Good Luck with Money

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Not much action in the markets on Friday. The Dow was off 34 points. Oil slipped to $69. Bonds rose a bit. Gold and the dollar remained pretty much where they were.

The thought we kept having this weekend was an old one: that nothing is more dangerous than good luck.

As Bret Harte said, “The only sure thing about luck is that it will change.” And it certainly has a way of kicking you in the derriere.

If you’re lucky enough to win the lottery, you should watch your back. Almost all lottery winners are broke within a year or two. Many are broker than they were before they won the lottery. Because their good luck causes them to miscalculate.

There was a story about one lottery winner in the press here in London last week. He had won millions of pounds. Feeling lucky, he invested in a number of enterprises suggested by friends, relatives and total strangers – all failed. He married a much younger woman – who later left him (taking with her the house he bought for her). He invested on the advice of analysts and advisors – who naturally turned out to be idiots. And he lent money to people who, naturally, couldn’t pay it back. He was in the news because he had been arrested for attacking one of his old friends while trying to collect a debt (he needed the money to pay his rent!)

Evelyn Adams won the New Jersey lottery twice – in 1985 and 1986. Talk about luck! She won $5.4 million in total. But don’t go looking for Evelyn in a Beverly Hills or Palm Beach mansion. She lives in a trailer.

“Everybody wanted my money. Everybody had their hand out,” she says.

Or take the case of William “Bud” Post. He won $16.2 million in the Pennsylvania lottery in 1988. Think he’s fixed for life?

“I wish it never happened. It was totally a nightmare,” says Post.

Within a year he was $1 million in debt and had to declare bankruptcy. Now, he is said to live on food stamps.

Niall Ferguson explains, in his book, The Ascent of Money, that it was good luck that ruined the Spanish economy of the 16th century. Indeed, we passed along the same basic facts here in the pages of these daily reckonings. Ferdinand and Isabella kicked the last of the moors out of Spain in the same year they sent Christopher Columbus across the ocean blue. Getting rid of the Muslims was a net loss to the Spanish; the moors took with them money…and more important…valuable commercial skills. But when the conquistadors arrived in the new world, they hit the jackpot.

One mountain, Mt. Potosi, yielded 45,000 tons of pure silver between 1556 and 1783. ‘Valer un potosi’ is a saying that is still used in Spanish to describe something that is worth a fortune. Even before the mining began, the Spaniards had helped themselves to billions worth of Aztec and Inca gold. Gold and silver were real money back then. The precious metals entered the Spanish economy and quickly inflated the money supply…first in Spain and then throughout Europe. The cost of living in England, for which there are some price records, went up 700% during the “price revolution” between the 1540s and the 1640s.

The “free” money coming from the colonies financed about 40% of the Spanish government’s budget. But even with ships still bringing more and more gold and silver to Spanish ports, the crown still ran short of money. In 1557 it defaulted. And again in 1560, 1575, 1596, 1607, 1627, 1647, 1652 and 1662.

The US government now finances half its expenses with borrowed money. This is similar to the Spanish financing system, in that much of the money comes from outside the economy itself. But the difference is that the United States still has to settle up on its financing. Spanish gold was real money. It didn’t have to be paid back. It was “monetized” from the very moment it arrived.

US financing is more subtle, and more complicated. But it is made possible by an extraordinary luck. The United States has the world’s reserve currency…and the largest, most liquid economy. People put their money in US Treasuries because they are sure the money will be there for them when they need it. And they are used to a world of disinflation; interest rates and inflation rates have been falling for the last 25 years. And, inasmuch as the world economy is now in a deflationary correction, the risk of inflation seems very, very remote. So, for the time being, the United States seems to be able to borrow almost unlimited amounts of money at very low interest rates.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. The Ascent of Money is a TV series. Have been watching it on TV and just bought the DVD set.
    Excellent because he explains the subtle but important points in laymans terms.
    I studied economics and worked in finance for years, and am impressed how this information has been so well distilled into 6 episodes.

    Reply
  2. We could all sell our services to California for some IOUs. This could be fun until we try to negotiate any such instruments with a third party at face value.

    Psuedo currencies issued by state/provincial government printing presses may become globally common. California is surfing the crest of this wave. Just a second …… I recall a famous surfing tune ending with the words
    W I P E – O U T !

    Coffee Addict
    July 2, 2009
    Reply
  3. Doug Casey, on The Greater Depression: “For those who stay in the U.S., the answer to the economy’s problem is going to be the same as the answer to every individual’s problem: you have to produce more than you consume and save the difference. Regardless of what happens to the economy in general, if you do that as an individual, you will survive and prosper. “

    Biker Pete
    July 3, 2009
    Reply
  4. Biker Pete. I’m not going to worry about the red inking of my small gold and energy portfolio today. As per your real estate portfolio, the key to many longer term investments is future dividends (rents). I think that Dan D could again re-emphasise this point in his D&D advice.

    Cheers

    Coffee Addict
    July 3, 2009
    Reply
  5. Biker: Re: Dough Casey “Regardless of what happens to the economy in general, if you do that as an individual, you will survive and prosper.”

    This would not always apply. Unless of course I am wrong, in which case i’m off to Zimbabwe to spread the good news.

    Reply
  6. Well, Charles Dickens made the same point about Dough, you’ll recall, Pete! :)

    Biker Pete
    July 3, 2009
    Reply

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