Easy Come, Easy Go

“Money, it turned out, was exactly like sex; you thought of nothing else if you didn’t have it and thought of other things if you did.” – James Baldwin (Nobody Knows My Name, 1961)

In a recent Daily Reckoning message (www.dailyreckoning.com), Bill Bonner made an interesting point about money, one that will make sense to ETRs who have been following our ongoing discussion on Living Rich. Bill says, “More money does not make people richer. It makes them poorer.”

He cites Peter Bernstein’s book, “The Power of Gold,” for a historical example. During the 16th century, Spain should have been the richest country in the world because of all the gold it had found in the New World. But it wasn’t. In fact, while other nations that had only a secondary or tertiary connection to the new money prospered, Spain steadily became poorer — and eventually went bankrupt.

What happened? According to Bernstein, “The massive imports of gold and silver stimulated the spending skills (of Spain) at the same time they stifled Spaniards’ incentive to produce. Spain acted like a poor man who makes a great windfall at the gambling tables but comes to believe that the money is his destiny rather than a non-recurring event.”

Bill argues that the same phenomenon explains why welfare does little good in America. “The days after the welfare checks come out are the worst. Drunks get drunk. Addicts get high. Children, untended, play on the sidewalk till 2 a.m. Fights break out. Deals go bad. People get shot.”

In the 16th century, the gold-rich Spaniards spent their money on wars. Charles V and his son, Philip II, spent a fortune (1) on a war with Francis I of France, (2) to try to subdue the Dutch and Belgians, and (3) even to send the Spanish Armada to England in hopes of toppling Queen Elizabeth I.

“All of this cost money,” Bill points out, “and, typical of people who get something for nothing, there was never quite enough.” Instead of transforming the gold and silver into new productive wealth, the Spaniards spent so much that their debts actually increased during this period. So much so that in July of 1576 King Philip declared his nation bankrupt. His army of mercenaries mutinied. “It was said,” writes Bernstein, “that at one point the captain general (of Philip’s army) did not have enough money for lunch.”

As Pedro de Valencia wrote in 1608, “So much silver and money . . . always has been fatal poison to republics and cities. They believe money will keep them, and it is not true; plowed fields, pastures, and fisheries are what give sustenance.”

The secret to acquiring wealth is to (1) invest a significant portion of your savings in productive enterprises that will grow more valuable over time and (2) resist wasting money on unproductive or even counterproductive things.

Don’t buy lottery tickets, and don’t spend any time dreaming of how rich you’d be if you won the lottery. Doing so will make you poorer, not richer.