History Tries to Repeat Itself at the Bank

In every society when times get tough people start holding back some of their resources, depriving their societies of the full contributions they can make. In a normal period of general economic stability this process has little direct impact on the growth and decline of economic activity. There is always some small segment of the population that experiences sufficient loss that they fall upon hard times. From these economic misfortunes arise new classes of poor families, although other poor families may break the cycle of deprivation and improve their status.

The process of circulating wealth and economic activity into and out of low production corners of society occurs at both ends of the spectrum. That is, wealthy people withhold resources just as poor people do. In fact, poor people withhold resources less by choice than by lack of opportunity, whereas wealthy people withhold resources more by choice than by opportunity. Either way, the withdrawal of resources (wealth, labor, intellectual participation, etc.) from the larger system leads to shifts in competition for resources among the people who continue to participate in the system. These shifts may result in stunning breakthroughs in productivity or they may lead to economic crisis.

Historians have long noted that discoveries of ancient coin hoards tend to gravitate toward periods of economic instability. That is, we are more likely to find ancient coin hoards from times of war and invasion, plague, or famine than from periods of relative stability and economic prosperity. Analyses of coin hoard patterns show us that people of all walks in life hoarded coins, especially if they were not actively involved in major economic centers.

A Roman soldier, for example, might hide his wealth to protect his family while he was away fighting; if he was killed no one would know where he had hidden his money. Likewise, if the people of a city attempted to flee with their wealth only to be found and killed, or to otherwise die en route to freedom, their coins and jewels would remain behind (or looted by the victors).

Buried coin hoards might have served as primitive savings accounts for people who did not have access to public treasuries or banks. These savings accounts, lost upon the deaths of the owners, did not accrue interest but might have been used for generations within the same family if the secret of where the treasure was hidden was passed from generation to generation.

The mystery of the lost coin hoard teases the modern imagination. We don’t know why the owners lost touch with their money. Perhaps some of them were driven away in time of invasion, unable to return to collect their valuables; perhaps some of them were carted off to prison or sold as slaves when they rebelled against authority. There are many possible explanations for why people’s hoards remained in the ground. But what we know for certain is that when we find a coin hoard we are more likely to date it to a time when there was a severe economic or military crisis than not.

And so one might conclude that in today’s society, which despite occasional economic turmoil seems rather stable — there are no barbarians threatening our borders — there is little motivation for normal people to hoard their wealth. We can put our money into banks and stocks and hope that keeping it there will help it grow over time. This strategy works for about 40-50% of the American population, albeit on a slow, small scale. But banks and stocks are not interchangeable investment options. Usually one sector outperforms the other and in the classic sleuth style “it pays to follow the money”.

In this case, economists are watching where today’s wealthy people are placing their money. The so-called One Percenters are increasingly less confident in the stock market and they are more likely to “hoard” their wealth in various ways. So the people who have the wealth to create jobs and stimulate the economy are withholding their resources, waiting for a change in times.

This pattern is normal and does not signal any great economic collapse. Historically we can argue that people were most likely hoarding their wealth to some degree all the time — hedging their bets, especially as there were no social safety nets thousands of years ago. We just tend to find forgotten hoards dating from bad times because bad things probably happened to their owners.

So these electronic hoards of wealth are not signs of chaos and impending disaster but they do illustrate how humans continue to do what humans have always done: hedge their bets when things look rough. The One Percenters stand to lose more than everyone else if the banking system collapses (which is actually a real threat) so they may begin converting their wealth to assets that exist outside the banking system if things really start to look grim. For example, One Percenters might start a land grab, buying up undeveloped properties for personal use or as investments. They might also invest more in rental properties.

In fact, recent news reports say that wealthy investors are starting to buy foreclosed homes by the thousands as a new investment strategy. The people who have lost their homes still need places to live, and since they can no longer buy new homes they have to rent. But the housing boom of a decade ago led to the demolition of thousands of apartment buildings across the country so the rental apartment market is seeing an increase in demand, which is leading to higher rents in many communities.

Hence, the demand for cheap housing will look for new resources and reconditioned foreclosed homes are just waiting for someone with enough money to create the infrastructure to rent out large numbers of houses. The One Percenters will collect their profits and the displaced former homeowners will flee overcrowded, over-priced apartment communities. This shift in wealth and economic activity has only begun and may not become popular, but the pattern has been established.

So the good news in all this is that investors may begin stimulating the economy in new ways by creating more demand for household products typically associated with independent homeowners. The bad news is that the economy we have known for the past twenty years may never return. Investors assume less risk in buying up cheaply priced foreclosed houses that banks desperately need to get off their balance sheets; they therefore may leave most of their hoarded wealth in the safety deposit boxes and savings accounts that are not making them much money. Until such time as the new investments begin to show real profits, and then maybe more money will loosen up and flow back into the economy.

But since the banks will be the primary beneficiaries of these foreclosed home sales, what will they do with the money? More than likely very little since they have tightened credit requirements for new home loans. At a time when there is a glut of available housing the banks are determined to not sell that housing to anyone who cannot meet the higher credit standards, and only the One Percenters (as a class) have the wealth and good credit to obtain real estate loans. These are, of course, the same people who invest heavily in banks — so they are likely only just borrowing and buying from themselves in a nearly closed loop of the economy.

And that means that tough times will continue for millions of families for the foreseeable future until someone comes up with a way to inject new resources into the economic system. We don’t have to wait for the wealthy to do that. In fact, if the next economic revolution takes the One Percenters by surprise then history may repeat itself and some of them will lose all or part of their wealth. Conservatism can be self-defeating if it prevents a rational change in policy reflecting new world realities.

Only this time around, any wealth that is lost won’t be buried in the ground, waiting for future archaeologists and treasure hunters to dig it up. The wealth will simply vanish in devaluations of outdated assets. Some people might call that poetic justice, if it happens.