Smart Enough to Get Rich, Not Smart Enough to Keep It

December 14, 2021

Are we smart enough to keep our oh-so-easily conjured riches? If we continue to believe that doing more of what's failed spectacularly will deliver permanently expanding riches, then the answer is no.

Near the end of his monumental 400+-page analysis of the notion that alternative energy sources can replace hydrocarbon fuels, (Energy and Human Ambitions on a Finite Planet), Thomas Murphy discusses the really big picture: mass extinction events and species' role in mass extinctions.

So here's the thing. The first species smart enough to exploit fossil fuels will do so with reckless abandon. Evolution did not skip steps and create a wise being -- despite the fact that the sapiens in our species means wise. (Self-assigned flattery) A wise being would recognize early on the damage inherent in profligate use of fossil fuels and would have refrained from unfettered exploitation.

Not only is climate change a problem, but building an entire civilization dependent on a finite energy resource and also enabling a widespread degradation of natural ecosystems seems like an amateur blunder.

In other words, humanity was smart enough to exploit the natural riches of hydrocarbons but not smart enough to figure out what to do after we've consumed all the easy-to-extract wealth or how to deal with the consequences of the profligate use of all the riches.

I think the same can be said of the immense financial (i.e. phantom) wealth that's been generated in the past 20 years: we were smart enough to generate all these hundreds of trillions of dollars of "wealth" but we aren't smart enough to keep it or manage the consequences of our profligate use of the magic of money-creation.

This dynamic is scale-invariant, meaning it applies to individual investors, organizations and nations / empires: each is smart enough to get rich but not smart enough to keep it.

There are many reasons for this inability to convert intelligence into wisdom, but chief among them is the conviction that doing more of what worked in the past will eventually produce the desired results. I call this doing more of what's failed spectacularly, and we're remarkably adept at doing so. (I know I am, and I observe this on a systems-wide level.)

So the investor who minted riches flipping houses will keep flipping houses even after the cycle has turned, eventually losing the fortune. The investor who minted riches buying call options on meme stocks will keep buying call options on meme stocks until the fortune has been lost. The investor who minted riches by maintaining a balanced portfolio will keep maintaining a balanced portfolio until most of the riches have dissipated. And so on.

On a larger scale, central banks that managed a spot of bother by printing trillions of dollars and buying bonds will keep doing so until the system unravels. Central banks are blind to the consequences of their "success" and confident that doing more of what worked in the past is the key to permanent success. It looks like it is until it isn't.

This confidence that doing more of what worked in the past will work once again slips very easily into magical thinking. Here's an analogy: the water well has run dry, and so the central bank prints money and gives it to the thirsty people standing around the empty bore hole and drilling rig in the belief that demand creates supply: if you give people money to buy water, the water will magically appear because somebody somewhere will figure out a way to supply water at a profit.

This is a nice idea but the water has to be available at a sustainable cost. Dropping water bottles from helicopters can be done for a time, but eventually the $1,000 cost for each liter of water has consequences, and printing trillions of units of currency to pay for this profligacy has its own consequences.

Recall that actions have consequences (first-order effects) and consequences have their own consequences (second-order effects.) We're smart enough to exploit first-order effects (drill an oil well and get rich, print money and get rich without even bothering to drill the well) but not smart enough to anticipate all the second-order effects or change course before our heavily loaded galleon of riches has crashed onto the razor-sharp rocks and been smashed to bits.

It turns out there wasn't much selective advantage 200,000 years ago to converting intelligence into wisdom. The key advantage was cooperating with other humans to strip all the low-hanging fruit from the tree and then move on to the next exploitable resource.

In the modern analogy, we stripped all the low-hanging hydrocarbon energy and exploited the magic of money-printing and its sibling, debt, and now we're ready to print another couple hundred trillion magical dollars and buy a replacement global energy system.

All these newly conjured trillions have boosted the market value of assets. This first-order effect is simply marvelous: just buy the asset with borrowed money and sit back and get rich by doing absolutely nothing and creating zero value. (If necessary, borrow more money to buy back your company's shares, reducing the float--this drives up share prices like magic. Hey, magic! Why not use this magic to get richer?)

But this conjuring trick has consequences which then generate their own consequences, one of which is all the phantom wealth suddenly evaporates. It can evaporate in various ways, but the result is the same, and doing more of what worked so wonderfully in the past (creating trillions out of thin air and speculating on asset bubbles) stops working, to general astonishment and anguish.

One consequence is extreme wealth inequality as this money-conjuring / asset bubble trick works extremely well for those at the top, who end up owning most of the wealth and virtually all the income derived from that wealth. But it works very poorly for the bottom 90% who don't own enough wealth to benefit and are too far from the central bank money spigot to get much of the free money. (Here's a $250 per child tax credit--enjoy your riches!)

As I describe in my new book, inequality and scarcity bring down nations and empires. The past 50 years of cheap, abundant goodies (now mostly made overseas) and money-conjuring have generated a compelling illusion that conjuring more money via printing and debt solves all supply issues and keeps asset bubbles expanding forever.

Those who believe that doing more of what worked in the past will always be successful are not looking beyond the first-order effects they desire. Anticipating simple cause and effect--get richer by printing more money and speculating more wildly--may appear intelligent while it works, but it isn't wisdom.

Wisdom, if it is ever gained at all, is only attainable after the second-order effects collapse all the conjuring.

Are we smart enough to keep our oh-so-easily conjured riches? If we continue to believe that doing more of what's failed spectacularly will deliver permanently expanding riches, then the answer is no.




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