Today's Wealth Destruction Is Hidden By Government Debt

Tyler Durden's picture

Submitted by Philipp Bagus via the Ludwig von Mises Institute,

Still unnoticed by a large part of the population is that we have been living through a period of relative impoverishment. Money has been squandered in welfare spending, bailing out banks or even — as in Europe — of fellow governments. But many people still do not feel the pain.

However, malinvestments have destroyed an immense amount of real wealth. Government spending for welfare programs and military ventures has caused increasing public debts and deficits in the Western world. These debts will never be paid back in real terms.

The welfare-warfare state is the biggest malinvestment today. It does not satisfy the preferences of freely interacting individuals and would be liquidated immediately if it were not continuously propped up by taxpayer money collected under the threat of violence.

Another source of malinvestment has been the business cycle triggered by the credit expansion of the semi-public fractional reserve banking system. After the financial crisis of 2008, malinvestments were only partially liquidated. The investors that had financed the malinvestments such as overextended car producers and mortgage lenders were bailed out by governments; be it directly through capital infusions or indirectly through subsidies and public works. The bursting of the housing bubble caused losses for the banking system, but the banking system did not assume these losses in full because it was bailed out by governments worldwide. Consequently, bad debts were shifted from the private to the public sector, but they did not disappear. In time, new bad debts were created through an increase in public welfare spending such as unemployment benefits and a myriad of “stimulus” programs. Government debt exploded.

In other words, the losses resulting from the malinvestments of the past cycle have been shifted to an important degree onto the balance sheets of governments and their central banks. Neither the original investors, nor bank shareholders, nor bank creditors, nor holders of public debt have assumed these losses. Shifting bad debts around cannot recreate the lost wealth, however, and the debt remains.

To illustrate, let us consider Robinson Crusoe and the younger Friday on their island. Robinson works hard for decades and saves for retirement. He invests in bonds issued by Friday. Friday invests in a project. He starts constructing a fishing boat that will produce enough fish to feed both of them when Robinson retires and stops working.

At retirement Robinson wants to start consuming his capital. He wants to sell his bonds and buy goods (the fish) that Friday produces. But the plan will not work if the capital has been squandered in malinvestments. Friday may be unable to pay back the bonds in real terms, because he simply has consumed Robinson’s savings without working or because the investment project financed with Robinson’s savings has failed.

For instance, imagine that the boat is constructed badly and sinks; or that Friday never builds the boat because he prefers partying. The wealth that Robinson thought to own is simply not there. Of course, for some time Robinson may maintain the illusion that he is wealthy. In fact, he still owns the bonds.

Let us imagine that there is a government with its central bank on the island. To “fix” the situation, the island’s government buys and nationalizes Friday’s failed company (and the sunken boat). Or the government could bail Friday out by transferring money to him through the issuance of new government debt that is bought by the central bank. Friday may then pay back Robinson with newly printed money. Alternatively the central banks may also just print paper money to buy the bonds directly from Robinson. The bad assets (represented by the bonds) are shifted onto the balance sheet of the central bank or the government.

As a consequence, Robinson Crusoe may have the illusion that he is still rich because he owns government bonds, paper money, or the bonds issued by a nationalized or subsidized company. In a similar way, people feel rich today because they own savings accounts, government bonds, mutual funds, or a life insurance policy (with the banks, the funds, and the life insurance companies being heavily invested in government bonds). However, the wealth destruction (the sinking of the boat) cannot be undone. At the end of the day, Robinson cannot eat the bonds, paper, or other entitlements he owns. There is simply no real wealth backing them. No one is actually catching fish, so there will simply not be enough fishes to feed both Robinson and Friday.

Something similar is true today. Many people believe they own real wealth that does not exist. Their capital has been squandered by government malinvestments directly and indirectly. Governments have spent resources in welfare programs and have issued promises for public pension schemes; they have bailed out companies by creating artificial markets, through subsidies or capital injections. Government debt has exploded.

Many people believe the paper wealth they own in the form of government bonds, investment funds, insurance policies, bank deposits, and entitlements will provide them with nice sunset years. However, at retirement they will only be able to consume what is produced by the real economy. But the economy’s real production capacity has been severely distorted and reduced by government intervention. The paper wealth is backed to a great extent by hot air. The ongoing transfer of bad debts onto the balance sheets of governments and central banks cannot undo the destruction of wealth. Savers and pensioners will at some point find out that the real value of their wealth is much less than they expected. In which way, exactly, the illusion will be destroyed remains to be seen.

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RSloane's picture

Its not hidden at all. Drive down any Main Street in the midWest and tell me wealth destruction is hidden.

Motorhead's picture

Enjoy the weekend, bitchez! 

King_of_simpletons's picture

Wealth is neither created nor destroyed. It is merely transfered.

OT: Kim Kardashian's charity auction (90% for her, 10% for Typhoon victims) pretty much sums up the way charity operates in this country. Red Cross, United Way all have extremely high overheads with their CEOs making millions.

SilverIsKing's picture

I tell people this all the time. Why would I ever give to a charity so I can help support the CEO's lavish lifestyle?

I only give to charities where most of the workers are volunteers and 90% or more of my money will go directly to the primary cause.

When confronted with my argument, most will just say, "oh well, still better than nothing."


flacon's picture

I actually disagree with the statement: "Wealth is neither created nor destroyed. It is merely transfered."

Communists/Socialists/Statists DO have the ability to DESTROY WEALTH OUT OF THIN AIR in the same way that laissez-faire Capitalitsts have the abilty to CREATE WEALTH OUT OF THIN AIR.


As Ayn Rand said: "Wealth is the product of man's capacity to THINK." and the crony communists have destroyed the capacity to THINK. Real honest THINKERS understand that this market is overvalued but the Central Planners PUNISH the ones who calculate correctly and reward those who leech off of them. Look at Hugh Hendry, he was right in being bearish but even he threw in the towel because the wealth destruction caused to the THINKERS who correctly calculated that "a crash is coming" is just too painful. 

RockyRacoon's picture

Too many folks confuse wealth with money.  They are not synonymous. 

Oh, BTW, all us gold-bugs are saved!  Get this headline from the FT:

Gold traders plan benchmark code of conduct

“At some point the authorities are going to be turning their attention to some of our benchmarks under the umbrella of looking at all benchmarks,” said one person close to the LBMA. “We want to make sure we’re prepared when they do that.”

Yeah.    I really needed a good belly-laugh to end the week.

Need I add the /sarc?  ...or isn't it obvious?

flacon's picture

The problem with central planning is that they have the magical ability to skew the UNIVERSAL pricing mechanism (to the point of cognitive dissonance). Nobody knows what anything is worth any more.


That old analogy of a one ounce gold coin could buy you a fine toga in the Roman days and could buy you a fine suit today does not hold true. I bought a fine locally made (ie, NOT CHINA) suit for $200, including a belt and a tie and a shirt. Is the fair value for one ounce of gold $200? 


The only way to get an honest price of anything is by millions of itterations of actual transactions without a third party weighing down or pushing up the price. We call that free market laissez-faire capitalism -which hasn't existed in a least 100 years. 

RockyRacoon's picture

You got a U. S. bespoke suit for $200?  Where was that... I could use a new one.

FredFlintstone's picture

A guy that buys a $200 suite has to google bespoke.

vanityvanity's picture

Amen! There's no substitute for free market price discovery. American medicine has been on government-set fee schedules for decades, and the demand for physicians sky-rockets while the supply dwindles. You can now get better care for a fraction of the cost in Thailand. Central planning is death.

Cursive's picture


Or, more simply, a broken window is not useful as a window anymore.  And then there's horse buggy whips....

flacon's picture

I'm trying to understand your comment but I'm afraid I don't get what you are saying. I read Henry Hazlitt and know the Broken Window Fallacy, I haven't heard the horse/buggy one, but could you be a bit more verbose in your thought process so that I can understand you?


Cursive's picture


It's probably too late for you to see my response, but here goes.  Whenever change or innovation is discussed, it is common for one party to mention that makers of horse buggy whips were adversely affected by the rise of the internal combustion engine.  But that's the point of change or innovation, there will always be winners and losers.  Imagine if you had an inventory of horse buggy whips and they were all worthless within a year.  Would that be wealth destruction or wealth transfer?  I'd say the former.  

BooMushroom's picture

If you have an automobile, and I put half a pound of thermite on the hood and light it, it will destroy the hood, the engine, and some of the blacktop under the car.

The wealth (the car) was not transferred, it was destroyed.

Son of Loki's picture

I've seen more houses fall out in the last three months then my entire life. Most families are living paycheck to paycheck...forget  about trying to qualify for a loan, even a zero-down, never pay back loan. Unless Ben hands houses out for FREE with the NINJA mortgages like Mozillo did, I don't see imporvement.


Add to that the dozens of Used Homes on the market and the picture is dismal.

indygo55's picture

Same with Goodwill. The "goodwill" is to the CEO not the rest of the herd.



TheMerryPrankster's picture

Funny that, I feel I've lost my bearings. This is not the world i was told of as a child or the one I knew in my youth.

Its a thin pretense, a veneer of luxury atop a great big chewy center of pure chaos. Independent domains of commerce, thought and production were merged into a globalocracy, that weakened everything, destroyed backup up systems and made everything easily manipulated and unstable.

When the US economy collapses how will Europe pull us out if they are connected to our banking and commerce systems, China as well.

The whole concept of globalization is retarded and for fools and bankers only. It has produced little of merit, other than a 7-11 on every corner in Tokyo and a castle of empty cargo containers stacked to the sky in every still functional US port, due to one way trade.

the average american knows he's been fucked but he's convinced it was the other parties fault, dems blaming reps and vice a versa. The real fucking was done by those who own the .gov that the duoply inhabit, they are but renters in the house of bankers.

THe bankers like it like that, let the peons charge each others throats while the hidden hand throws chunks of beef to the piranha politicians to ensure the madness continues.

But the bankers have secretly fucked themselves by building a system on a currency of despair which cannot but fail. there is no turning around a sinking ship, it doesn't matter which direction you are heading if you're ship is sinking.

How now Dow Jones? a tower to the sky built of infinite invisble bricks which cannot support their own weight, let alone the weight of those stacked upon it. It all falls down when the boy stops beleiving in fairies, can we all keep Tinkerbelle alive one more day?

Isn't everything hunky dory if the media says so and the dow keeps climbing. Welcome to Wonderland, watch out for pirates.


Running On Bingo Fuel's picture

What the fuck is there to enjoy? Were in the final stage of a crack-up-boom, there is massive inflation, massive dollar deflation, and were controlled by a government that has gone completely ape shit crazy.

You can't even watch a good show anymore, there all brought to you by and created by sick perverted Lizards.

Good weekend, BAH!


Dre4dwolf's picture

Fuck the world.

Grab a pack, smoke um all and sit back and enjoy the fucking show.

This shit is burning down nice and slow.

Headbanger's picture

I literally was on Main Street this morning getting a few things at the hardware store and saw hardly any traffic for a Saturday morning.

It's getting spooky seeing this along with the all the for sale signs and closed restaurants and small hotels left abandoned.

And then there's all the boats for sale everywhere! 

It all makes me feel more appreciative I grew up in more modest times with parents who went through the Great Depression in their 20's

so I can take these times in better stride perhaps and try to help others have a more enduring perspective.

Skateboarder's picture

Things are slowly falling apart, but no one wants to recognize it, no one wants to talk about it.

People are especially oblivious in college bubble towns. I was in one last weekend, totally banana.

natty light's picture

Floating on top of student loan debt.

flacon's picture

Educated pHDee types arrogantly think they "can change the world through education" little realizing that they are the least educated people on the face of this planet. 


High School Dropout knows more about his rights than the 4 armed to the teeth gorilla-cops who are threatening him:



pashley1411's picture

I was walking down the 16th Street Mall in Denver last night, thinking the same thing.   One university/college after another, on a 1/2 mile long retail strip. (!?!)

Pure student loan bubble.

max2205's picture

I need a boat...where do you live? 

MrButtoMcFarty's picture

Jesus Christ.....Ya'll are some seriously whiny bitches sometimes....

booboo's picture

The writer has obviously been influenced by Hans Hermann Hoppe, I would that you all would be as well. The virus is democracy and as much as you neophytes want to believe that you can vote your way out of this through a democratic process I am hear to tell you that the definition of insanity is doing the same thing over and over and expecting different results. Democracy was foisted on the world as a means of letting the proles enslave their own ass. Goddamn, it's like watching people fight over two piles of shit come election time.

Start here

max2205's picture

My ass feels like it's been Caruso'd

0b1knob's picture
Today's Wealth THEFT Is Hidden By Government Debt

There, fixed the headline for you.

StillSilence's picture

Exactly, it's really not wealth destruction, but more the destrcution of the perception that debt currency represents wealth. If our money still represented real production of goods or services, then it could be labeled as wealth, but we are clearly far from that.



DoChenRollingBearing's picture

There is a real case to be made for having a large percentage of your assets in hard assets, my favorite being gold.  But, I believe, perhaps even more, in diversification.

Diversification (if you have money) even includes having some assets in stocks & bonds.

No one knows what is going to happen, Black Swans and all.  Best to be prepared for a hard landing, and it could get very ugly.

cossack55's picture

I used to think so.  I am now totally into consumables, not anticipating coming out the other side.  I'm pretty sure I won't not be coming out alone.  (gotta lub dem double negatives)

Cursive's picture


Agree with all you wrote, but I always wonder how the "smart people" (i.e. the little red hens of the world) will fair against the so-called "golden horde" of the free shit army.  We are testing Jon Dunne's "no man is island" hypothesis and any prepping may be all for naught.  Contrary to the "rugged individualism" of American folklore, our fates are all tied together and the figurative clean shirts will be bloodied by the masses anyhow.

fonzannoon's picture

I am attempting to book a 2 day ski trip in January. I am trying to do it during the week to save money. Every ski resort I look at is booked up. This with everyone knowiing that if you fall and break your leg you are probably paying several thousnd dollars in healtcare costs now.

Yet as I drive around I see more and more "space available" signs. 

So weird.

Cursive's picture


Maybe there are less ski resorts open?

Or maybe there are less slopes open b/c the facility purposely decided to short staff?

Or maybe fuck all that and it's the the 1% have booked the place up through 2020.

As for a broken leg, that's somebody else's problem.  I mean, if I break my leg, Obama will make sure some rich ass doctor fixes it.  And he better fix it or its his ass.  I mean, maybe I've got a broken leg and all, but life will be much harsher on someone else if they don't do their damn job and fix my leg like it was new or better than new!

StormShadow's picture

I run a private jet charter company in the southeast US. I've been in the business for 13 years through several business cycles. Our business has never been better. The demand is unreal. Why? Because we cater to the .5% and they are doing exceedingly well while everyone else struggles.

What is really interesting though is that as part of my job I travel throughout the country to both high end locations and "middle America". I see firsthand just how enormous the wealth inequality is. I've looked behind the facade and it is not pretty. I fly a lot of finance guys who are generally really nice, smart folks but are TOTALLY clueless about the markets and why they are at the levels they are. Almost universally they believe that the "real" economy is recovering and the market is a reflection of that. Before I became a professional pilot I graduated Wharton undergrad. What they taught me there helps me understand the delusion of such folks, and it is a reason I got out of that world early on.

Eventually this will all unravel, but it will take FAR, FAR longer than any of us can imagine. I am constantly amazed at how far they can stretch this bubble. It's heart wrenching and depressing to watch. We live in interesting times.

Cursive's picture


I'm in Louisiana and, although I hate "little" plans, but it's really the only way to fly.  No TSA up your ass....

Professorlocknload's picture

Missallocation at work there, fonz. Wealth is not being created, credit is.

Skateboarder's picture

Today's pleasure driven by the promise of tomorrow's work.

Al Huxley's picture

Skiing is for the relatively well-off, of which there are still a fairly large number, in absolute terms (less in percentage of the overall population).  And the relatively well off are getting more well off (except for those being whittled off the bottom end) so this doesn't surprise me.  I see it everywhere.  What you'll see WAY less of is middle-class or lower middle-class families making a 'special ocassion' ski trip (or name some other comparable) as these activities are priced way beyond their means now.


High and increasing pain for the growing lower and lower middle classes, increasing wealth and privilege for the gradually shrinking number who are still 'winning' in this game.

Seeking Aphids's picture

Excellent post Al. Looks like we are running out of customers........deflation anyone?

Professorlocknload's picture

  Might have something there, Cursive. All the more reason to save in portable/real assets. Old adage; of all the ways to avoid trouble, the best is to leave.

  Beside, the dollar being a credit instrument, why save debt in a world of falling productivity? It most likely (certainly?) won't retain value.

  On diversification, I've always looked at it as a refuge of the uninformed or unsure. Better to be all in something one understands, than fractionally into several entities one knows little about. That can get like herding cats.


uncle.bigs's picture

Diversification is for pussies.  You love gold and you might be right.  What happens when the stocks and bond you own crater and offset the gains you made in gold?  You made nothing.  LOL

Petrus Romanus's picture

I believe this gentleman has the answers you seek:


ETA- Synergy really is for faggots!

cossack55's picture

What if it were Robinson and Black Friday? What outcome then, eh?

Cursive's picture

So, heed Eisenhower's advice about the military-industrial complex and acquire hard/productive assets at the expense of fiat.  Got it.