What Makes a Country Rich?


During the election this week, Greek voters decided to oust the party that has been leading the country for the last few years and put into place many individuals from the Syriza party, which some describe as Marxist.  You will remember that Greece was facing an economic collapse just a year or so ago that was prevented only because to loans made by Germany and other European countries that were in better economic shape.  In exchange for these loans, Greece enacted “austerity measures,” which meant cutting government spending and raising taxes.  With the election of members of the Syriza party, voters are saying they wish to cast off austerity measures and open up the government spigots again.  This will no doubt upset their lenders, leaving Greece on their own.  Perhaps a total collapse is the only way that Greece could become prosperous again.

While I have no doubt that there are a lot of wonderful Greek people who don’t deserve to go through such hardships, I can’t help but watch the situation with a tinge of Schadenfreude.  I would love to see a turn-around where the citizens of Greece stopped doing the destructive behaviors that have caused their economic troubles and instead started doing things that would put them on the path to economic stability and prosperity.  Watching the situation between Greece and the rest of Europe is a little like watching your mother send checks off to your lazy brother who sits around and plays video games, spending ever dollar that comes into his hands.  You know that the situation is economically unsustainable and eventually will collapse, even if it is with the death of your mother, so you would much rather get the inevitable collapse over with so that the healing can begin.  To make it worse, the people of Greece being helped by Germany’s kindness are bad-mouthing their savior and complaining about any interruption in their leisurely lifestyle.  They should be happy to be given bread to eat, but instead they’re complaining that it’s white and not whole wheat.

So why is it that there are countries like Germany that are so wealthy and others like Greece that are bordering on the brink of insolvency?  Is Germany just more fortunate or lucky?  Do they have a better piece of land or more natural resources?

Really what makes a country rich are the same things that make a family rich.  It is a matter of how much the citizens of the country are producing, because wealth comes from production.  Countries that are rich have policies and economic systems that promote production.  They also have a population willing to produce and effective tools to make production efficient.  Countries that make it easy to create those tools will be wealthier.  (Note, yes, some countries are rich because of natural resources such as sitting on a lake of oil, but even in those countries the leadership often keeps all of the wealth from selling the resources and leaves the population in general desperately poor.)

And this makes sense.  If you have each family in a country producing a house during a given year, at the end of the year everyone will have a house.  If everyone is growing crops, there will be plenty of food to eat.  If many people are producing tools, there will be a lot of tools available to make work more efficient.  And if a country has a lot of backhoes, cranes, and other equipment, they can build skyscrapers, canals, and other things to make life a lot more comfortable.  You first need people producing enough food, clothing, and shelter to meet their basic needs, then people producing tools to make parts, and then people producing the cranes and the backhoes.

Countries that are poor have few people producing.  In almost every case there are things that discourage production such as war or a corrupt government that steal production.  Some are torn by war, so people are just trying to survive.  Things of value get destroyed or stolen quickly, leaving little incentive to produce anything that you don’t need immediately.  Other countries have never gotten production methods to the point where they have enough time to make the tools that make it possible to become more productive.  Everyone is scraping for food and shelter, leaving little time to build quality hammers, saw, shovels, and other implements, let alone tractors.  Often such societies are victims of constant war as well, or have leaders who take whatever excess is produced, leaving little incentive to produce more.  There are also a few primitive societies remaining who have established lifestyles that follow the game herds, making development of things like windmills and substantial shelters impractical.

Then there are some countries like Greece that could be very rich, and were in the past, but have developed a culture and a companion government that discourages work and production.  Leisure time is seen as a right and highly valued, while hard work is seen as a waste of time.  High amounts bureaucracy, coupled with high amounts of corruption, make it very difficult to produce things, so people give up trying.  Those who do little are just about as well off as those who do a lot since people who work hard are highly taxed to pay for those who do not, so there is little incentive to work and produce.  Greece also has been enabled by a series of different countries over the last fifty years or more, allowing them to live a lifestyle beyond what they were producing.  Each time they exhausted their supporter, they moved onto another country like a tape worm that kills its host then finds another.  It is somewhat comical, somewhat frustrating to see the citizens of Greece upset with the citizens of Germany whenever the least stipulation is called for when a loan is made.  This is like a spoiled adult child unhappy when his parents say he needs to hold a job before they’ll pay his rent.

So what can a government, and more importantly, the people of a country do to make their country wealthy?  It’s simple:

1.  Create a safe area free from crime and seizure of goods and property by outside countries.  Without a safe zoneand security for the producers, no country can prosper.

2.  Create an economic system that rewards production.  The more you create, the more you get.  This encourages people to leave their homes and produce things, rather than engaging in leisure activities and doing the bare minimum needed to get by.

3.  Keep bureaucracy to the absolute minimum.  A small amount of regulation is needed, but make the barriers to starting and running a business as low as possible.  The more competition there is, the more everyone’s production increases, the cheaper the prices of goods become, and the higher wages get.

4.  Do not tolerate any form of public corruption.  Put people who demand bribes or use their office for personal gain under the jail.

5.  Make government as small a burden on people as possible.   Keep taxes low and use them only to provide defense and necessary functions of government to keep things running smoothly.  Resist the urge to tax and take from one party and give to another.

6.  Provide for strong property rights.  People will not produce if their property can be seized at any time.

7.  Before any sort of assistance is given, expect people to do all that they can to provide for themselves, then let private charities do what they can.  Give out temporary public jobs to help those between jobs rather than providing money and goods directly.  Always make sure there is an advantage to work.

In many ways, the United States is heading down the path that Greece took about a hundred years ago.  One look at where they are should make anyone want to stop heading down that path and take another.

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

It’s Time to Stop Thinking of College Students as “Kids”

The Vanderbilt rape case provides a disturbing reminder that college students are not children.  These are adults that have full access to an assortment of “grown-up” things like sex, automobiles, firearms, credit cards, voting, and contracts.  While they cannot do so legally, they also have ready access to alcohol, which clearly played a major role in this case for both the victim and the perpetrators of the crime.  They face very real dangers and they are capable of truly horrific things with the freedom they are given.  

One has to wonder whether our culture that treats young adults as children, where adult freedoms are given but adult responsibility is not expected, contributed to this event occurring.  Certainly the convicted assailants, looking at mandatory sentences of at least 15 years in prison, now realize that their actions have real consequences.  Hopefully they also now realize the tremendous impact their actions had and will continue to have on the life of their victim.  However, they were probably thinking of themselves as being free from adult-level consequences during the period before the assault where the young men made the bad decision to drink large quantities of alcohol and possibly even during the assault itself.  They were probably thinking that it was all a funny game that was a consequence of the girl’s drunkenness.  That it really wasn’t a rape at all because they were just a bunch of kids having a good time, kind of like few middle-schoolers think of a schoolyard fight as an assault and battery.

It is time to stop treating young adults leaving our homes for college dormitories and fraternity houses like children and impress upon them that they are entering a world where they will have great freedom, but that all freedom comes with great dangers and great responsibility.  

The experience of the victim in this case shows that there are monsters in this world and young adults need to guard against them.  There are monsters on the streets that will mug them, assault them, and possibly even kill them.  There are also monsters in their classes and on their campuses who will do the same things.  Young people need to keep themselves always vigilant and not leave themselves vulnerable to be the prey of these monsters.  Certainly no one deserves to be the victim of such a crime, no matter their actions, but that won’t protect them if they are in vulnerable situations any more than being in a cross walk will protect a pedestrian from a speeding car with an inattentive driver.

There are also monsters beyond those who commit physical violence in the world.  We also need to teach young adults that there are monsters in the financial world that will destroy their lives with credit cards and other life-damaging loans.  There are monsters who are outright con-artists that will take their money.  There are monsters in political office who will abuse their trust if given power through their vote.  There are monsters in relationships who will manipulate and control them.  There are monsters who form cults that will take their money, their futures, and even their lives.

The experience of the perpetrators in the case shows that there is also great responsibility in entering the world.  Young adults must be taught that if they engage in a crime and hurt someone, or hurt someone through their negligence, being a student at a college or simply being a 19 year-old is no excuse and will not absolve them of consequences.  Being drunk will not undo the damage they do if they rape someone.  Being young will not bring back the people they kill when they are driving recklessly down the highway.  Being a student will not erase the loans they pile up living the high life in college or the credit card balances amassed through overspending.  Being young will not bring back the years lost when young adults choose to live in a state of perpetual adolescence rather than gaining the skills and experience needed to move into careers and build a solid financial future.

It wasn’t too long ago that we expected young men to leave home and start their lives at 15 or 16.  Young women might leave and start a household even younger.  It was expected from a very young age that individuals would move beyond childish things and much was expected even of relatively young children.  Today many parents don’t expect their children to become independent before the age of 25 to 27.  Many young adults don’t expect to become fully independent before the age of 30 or even 35.  Maybe if we expected more from our young adults right from the age of 16 or 18; if we expected college students to be there to study and better themselves rather than party and socialize; if colleges had no tolerance for alcohol and non-professionalism among its student body, we’d get better results.  This is a tragic case that shows the extremes of the consequences that result when we treat our young adults like children, but there are consequences that are less severe but still damaging to the students and society that occur far more often.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

It’s the Little Sacrifices that Will Make Your Rich

$8 Bottles of Water

Do You Need $8 Bottles of Water

Shows such as Extreme Cheapskates are fun to watch, although you can’t help but wonder how much of it is true.  When talking to most normal people about budgets and saving in order to reach financial independence, however, that is the kind of lifestyle they may picture in their minds.  While cutting open toothpaste rolls and dumpster diving might get you on a reality show as a spectacle, there are plenty of people all around you who live perfectly normal lives who nonetheless find a way to grow wealth and become financially independent during their lifetimes.  This financial independence may mean an early retirement, or it may just mean a more secure retirement at a normal age or the ability to travel and do things in retirement rather than being confined to a small apartment for lack of resources.

Fundamentally there are two things needed to grow financially independent.  These are 1) to live on less than you make and 2) to increase your income to the point where you can amass enough money to be financially independent within a reasonable amount of time.  Increasing your income can come from training and career choices to make your work income larger, but most people cannot attain the kind of jobs that pay the quarter million dollar plus salaries needed to grow wealthy from work income alone.  Many also don’t want to make the sacrifice needed to start a business and make it successful, or have the business skills needed to do so.  For the vast majority of us, wealth comes from a middle class income, growing into an upper middle class income through work advancement, combined with investing to increase the rate of wealth accumulation.

Investing is only half of the equation, however, since without money to invest, you can be the best investor in the world yet still fall far short of your goal within your lifetime.  As the saying goes, “It takes money to make money.”  This is where the sacrifice comes in, but the sacrifices are not as great as many may think.  They are little things that people who get rich do and those that stay in debt and a slave to a job do not.  Here are a few:

1.  Go to a college you can afford, or skip college altogether and go into a trade that pays well.  This can be a really tough sacrifice since when you are graduating high school you think going to your top school is the most important thing you can do.  Some people think that their lives will be radically different if they go to an Ivy League school or an expensive private college than if they go to a state school.  The truth is, unless you are planning to work for a few, very select firms that only hire those from ivy league schools, your outcome in life will not be that different if you go to Harvard or you go to Oregon State.  It won’t even be that different if you start at a community college and then finish at a university.  The important thing is to learn the skills that will help you provide things to people that they need, because that is how income is generated.  Few people will pay you for your knowledge of French History, even if it comes from Oxford.  Many will pay you to design their home or create an app that makes their lives better.  If you or your parents have a half million dollars set aside for your education, going to an expensive school is a luxury you can afford.  If not, your life will be better with an education you can afford without going into debt.

College also isn’t the only path to a high income.  The people with the highest incomes tend to be those who start a successful business, many of whom never went to college, giving them time to get things going while their friends from high school were busy taking remedial algebra.  Also, a skilled craftsman can often make a bigger income than many college graduates (just call a plumber or a bricklayer and see).  These are also good occupations in which to work for yourself, allowing you to keep more of the income you generate.   If you can get through a trade school in a year and come out a skilled welder, you can make $150,000 in income while those going to college are racking up $50,000 in debt, putting you $200,000 ahead of them from the start.

2.  Drive used cars until you are a millionaire, then switch to new cars if you wish.  A new car will cost you $5,000 a year in depreciation alone, where you can buy a perfectly running used car for $5000 or less.  This gives you an extra $5000 per year to invest during four out of five years if you buy used cars every five years instead of new cars.  You can even trade up after you’ve gone through a few older used cars to something costing maybe $10,000 or $15,000, which will look an awful lot like the new cars your coworkers are driving.  Today’s cars are very sound mechanically and will go for hundreds of thousands of miles before any major repair work is required.

3.  Eat in more often.  The sugar packets used to say “Enjoy life, eat out more often.”  If you eat out most meals, however, it quickly becomes old and does not add to your enjoyment of life.  You also blow through a lot of money, not to mention expand your waistline.  If you learn to cook just simple meals at home with fresh ingredients, you’ll find that you can make better tasting meals than many restaurants (who often are just warming up frozen food).  You’ll also be saving a lot of money.  Giving up just one restaurant meal a week for a family of four will save you between $2000 and $3000 per year.  Going from eating out every night to going out once a week will save you ten thousand dollars a year or more.  That’s a lot of money to invest.

4.  Look for little ways to spend less.  Hopefully not many people would buy an $8 bottle of water like we found at a hotel one time, but do you drink bottled water at home or at the office when a tap is sitting right there?  How about using a refillable bottle instead of grabbing a new bottle out of the fridge each time?  Not only will you reduce the amount of plastic waste you’re generating, you’ll save on the order of a few hundred to perhaps a thousand dollars a year.

Other things you can do are: 1) Skipping the overpriced snacks at the movie theater.  2) Carpooling to work to save on gas and parking.  3) Buying clothes you can wash in a machine at home rather than dry clean only clothes.  4) Taking up hobbies that cost little like hiking or Frisbee golf rather than expensive hobbies like regular golf.  5) Limiting your trips to the grocery store or Wal-Mart to reduce the amount of impulse buying you do.  There are many other ways to cut a few dollars from your lifestyle that can add up to big savings and money for investing.

Note, it is not necessary to do all of these things.  It is just a matter of doing enough to have a few hundred dollars each month to invest.  The larger your income, the more you can do and still grow wealthy, or alternatively, the faster you can grow wealth and become financially independent.  If people making a quarter million dollar salary would live like someone making $50,000, they could easily have a couple of million dollars in the bank in ten or fifteen years and be financially independent in their thirties.  Someone making $60,000 will take 25 or 30 years, but it will happen.

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.