What does it mean that someone has a net worth of 2.9
billion dollars whereas someone else is worth a mere 290 million dollars? On
paper, it looks like the first is 10 times wealthier than the second, but to understand
what this means in practical terms, we need to think about wealth in terms of
what it is in reality, not what its projection makes it look like. And the
projection here is the dollar figure that is attached to wealth.
And so we ask: What is wealth in practical terms? To answer
the question we take two real-life situations and compare them. It is said that
Mitt Romney – who ran to be president of the United States not long ago – is
worth somewhere between 250 million and 300 million dollars. Let's make that
290 million, and juxtapose it to the 2.9 billion that Stan Druckenmiller is
said to be worth. If you want to know who Stan is, read the article written by
James Freeman in the October 19, 2013 edition of the Wall Street Journal. It
has the title: “How Washington
Really Redistributes Income” and the subtitle: “The renowned money manager goes
back to school to explain how entitlements are helping the Baby Boomers rip off
future generations.”
Freeman describes Druckenmiller as being “a member of the 1%
– make that the 0.001% – one of the most successful money managers of all
time.” As you will learn from reading the rest of the Freeman article, one has
to be a super salesman to become a super wealthy money manager. And promoting
himself is what Stan does at the start of the interview he had with Freeman. In
fact, the man began by selling himself and his newly adopted mission – that of
telling the young to watch out for characters like himself who are out to rip
them off.
After several paragraphs of self-promotion which he
interweaves with cheap attacks on President Obama, Druckenmiller takes up the
subject of income distribution; and Freeman begins that part of his article as
follows: “Which brings him to his thieving generation.” To set the stage, Freeman
tells us that Stan founded a hedge fund and ran it for three decades. He
retired three years ago from managing other people's money to run his own
assets. And only now does Freeman tell us what Stan's beef is about: “Why in
five years the massively indebted U.S. government will begin sending
him a social Security check for $3,500 each month?”
So Freeman asks the question: “Because he earned it?” and
lets Druckenmiller respond: “I didn't earn it,” which he does while discussing
the transfer of wealth from the younger generation to the older one. The man
then explains his idea by giving hard figures. He says that today's
65-year-olds will receive on average net lifetime benefits of $327,400 whereas
children born now will suffer net lifetime losses of $420,600 because they will
be paying the debt incurred by the older generation.
Several more paragraphs of the Freeman article are taken up
to discuss how those figures impact the current generation, and what they will
do to future ones. The problem with this approach is that it deals with the
dollar value of ideas which are nothing more than the projection of future
realities imagined by debaters who cannot tell what the future will look like
because they are no prophets.
Well then, what's the best way to analyze the situation and
form a good understanding of it? The first thing we do is separate wealth
creation (which is the production of goods and services) from income
distribution (which is the handing out of money as wages, salaries and
bonuses.) This is important because the first is what makes the real economy;
the second is what makes the projection of it – one that can be distorted by
local mini bubbles or by a general bubble affecting the whole economy. The
second thing we do is separate the basket containing the non-durable goods and
services which are consumed within a year or two of their production from the
basket that contains durable assets such as the real estates, the production
machines and the infrastructures.
So now, we ask again the question that we asked at the start
of this presentation: What does it mean that someone has a net worth of 2.9
billion dollars whereas someone else is worth a mere 290 million dollars? It
means that Drukenmiller's basket of durable goods contains ten times as much as
Romney's basket. Neither of them walks around with that much cash in their
pocket; what they have are certificates and deeds that say they own these
properties therefore have control over them. Most of the assets would be
producing an income, some of which is used for the daily expenses of the owners
and the rest ploughed back into the business.
When you come right down to it, there can only be small
differences between the daily expenses of Mitt Romney as compared to those of
Stan Druckenmiller. In fact, it sounds that Mitt's ego is so much larger than
that of Stan, he probably spends more to flaunt his wealth – such as having a
car elevator in his house – than does the more modest but bigger mouthed Stan.
And that's not all because neither of these two gentlemen can eat a whole lot
more than the average person given that no matter how fat they get, there will
always be someone fatter than they; someone that will turn out to be less
wealthy. And like the saying goes: They wear their pants one leg at a time like
everyone else.
To sum up, they may be a thousand times or ten thousand
times wealthier than the average person, but that's only because the basket of
assets under their control is that much bigger than the basket of the average
person. They wear stuffed attires all day long, and long to get home as soon as
possible to slip into something more comfortable. And when they die, they do
not take it with them but let their descendents inherit the control of the
assets they spent a lifetime accumulating. An increasing number of them now
choose to distribute a good part of their wealth on charitable causes.
And this brings us to the current retirees who live on
Social Security and Medicare. Stan Druckenmiller says he does not want the
$3,500 a month that the government will send him when he reaches the age of 65.
It is good of him that he will refuse to take the money; and good of him to
suggest that there should be a means-testing for handing out Social Security
and Medicare. But this does not support his argument that the current
generation is ripping off the younger one. The fact is that the middle class
will hand the assets it has accumulated to the next generation in return for
receiving enough to cover its daily expenses.
When you look at it objectively, these people cannot eat
anymore than a person can and that, in the aggregate, amounts to much less than
the surplus food America
throws away now. Also at their age, these people need very little clothing if
at all. And they live in their homes or in apartments that would go decrepit if
left unoccupied. Thus what they receive from the government is not what creates
the burden on the next generation. They are not the thieving generation;
someone else is responsible for the thievery.
Who could that be? Well, by his own admission, Stan
Druckenmiller is one of those responsible. It stands to reason that a society
cannot consume more than is physically possible. If we're talking about a Third
World country where everyone lives the high life in a place that produces very
little, money will be borrowed to pay for what they receive, and the country
will get into trouble. But America produces or can produce what it consumes,
which means that if it has a foreign debt problem, the responsibility falls not
on the consumers but on the producers who take their assets and move to places
where they can produce things cheaply.
These would be American producers who locate their
industries abroad and turn around to sell to Americans foreign goods that must
be paid for with money borrowed from foreigners or printed by a Fed that gives
out cash for securities – much of which is of dubious quality. And who gets all
that printed money? The people close to the Fed such as the Druckenmillers and
the Romneys.
Yes, America