Masters Series: No Such Thing as a Level Playing Field

Editor's note: In today's Masters Series... Bill Bonner, the founder of our corporate affiliate Agora Inc., explores a critical trait that explains why many wealthy families have preserved (and grown) their fortunes across generations.

Regular readers know Bill is one of our favorite writers on history, politics, and economics. He (and co-author Addison Wiggin) has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt.

And today's piece – originally published in the May issue of his new family wealth advisory service, Bonner & Partners Family Office – describes why the idea of creating level playing fields in life is a myth. (Today's issue is the second half of the essay. You can read the first part here.)

No Such Thing as a Level Playing Field
By Bill Bonner, Bonner & Partners Family Office

Recently, in the U.S. and France, there is a surprising (to me) movement against homework for schoolchildren. At first, I thought it was a joke. But my wife, Elizabeth, explained that it was motivated by the same desire for fairness that makes Warren Buffett want higher inheritance taxes.

Children of certain parents get a lot of help with their homework and do better in school. Other children do not. They may get no help and are likely to do worse.

The levelers want to eliminate homework altogether so that the children will be able to compete on a level playing field. None will get help with homework because there won't be any homework.

They misunderstand how life works. There is no such thing as a level playing field. Every field is tilted in one direction or another. If you take away the homework, you do not level the playing field. You just tilt it in another direction. The most successful children will be those who understand things quickly and easily, rather than those who work hard on their homework.

Of course, it wouldn't be that simple. The marginally engaged parents may welcome the absence of homework. They won't have to spend hours helping their children. But the typical "Asian Tiger" mother will not stop trying to push her children forward.

The unintended consequence of such legislation would probably be that parents who ignored the ban on homework and found ways to help their children after school – math camp! – would give their children an even greater advantage over the "no homework" children.

Everybody enters life with some advantages and disadvantages. Some you see, and some you don't. Like tiger mothers, our goal is to give our children and grandchildren whatever advantages we can. And the one that concerns our family office project is helping them understand how wealth is made... and kept.

We are not really trying to make the world a better place. We are just hoping that our world will be better if we, our children, and our grandchildren are able to control capital and use it well.

Not only are families with capital able to live better, but they are also better able to take advantage of investment and business opportunities... and much better able to survive setbacks and shocks.

Making Preparations

In Argentina, where my family owns a ranch, you can scratch the surface of any family and you will find an interesting and instructive wealth story. The middle classes here have been wiped out twice in the last 30 years – first in the inflation of the 1980s... and again in the defaults of 2001-2002.

"Oh, yes. I remember," said a friend in Buenos Aires recently.

"I was just a kid in the 1980s. My father would call home and say, 'Go to the supermarket... I've just gotten paid... I'll meet you there.' We would take all our money and spend it immediately... loading up for the month. And we'd do it as soon as we could, because while were at the market, the prices were rising. The idea was to shop as fast as you could."

That was the hellish situation the middle class had to endure. But that was just the start. Later, Argentine inflation rates rose to 1,000% per month. It was impossible to keep up. Families that did not understand inflation... or that had failed to take precautions... were ruined. Their savings vanished. Their salaries could barely pay for necessities – if they could find them in the shops.

The government was forced to introduce an entirely new currency... twice!

The crisis of the early 2000s was different. The peso was linked to the dollar. Savers were assured their peso deposits were safe. They could be exchanged for dollars at a fixed rate. Wary savers took no chances; they left their deposits in dollars. As it turned out, the government whacked them both – closing the banks, converting dollar deposits to pesos... and then devaluing the peso by 66%.

But not all families were hurt. Some understood what was going on. Some had taken steps to avoid the damage.

Real estate prices varied greatly. But generally, you were a lot better off with land or income-producing buildings than you were with cash. The stock market saw its ups and downs, too – but shares in solid companies survived. And for cash, smart families kept accounts in foreign countries.

Or as Eduardo Elsztain, one of the richest men in Argentina, explained to me, "If you had bought gold coins early, you looked like a genius later."

We don't know what will happen. But the financial history of the world – like its political history – is punctuated by crises: inflations, bankruptcies, shortages, and bubbles. These things arrive on most people's doorsteps like an IRS audit – totally unexpected and often devastating.

But some families have made preparations. They have contingency plans. They recognize the threats, and they know how to deal with them. That, too, is what we hope to achieve in our family offices... preparing and protecting the following generations for the challenges they will inevitably face.

Primum, Non Nocere

Our old friend and business partner Mark Ford has set up a family foundation. He gave it a modest motto: Primum, non nocere. "First, do no harm."

He is not naive enough to think that just because he intends to do good, good will inevitably result. We've seen over and over – in foreign aid programs, domestic social welfare, and rich families – that giving money to people is not necessarily a good thing.

Foreign aid undermines local businesses. Social welfare programs remove the incentive to work. Inheritances often have the same effect: The children become "trustafarians" with few skills, little self-confidence, and even less self-esteem. So my friend undertakes his own do-good programs very carefully, with his eyes wide open.

We do the same. But we also recognize that since all wealth ultimately must be owned by someone – no matter what we do – our wealth will change hands. If it goes into the pockets of welfare recipients or foreign aid programs, we will not see the damage it does. But that is comfort only to a scoundrel.

Instead, we take the responsibility that my friend takes: To direct our wealth to people who will not be harmed by it. Instead, we hope to make them stronger. That is a large burden... but it is one we cannot escape.

We will try to do the best we can...

Regards,

Bill Bonner

Editor's note: Bill recently established a "family office" to preserve and grow his own family wealth. In doing so, he realized that many subscribers would benefit from learning the same techniques and strategies it employed. So he launched the Bonner & Partners Family Office as a way to share these insights.

He recently recorded an interview describing some of his core ideas about building a lasting legacy. To ensure you see the video when it's released next week, register here.