Columbia International Affairs Online: Policy Briefs

CIAO DATE: 07/2008

Wealth Enhancement and Storage

John H. Makin

May 2008

American Enterprise Institute for Public Policy Research

Abstract

The desire to enhance and store wealth has been present ever since income rose above subsistence levels. In ancient times, prior to the creation of symbolic financial claims on wealth, wealth storage was, quite literally, the storage of intrinsically valuable articles in temples, pyramids, or other such formidable structures. Even today in Tibet, which was long a theocracy, a major repository of wealth can be seen in religious statues of solid gold resting in temples.

The enhancement and storage of wealth by individuals--as opposed to kings or religious organizations--grew rapidly after the Middle Ages. Italian and Dutch traders amassed great fortunes in the fifteenth and sixteenth centuries. After the Industrial Revolution, large fortunes were accumulated in England. The accumulation of great wealth always brought with it problems of enhancement and storage. Enhancement often meant moving into businesses unrelated to those that first created the wealth for an individual or family. When the desire for wealth enhancement (as opposed to wealth storage) grew too intense, fortunes were sometimes lost. Striking the right balance has defined successful wealth management.

The dangerous stage for many wealth managers arises when the prospects for wealth enhancement (as opposed to storage) seem to become overwhelmingly attractive. Bubbles arise, be they tied to the price of tulips, tech stocks, or Miami condos. A bubble occurs when investors believe that purchasing a particular means of storing wealth will yield such strong returns that a substantial rise in living standards will be possible much sooner--and for many more people--than previously imagined. Journalist Samuel Crowther's 1929 interview with General Motors financial executive John J. Raskob, published in Ladies' Home Journal under the title "Everybody Ought to Be Rich," comes to mind. It cited an expected annual return on stocks of 24 percent.[1] Contemporary examples abound in print and on television about how to grow rich in real estate. Some people do. Many do not.

The prevalence of postbubble regrets notwithstanding, there is substantial evidence that the United States enjoyed a remarkably strong period of wealth creation during the 1990s. That experience convinced many households that wealth enhancement did not require saving out of disposable income, as evidenced by a substantial drop in the personal savings rate from a long-term average of around 8 percent of disposable income between 1960 and 1990 to just 2 percent by 2000. Thereafter, by 2004, a credit boom, which enabled households to convert rapid gains on home values into cash, was associated with a drop in the measured savings rate virtually to zero.

A major question surrounding the outlook for the U.S. economy, in terms of the length and depth of the current recession, concerns the pace at which Americans will restrict spending relative to (falling) income, first to arrest the drop in accumulated wealth and subsequently to restore wealth.