Recent news about the advent of rapidly rising gas prices has brought the subject of energy into the forefront of public opinion.  Unfortunately, the majority of the discourse occurs over typical “political football” issues such as profits from oil companies and proposals for higher taxes.  Recently, the topic has shifted toward the topic of exporting domestically produced oil to other countries.  Naturally, this is being portrayed as unpatriotic greed on the part of the oil companies who are subverting the national interest of the United States for their own selfish interests. What this phenomenon really represents is a signal.  It is a signal to the United States that the “loose money” policies of permanently low interest rates and perpetual monetary expansion has consequences.  The government is clearly attempting to inflate values in the stock market and real estate sector by pumping money into the economy.  The problem is that this has the net effect of reducing the real value of dollars that are already in circulation.  It also has the effect of making products & services we sell to other companies less expensive, while making products & services they sell in the United States more expensive. One of the products made less expensive by a loose money / weak currency policy is oil.  When the US intentionally devalues its currency to support government spending programs and financial markets, it increases the relative purchasing power of other global currencies.  As the purchasing power of these other currencies increases, it allows them to purchase more energy than they otherwise would have bought.  This translates to increased incentives for oil companies to export their product instead of sell it domestically, unless the domestic price increases. Thus, the phenomenon we are seeing is not any kind of conspiracy or the result of evil intentions by corporate plutocrats.  It is nothing more or less than the predictable result of loose money policies.  It is certainly convenient for politicians to blame the usual suspects of “corporate greed” or “big oil” … however, the current situation is one that has been intentionally created.  It was not created to reward oil companies, it was created in an attempt to avoid a double-dip recession and conceal the sluggish growth of the US economy.

Canary in the Coal Mine

In years past, coal miners would take a canary down a mine shaft as a signaling mechanism.  If the canary died, it meant the air was becoming toxic and that they need to vacate the mine … quickly.  Similarly, these rapidly rising gas prices should be viewed as an indicator of what is going to happen as a result of continued easy money policies by the government.  It is an indicator of what the future holds for our economy.  Unfortunately, addressing the underlying problem that causes these higher prices carries with it separate problems.

A Rock and a Hard Place

The most certain remedy to the recent rash of price inflation is to begin tightening the money supply.  By raising interest rates and pulling-back money from circulation, it will increase the relative purchasing power of dollars.  This will make it (relatively) more profitable to sell oil in the United States than in other countries, so more supply will be attracted to the US.  This increase in supply will drive prices down to a new equilibrium.  The same effect will happen for food, which has also experienced a dramatic run-up in its price over the past few years.

The problem is that if interest rates are not constrained, and if money is removed from circulation, it will place significant downward pressure on both real estate prices and stock market values.  Increasing the cost of borrowing will also suppress business investment in new plants & equipment.  The unfortunate truth is that inflation has become the price we are paying for cheap money.  The irony of this observation is that the result of this policy, which is being pushed by the self-proclaimed champions of social justice is to disproportionately impoverish those at the bottom of the wealth and income ladder.

Since people who earn less income or are dependent on government subsidies tend to spend a higher percentage of their income on things such as food and energy, inflating the prices of these commodities to artificially reduce the costs for stock market investors and home buyers results in a net transfer of real wealth from those at the bottom to those at the middle and the top.

An even more concerning fact is that the current government entitlement liability has grown so large that long-term inflation is all but inevitable unless significant changes are made within the next few years.  Since entitlement programs are very popular with the people who receive the payments, it has become a matter of political suicide to propose any changes to these programs.  Unfortunately, the people who rely on these ‘safety net’ programs are the same ones who will be the most intensely impacted in the future when prices continually increase as the government prints money in an attempt to meet their financial obligations.

In the end, we must all decide what we will personally do to ensure that we are able to personally resist the coming inflationary wave.

 

An article was recently published by Reuters entitled: “The New American Dream is Renting to Get Rich.” The thesis of this article is that home ownership is not the fast-track to wealth that it used to be.  It also makes the point that many people would be better off renting and investing their surplus income in wealth-building investments than by sinking all of their income into owning a home.  The article also went on to explain how many people who had purchased homes during the boom lacked the financial resources to pay for building wealth through other investments, and became solely dependent on their home equity for their net worth.

This serves as an excellent backdrop for a deeper discussion on what wealth really is, and what wealth building is really about.  A useful first step in changing the way we think about wealth is to take the dollars out of the equation.  Instead of thinking about our personal wealth in terms of a dollar value, we should think of it in terms of what we own and what is produced by those assets.  In order to help articulate the difference between asset types that comprise our wealth, we like to separate wealth in to three tiers of assets.  The characteristics of your wealth portfolio in terms of where the assets land on the wealth tiers exerts a high degree of influence on how your personal financial future will unfold.

Tier 1 Assets:

Tier 1 assets are physical assets that generate real cash flows.  Examples of these assets are mines, energy exploration contracts, income producing real estate, and other such physical property.  The reason for positioning these assets in the top tier is because their physical nature and residual cash flows make them the most dependable and least volatile.  For most people, it is not always practical to have full ownership of physical assets such as this, so it can make sense to invest in companies that own and operate these types of physical assets and pay out a significant portion of earnings to investors.

Tier 2 Assets:

Tier 2 assets are fully owned business enterprises.  The reason why these assets are ranked below physical, cash producing assets is because their returns are typically more volatile.  The upside of volatility is that it frequently exhibits greater growth characteristics, but the downside is that it frequently carries more risk.  By fully owning a business enterprise, it allows you to exhibit a significant degree of influence on its financial success.  Many people build their wealth with Tier 2 assets in the form of a business and diversify into Tier 1 cash producing, physical assets.

Tier 3 Assets:

The third asset tier holds investments where the returns are completely dependent on market sentiment in regard to the asset value.  Metals such as gold and silver fall into their asset tier, along with growth stocks that don’t pay dividends.  Home equity is also a tier 3 asset, and this is where its danger lies.  When the value of an asset is completely dependent on the sentiments of other people in the marketplace, there is an omnipresent risk of value collapse if market sentiment turns south.  Almost every market bubble takes place in Tier 3 assets, as people purchase with the expectation that others will purchase for perpetually higher prices.

The way to apply this construct to our personal investment portfolio is to determine where our wealth fits on the asset tiers.  Unfortunately, most people have an extremely high percentage of their wealth concentrated in Tier 3 assets that fluctuate in value based on market sentiment, and rely completely on value increases from that same market sentiment to deliver their future returns.  When your wealth is concentrated in Tier 3, you will be highly exposed to collapsing bubbles that destroy market valuations as people shift out of a ‘buying frenzy’ into a ‘selling frenzy’ that collapses asset prices.

The most prudent advice for 21st century wealth building is to push your wealth as far up the ladder of asset tiers as possible.  If you own Tier 3 assets that are highly volatile, seek to shift more of them toward Tier 2 assets that you can influence or Tier 1 assets that are more stable.  By and large, assets in lower tiers tend to be more volatile, offer the potential for higher short-term profits, and involve higher transaction costs.  Many people who are successful in building businesses would be well advised to diversify their wealth portfolio to include more Tier 1 assets that produce stable cash flows without the necessity of their direct participation.

As prudent investors, we should seek to build our wealth around vehicles with strong fundamentals.  We should also seek to minimize the proportion of our assets that exist at the lowest tier.  We should also be mindful to avoid the temptations of “easy money” from Tier 3 assets that are experiencing temporary price spikes.  Attempting to speculate on the movement of volatile assets is an inherently risky business.  In the end, our best opportunity for long-term prosperity comes from sticking to fundamentals and building a high-tier wealth portfolio.

 

The terms ‘profit’ and ‘loss’ are common parts of the business vernacular, but not many people fully understand their role in a market economy.  This has become even more pronounced after the recent financial crisis, as the government has attempted to perpetuate a system of profits without losses.  The problem implicit within trying to build a market economy without both profits and losses is that it will inevitably lead to one of two extremely undesirable results.

One sentiment that was popular in the middle of the 20th century was the notion that private profits are fundamentally immoral and that all production should be socialized.  This is the fundamental tenant of socialism and communism, and ultimately results in a stifling of risk taking since the rewards for entrepreneurship become non-existent.  In this environment, the resources available for redistribution don’t grow, and the costs of government control place a tremendous burden on national output as access to wealth becomes a function of political connections instead of skill or productivity.

Another sentiment that has been unfolding over the second half of the 20th and early 21st century is the notion of socializing losses from private activities through creditor bailouts.  The textbook term for business sector that enjoys government sponsored monopoly power and implicit (or explicit) guarantees of solvency is the “corporate state.”  In this model, profits are privatized to politically connected businesses and losses are socialized on the backs of taxpayers.  Some people refer to this as “crony capitalism” … however, the term is an oxymoron since capitalism is a system where market conditions are allowed to prevail and political officials are unable to provide special benefits to their “cronies” through the power of government.

The fundamental characteristic that both of these flawed models share is that they distribute wealth based on political influence instead of ideas and productivity.  In both cases, the government wields tremendous power and entrepreneurship is suppressed by either an absence of profits from success or from entrenched competitors with government backing that crush competition.  The danger that is posed by this model is that the “profits” it generates look the same as earnings from legitimate business activities.  However, the former provides nothing of net value to the marketplace, and the latter is the fundamental foundation of every market-based economy.

In a ‘real’ capitalist economy, profits are generated by success in the marketplace and failure results in losses for both equity and debt investors.  The current brand of “crony capitalism” has architected bailout after bailout of creditors who financed excessively risky business operations.  The importance of this comes from the fact that creditors have historically been the primary guardian of prudence in business activities.

Consider that a creditor receives no premium if a business is successful like a stockholder . . . all that they get is their regular interest payment.  Because of this, creditors in a ‘normal’ environment will demand a higher interest rate from risky businesses.  These higher interest rates will temper risk taking by entrepreneurs since the increased financial obligations will reduce their probability of success.

However, if the government guarantees the debtors of a particular company, then they have no reason at all to encourage prudence . . . they are going to get their money back from the government if things go upside down.  This creates perverse incentives where risk taking becomes more and more intense while the cost of borrowing stays low because of a government guarantee.  When big profits roll in, management gets big bonuses.  If a collapse occurs, the government bails out the creditors and the taxpayers get stuck with the bill.

Even in cases where government guarantees have been “successful” for companies that did not require an explicit bailout, they have contributed to insane risk taking that eventually culminated in the financial crisis of 2008.  Furthermore, these ‘successful’ bailouts are fomenting an even larger collapse, since the fundamental incentives have not changed.  Thus, the system of government guarantees results in an ever increasing avalanche of risks that are concealed from the public through clever accounting tricks until they eventually explode into a massive market collapse.

In the end, both profits and losses are necessary for true capitalism.  Unfortunately, true capitalism has not been present in the developed world for nearly 100 years.  In an environment of increasing manipulation and government control, the strategy for success is to gain control of income producing assets that can be financed with fixed-rate debt.  This will allow you to realize financial gains when the day of financial reckoning arrives and the US government falls back on creating inflation by printing money to finance its bailouts and entitlement promises.

 

Throughout the lexicon of financial advice in the marketplace, there are many different views regarding the role of debt in our lives.  The traditional view is that debt causes us to make interest payments that deplete our wealth and erode our ability to build wealth.  In the case of the current mortgage crisis, many lending institutions and government agencies encouraged excessive lending to borrowers that were in very high risk of default.  This has even prompted some financial authors to proclaim that all debt is bad, regardless of what it is used to finance, and regardless of how it is structured.

It is certainly true that using debt to finance consumption purchases is fraught with danger.  (This is what people typically refer to as ‘consumer’ debt)  The problem you run into is that when consumption is financed with debt, you end up paying for something that either doesn’t exist anymore such as food & drinks or something that is currently worth less than what you paid for it.  (The overwhelming majority of consumer purchases decline in value after they are purchased)  Automobiles also fall into this category, but are frequently financed because most people do not posses enough cash to purchase them outright.  Many of these items are necessities or highly sought after luxuries.  The thing that we need to keep in mind is that these expenditures should be made with our current income … if we allow ourselves to pay interest on the purchase of something that is consumed or that depreciates in value, we will quickly be consumed.

Conversely, you can also use debt to purchase something that increases in value such as your home.  This type of transaction provides a double-benefit because the value of the dollars you use to repay your loan are eroded by inflation while the value of your home increases.  The difficulty in this strategy is that you can’t spend the increase in your home equity until you sell the house and realize the gains.  One way to get around this crunch is to use debt for purchasing rental/income investments where the income collected is used to pay the interest on the loan and you benefit from the increase in the asset value.  Generally speaking, the fundamental basis of all capitalistic wealth creation stems from the notion that you invest capital at a higher rate of return than its current use.  This process systematically directs capital toward its highest and best use … it also benefits the investor / entrepreneur by generating a rate of return on money that has been borrowed.  The important factor to consider is that debt used to finance investments is like a magnifying glass … it will amplify both good and bad results.  When debt is used prudently, it can create tremendous value.  When debt is used foolishly, it can destroy tremendous value.

A third option has generated considerable attention in recent years, and this is the notion of living with no debt at all.  The advantages are quite clear, since you will have total ownership of your assets, and will not owe interest to anybody.  This desire stems from a view on the part of many people that debt is inherently bad.  The truth is that debt is neither good nor bad, it is simply a tool.  It is a tool that can create great benefits or create great problems … the difference is all in how the debt is used. Debt that is used to finance a prudent investment or business can generate returns that exceed the cost of carrying that debt by a considerable margin.

Consider the common advice to pay extra principal each month on a mortgage.  The rate of return that you will earn by following this advice is equal to the interest rate that you pay on your mortgage.  For example, if you pay 5% interest on your mortgage loan, paying extra principal each month will generate a 5% internal rate of return for your additional principal payments.  If you consider 5% to be an exceptional rate of return, than this may represent a highly prudent decision.  If you are able to earn considerably more than 5%, it may represent systematically trapping capital in home equity when it could have been put to another more productive use.

In the end, the way that we use, view, and live with debt doesn’t have anything to do with the debt itself.  Like all tools, debt can be used for both constructive and destructive purposes.  It is our responsibility to ensure that we use debt prudently so that it generates value.  If we are going to use debt as a tool in our lives, it is critical to ensure that the things this tool is being used to purchase are of high value.  This is the best way to avoid the “bad debt” trap that ensnares millions of people each year.

 

Recently, much attention has been brought to the topic of inequality … most specifically, inequality of wealth and income.  Underlying this attention is a fundamental belief that some people are able to earn a level of income that is disproportionately high relative to other people on the economic ladder.  This belief stems from a misunderstanding of the difference between a person’s ability and their production. At first blush, these two attributes feel tightly related … and in many respects they are.

Most people require some measure of ability in order to produce a product or service of value.  The desire to develop ability is why people attend college, and it is what most people perceive as the driver of our ability to earn an attractive income.  The link that many people fail to appreciate is that our total value as an employee or entrepreneur is based on their ability, and amplified by the financial and organizational leverage of their business organization to create production.

This generates an effect that has caused tremendous misunderstanding.  The compensation of corporate executives has received a considerable amount of attention in recent years.  Many news reports show how CEO’s earn a high multiple of the earnings for an average employee at a corporation.  Most people who see this feel that there is no possible way the CEO can be 40, 50, 100, or 200 times as valuable as the average worker.  This is where the difference between ability and production becomes important.  The CEO’s ability to drive value is based on their ability, amplified by the organizational leverage of the business.  The CEO does not possess 50 or 100 times the ability of the average worker, but is able to use organizational leverage to drive 50 to 100 times the results or more.

What Does This Mean For Me?

There is something important that each of us can take away from these insights about ability and production.  In order for each of us to fulfill the greatest potential for our professional and financial achievement, we must find a way to employ organizational and financial leverage to amplify our ability so that it produces exceptional results.  This means that our professional and financial walk should focus on both the acquisition of superior skills and the opportunity to leverage those skills so that they generate exceptional results.

Once we understand the importance of production vs. ability, it becomes apparent that a narrow view of ability misses much of the picture when it comes to driving results.  Unfortunately, this has become fodder for politicians advancing a “class warfare” platform where they attempt to use people’s frustration with the unfairness of life to garner support for their candidacy.  The truth is that life is not fair, and most of us would be very unhappy if it were.  The simple fact that a person is born in the United States of America means that they will have access to more opportunity than nearly 80% of the world’s population.

People who live in the United States don’t necessarily possess any more ability than people from other countries.  However, they are able to leverage their abilities to a much greater extent than those other people to produce greater results.  The dramatic inflow of immigrants to the United States stands as a testament that people seek the opportunity to leverage their abilities so that they produce greater results.  From both our personal standpoint, and from the perspective of the larger economy, this demands a simultaneous focus on both enhancing our personal abilities and figuring out how we can leverage those abilities to generate greater productive results.

Equality vs. Achievement

In the current political environment, much attention has been steered toward equality and the lack of equality in regard to incomes and achievement.  The way that these large inequalities emerge in a free market is by competition for the best business talent by entities who can leverage that talent to produce very large results.  What happens is that the people selected to lead these large enterprises are compensated very highly because the results they can drive exceeds their compensation many times over.  To many people, this feels inherently unfair.  However, it is a necessary component of generating optimal productive output for the economy.

The way that economies grow is by people and businesses creating new products and services.  The way that individuals benefit from this is by the opportunities that emerge to both work for these new businesses and enjoy the new products that these businesses create.  Thus,the path to affluence means that there must be freedom to create, risk of failure, and rewards for success.  This is something that we must understand in our personal rise to achievement.

One thing that we should be careful to avoid is the assumption that all inequality is identical, and all profits are equal.  Some companies profit from creating products and services that people voluntarily purchase, while others “profit” by lobbying the government for special contracts, trade protection, or other regulatory advantages.  The former example is what drives economic growth.  The latter is nothing but a drag on the real output of others.  Unfortunately, the earnings reported to wall street make no distinction where the profits of a business come from.

This represents a conflict for those seeking greater equality, since the graft of people who use the power of government to enrich themselves appear to be the same as those who legitimately create useful products and services.  There is also a cautionary note that we should take notice of, since the great affluence we enjoy in the United States can be dismantled quickly if the capitalist system is torn down.  Similarly, the size of the government-entitlement regulatory system is not sustainable.  In order to reclaim the future, we need to create both people of ability and opportunities to leverage that ability.

In the end, most of us do not possess the ability to singlehandedly alter public policy.  However, we do have the ability to impact the decision we make in our own life.  Thus, we should all seek to simultaneously increase our own personal abilities and seek opportunities to leverage that ability so that it produces greater results.  This represents more than an opportunity to create results for ourselves … it is a channel for growth of the larger economy through our efforts.

 

One of the things that we have been conditioned to believe in both business and in life is that mistakes and errors need to be avoided.  This idea pervades our education system, our mindset as employees, and our behavior as business owners.  It is important to understand that mistakes cannot be completely avoided.  Thus, an attempt to “eliminate” mistakes generally results in hiding them until they are so large that they become devastating.

This is what precipitated the financial crisis of 2008.  A long history of regulations that consolidated power in major banks, and policy decisions that attempted to “fine tune” the economy and seemingly avoid a crisis resulted in a financial disaster that is beyond the ability of most people to comprehend.  The thing that is important to understand is how the financial crisis emerged from an attempt to disguise risk and hide errors instead of any particular lack of regulation.

The financial system was built for “stability” since each bank purchased a “diversified” portfolio of debt from other banks.  This meant that all of the major banks had access to a regular stream of capital … until investors became justifiably concerned that they might not be paid back.  This happened because the banks financial decisions became progressively more risky, until the plank finally broke and Bear Sterns announced they would not be able to pay their financial obligations since nobody would lend them new capital, and their investment portfolio contained a large amount of toxic debt.  What precipitated was a freeze of credit markets as all the players became concerned that they would lose their investment if they loaned to the troubled entities.

What all of this demonstrates is how a cluster of (minor) errors is necessary for a robust business, life, and economy.  Making mistakes is how we learn.  It is much better to learn from small mistakes than from large ones, and a system that is built around steady course-correction from many small errors is much more robust than one that attempts to conceal errors and mistakes with bailouts and guarantees.  Sooner or later these concealed risks will become too large to conceal, and will result in a collapse.

An example of this phenomenon in the physical world is to consider driving an automobile.  If you run into a wall at 5 mph, it will cause a small degree of damage to your car, but will not result in any permanent harm.  Furthermore, it will serve as a legitimate warning to avoid driving habits that could cause collisions.  In fact, you could reasonably sustain 100 of these 5 mph collisions without significant adverse effect, outside of the nuisance associated with re-painting your bumper.  However, let’s assume that a new technology designed to avoid collisions warns you when you are about to hit something.  Furthermore, let’s assume that the quality of your automobile rises such that you can run at very high speeds and receive preliminary warning before a crash occurs.

Carrying this analogy further, let’s assume that you are able to drive your car at 500mph, achieving incredible mobility and with no perceived risk because of your warning system.  You have increased the efficiency of your transportation by a factor of one hundred.  You are a genius of efficiency and mobility … until something in the system doesn’t work.  What happens when your warning system does not signal correctly while you are moving at 500 mph?  The answer is that you become involved in a crash that is fatal to you, everybody riding with you, and everybody around the area of the accident.

Now take this same principal, and apply it to the entire financial system.  What results is the situation that precipitated the financial crisis of 2008.  The way that future disasters of this variety can be mitigated is by ensuring that mistakes are localized instead of centralized.  In the realm of our personal lives, this means taking more small risks.  This allows us to learn from our failures and evolve them into future successes.  It also avoids a situation where years and years of playing it safe back us into a corner where we must take large risks all at once, and place our entire future on a single roll of the dice.

In the end, mistakes and errors are impossible to avoid.  They can be hidden or concealed for a certain amount of time, but they will eventually come to bear.  The key principal for people to understand is not how to avoid mistakes, but how to ensure that the impact of our mistakes stay small and localized so that we can learn from them to achieve more in the future.  Ultimately, each of us are responsible for our own personal, professional, and financial future.  In order to get there, it turns out that a perpetual cluster of (minor) errors is a necessary part of the growth and development that we all need to reach our goals.

 

A persistent situation has developed among the current political and economic climate that forebodes of large potential problems in the future.  This situation finds its source in a phenomenon that we refer to as “Evading the Obvious.”  The way this effect manifests itself is a stalwart refusal to recognize and adapt to the economic realities.  This issue is modestly problematic when constrained to people and absolutely catastrophic when employed by the political authorities.

The reason for this is because people are limited in the extent to which they can impact the overall marketplace.  However, political authorities can establish highly destructive rules and regulations that have the ability to cripple an otherwise vibrant economy.  Of the many pitfalls and problems that public officials can find themselves caught up in, there are three main principles that drive the most evasion of obvious economic truths.  These principles are that spending isn’t free, profits and losses are equally important, and that prices communicate knowledge.

Reality #1: Spending Isn’t Free

Against the backdrop of huge deficits in both the US and Euro-Zone, this truism cannot possibly be expressed poignantly enough.  Every time that any person, business, or government spends money, that money must come from somewhere.  In the cases of people or businesses, the spending frequently comes from either savings or credit.  In the case of governments, it can also come from ‘monetary expansion’ or simply printing new money.  In all cases, it is not free.

The world is a place where resources are limited.  These resources are often represented in terms of money, but there is no scheme that can ever be devised to create new resources out of nothing.  When savings are spent, those savings are not available for spending on anything else.  When money is borrowed, it must be paid back … with interest.  When new money is created, it devalues the money already in circulation.  Any time that money is spent, it represents a choice to bear a certain cost in exchange for a certain outcome.

Thus, the fundamental question for people, businesses, and governments is one of whether their money/resources are being spent in the most effective way possible.  It is certainly true that the notion of effectiveness is inherently subjective.  However, it is also true that when people are spending their own money, they do so much more effectively than people spending other people’s money.

When investors borrow to build a new factory, they do so because the rate of return from the factory is expected to exceed the cost of interest on the loan.  When people spend their savings, they do so because they value what they are buying greater than having a certain amount of money available to spend on something else.  When the government borrows or prints money to spend on “stimulus” projects, the net result is to either create or destroy value.  Projects more valuable than the alternative uses create value, and projects less valuable than the alternatives destroy value.

When one considers that political decisions are made by people who must be re-elected at regular intervals, and who are spending other people’s money, it is not difficult to see how large sums of money are spent on value destroying projects that benefit a particular political constituency.  If we seek economic growth, then net spending needs to be concentrated in areas that will generate more value than the (full) cost of the resources.  It is not possible to create affluence through borrowing to spend on value destroying projects.

Reality #2: Profits and Losses are Equally Important

Another key concept that seems to have been lost over the past five years is the importance of losses in a free market.  Profits exist to encourage innovation and risk-taking, but the risk of loss must be present to encourage prudence, and to weed-out under-performing entities so that the capital can be deployed more profitably elsewhere.  Problems emerge when the government seeks to insulate certain businesses from the impact of losses.  When profits are guaranteed, and losses are bailed out, the result is highly inefficient entities that funnel benefits to their insiders.

The reason for this is because in a competitive market, businesses who take excessive risk or have incompetent management will eventually go bankrupt.  In this scenario, the assets of the business will be sold off at a discount to other entities who behaved more responsibly.  The profit and loss system systematically channels resources from under-performing entities to those who are more effective and more prudent.

The problem that many people see in this process is the ‘creative destruction’ aspect of economic growth that pushes some companies out of business while new enterprises emerge and grow.  In response to this churn of business fortunes, many companies seek protection of their business, while people seek projection of their jobs.  Unfortunately, all of this creates a barrier against the systematic re-allocation of resources toward their most effective use.

Reality #3: Prices Communicate Knowledge

The third, and least well understood of the fundamental realities is that prices communicate knowledge.  When prices for a particular product or service are high, it signals to entrepreneurs that there is an opportunity for profit.  This opportunity attracts new competitors, and this competition often places downward pressure on the prices.  Similarly, when prices are pressed down low by weak demand relative to the amount of supply in the market, it is a signal to the marketplace that there are too many entities in competition with one another.

The problem that many government’s run into regarding prices is their attempts to manipulate prices for political reasons.  Almost every politician in the world will complain about the high price of health care.  However, very few ask why health care costs are so expensive.  Much of the reason comes from the fact that most people access health care through insurance plans where they do not personally bear the costs of care.  This means that they have no incentive to economize, and often consume much more care then they would if they were directly responsible for the costs.

This phenomenon bears itself out over and over in nearly every corner of the economy.  Most of the people who are upset about prices fail to realize that the prices are communicating valuable information.  Instead, they accuse the business charging the prices of ‘greed’ when the business is really just a messenger of market realities.  High gasoline prices stem from a relative shortage of petroleum that drives up market prices.  These market prices are created by other people who are competing for the same petroleum.  The reason the prices rise is because exploration of petroleum has not kept pace with demand.  Thus, the problem is not one of rapacious oil companies, but regulations that constrain supply.  Nobody is able to maintain high prices for long when competing against somebody else who is willing to sell for less.

As we have seen, the phenomenon of “evading the obvious” has a distinctive impact on each individual’s personal, professional, and financial life.  The impact of these fallacious misunderstandings escalate as the scope of influence grows.  As each of us go throughout our own lives, we must stay aware of the fundamental realities so that we can learn to recognize opportunities and take intelligent action.  It is only through embracing the obvious and understanding the reality that we will be able to create a life of happiness and fulfillment for ourselves and the people we care about.

 

A curious aspect of the human condition is how we are much better at understanding scarcity than abundance.  Our minds naturally gravitate toward what we do not have, instead of noticing what we possess.  Some observers have astutely noticed that every abundance creates a new scarcity.

However, it is an interesting thought experiment to consider what our life would be like if the things that we currently consider to be the most scarce and expensive suddenly became abundant and cheap?  How would our perceptions of value and our priorities shift?  What things that we currently ignore would we begin to shift our attention toward?

The interesting twist is that this transition has already happened in the realm of information.  Before the advent of the internet, information was scarce, expensive, and difficult to acquire.  As the global online marketplace emerged, it created a situation where a literal wealth of information was available to all people in all places.  Suddenly there was a flattening of access to a valuable commodity that had previously been the exclusive property of some, but almost completely unavailable to others?  How has our life changed since we all gained access to the insights and information of the internet?  What new things have we been able to learn?  What new insights have we been able to uncover?  How has our life been enriched?

Of course, there will certainly be those who point out the abundance of low quality content that prevails on the internet.  These observations are completely correct, but are almost totally irrelevant.  The presence of great abundance almost always means that the abundant resource will be wasted in some manner or another.  Since many people grew up in a world of expensive information, it feels unnecessarily wasteful to have low quality information floating around the internet.  The thing that most people miss is how this apparent waste is the laboratory out of which we gain new ideas and insights.

Growth and development is not a linear process.  It is a jagged line that moves up and down, backward and forward.  In order for great new things to happen, there must be the appropriate conditions for the new innovations to emerge.  Abundance allows those conditions to occur without the necessity of being planned or funded by a central authority.  By extension, this means that more experimentation happens with new ideas, and more innovative breakthroughs are discovered.  Of course, this also means that many seemingly useless ideas will be advanced.  However, this apparent ‘waste’ is actually a critical part of innovation and advances.

What Does Abundance Mean To Me?

An important point for us to consider as individuals is the impact to our persona lives if the things that we found the most scarce such as money and time, suddenly became ubiquitously available?  What would you do with your life if you never needed to work in order to live?  What would your life be like if people lived to be 500 years old?  How would your priorities change if a scarcity of today turned into an abundance of tomorrow?  What things that you neglect today would you notice tomorrow?

The reason why this thought exercise is important is because it helps us to clarify what we truly consider to be important.  There are certainly some people who would allow themselves to become idle if they no longer needed to earn money to live, but there are many others who would endeavor to help others acquire the blessings that they have come to enjoy.  When we no longer have to spin our wheels just to get by, it allows us pause to search for meaning.

The clincher is that most people seek meaning at some point in their life, and many wait for far too long before taking the intellectual journey.  This is not to say that we should neglect the things that we need to do today such as earn an income or care for our families … only to say that we should also think of the things that we will pursue when scarcity turns into abundance.  In truth, it frequently comes to pass that the things we perceive as being scarce today will be less scarce in the future, and may possibly be available in great abundance.

Each of us should take a moment to think about the things that we would want to do, and the person that we would want to be if the constraints of our present life were removed.  The power of this thought process is that it underlines how there is very little stopping us from working toward that goal today.  We may not live in a world with no scarcity, but we also do no live in a world of total scarcity.  In this way, we literally have the ability to shape ourselves into the people that we want to be tomorrow … and we are able to start today.

 

In the midst of the current sluggish economy that has engulfed the government and business sectors in an avalanche of difficulty and uncertainty, there is a great temptation to ‘curse the darkness’ by casting blame.  It is certainly true that the current financial situation has plenty of blame to go around.  Typically, entities such as “Wall Street Greed” and “Irresponsible Government” are dogs that frequently get kicked.  However, there is a very large elephant that frequently seems to be overlooked.  That elephant is personal responsibility.

The reason why personal responsibility plays such an important role in the current economic situation is because it is impossible for a financial crisis to develop unless there are a LOT of people using credit to live beyond their means.  The crisis develops when the people who have been living on borrowed money can no longer make the payments.  Once the borrowers stop paying the creditors, there is suddenly a crisis.  (Note that the crisis is the proverbial ‘hangover after the party’ since it is necessarily preceded by people living high on borrowed money.)

This phenomenon highlights a curious and unflattering corner of the human condition.  Namely that people are more eager to “curse the darkness” and blame somebody else for their problems than seek a path of action that they can personally take to influence their personal situation.  This is not to say that all things are all our fault.  Quite to the contrary, there are many parties who have earned a considerable measure of blame.  However, the collective malfeasance of various players on the economic stage is not within our direct control.  Taking personal responsibility for our personal decisions is of paramount importance because our actions are the primary points of influence that we have control over in regard to our personal, professional, and financial well being.  The only way that our life will improve is if we take action. Past precedent has most clearly shown that the so-called guardians of our financial well being will look after their own interests before ours.

An unfortunate and disappointing part of the current economic situation is that the ‘solution’ being sought isn’t one of returning to responsible spending and lending practices . . . no, it is the exact antithesis of responsibility referred to affectionately as a ‘bailout.’  The extreme danger posed with the ‘bailout’ solution is that it simply subsidizes the irresponsibility that caused the problem in the first place.  My greatest fear with this ‘bailout’ mindset is that constantly rewarding irresponsibility can only lead to an increase in irresponsibility by more and more people until the problems eventually get so big that it is beyond of the ability of the government to bail out.

Simple arithmetic clearly demonstrates that the extent of government financial obligations will soon exceed its financial resources by an impossibly large margin.  This will lead to a situation where many people receive far less than they have been promised for their benefits, pensions, salaries, and many other varieties of services.  This will compel many of them to “curse the darkness” as well, saying that the problem comes from taxes not being high enough on the “rich” or from unfair foreign competition, and from a variety of other sources.  In order to endure this ensuing storm of financial darkness, it is completely necessary that we take action now so that the financial well being of our families are safeguarded.

Ultimately, there is only one way to permanently restore stability.  That is to retreat from blaming other people for the financial problems that we the people have created.  Put another way . . . instead of cursing the darkness, try lighting a candle.

 

One of the curious aspects of the human condition is that we grow to achieve comfort, but when we achieve that comfort it prevents us from growing.  It has long been said that luxury is the lull to apathy.  In practice, this means that it is difficult to reach new heights if we do not leave our present place.  For most people, this means that personal, professional, or financial growth will require that we “Dial up the Discomfort” of the conversations and decisions that we must make.

The reason why this principal takes on such importance is because we all have a natural tendency to perpetuate the standard quo.  Keeping things going the way that they have been going in the past is the path of least resistance.  The problem is that following the path of least resistance cannot be expected to produce results that are different than what has been achieved in the past.  Fundamentally, this means that each time we wish to expand and grow our personal abilities, we must push beyond the realm of our comfort zone.

Why is Discomfort Necessary?

Whether we are talking about the context of personal, professional, or financial life, dialing up our level of discomfort is necessary to grow and progress.  If our relationships never experience any friction, they will not progress … they will simply stay where they are, and may possibly slip into decline.  If a business never challenges itself to accomplish new goals, it will pass through the stage of maturity and into decline.  If our financial decisions are rooted only in the desire for comfort, it will result in many lost opportunities throughout our career.

Fundamentally speaking, the way that we grow is to break out of our current ‘normal’ and seek out a new equilibrium that generates higher and greater levels of achievement.  Once this has been achieved, a new ‘normal’ is established, and the process begins over again.  The world’s high achievers must learn that constantly challenging the limits of their comfort zone is part and parcel to the growth and development that a high achiever should expect from themselves.

How Far Should We Dial It Up?

Once a person has accepted the necessity of discomfort as a piece of personal, professional, and financial growth, it becomes necessary to determine how far we must push the envelope.  If we push too hard, it can create destructive results from failed ventures, nervous breakdowns, and the like.  Conversely, if we do not push hard enough, we cannot expect to grow and progress.  In order to achieve this “Sweet Spot” of personal and professional development, it becomes necessary that we learn to recognize how much discomfort is necessary without pushing the boundaries so hard that they collapse.

The True Hallmark of Success

The true characteristic that differentiates those who achieve success and everybody else is the number of uncomfortable conversations that they are willing to have.  This does not mean that successful people need to become a “Bull in a China Shop” who constantly disrupt the environment around them.  Rather, it is a testament to the fact that constantly growing means that we will constantly be pushing the boundaries of our comfort zone.

In this way, we should go into each day asking ourselves what we are going to do that pushes our zone of comfort?  What conversations are we willing to have that we would rather put off?  What difficult work are we stalling on by keeping ourselves busy with something else?  What do we avoid by telling ourselves that we will get to it later?  The sooner we develop the ability to take these tasks head-on, the faster our trajectory of personal, professional, and financial growth will accelerate.

In the end, each of us who seek to follow a trajectory of continued growth must find a way to consistently push our personal boundaries of comfort.  The exact way that each person dials up their own level of discomfort will be unique.  However, there is one common characteristic that is shared between the journey of all aspiring achievers.  This common thread is that we must all find a way to push our comfort zone, and find the right way to undertake this task in such a way that it propels us onward and upward, but does not wreak a destructive force upon our lives. Ultimately, this serves as one of the many challenges that all achievers must undertake.  And like all other challenges, ignoring it will not make it disappear.  It will only be accomplished if it is addressed.