Building Wealth
A View from Europe
One thing I do is to read viewpoints from around the world. The USA may be the most powerful economy, but we are only part of one big world. The same problems we have here are reflected across the globe.
Why? Because fiat currencies and excess government spending have infected nations worldwide.
This substack article from Germany has some excellent discussion which I’d like to quote. I’ve used Google translate to mass translate the article but several concepts Google translate is weak on and provides inaccurate translations, but it’s still good enough to get the meaning intended.
““What is rich to you?”
The moderator replied, “People who pay the top tax rate.”
The top tax rate in Germany pays someone who has a gross income of 70,000 euros. In the following days, there was vigorous contradiction in the social networks, but also in the daily newspapers. With such an income, you may be wealthy, but not rich.
BlingBling asks: Can you get rich with such an income?
The answer is yes. It’s fine. It’s not necessarily easy, but it’s possible. Here is a guide:
The basic problem
Let’s start from the following case. One person is in his early 30’s, has a university degree and a good job with a German corporation. His gross salary: 70,000 euros. Now you can argue for a long time about whether that is extremely much or little. But I would say: after three to five years of work experience, it is possible. The person is single and has no children. A permanent employee of this remains net almost 3500 euros per month. Even in an expensive city like Munich, you can live comfortably from it.
But there is a basic problem and understanding that is essential.
Capital income grows faster than labor income.
It’s about why that is. The point here, however, is that it is a matter of switching to the side of capital as quickly as possible. Because from a certain threshold, the growth of the capital stock with the growth of an employee salary simply cannot be obtained.
Why is that? The current inflation rate in Germany is around three percent. In fact, it’s probably higher, but we don’t have to care about that at this point. An inflation rate of 2.5 percent means that the purchasing power of 100,000 euros shrinks by 2500 euros in real terms every year. After 20 years, only 67,000 euros are worth 100,000 euros. Prices have risen by 50 per cent over the same period.
It is quite possible that a hard-working employee will earn 100,000 euros or even 150,000 euros after 20 years in the same company. The only problem is that he has hardly gotten richer in real life. By no means has he become “rich.” So just to maintain the same standard of living, the person would have to rise at least with the rate of inflation every year in order not to become poorer in real terms.
Honest answer: Who has received 2.5 percent more salary every year in recent years?
But this is only a superficial consideration of the problem. The truth is even more shocking: inflation measured in Germany is made up of a shopping cart. Those who deal with the monetary system quickly come across other figures. The global money supply is growing by 7 percent every year. That’s a conservative estimate. Other figures speak of eleven percent:”
The numbers are slightly different than in the USA but the concept is the same:
The growth of the money supply (aka inflation) exceeds the growth in salaries and is substantially more than any cash investment (like a CD or savings account) pays.
So to build wealth you need to build investments that earn a decent return. As I’ve mentioned before, aim for 25% and don’t settle for less than 15% annual rates of return.
Also retaining wealth is best done with something that doesn’t lose value: gold.
I'm skeptical that anyone is going to achieve fifteen percent return on investment over a long period of time, and I don't think that aiming for twenty-five percent is a good idea.
I haven't looked at the numbers in a while, but the number I remember was that the market traditionally grew at a rate of about ten percent. To the extent that the market may have grown faster in recent years, I have to wonder whether that growth is just a response to inflation. If the government pumps more currency into circulation, that currency will inflate everything, include the stock market.
I believe that getting fifteen percent returns will require having a very high risk portfolio. For people who are good talkers and always able to land on their feet and get others to help them, maybe this approach isn't too dangerous. Even in a crash, they will find ways for their needs to be met. For those of us who are not fancy talkers and able to influence people through slick words, crashes are more dangerous. People might feel sympathy for us, but when they have to decide who's going to be left to die, they pick us.
As I've said in other replies, gold doesn't "do" anything. Gold can't produce more gold from "seed" in the way that a tree can produce seeds to produce more trees that will produce more fruit. Gold can't plow a field to grow more crops. Gold is not a good metal for making hunting implements to harvest meat from nature. Gold isn't a particularly good metal for any implement of animal husbandry, so gold isn't a big part of raising herds for meat, eggs, or milk. Gold doesn't have that many uses in manufacturing industrial items that are useful for production or recreation. Gold's value is only from the fact that people have wanted gold since the first people found the first pieces of gold.
I remember that some political commentator years ago was interviewing her father around Father's Day. He liked investing in gold. As an example of gold's sustaining value, he said that throughout modern history, an ounce of gold would buy a really good men's suit. He said that no matter what prices were at any given time, the cost of a really good suit was about the same as that of an ounce of gold. Maybe we've finally reached a point where suit-making is cheap enough that plenty of good suits cost much less than an ounce of gold. I think this guy was talking about a fine, tailored suit. To the extent that he was right, the value of gold was not appreciating. The ounce of gold today would buy a fine, tailored suit today, but when that suite was gone, it was gone. Holding onto that ounce of gold would still only buy another fine, tailored suit in the future. An appreciating investment should be worth more in the future.
I agree that every good portfolio should include some gold. Gold is a good hedge against inflation. When other things fail, gold won't fail as quickly. If the rest of the market tumbles, gold won't tumble as quickly. None of that changes the fact that gold isn't producing anything else so that it will multiply in value.
I would urge people to invest in a number of things and not try to meet a specific return. Some things will produce huge returns. Others are just safety nets against market collapse. A four percent dividend return that is fairly stable is better in five years than a stock that is growing twenty percent per year and then crashes to zero if someone doesn't get out of that stock in time.