Yesterday, the Dow fell. Gold did nothing worth mentioning.
As usual, investors are looking in the wrong direction.
Where does real wealth come from? We will answer the question ourselves. Not from the Federal Reserve, is the answer. Not from the government. Not from quantitative easing (QE) or stimulus programs. Not from the Democrats. Or the Republicans. Or the Tea Party. Not from Obama. Not from a bi-partisan agreement to extend spending and pretend that the feds can pay their bills.
Nope. No gimmicks. No magic. No claptrap formulas. Wealth comes from work, savings, and innovation. Typically, somebody saves money, works long hours and starts a business that produces something people want.
But now, in the mountains of Argentina…as on the fruited plain of the United States of America…the wealth machine has begun to sputter and choke.
We promised to tell you how our investment in Argentina has become a welfare program. Coming right up. But first, here’s the story in the US as told by the Economist:
‘Established firms are usually in the business of preserving the old world; start-ups are under more pressure to come up with new ideas, and if they do so they usually create lots of new jobs. But these growth machines have broken down. America is not producing as many start-ups as it did a decade ago and those that have been created are providing fewer jobs-less than five each, compared with an historical average of about seven. Start-ups created 2.7m new jobs in the 2012 financial year compared with 4.7m in 1999.‘
What went wrong? Zombies.
…In 2009-11 the Obama administration issued 106 new regulations, each expected to have an economic impact of at least $100m a year. The Vanguard Group, an asset-management firm, calculates that since 2011 Washington’s bickering politicians have imposed, in effect, a $261 billion uncertainty tax that has cost up to 1 million new jobs.
The Sarbanes-Oxley act imposes additional costs of $1m a year on public companies. Investors no longer bother with ‘growth stocks’ because there is more money to be made in making lots of big trades in established firms. The dramatic decline in the number of firms going public since 2001 is worrying because, over the past four decades, more than 90% of jobs created by start-ups came into being after they went public.
Similarly, up in the Andes, the Argentine zombies are squeezing out initiative wherever they find it.
On the ranch that we bought in Argentina were 25 families…living in various nooks and crannies in the hills. We didn’t even know they were there. Nobody mentioned it.
We were told there were some people who rented some of our land. They paid us in sheep, goats and cattle. We thought they were hoplites, independent yeomen farmers…and a source of revenue for the farm.
Some of them came to visit before we left on Sunday.
‘Señor Bonner,‘ began a fat woman in a colourful sombrero. She wore a dress, but over a pair of pants. Her face was very brown and chubby, with a horizontal mouth, lacking several teeth. She has had eight children, we learned later in the conversation.
‘The roof of our house fell in. Can you help us repair it?‘
Just a few minutes earlier, another woman, similar in build, but with all her teeth and a nice smile had made her case.
‘I have five children. We all sleep in the kitchen of my parents’ house. Can you help us build a new house? My parents are tired of having so many children around.‘
We didn’t ask about the children’s father. Most of the children in the valley have ‘unknown fathers’. The older generation – people like our farm manager, Jorge – are scandalised and disgusted.
‘It’s the government’s fault,‘ he explained. ‘They give money to these girls for each child that they have. And if they have seven children, they get a pension.
‘When I was growing up, we all worked. We didn’t have jobs. We just worked. We thought it was good to work. We planted crops. We took care of animals. We knew that we had to work to survive. We didn’t have any money, but at least we didn’t depend on government handouts.
‘But now the government comes along and tells them that all they need to do is to have children…and not get married. So, the young men leave and we are left with women having babies. I don’t know what is going to happen to this farm.‘
We don’t know either. But we see what is happening now. Without men in the households, the women turn to the landlord. One asks for a house for her ageing mother.
Another wants her roof fixed. Another wants a new house for herself and her children. And all these supplications happened within a few minutes. If we had stayed longer, we might have had more.
‘What are we going to do?‘ we asked the farm manager.
‘Well, we want to help. But this is a dead end. There is no future in this isolated valley for children. And without fathers. They need to get out into the bigger world…go to school…learn how to do things. We can help all these women to live a little better. But we’re not doing them any favours. Because they would be better off moving down to the city.‘
Welfare makes the giver feel good. But it generally harms the givee. It makes them dependent. Selfishly, we volunteered to help.
‘Maybe we should offer to help get them houses down in Molinos or Angastaco,‘ we suggested.
‘Yes, it would be better for them. They’ll be ruined by the welfare system in either place. But at least there we won’t have to watch.‘
for The Daily Reckoning Australia