Turnover of Wealth

John Steele Gordon's book An Empire of Wealth presents a detailed account of the history of America - from an unusual perspective, from that of an economist.  One particularly interesting theme expressed in the book was that in the 150 years preceding the Great Depression of 1929, roughly every 20 years Americans were hit with a serious financial crash. In these crashes many banks and corporations outright failed or went into bankruptcy, and the holders of their notes, bonds and/or stocks lost their fortunes.  Others saw their debts disappear overnight. So with these crashes there were huge and immediate turnovers in wealth.

Gordon suggests that it is the repeated major turnovers of wealth that were key to America becoming the very wealthy nation that it is today. He argues that the financial crises had the effect of periodically taking wealth from those who were squandering it and giving it to those who would invest it in endeavors that spawned more wealth. He goes on to note that Europe has fought and to a significant degree succeeded in diminishing financial crises and associated chaotic turnovers in wealth. However, rather than befitting Europe's economy this has instead brought on the undesired outcome that today Europe's wealth is too much squandered.

Today America is in the midst of circumventing a major financial and economic collapse that would been more tumultuous that the 1929 Great Depression. It appears we have successfully avoided a crash that would have surely led to major turnover of wealth.

Is this a good thing or bad? Gordon I guess would say this is bad. Perhaps this is the reason he wrote this book - specifically to send that message.

My opinion is that the avoidance of this big of a collapse was a good thing. Had the collapse happened it would have precipitated losses and setbacks many times worse than those of the Great Depression.  I think it would have not only turned over wealth, but it would have also resulted in a huge loss of wealth.

So in having averted the collapse will our wealth holders now pass on their wealth with sufficient disorder and speed so that it will get to those who will use it rather squander it? Will there be sufficient opportunity for the next Steven Jobs (orphan, college drop-out, genius entrepreneur) to pull himself up from nowhere and rise to the very top?  Or are we now like Europe - where wealth too much sits protected and unused and opportunity is scarce?

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I suppose its possible inflation could drive our next round of wealth turnover.

If you have low wealth there is a good chance you have debt - such as a big home mortgage. Inflation would reduce the real value of that debt - which would, in effect, increase your wealth.

If you are wealthy your situation would be opposite.  An inflation rate of just 7% would in 10 years eat up half of your cash savings  - greatly decreasing your wealth.

With the Fed today working on raising inflation rates (recent announcement of QE3), inflation driven wealth turnover might soon be underway. (See Expect Higher Inflation.)

So, don't worry, be happy - we are saved!