What is wealth preservation? This is not a rhetorical question. The issue of wealth preservation is not one often explored. For some, wealth preservation means shielding one’s estate from onerous inheritance taxes. Fortunately, Congress eliminated that concern in 2010. For others it could mean using their country’s tax code advantageously to mitigate income or other tax obligations. In both of these cases, an investor attempts to engage in wealth preservation by avoiding something imposed upon them by government.
Are there other ways to consider wealth preservation? Readers of this column understand my view on various issues related to inflation, deflation, our unit of exchange (currency), and other investment vehicles. This May issue of The Sentinel Economic and Financial Newsletter placed a much tighter definition on wealth preservation.
Before embarking on the topic of wealth preservation, we need to examine what exactly is wealth. From the inaugural issue of The Sentinel Economic and Financial Newsletter, we stated the following:
“What is wealth? Is it something you possess? The forty-year-old Webster’s text indicates wealth is “much money or property”. Adam Smith in his work, The Wealth of Nations, said that wealth was “the annual produce of the land and labour of the society.” In the former case, Smith highlights possessions and in the latter case, he emphasizes our capacity to make something. The Sentinel defines wealth as a material item produced by human effort having exchange value. Exchange value means it is tradeable or substitutable for something else.”
We remind readers of this definition since over the course of our monetary history, this definition has come to mean different things. Readers are also encouraged to review Volume 1 Issue 1 for more information on money, credit, inflation, deflation, and wealth.
Let us also consider where an individual’s wealth resides. In this era (yes we are still in it), of a credit-fueled, consumer-based economy, an individual’s home often represented the greatest source of perceived wealth. This was a flawed approach since a home is a consumer good (a roof over your head), perhaps the most important consumer good, but still a consumer good. The fact that it became something else was largely a function of excess credit creation and excessive speculation. We chronicled this event in detail in previous issues (Volume 1, Issues 1, 2, 5, 9).
Other areas where wealth might reside include brokerage accounts invested in stocks, bonds, or mutual funds. Wealth could also reside in banks or credit unions via demand deposits (checking) or time deposits (certificate of deposits). We should also mention wealth existing in owned businesses, land or other property. Another area where wealth resides is in precious metals. Precious metals meet all the requirements of our wealth definition, though most people do not consider it a wealth preservation method.
Do you know where your wealth is? Is it safe?
Jim publishes The Sentinel Economic and Financial Newsletter.