Financial Problems are Capital Problems
The financial industry has made a killing compartmentalizing various financial objectives into individual silos, each of which is purportedly addressed by unique, financially engineered products. This article explains why this is a case of treating symptoms, rather than the underlying disease.
Everyone knows on some level that as they mature, generate income, and think beyond the immediate present, that conventional wisdom instructs us to develop a financial plan.
Perhaps one of the reasons that this generates a feeling of discomfort or undue pressure is that the industry does not explicitly define what a “financial plan” means. Most of us — especially young people — are socially conditioned to feel ashamed because we’re reluctant to pursue the development of something, that if we were honest about it, we don’t understand and which those applying the pressure behind the veil of expensive marketing tactics don’t do a very good job of explaining.
Upon capitulation to this societal pressure, the minority of us will end up taking some sort of action. You might go see one of these so-called “financial professionals.” You might start reading various books that purport to say something clever about money. A very slim minority will see past much of the financial entertainment and turn, instead, to economic theory. Sadly, those who end up turning to economics will be disappointed to discover that most economists have either nothing to say or nothing useful to say about financial strategy.
The absence of a discussion of financial philosophy and first principles, i.e. what we even mean when we call a plan “financial,” creates a vacuum. Lack of understanding of what might matter in a financial sense, and more importantly, why those things might matter in a practical, applicable sense is replaced by the most profitable marketing industry in the world. Individuals with one of many of an alphabet soup of designations and credentials leap to tell you what they think you should care about — this is, if they bother to get past a mere explanation of the features of the assets they happen to have permission to sell. For example…
The CPA will tell you about short-term tax liability management; the registered securities adviser will tell you about maximizing contributions to tax-qualified plans; captive agents of behemoth financial services companies will tell you about retirement income; estate planners will tell you about wills and trusts; contrarians will tell you about potential (no, inevitable!) appreciation in cryptocurrency; precious metals salesmen will tell you about the demise of the US Dollar and the appreciation (in US Dollar? Hm.) of gold and silver; internet marketers will sell you a script so you can persuade a commercial bank loan officer to open a line of credit with no prior business experience; realtors and real estate flippers implicitly judge you for not pursuing “mailbox money;” financial entertainment gurus berate you for drinking retail coffee; pastors really berate you for tithing or not tithing enough (to their particular church…); and on and on.
The sad, but understandable consequence of this shotgun-style approach to all things finance is confusion, irritation, and frustration. Who can blame you?
In high school and college, I participated in a program called “mock trial” (shout out to Mr. Berman at Redlands East Valley High School!). In mock trail, schools in your district or colleges across the country receive various materials including a fact situation, witness statements, and some legal information (resources regarding pre-trial constitutional issues and proper trial procedure) at the beginning of the season. All teams prepare strategies both to prosecute or sue and to defend or represent the accused. In competition, each school has a team of two to three attorneys who conduct direct examination of teammates who play the role of witnesses and cross examinations of students from the opposing team, raise objections to the conduct of attorneys on the opposing team and respond to objections raised against their conduct, and offer opening and closing arguments.
I spent most of my time in mock trial giving the closing arguments. The idea was to use material you’ve had available all season, combine it with the circumstances of what happened “in court” that day, and integrate and frame it all to effectively argue for or against a guilty/liable verdict in eight minutes or less. I was fortunate to be very successful.
The core challenge in giving a closing argument — in giving any argument — is identifying the underlying problem (many will say it’s about the narrative, but how you develop a narrative without identifying the problem is, itself, a problem). For a given mock trial season, this would take months and involve reading the given materials over and over again until salient passages could be cited from memory. The next step is to escape and reflect. In high school, my mock trial coach would take us up in the hills to a small resort town in southern California. At the time, I didn’t fully understand the power of this (we thought it was an excuse to party), but it was crucial.
My point is that this does not come easy, and the path to figuring out the deep, motivating, core issue in a given scenario is totally unclear and takes loads of time, without victory, without reward, before understanding, and long before articulating.
If you wanted to build an industry that incentivized this sort of slow, imaginative, creative process in order to solve the core, driving, motivating problem in the world of finance, you could not fail any harder than if you mapped out the contours of the contemporary financial services industry.
This is why it makes perfect sense that an extremely independent-minded, thoroughly Christian, wise speaker and author named Nelson Nash, who was utterly unsuccessful in getting the conventional, monolithic financial services industry to listen to him is the one who figured it out. The answer couldn’t have come from the conglomeration of short-term thinking, commission-chasing, drag-and-drop marketing, suffocatingly formulaic, anti-imaginative, mass known as mainstream financial services.
In 2019 I spoke at the Nelson Nash Institute’s annual Think Tank — the last Think Tank that Nelson would attend. Looking back, I think what I wanted to do, and hopefully did do, was express what Nelson showed me in the language of what I understood to be technical economics.
Nelson told me and others that his contribution to finance was the observation that “your need for finance during your lifetime is greater than your need for death benefit.” In his book Becoming Your Own Banker, he writes that the main question is, “how much of the banking function do you control as it relates to your needs?” And finally, “if you know what’s going on, you’ll know what to do.”
Since 2010, I’ve studied the Austrian School of Economics, which, in short, is the answer to the failed morass of piecemeal, semi-economic musings of tenured, almost universally pro-state, anti-freedom, non-commercial “intellectuals.” To me, “your need for finance” sounded a lot like “your demand for capital.” “How much of the banking function you control?” sounded a lot like “what is the quantity of capital you can access and to what degree is that access secure?” “If you know what’s going on, you’ll know what to do” sounded a lot like, “if I figure out the core problem — the narrative, the direction — the argument will follow in compelling, motivating, empowering fashion.”
You can tell that my interpretation of Nelson’s extraordinarily wise observations is centered on capital.
In the 2016–17 academic school year, I was enrolled in a PhD program in agricultural and applied economics at Texas Tech University, where I received sponsorship from the Free Market Institute (FMI). At the time, an extremely prominent Austrian economist by the name of Robert Murphy was employed at the FMI as a Visiting Assistant Research Professor, which is a fancy academic label for a non-teaching professorship. Appalled that one of the greatest Austrian economists of my generation was employed at a university and not teaching, I strongly suggested that we at least do an informal reading group. Graciously, Dr. Murphy assented.
One of the books we read was an english translation of Austrian economics founder Carl Menger called Principles of Economics, originally written in German and published in 1871. This particular translation came with an introduction from Nobel Prize winning, Austrian-friendly economist Friedrich Hayek. In that introduction, Hayek observed that the view of capital ever so briefly referenced by Menger in Principles was not the view of capital he would later develop.
There was more than one understanding of capital in the Austrian tradition?!
Come to find out, indeed, there was. In 1888 Menger wrote that capital is the monetary value of assets with acquisitive purpose. This hit me like a 2x4 across the forehead.
Menger’s developed view of capital as something abstract, monetary, and financial was exactly the notion of capital that Nelson talked about in Becoming Your Own Banker. In 92 pages, the word capital appears 72 times.
Developing a compelling closing argument took four to six months. Figuring out that all financial problems are capital problems took me two years.
Short-term tax liability management is about retaining greater control of capital in the face of the great capital destroyer: the Internal Revenue Service.
Maximizing contributions to tax-qualified plans is a (highly suspect) proposal to address a combination of two objectives: deferring the anti-capital effect of current taxation, and accumulating capital from which an individual can draw in their elder years.
The concept of retirement planning (the root of which is the zero-sum fallacy and the propaganda of German dictator Otto von Bismarck) revolves around developing sufficient capital in order to finance one’s late-life needs.
Estate planners preserve and/or maximize how much capital you can transfer to your people upon graduation.
Internet contrarians posit the hypothetical appreciation in the value of cryptocurrency on the expectation that the sale of cryptocurrency in the future, for money, will bring the individual more capital. Precious metals salesmen, whether they know it or not, are engaged in the same activity (which makes the animosity between crypto-promoters and precious metals promoters absolutely hilarious). The whole idea revolves around the hypothetical appreciation in the monetary value of an asset. In other words, buying low in order to sell high. And why? To have more capital — access to a higher quantity of monetary units — in the future. The “demise” of the US Dollar is a key component of this narrative. By demise, they mean an increase in the quantity of US Dollars. This dynamic of a significantly increased quantity of US Dollars compared to a relatively fixed quantity of precious metal is the suggested cause of this appreciation, and therefore, of future access to capital.
The Online Cottage Industry of Individuals with Obnoxious Titles, including “influencers,” “life coaches,” “wealth strategists,” “wellpreneurs,” “success consultants,” and others, which we might cumulatively refer to as financial entertainers exist because most people do not have access to capital. Hence, the worship of the financial idol called “Other People’s Money” or OPM. The only reason the financial entertainers evangelize OPM is because people don’t have money of their own. If we sprinkled a bit Mengerian economic theory on these folks, their gospel wouldn’t be OPM, it would be OPC, or Other People’s Capital. The only way you get to Other People’s Money is if Other People have built capital — again, the monetary value of assets. And by the way, the goal of attaining OPM/OPC is to invest in one field or another (typically real estate or crypto-currency) in order to generate a financial return, which — wait for it — increases one’s own available capital.
Their are legitimate real estate investors who have mastered the entrepreneurial art of transforming low- or no-value properties (read: property in which people perceive there to be relatively low capital) into high-value ones. Some of them are my clients and they do important work. But the promotion of “mailbox money,” or the idea of “passive income” generated from real estate are attempts by financial entertainers who are familiar with the financial terminology in this industry to indulge the fallen human desire to get something (capital) for nothing (hence, money magically appearing in your mailbox, or income purely passively floating toward you). You will know that this is the case when this particular class of financial entertainers offer you a product for sale, i.e. something to sell you so that they can improve their own capital position, rather than, perhaps, a property they purchased and improved. I’m not against the idea of real estate investing education. I am against the idea of book and video sales posing as technical education.
A highly sophisticated class of financial entertainers take the clever approach of making individuals feel bad for certain habits like buying retail coffee. The financial solution they propose to their convicted audience is two-pronged: capital liquidation (i.e. “paying cash” for major purchases), and under-capitalized investing (i.e. purchasing widely available, mostly misunderstood, paper assets that don’t pay dividends with what little capital remains on a frequent basis). This implicit attitude of neglect toward capital will have a two-fold effect: economic class stasis (i.e. permanent solidification in the middle class, as opposed to the natural progression over one’s lifetime to the upper class), and false expectations that neglect what the industry calls sequence of returns risk (jargon for: you don’t know, and we don’t know, whether one of these pesky recessions or depressions might come around and demolish your invested account value at the future, unknown, uncertain time you need it most).
I struggle when pastors admonish the congregation to tithe, when I know with virtual certainty that the capital I transfer to the church will be summarily liquidated for purchases, rather than secured, accumulated, and collateralized for those purchases. This struggle is compounded by the observation that all crucial lessons — the presumption of the propriety of property, the seed and the harvest, the parable of the talents, the Matthew Principle, and others — are there in the Christian story for the development of a sophisticated understanding of capital.
Do you see how each of these financial objectives and their associated financial professional exist, in some reason or another, because the individual lacks access to and control over capital?
I enjoyed what James Neathery said recently on one of our episodes of Banking with Life, where he recounted what he told a 20-year community banker friend of his (paraphrasing): “Do you know that the only reason bankers exist is because their clients don’t have access to capital?”
As it turns out, he hadn’t thought of it that way before.
The situation is akin to the classic (maybe cliche) symptom-disease problem. If you want to eliminate the symptoms, you should treat the disease. Just as the behemoth pharmaceutical industry has made a killing (pun intended) with “pain management” pills, i.e. symptom mitigation, so too has the financial services industry profited phenomenally from the sale of products meant to mitigate financial symptoms, i.e. various manifestations of the need for capital. In fact, Big Pharma could learn something from Big Finance. In medicine, we have a word for and understand what the core medical problem is: disease. Whereas Big Finance and Big Academia have nearly eliminated the vocabulary itself necessary to understand the core financial problem: capital.
Astonishingly, Big Finance is quite honest with their professional objective: Assets Under Management. If they were more particular, they’d say: Your Capital Under Their Management.
In short, solve for the availability of and access to capital over your lifetime — treat the disease — and the scores of other financial symptoms will resolve themselves. Even further, instantiate, secure, grow, and properly maintain capital over your lifetime, and a landscape of previously unavailable economic opportunity will open up to you, much in the same way the spectrum of physical achievements (e.g. completing a marathon, climbing a mountain) opens up to a very healthy, prepared athlete.
To help you think about how to instantiate, secure, and accumulate capital over the course of your (and your family’s) lifetime(s) from a conceptual, philosophic perspective is the subject of another article. But I hope at this point you might see why such an investigation is urgently warranted.