July 19, 2010

Answered questions IV - Escape Fortune

Have you ever heard of the escape velocity? It is a term that in physics and astronomy is used to indicate a speed point at which, if a body is thrown into the sky, it would no longer fall to the ground but it would escape the gravity field and end up disappearing into the empty infinities of space.

What is the reason for this comment? The reason is that this is a phenomenon related to the question: «Why the rich are getting richer and the poor poorer? » Well, that phenomenon is not the cause, that would be too pretentious, but it sheds some light on an invisible border that separates the two worlds (wealthy and poorer). It's what I call the “Escape Fortune”.

I do not intend to get into heavy scientific speculation, just notice that the gravitational field of a body (like the earth) exerts a force of attraction and this force decreases as we move away from it. So a stone that is thrown from the earth will lose speed due to gravity until it stops and falls back. But the force which pulls back the stone gets smaller as long as it moves away from the ground, and it could reach a point where, without having lost all its initial velocity (a velocity greater than escape velocity), the land would no longer attract it and the stone would go wandering through space, forever free from the gravitational field.
The analogy lies in the fact that if someone has an amount of wealth, unless that person undertakes an investment task force, i.e. works, takes risks and finds ways to make his wealth more productive that wealth will gradually diminish and finally disappear. That amount of money would be like a comfort air cushion that raises him from the floor, but only for a while, because the air escapes that cushion and it will soon bring him back on the earthly reality.

Where does the air escape? For instance due to the income for this person, but we must add to that many other expenses such as maintenance costs, commissions, regardless of the overall increase in prices in the country. If we add to that he would have to pay taxes on that money and taxes for the earnings, that initial impulse is soon reduced to nothing by the gravity of the system which absorbs all proto-rich.

Here is an little example, exaggerated, (percentage data may be inaccurate), but that qualitatively shows what I meant:

It turns out that I inherited from my saving grandmother a small 750mil Euros fortune, which allows me  to live on 25 thousand assignment per year, doing nothing. It happens that a year later, the money I have left of that small fortune is less than the initial quantity after deducting all expenses, especially if I correct with the consumer price index, which usually climbs year after year. See?

Now suppose I had 10 equally saving grandmothers, something genetically impossible, but as I said, the example is qualitative. My fortune would be then ten times larger. Now, this would allow me to have such a team of professionals (lawyers, family office managers, etc. who would be paid better than me) to better negotiate with banks (thanks also to the larger amount of money), to find tricks to minimize all my expenses including tax, so that after spending my 25 thousand per year, I would be left with a bigger amount of wealth than in the beginning.

Do you notice the difference? In both cases I could live without doing anything with my 25 thousand assignment per year, but in the former I would be poorer year after year (until soon cease to collect my money), and second, increase my wealth: it's beyond the limit of Escape (of having to be productive for a living).

Well, I know that when no wealth is available, it is silly to talk about escape fortunes, but it is also interesting to note that there are people who may comfortably wander through space while most of us remain trapped in a gravitational field where it is extremely difficult to lift off.

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