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The End of Wealth Creation

Politics / Credit Crisis 2009 Feb 07, 2009 - 12:48 PM GMT

By: Ronald_R_Cooke

Politics Best Financial Markets Analysis ArticleThe Roman Empire - The rise and fall of the Roman Empire is a classic example of Return On Investment (ROI). Rome essentially funded conquest through pillage, bringing rich treasures of gold and silver back to Rome. During the early years of the Empire, the ROI on conquest was very good and Rome prospered. It had plenty of coin to fund its Legions. As the years went by, however, it became more difficult to find lands worth conquering and the travel costs to send a Legion to remote lands increased. The ROI of conquest began to falter, and Roman Emperors finally concluded additional conquests were not worth the cost. Years of wealth creation came to an end. The Roman Empire shifted its attention to wealth preservation.

Whenever a nation slips from wealth creation to wealth preservation, it becomes increasingly difficult to sustain the prior level of wealth. As the cost of maintaining the Legions went up, the ROI on having them declined. In order to pay the cost of preservation, Rome debased its currency multiple times. Debasement is a way to pay today’s bills with tomorrows worthless coins. That led to incredibly high rates of inflation. Payment in kind often substituted for worthless currency. This debasement continued until mercenary legions refused to take Roman coins, sacked Rome, and established their own government. (Reference 1)

Sound Familiar?

There is a lesson here. If economic circumstances yield a positive ROI on labor, capital and material, then a nation is able to create wealth. When a nation lapses into wealth preservation, the ROI on invested capital declines. It becomes very difficult to sustain transfer payments because the creation of wealth declines to a point where there is no more wealth to transfer.

Wealth, in this sense, has little to do with how much money the rich can command. We are talking about the wealth of a nation’s workers, and more specifically the wealth of its middle class. Rome’s declining ability to maintain the wealth of its workers led to unsustainable welfare costs. The cohesive energy of Roman culture collapsed.

This is precisely the situation in America and the European Union. The 20th century was marked by multiple opportunities to create great wealth – radio, television, movies, telephone, automotive transportation, coal, oil, natural gas, electricity, railroads, airplanes, bio-sciences, communications, electronics, semiconductors, computers, PCs, the Internet and software. Economic circumstances created multiple opportunities to create wealth for the ordinary person from the mid 19th through the end of the 20th century.

The collapse of the technology bubble from 2000 – 2003 was especially significant. Beginning in the late 1960s, computers, then PCs, then networking, and finally the Internet – along with all the software to make them work – offered the last significant wealth creation opportunities of the 20th century. When the technology bubble burst, the era of wealth creation ended. Subsequent development of cell phones, computer games, and other electronic devices are merely an extension of the technology era. Important as they are, they did little to increase the GDP of most nations.

Every OECD nation will be focused on wealth preservation.

Aside from nano-technology and energy, it would appear the 21st century will be characterized by an unsuccessful attempt to sustain prior wealth. There are few significant opportunities to generate new wealth on a scale of the innovations that underpinned wealth creation over the last 160 years. We will build new cars, interesting vehicles with new energy components, but we will not create the auto industry. We can now fly anywhere in the world, but our ability to manufacture economically viable airliners has peaked. The traditional media industry is now in contraction. We have already discovered, and consumed, most of the cheap oil. And so on.

The Deterioration Of GDP

The American economy has an embedded structural problem. Our economic focus has shifted to the preservation of wealth. This is not a prediction of the future. It is already happening. The following chart shows the annual change in Current Dollar Gross Domestic Product (GDP) from 1968 – 2008. Note that current dollar GDP seldom exceeds 2% after Q2 of 1984. For the last 20 years, the average has been just over 1.2%. The “Internet Boom” of the 1990’s actually did little to increase current dollar GDP. And despite a few quarters of spectacular growth as we claw our way out of this recession (no sure thing), it would appear average annual current dollar GDP growth will continue to deteriorate.

This is why I am furious at the intellectually challenged thinking that has gone into the proposed “stimulus” bill. It does much to transfer wealth. It does a woefully inadequate job of providing the opportunity to create substantial new wealth.

Our government is currently trying to artificially elevate American Real Estate values and sustain economic activity by spending several trillion $$ of taxpayer money on “bail-outs” and “stimulus” packages. Although money flow will surge for a time, these efforts will ultimately fail because they do not address the fundamental underlying problem – we have slipped into preservation mode. If we want these programs to be successful, they have to either create wealth, or facilitate the creation of wealth. (Reference 2)

Looking Ahead

For the purposes of this article, there were four other reasons for the decline of the Roman Empire:

1. Product manufacturing drifted away from Rome to outlying regions. As Rome’s importance as a manufacturing resource declined, its ability to pay for food and goods from outlying lands also declined. “Why trade with Rome?”, goes the argument. “They can’t pay you and if they do, it’s with worthless debased coin.”

2. In order to pay for its Legions and welfare recipients, Roman Emperors increased taxes to the point they were confiscatory. Farmers lost their lands because they could not pay the taxes, or because the tax burden made further farming uneconomical. Cultivation declined. Displaced, and often starving, thousands of farmers drifted into Rome or became bound to rich patrons (the start of serfdom).

3. Thousands of slaves, displaced farmers, former Legionnaires, and aliens flooded into Rome, swelling the welfare rolls and degrading Roman culture.

4. Rampant political corruption and moral decay demeaned the value and quality of life. Desperate for spiritual fulfillment, thousands abandoned pagan beliefs in favor of emerging Christian doctrine.

Does any of this sound familiar?

If we are willing to compare the decline of the Roman Empire with the current cultural and economic condition of the United States, Canada, and several nations in Europe, the parallels are too obvious to dismiss. Our manufacturing base is declining, and welfare transfer payments are increasing. There is a call for higher taxes. Aliens flood across porous borders. Corruption and moral decay is not merely the norm, it is defended with emotional fervor.

The era of wealth creation is over.

Reference 1. With sincere apology to those who have invested hours of time in the study of the Roman Empire. This thumbnail description is all too brief and partly whimsical.

Reference 2. For more information on how we got here in the United States, please do browse through my blog

Ronald R. Cooke
The Cultural Economist
Author:  Detensive Nation

Cultural economics is the study of how we interact with economic events and conditions. Culture, in this sense, includes our political systems, religious beliefs, psychology, history, customs, arts, sciences, and education. The term "Economics" refers to the extent and process of how we employ capital, labor and materials. If human existence is dynamic, then economics – as a science – must be able to characterize the interaction of culture and economics in contemporaneous terms.

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