Doug: No.

L: That’s it? No?

Doug: Most charities aren’t worth the cost of the gunpowder it would take to blow them to hell.

L: And the permitting for the demolition — fuhgeddaboudit. But can you explain why?

Doug: Sure. Charities are largely counterproductive. Their main beneficiaries are not the intended recipients, but the givers. They get some tax benefits, but mainly they get the holy high of do-goodism. Frankly, the idea of charity itself is corrupting to both parties in the transaction.

For instance, take Bill Gates and Warren Buffett. Both are geniuses at their businesses. But they’re the type of geniuses I consider to be idiot savants. If they really wanted to improve the state of the world, they should continue doing what they do best, which is accumulating wealth. Or, actually, creating it — as opposed to dissipating it by giving it away. Giving money away breaks up a capital pool that could have been used productively by those who build it for making new wealth (which increases the amount of wealth that exists in the world).

Worse, giving money away usually delivers it into the hands of people who don’t deserve it. That sends the wrong moral message. People should have, or get, things because they deserve them. And you deserve things because you earn them. In other words, wealth should be a consequence of doing things that improve the state of the world. Endowing groups, or individuals, because they happen to have had some bad luck, or are perpetual losers, is actually immoral.

When money is given away, it’s almost as bad as government welfare. It makes it unnecessary for the recipient to produce, and that tends to cement him to his current station in life. The very act of making an urgent situation non-urgent takes away the incentive, the urgency, to improve.

Morally speaking, charity is not a virtue, it’s a vice.

L: The giver gets to feel good at the expense of the people whose independent drive they undermine. But what about the programs that are specifically designed to teach an individual to fish, rather than to just hand out fish — those that teach job skills, for example — do you see them the same way?

Doug: I’m not saying that programs like that can have no positive effect. There are people who genuinely want to improve themselves, but, for whatever reason, just can’t manage it on their own. But charity is not the best way to approach the issue.

Look, the basic point I’m making is that the best way to reduce the amount of poverty in the world is to create more wealth — as much as possible, as quickly as possible.

The essence of a charity transaction is to transfer wealth from those who have shown they can create it to those who have not shown they can. I mean, if a man doesn’t know how to “fish,” which isn’t exactly rocket science, after all, you have to wonder why. Money is best left in the hands of the most competent and productive people, and the best way to tell who’s the most competent and productive is generally to look at who’s created the most wealth.

L: And the more wealth there is in the world, the better off everyone is — even those who end up working for the creators.

Doug: Right. And those employees are creating and earning on their own wealth as well. It sure has a lot more dignity than being a welfare bum. Besides, if they are competent and creative, there’s no reason for them not to rise to the top.

L: And as we’ve discussed before, you need large pools of capital to develop new technologies, and new technologies tend, on average, to improve the lot of the little guy proportionally more than the guy at the top of the social pyramid.

Doug: Yes. Charity exists, mostly, to make the donor feel good. It assuages guilt people accrue over a lifetime, for real or imaginary reasons.

L: I remember that interview John Stossel did with Donald Trump, in which he asked him to explain why he gave a billion dollars to the UN. Trump looked poleaxed for a minute, then got up and walked out of the interview.

Doug: [Laughs] That’s a polar extreme opposite to charity. That was giving money to an organization that is itself destructive. Counterproductive in the extreme. The UN, which is just a corrupt club for governments, should be abolished, not subsidized. And here’s this fool actually feeding the beast.

It’s a perfect example of what most so-called charitable giving is about. It’s an excuse for people to display their fine philanthropist plumage. It’s a never-ending contest of one-upmanship, to see who can be the king of the hill of fools for a day, by giving the most. In most cases, it’s not about what the money is going to, it’s about being a big shot among peers and getting invited to all the most fashionable parties. They get to socialize with celebrities and others who, in our corrupt society, buy fame by giving away money — which in many cases was either easily earned or unearned.

In most cases, philanthropy doesn’t arise from a love for one’s fellow man, but from a need to assuage guilt, a need to show off, and a lack of imagination.

L: So, your basic argument is like the old saying about it being common sense that it’s better (and cheaper) to put a fence at the top of a cliff, rather than to put an ambulance at the bottom of the cliff. That is, rather than putting band-aids on the poverty-stricken, it’s better not to have any poverty-stricken. Therefore, it’s better to allow wealth to continue accumulating and creating more wealth. And that means that any effort to take wealth away from the wealthy — the productive — and give it to the non-productive, is… counterproductive.

Doug: That’s basically the argument. Yes. And it’s true for both practical and ethical reasons.

L: Okay. So, what happens when you run into literally starving orphan babies in Haiti, the way you did? Even if you allow wealth to accumulate, and society becomes 50 or 100 times wealthier, and that decreases poverty by 50 or 100 times — or maybe 1,000 times. There will still be some cases of people who, through genuinely no fault of their own, truly need a helping hand — and the consequences would be dire if they don’t get it. What would you advocate in those situations?

Doug: Well, in the first place, though I’m not a Christian, let me quote Jesus of Nazareth. He said, “The poor, you will always have with you.” He had a different context in mind, but he was quite correct. That’s because in most cases, poverty is not a function of bad luck.

It can be, sometimes, of course. Perhaps if you’re born in a country with a brutal and repressive regime, or if you’re born with mental handicaps — there are all kinds of things that can happen. But generally, with a few such exceptions, poverty is simply a sign of bad habits. In a relatively free country, it’s a sign of an inability or unwillingness to save, which is to say, to produce more than you consume. It’s a sign of a lack of self-discipline. Sloth that afflicts those not willing to learn skills they can sell to other people. It can be a sign of having no self-respect, as among those who spend all their money on drugs and alcohol, which are debilitating, rather than strengthening.

In the vast majority of cases, those who suffer from poverty are not victims of anything other than their own bad habits.

L: Wow. Tough words.

Doug: It’s even worse than that. Think about it. Let’s say we’re looking at some place where there’s been a drought, or some other serious natural disaster, and then organizations like the UN ship in thousands of tons of food. What happens when that food hits the local market?

L: Does it even get there? Doesn’t the local dictator usually take it and sell it in some other country where people can pay for it, and then stash the cash in a Swiss bank account?

Doug: Well, that’s the first thing that happens, of course. But even when it gets through to them, such aid rarely helps the people it’s supposed to help. In fact, it usually hurts them, because, as I was saying, when all that free food hits the local market, it drives the price of food down so low, the local farmers can’t produce profitably.

What happens when you drive the local farmers out of business? They stop planting, there’s no crop the next year, and the shortage of food becomes even worse. The very acts of these charities trying to help people in famine-stricken areas prolong the famines.

Now, I’m not saying that if you know someone who needs a helping hand, and you feel good about helping — which is different from feeling guilty about not helping – that you shouldn’t do it. It can be a good-karma thing to do – and I do believe in karma, incidentally.

But when these things are institutionalized, they create distortions in the marketplace.

L: People may think it strange to hear you talking about markets in famine-stricken places or regions devastated by earthquakes, etc. But markets are everywhere. They are not physical places in New York and London, but are aspects of human psychology. They are patterns of human behavior created by people when they enter into voluntary transactions — as distinct from government action, which is always based on coercion. In today’s world, famine can still be caused by storms, drought, and other natural events. But it’s more often caused, and always aggravated, by distortions in the market: taxes, wars, idiotic regulation, runaway inflation, and the like.

Doug: And when a big charity intrudes on one of these weakened, distorted markets, it usually adds even more distortions, prolonging the problem.

Consider these charitable organizations going around the world treating diseases. The reason these countries have these terrible diseases that kill so many people is because they are economically undeveloped. Keeping people alive via extraordinary measures in such a place only results in more people competing for the same scarce resources. The answer to the problem is not to send in teams of doctors, so that you’ll have even more destitute people producing no wealth, but to free the local market so the people can become wealthy. The disease will go away as a consequence — this is the only permanent cure. What they are doing is the exact opposite of what they should be doing; they are making things worse.

L: Sounds pretty cold, Doug, to say, “Don’t send doctors-”

Doug: Well, don’t forget that a lot of people have supported the likes of Mugabe and deserve the economic ruin they are getting — and the diseases that are going to follow. Send doctors in if it makes you feel good, but it’s putting band-aids on smallpox. Don’t imagine that you’re actually helping solve the problem. People who do this kind of thing, I believe, do it because of feelings of guilt and shame they carry around inside. I understand them, but I don’t agree with them.

It does sound cold-blooded, and I’m sorry. I like kids and dogs and the same things most people like. But I’m not talking about whatever I or others might imagine is nice. I’m talking about the only real way to solve such a problem.

It’s disgusting to see the hot-shot yuppies self-righteously driving around the African bush in their new Land Rovers, pretending they’re eliminating poverty. That’s where most of the money goes, in fact. High living and “administration.”

L: You didn’t let me finish. I was saying that it sounds cold-blooded, but who’s really more cold-blooded: the one who knowingly spends precious resources on measures, knowing they won’t be effective and will lead to greater sorrow, or the one who has the courage to make the hard decision and reach for the real, long-term solution?

Doug: Yes. That’s the way I see it.

L: It occurs to me, reacting to the distinction you made earlier between individual charity and institutional charity, that perhaps it’s like religion. Whether we agree with their beliefs or not, it’s clear that many people derive value from those beliefs. But when religions become organizations and dogma sets in, they can get really destructive.

Doug: Well, as an individual, if I come across a person who I have reason to believe is worthy of my charity, and my trust, I might act individually. But yes, when things get organized, they get bureaucratized. It’s just the natural course of things; it seems almost universal that as organizations get older and more structured, they become counterproductive to their intended purposes.

Charity is especially prone to this problem because of the phony ethical notions that now seem to pervade Western society. It’s gotten worse over the last 100 years. People have come to believe that an instrument of coercion, the state, has to take care of them. Perversely, when the state engages in charity – which isn’t charity, because tax-supported giving is not voluntary — it discourages true charity. People who have money taken from them by the taxman have less of it to give to those they might know who genuinely need help.

L: The Tragedy of American Compassion. Marvin Olasky.

Doug: Great book. I think the Chinese are much more intelligent than Westerners in this regard. The only charity you find in most oriental societies is organized by beneficial societies that seem less pervious to squandering. Peer pressure and moral approbation keep them in line, unlike governments, which exist primarily to serve themselves. And taxes tend to be a lot lower in the Orient, so people have more money to give, if that’s their inclination.

In fact, one of the horrible aspects of this issue, in the United States, is that large amounts of money are stolen from estates in the form of death taxes. The idea seems to be that the government will deploy wealth more wisely than the children of its creators. But this is ridiculous. It’s part of the whole ethical morass that charity and taxation are tied up in, in the U.S.

Suppose you have a Chinese and an American, of equal intelligence, work ethic, education, skills, etc. — and an equal amount of starting capital. The American who starts with a dollar might end up with a million. But the Chinese guy in the same circumstances will end up with 50 million. All because of the difference in taxes and regulations.

But it’s worse than that, because whatever amount of money the American is going to leave to his kids, half of it is going to disappear down the tax rat hole, while 100% of the money the Oriental guy leaves will go exactly where he wants it to go.

That has major implications for wealth accumulation of the sort that we help people achieve. It’s another reason for the diversification of political risk we keep reminding people is so important.

But sadly, even if an American ends up with $100 million, odds are he won’t leave the bulk of it intact as an effective capital pool, to be expanded upon by his chosen heir. He’ll give it to some charity that will be run for the benefit of its board of directors. They get to be big shots with other people’s money — corrupting both themselves and the intended recipients.

L: So, the bottom line is that if you had a magic wand and could abolish all charitable institutions with a wave of it, you’d do it. And you would not replace them with anything. You’d use the wand to reduce taxes and regulations everywhere, to allow for more wealth creation. And for those few desperate cases clinging to the bottom rungs of the social ladder, you think individual conscience would suffice.

Doug: Exactly. To me, charity should be strictly an individual, one-to-one thing. That’s the only way you can know that it can really help, and even then it doesn’t always work. Once you have to hire somebody to run a charitable organization and have secretaries and assistant vice-presidents in charge of light-bulb changing, it’s just another bureaucracy headed for disaster, dissipating wealth as it goes, and doing more harm than good even among the intended recipients of the charity.

L: I don’t see a lot of immediate investment implications here, but there’s certainly a lot of food for thought for those intent on wealth accumulation.

Doug: Let’s just say that your moral obligation to the rest of humanity – insofar as you have such an obligation — is to keep your capital intact. First, that means to deny it to the state, which will very likely use it in a destructive way. Second, direct it to those who will use it to produce more — not to unproductive consumers. Third, take some personal responsibility, and do it yourself — don’t devolve it upon some unknown board of worthies who will have their own ideas about what to do with your money.

L: Got it. Thanks.

Doug: You’re welcome.

Doug Casey
Whiskey & Gunpowder

May 17, 2010

Charity and the Real Root of Poverty was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The U.S. Labor Department reported that around 467,000 Americans lost their jobs in June. This was unwelcome news. The data had been getting less bad every month since January. Then the June numbers rocked up, fell out, and took stocks down with them. This is causing everyone with a pulse (and most with a brain) to have second thoughts about just how good things are-or how much worse they might get.

The S&P and the Dow both fell nearly three percent. Oil and gold were down too. About the only things up were Treasury bonds and notes. Speaking of which, the U.S. will auction another $73 billion of those this week. Wednesday’s auction is for $19 billion in ten-year notes while $11 billion in 30-year bonds go on sale Thursday.

“You may have green shoots, whatever you want to call them, you may have temporary relief, but you are still in a world that’s breaking,” Black Swan author Nassim Taleb told CNBC’s Squawk Box. “Anything that’s fragile like the financial system will eventually crash, he said…We’re in the middle of a crash…So if I’m going to forecast something, it is that it’s going to get worse, not better.”

Taleb’s point is not a popular one. But it is a realistic one. The fiat money, leveraged finance Western financial system went global in the last twenty years, providing an epic rise in asset prices (and the debt used to purchase them). There’s no doubt that real goods and services have traded hands with world growth. But now we wonder how much of that is sustainable when you take the credit away.

Did we use phony money to build a world with completely unrealistic levels of growth? Were trillions of dollars of capital allocated based on final demand that was artificially pumped up by credit, currency manipulation (low U.S. interest rates and global dollar pegging), and government stimulation?

Yes we did!

Mind you, the crash of the financial system is not the end of the world. It is a massive calamity to be sure, wiping out the value of retirement assets many people were counting on to make it through their golden years. But as many readers have reminded us in the last few months, there is more to life than money.

Fair enough. But there is more to wealth than money too! Peace of mind, having your assets in forms that can’t be inflated away or won’t suffer from debt deflation…we would count these as “wealth” at a time like this.

That brings us back to the problem growing at the back of our mind yesterday. Can a massive deflating credit bubble nullify the liquidity measures by central bankers, which are puny in comparison to the nominal value of the assets at risk? “Yes you can!” comes the answer from some of the friends we put the question to.

“I’m tempted to disagree that expansion in government credit won’t reach the economy and therefore won’t be inflationary,” replied Money Morning editor Kris Sayce. “I’m not mistaken, the Fed is buying up these ‘assets’ in order to take them off the banks and also to help price them. If the Fed didn’t do this then the banks wouldn’t be able to lend extra money to customers as they would breach their lending limits.”

“It’s not so much that the Fed is directly feeding the banks money which flows through to the economy, it’s more that the Fed is feeding the banks money which allows them to expand lending which they otherwise wouldn’t be able to do. Thus at the very least is preventing prices from falling, or from falling as much as they ordinarily would without the intervention. In effect there is more money flowing in than there otherwise would be. There already IS inflation.”

Another colleague in the States replied that, “I am leaning more and more to the idea that the credit-based stuff will deflate (real estate, stock prices) but the cash-based stuff could rise (like foodstuffs, energy). In a way, it’s not a debate about inflation or deflation, but which assets inflate and which deflate. There might be a strong dichotomy within the economy between the two.”

To the extent that you cannot eat a mortgage-backed security, we see the wisdom in this view. The world has a lot of people. They have a lot of real needs. Regardless of the value of derivatives and opaque financial assets, a certain level of economic activity for a certain kind of tangible good will still be there. The challenge for investors is to determine if you can profit from this in traditional ways (stocks and bonds) or if you have to venture into less traditional asset classes and forms of ownership (land, real commodities, precious metals).

And of course, the thesis could be incorrect. If credit is not money-or if the large lending and government guarantee programs don’t reignite a lending boom in the real economy-then you may simply see a lot of wealth disappear down the memory hole.

Finally, a mystery Aussie commentator who wishes to remain anonymous but whom you may hear from in the future in this space sent a philosophical yet practical reply.

“What is money? Currently, that’s what the Federal Reserve (and other central banks) put in the reserve accounts of their member banks. The banks then use this as a base to create their own money, or ‘like money’. I guess this is also known as credit. So yes, credit is not money.

“And this bank credit is now contracting as the natural force of the market tries to drive prices lower and correct the boom. The Fed is offsetting this process by swapping ‘money’ (fed funds) for the impaired assets. But the banks are sitting on the cash, and obviously do not have the risk appetite (or the demand) to lend it out.”

“So at this point additional base money is not being lent out as inflationary ‘like money’. I’m not sure the Fed has the mechanism to make out and out purchases of assets other than through lending facilities, unless they are Treasury or Agency purchases. As far as I’m aware, the Fed can only distribute its newly created money through the banking system, and no other way. The banks have always been the source of inflation, and they need to lend to create this. They will probably use their excess reserves to buy Treasury’s in the coming years, and then the Fed can but the Treasury’s back off them in time. This will be inflationary.”

“Where does gold come into it? Well, gold is real money….chosen independently by the people. As trust in the US dollar continues to evaporate, demand for gold will increase. At some point gold will again be referred to as money. Because the amount of credit (debt) in the world dwarfs the amount of gold, and because gold will be a legitimate extinguisher of the debt, gold will likely rise massively to have the capacity to extinguish the debt. This is a process unfolding over years though.

“A rising gold price is actually deflationary in that it represents a rise in the purchasing power of money. So I think deflation is the ultimate force that cures this massive credit bubble…outright deflation if long-term faith in the US dollar remains, or gold price induced deflation should the bottom fall out of US dollar trust. The quantity of US dollars may be rising at the moment but the real turning point will be when the perceived quality of the dollar declines.”

Hmm. Gold rising indicates the rising value of cash…because gold is money. But if money is not wealth…and gold is money…does this mean gold is not wealth? Now there is something to think about.

Regards,
Dan Denning
Daily Reckoning Australia

July 7, 2009

Money Isn’t Wealth was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.