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The Daily Reckoning PRESENTS: For anyone living
in the 20th century, the rising cost of living is nothing
new. Since the creation of the Federal Reserve, the dollar
has lost about 95% of its purchasing power. Chris Mayer
explores our other options for making sound investments...
Inflation, as it is commonly known, has not
always been the normal state of affairs. As James Grant,
editor of Grant's Interest Rate Observer, has pointed out,
"From George Washington to the A-bomb, prices alternately
rose and fell... As Alan Greenspan himself has pointed out,
the American price level registered little net change between
1800 and 1929."
The basic nature of our money assures it will
lose value over time. It can be created nearly at will and
it is left in the hands of government officials, who routinely
spend more than they have. In such a state, a nation's paper
money has a shelf life like a fresh egg or a jar of mayonnaise.
It doesn't last forever. Unlike these foodstuffs, paper
money has no printed expiration date.
According to economist Felix Somary, who experienced
firsthand the devastating monetary inflations that destroyed
the German mark in the 1920s, it took Rome four centuries
to destroy its currency. Germany and Austria reached that
point in just nine years, ending in the famous hyperinflations
of the 1920s, and before that, Russia managed it in only
five years. Everyone's experience is different, but our
collective experiments in paper money have not created a
currency that increases in value over time.
The life and value of a monetary unit has
less to do with the wealth of a country than with the simple
facts of supply and demand. As the great Austrian economist
Ludwig von Mises noted, "Even the richest country can
have a bad currency and the poorest country a good one."
For some interesting insights into the flight
of the dollar, I want to share some thoughts I recently
read from Justin Mamis, author of several investment books
and a longtime market adviser. Mamis was born during one
of the great turning moments in stock market history - 1929.
Mamis talks about the experience of the dollar's
immediate predecessor as cock of the walk, the old British
pound. The pound, the currency of choice for a long stretch
of time before the American dollar, was the product of the
British Empire. Imperial ambition and sound money, though,
never mix, and the pound probably peaked somewhere before
World War I. After World War II, Mamis notes, "The
Empire peeled off like an onion into a grab bag of different
independent countries... the Bretton Woods Agreement of
July 1944 signaled the end of the British pound as the world's
reserve currency."
The British pound continued to weaken against
the dollar over the ensuing years. Mamis notes: "Weakness,
in a long-term sense, begets weakness, like the flaws in
an incestuous genetic pool."
The dollar has been the world's reserve currency,
or currency of choice, since at least Bretton Woods. From
this short collection of historical vignettes, we can make
one safe assumption. As Mamis puts it, the status of being
a "reserve currency is not a permanent appointment."
To pinpoint when the dollar's status as the
world's currency of choice will end is an impossible task.
These things tend to unfold over many years, and there does
not appear to be any immediate contender ready to ascend
to the throne. But that should not deter the investor from
making the basic assumption that the dollar of a decade
hence will buy less than a dollar of today.
I'll include one last quote from Mamis, who
advises us not to expect long-term trends to always be immediately
apparent or obvious. "We must warn not to turn the
next century's global changes into something that has to
be evident in its entirety all at once - or else denied.
Nor will our concerns be proven instantly 'wrong' because
the dollar finally has its oversold rebound." Well
said.
This situation - the whittling away of the
dollar - creates the need for sound investing. Basically,
investors look to survive the ravages of inflation (and
taxes - of which inflation is a most insidious type). Like
the biting winds of nature that sculpt rock and carve stone,
inflation and taxes will grind the greatest piles of fortune
to dust over time. Preserving it, making it grow - essentially
investing well - is the investor's difficult art.
So should you put your money in euros, perhaps,
or some other foreign currency? The euro may strengthen
against the dollar, but I think the dollar and the euro
share the same fate, like the passenger pigeon and the Carolina
parakeet. The road to extinction may be of indeterminable
length, but the final destination of that road is not in
doubt. The same can be said of all our paper currencies,
be they yen or pounds, pesos or ringgit. All of them are
on the same slide.
But there are other ways to beat the decaying
paper currencies that make up so much of our financial wealth.
The idea of tangible asset investing, investing in stuff
that has survived and prospered in a variety of conditions,
should meet the challenge in the years ahead.
Often, I've looked at some great fortunes
and drawn insights and lessons from those experiences. Recently,
I came across an old book, originally published in 1907
and written by Gustavus Myers, called History of the Great
American Fortunes.
It is a mammoth study of American wealth over
the previous 200 years and deals with fortunes in shipping,
land, fisheries, railroads, trusts, banks and other industries.
I've only read a couple of the opening chapters, which happen
to cover the shipping and land fortunes. But some of Myers'
observations got me thinking about the durability of some
forms of investment over others. Shipping and land offer
interesting contrasts.
Myers writes about the great fortunes of the
shippers. "Enormous as were the profits of the shipping
business, they were immediate only. In the contest for wealth,
it was inevitable that the shipper should fall behind. Their
business was one of peculiar uncertainties. The hazards
of the sea, the fluctuations and vicissitudes of trade,
the severe competition of the times exposed their traffic
to many mutations." In other words, shippers' fortunes
came and went, like the late-1990s boom in tech stocks,
the 1960s conglomerate boom or any number of investment
crazes of years gone by.
Many shippers were aware of the vicissitudes
of their business and often invested some piece of their
fortunes in land, banks, factories, turnpikes, insurance
companies and railroads. Those that didn't didn't last.
Contrast this with Myers' observations on
those fortunes built on land, primarily in commercial cities
of importance:
Fortunes built on land in the cities were
indued with a mathematical certainty and perpetuity. A lot
of the tendencies and currents of the times favored the
building up of an aristocracy based on the ownership of
city property. With the progressing growth of commerce and
population, with immigration continuing... every year witnessing
a keener pressure for occupation of land, the value of this
latter was certain to increase.
An investment in land was an investment in
something that was real and often increased in value despite
what its owners did with it. It could be titled and its
ownership made certain - unable to be copied by a competitor.
One more quote from Myers, who draws this
interesting conclusion:
A more formidable system for the foundation
and amplification of lasting fortunes has not existed...And
that it is pre-eminently so is seen in the fact that the
large shipping fortunes of a century ago are now generally
completely forgotten, as the methods then used are obsolete.
But the land has remained land; and the fortunes then incubated
have grown into mighty powers of great national, and some
of considerable international, importance.
Now, I'm not concluding that land is a new
surefire investment bound to make us all rich in time. But
the best characteristics of land provide insight into what
makes a resilient investment, able to hold its value in
a variety of market conditions.
Land has some characteristics, such as its
durability, relatively fixed supply and timeless qualities
that have often made wonderful investments and formed the
keystone to later fortunes.
To survive and prosper in the years ahead
while the dollar crumbles, look for real assets that share
these qualities.
Regards,
Chris Mayer
for The Daily Reckoning
Editor's Note : Christopher W. Mayer is a veteran
of the banking industry, specifically in the area of corporate
lending. A financial writer since 1998, Christopher's essays
have appeared in a wide variety of publications, from the
Mises.org Daily Article series to here in The Daily Reckoning.
He is also the editor of Fleet Street Letter.
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