
Other investments have yielded spectacular returns. Many tech stocks have risen ten-fold or more, and those who bought Bitcoin for $650 in August of 2016 when I projected a price target of $17,000 (absurd at the time) could have reaped a nearly 100-fold gain had they held on and sold at the peak around $65,000 in November 2021.
Not everyone who owned or bought assets in the early years of the credit-asset bubble have become wealthy, but most have done well for themselves.
Going forward, the tricky part will be keeping this wealth.
There are several reasons for this.
One is that all bubbles pop, despite the vigorous protests of those who have profited so mightily from the bubble.
Another is the magnitude of the challenge: to preserve their gains, everyone will have to rotate out of asset classes that are deflating into assets that are rising or at least holding their value.
As John Hussman has pointed out, somebody owns the devaluing asset all the way down, i.e. bagholders. These owners absorb the losses.
There’s about $400 trillion in assets / wealth sloshing around the global economy. If (say) half of that wealth must exit declining assets and find safe haven in some other asset classes, that’s a tall order.
$200 trillion out of declining asset classes (real estate, bonds and stocks, for example) into what asset classes that will be worth $200 trillion in the new era?
Proponents of safe-haven asset classes abound. Crypto enthusiasts are confident cryptocurrencies and crypto-investments will register massive gains, while precious metals investors are equally confident that PMs will fulfill their historic role as safe havens that gain value as things unravel.
Others claim real estate and stocks will hold their value for various reasons (global capital flows, etc.).
I have little confidence in any of these projections because the era we’re entering–the instability born of scarcity and depletion–has no modern analog.
We have to go back to the 1600s to find any sort of similar climate-driven scarcities, and even further back to to find eras of climate-disruption / resource depletion instability (Ming Dynasty, Cambodian Khmer, late Roman era, Mayan city-states, Bronze Age civilizations, etc.)
Just as previous civilizations cut down their forests to sustain the expansion of their economies, we’ve exhausted the cheap-to-get oil and coal.
The transition to some other equivalent sources of energy is not guaranteed to be smooth or equivalent in scale, portability, reliability, etc.
If there are no recent historical analogous eras, how confident can we be in projections of how $400 trillion can seamlessly slosh out of loser-assets into a set of winner-assets?
Another reason is the entrenched nature of speculative fever. “Investors” is now the polite term for gamblers who have grown accustomed to reaping quick gains and moving capital around with a few keystrokes.
This mentality is a rocket booster for instability, an instability that undermines real investing by generating wild swings of valuation. One either joins the crowd at the gaming tables or risks being wiped out by sudden downdrafts.
Another reason is the increasing desperation of authorities to keep a fragile, destabilizing system glued together.
Put yourself in the shoes of authorities seeking revenues to cover the costs of their immense borrowing and spending.
Any asset class that registers spectacular gains draws a target on itself. Hmm, shouldn’t “the rich” (i.e. the owners of whatever asset registered spectacular gains) pay “windfall taxes” on these (undeserved / unearned) gains?
Of course they should. Let’s start with a 50% tax that progresses to 90%, and increase the penalties for evasion.
Then there’s a wealth tax to nail all those greedy souls who refuse to sell to reap their gains. Let’s start a wealth tax at $10 million, so the bottom 95% will support it, and then move it down to $1 million.
How about requiring pension funds, 401K and IRA retirement accounts to own government bonds “to protect these assets from speculative losses.”
Next, let’s limit withdrawals and transfers to overseas accounts to a trickle. The “wealthy” will be wealthy on paper but won’t be able to access much of their wealth.
Assets held in Periphery economies may simply be expropriated without due process. You have it, we need it, done.
In the course of this year, I have endeavored to explain my thesis that the real action to pay attention to isn’t in comparing one broad asset class to another, but nuanced differences within each asset class.
For example, real estate in enclaves that are highly attractive to the super-wealthy and merely-wealthy may gain in value even as 95% of real estate / housing declines or even collapses back to the valuations of a generation ago.
Some stocks may do extremely well even as 95% of equities crater.
In other words, I doubt that there are any easy generic answers to the question, “how do I preserve my wealth going forward?”
Diversifying assets is one strategy.
Another is to concentrate on assets we control directly such as our primary residence, family enterprise, etc.
Another is to focus on intangible forms of wealth such as skills and trusted personal networks.
Yet another is to recognize the divide between Core and Periphery will widen and assets in the Periphery will be at far greater risk than assets held in the Core.
From a historical perspective, we might lower our expectations so we’ll be delighted to hold onto 50% of our current wealth, or perhaps 25%.
In other words, when the $400 trillion global credit-asset bubbles all pop, maybe there will only be $100 trillion in wealth sloshing around, and much of that will be severely constrained by authorities of one kind or another.
The instability generated by climate disruption-resource depletion will not be easy to navigate. Partial success may be all that’s within grasp for most of us.
What do we need to sustain our well-being? Perhaps that’s the type of wealth we should prioritize preserving.
My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.
My recent books:
A Hacker’s Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).
Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).
The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 Kindle, $8.95 print); read the first chapters for free (PDF)