Past performance is no guarantee of future results - any investment carries a potential for loss. This author does not take account of your objectives or your financial situation and Field Notes does not offer any personalized investment advice. Field Notes is not a licensed securities dealer, broker, investment adviser or investment bank. Don't gamble with money you can't afford to lose.
That's the disclaimer you'll find stapled to every investment product on the market. People are happy to believe it: "there are good years and bad years, everyone knows that!" But the truth is...
There are Good Centuries. There are Bad Centuries.
If history can't be trusted to predict the future, then why is it suggested, without a shred of evidence, that "the stock market will average an annual yield of around 8%," as if such a claim is beyond reproach? Is there a reason we can't apply that same disclaimer over the long-term, even the very-long-term?
We just had a really good century. People who invested wisely made a ton of money. Unfortunately, the days of the stock market returning inflation+5% are over.
The Market Can Remain Irrational Longer Than You Can Remain Solvent.
John Maynard Keynes
I wonder what year it was when the someone thought of the "130-minus-your-age" rule. The premise is sound -- when you're younger, you're more risk tolerant, because you have plenty of time to make more money. You can be invested 100% in stocks, which ostensibly return more than bonds. As you get older, you have to preserve your existing capital, because you don't have time to lose it all and start over.
To me, it sounds like the sort of thing somebody would have thought in the 1980s: it reeks of that bulletproof fuck-boy energy at the intersection of "my CDs pay 18%, and I don't need the money today" and "do you want to do the other half of that eight-ball?" But I wouldn't be surprised if people were more-or-less following the rule in the 50s; it's common sense, and in the 50s, most people still had that.
But since past results are no guarantee of future performance, the fact that 130-minus-your-age was the most profitable strategy for the last 80 years doesn't mean it'll be profitable for the next 80 years. The world has changed a lot since the 50s -- and it's changed in ways that we will not be able to recreate.
Where does Money come from, and where does it go?
By my accounting, there's only one way to make real money. It comes out of the sun and been it's hammering our planet for billions of years. Whether you turn it into electricity, food, lumber, or cattle doesn't really matter. The sun will provide a stable contribution of energy for billions of generations. Sunlight is the only thing in the known universe that can reverse entropy. Not a single therm of sunlight goes unused on this planet. Wasted, perhaps, but not unused.
Humans started making money over four billion years before the first African paid for a prostitute with gazelle jerky. We were making money when the first ray of sunlight hit the primordial soup and caused a couple of amino acids to come together and decide to be a fish. For the next several billion years, that same sunlight hit the plants. Dinosaurs ate them, then they walked into tarpits. Fast forward a hundred million more years, and a person showed up and named all those dead plants and dinosaurs: oil.
Over the last 80 years, we got really good at extracting that old sunlight. We can harvest it from anywhere. Deep oceans. Permafrost. We can even get to the stuff that's really, really deep beneath the surface. You found some gas trapped in some rocks? Frack yeah, we can harvest that.
Maybe over the next 80 years, we can make refineries 5% more efficient with a clever tech innovation, but there's simply not a lot of new stuff to dig up. We're already pulling out everything of value as fast as we can build storage for it. We've withdrawn four billion years worth of sun-money. No wonder we're all rich enough to buy food at a grocery store.
We've bought so much food that we've created enough garbage -- and remember, we care deeply about garbage; we try very hard to put it in landfills -- but there's so much garbage that the petroleum we wrap our food in found its way into a whirlpool in the Pacific Ocean and created a trash vortex that's bigger than Texas.
That must have taken an astronomical amount of food to create. When we look back and ask, "where did four billion years of sun-money go," the answer is obvious. "We spent it at the grocery store."
Where does Inflation come from, and where does it go?
People used to live a lot closer to their sun-money; they withdrew it as they needed it, one cabbage at a time. They dug in whatever dirt was closest for just enough sun-money to survive. And it was really sustainable, because 95% of the sun-money it took to grow that cabbage would have just grown more grass if the cabbage wasn't there.
When the population was low, and everyone was spread out, we didn't need to withdraw ancient sun-money. We simply subsisted on our sun-money income. We lived within our means. When most people live within their means, it doesn't create a lot of inflation.
You only start to see inflation when too many people like you and I show up: the value-shifters. I work in cybersecurity. My entire career exists because somebody somewhere created enough money that they're willing to pay me to protect it. And I need an accountant, but the accountant only shifts value again. At the end of the day, we all must consume food, clothes, shelter, but the only thing that creates those necessities is the sun. We can't scale the amount of sunlight we get, so we have to withdraw it from savings.
We can certainly scale the population though -- and by extension, the total required consumption. Our consumption has already outpaced our sun-money income by a factor too big to fathom. We could only afford to feed that many humans by digging up the buried sun-money, which, as we've established, is not sustainable. But, we needed it for the tractors. People would have died without them.
Static sun-money income + more consumption -> food prices rise. Inflation. Unavoidable. The alternative is to not eat. More accurately, the alternative is not to feed so many people.
Where does Capital come from, and where does it go?
Let's define capitalism with a simple modus operandi. If I charge you a penny less than the alternative, you should pay me money. I have a job because cybersecurity keeps people from losing money. Because I have a job, I need an accountant. After all, she's cheaper than an audit. On and on, the sun-money, now fungible thanks to currency, shifts. Eventually, it ends up on a plate or becomes shingles that stop the rain. Through the magic of "guess I better feed you, because I need someone to do this job for me," it becomes the rubber in the soles of our shoes.
Feed more people -> Food prices rise -> I gotta charge more for cybersecurity -> OpEx goes up. Unavoidable. If you don't pay me enough to eat, I starve and die. We've already established that, by virtue of my job existing, you'd rather have me than not have me. If I die, you can't have me. Ergo, the profitable choice is to pay me enough to keep me alive, even if that's more today than it was yesterday.
Multiply that by 7 billion people all trying to live off the same sun-money income that we've always had, and the consequences become evident. It wasn't that long ago that somebody realized we'd need tractors to feed all these people, and we'd need gasoline to power the tractors. Now we have millions of tractors.
A million tractors means a million times more gasoline. But, so long as it remains cheaper to feed the people than it is to have fewer people, you gotta keep building tractors. Once you've built a critical mass of tractors, the food starts to cost more again. Now your tractor mechanic has to charge more money to afford the food.
But the mechanic needs boots, and someone has to make them. The cobbler has to charge more, too. So does the lawyer that the cobbler hired to incorporate him. Guess who else needs corporate lawyers? The company digging up sun-money. With the lawyer charging 400x what he did for the same job 40 years ago, you're simply going to make less money for every barrel of sun-money you dig up. That's OpEx for ya.
OpEx goes up + you're running out ways to dig faster -> Return on capital goes down. -> No more inflation+5%. Maybe inflation+2%. Maybe less.
Where do Investments come from, and what happens once they're all unprofitable?
My guess is that if you throw all that sun-money-value-shifting math in an excel spreadsheet, inflation will eventually outpace capital return. But what option do you have? You've dug up all this sun-money and put it in a bank that's on the internet, but now you're gonna stop paying for cybersecurity? Nope, it's still way cheaper to keep me alive. Does it matter that now you're paying for insurance instead of generating a return on capital? Not to you, but it certainly does to an investor.
How confident are you that "130-minus-your-age" will be the rule for the next 80 years? Do past results guarantee future performance? Maybe investments will remain the best place to park your money, maybe not. At the very least, when the rule becomes, "you lose money by investing, but it's less than you'd lose by not investing," the fundamental principal that capital appreciates in value loses its meaning. You no longer "need money to make money" - you need money to survive, and the sum total of money that you have is nothing more than an hourglass that tells you how long you have until you won't be able to afford to eat.
It sounds easy enough to label that economy "deflationary," in which money disappears from the system, but I have my doubts about that label. For one, why does it sound nothing like inflation? Are we all happy with the premise "if you feed more people, it creates inflation, but you'll eventually feed enough people to create deflation!" Because I'm not. I think we created something far more dangerous than inflation. I think we created the Point of No Return.
The Tipping Point / of No Return
When you have to feed so many people that the sun-money income plus the sun-money withdrawals simply cannot keep pace with the cost to feed those people, a hell of a lot of value-shifters like us become too costly to feed. The capitalist no longer makes enough money that the maxim "it's still cheaper to keep you alive" is universally true. Security folks like myself will be fine for a lot longer, because you still need people to stop the starving hoards from stealing your sun-money barrels, but what about garbage men? Professors? Artists? Golf caddies?
I suppose we'll have to survive without them. They won't like that answer. They might all get together in a big group, walk to your house, and beat your ass for some gasoline. Maybe defunding the police wasn't the best idea, but what choice did you have? They ate like pigs.
I can only think of one way to prepare for the future. You've gotta vote Republican. There's literally nothing that the Fed, fiat currency, or a blockchain can do to change the consumption-inflation-capital equation. They're all just value-shifters like the rest of us, so it doesn't really matter which political party picks which policy. Until someone figures out how to write a policy that can make the sun shine brighter or allow humans to live off fewer than 2,000 calories, all policies are net neutral.
At least the Republicans will let you keep your guns. You'll need them in the Thunderdome.
Who's to Blame?
It's easy to pass blame around, but it's hard to find a place to make it stick. Capitalism isn't a machination imposed on us by the wealthy, it's just common sense. Redistributing the wealth won't help, because that's just shifting value again. The only person who deserves any of the blame was the guy who invented the tractor. That was awfully short-sighted, but you would have done the same. After all, you're both the sort of bulletproof fuck-boys at the intersection of "my 401K pays 8%, and I don't need the money today" and "do you want to do the other half of that box of wine?"