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On the nature of money, capital, scarcity, growth and

capital preservation. A wide-ranging discussion on investment
issues with the ‘Austrian-school’ strategist of Sage Capital.

A conversation with Sean Corrigan

Mises meets Graham and Dodd

Q: Sean, during last week’s annual shareholders’ meeting of

Berkshire-Hathaway, Mr. Buffett suggested that sometime in the
next ten years he expects an economic disaster. Has someone
converted him to a gloom-and-doomer or what?

A: As we can infer from his expressed difficulty in finding

suitable investments these days, Mr. Buffett seems to realize
that wealth creation is becoming impaired by, not facilitated
by, the enormities of our present-day financial system. As one
who has made his money partly through a close reading of
balance sheets and income statements, he, of all men , must be well aware that
increasing indebtedness at an exponential rate, when the pace of material progress is
much less rapid and continuous, is a sure road to the poor house.

Q: Yes, but, you know, people have been forecasting disasters forever. There are a
number of people out there who make tidy profits preaching doom and gloom, but it
never happens. Life just goes on. Now Buffett pipes in with such melodrama. It makes
one stand up and take notice, no?

A: We should be careful of making the Sage of Omaha—an investment genius—into the

Oracle of Omaha – the possessor of an economic crystal ball: he himself would
traditionally never have claimed any such a special insight. That said, when eminent

A conversation with Sean Corrigan ⎜ Page 1

investors such as Buffett, Sir John Templeton, Jim Rogers, and Pimco’s Bill Gross, as
well as and sober and well-regarded market analysts such as Richard Russell, express
opinions ranging from caution to outright alarm at the state of play, we, too, should at
least consider what it is that they see that the central bankers and their mainstream
worshippers fail to recognize.

Q: Speaking of disasters let me ask you something. Virtually all ‘Austrians’ view the
cup as being half-empty—I mean, constantly and forever bearish on the world. In the
meantime and somehow, the world keeps going. Let’s be honest, can Austrians really
be good investment advisers?

A: A good point! After all, Mises himself once wondered whether, instead of being a
teacher, he was doomed to be merely a ‘historian of decline’, but he never yielded from
the task of pointing out the right path. Austrians are not pessimists, only realists. We
know that much of the present-day menu of policy choices are founded on erroneous
principles and thus do more harm than good, even when well-intended. However, we
also know that it is the lot of individuals, in the main, to make their own lives better by
materially enriching others and that it takes a very great deal of folly and vice to stem
the wellspring of entrepreneurialism which waters the fields of human endeavour.

Q: Fair enough. But again, what is it about the ‘Austrian school’ that gives you any
marginal advantage in money management?

A: The Austrian school on its positive side teaches us to glory in the power of the
unhampered market to increase wealth and well-being – even in the face of government
interference - and it extols the roll of the honest entrepreneur as the main agent of this
progress, praising his profits as a mark of his success in bringing about such
improvements. However, it also teaches us that the laws of scarcity are not to be
avoided by the simple printing of money; that mere technological know-how is not a
sufficient condition for our advance; that savings – foregone present consumption –
wisely parlayed into capital by placing them at the disposal of entrepreneurs – is what
fuels the increase in our prosperity. The first helps us avoid unwanted pessimism: the
second instills in us a due measure of caution and helps immunize us against
investment manias—not a bad philosophical starting point for money management,
surely!

Q: Yes, but you also seem to dismiss statistics and the whole lot of modern financial
analytics, no?

A: Yes, Austrian economics dismisses the supposed predictive ability of statistics and
offers valid criticisms of the worth of the common catch-all aggregates such as ‘growth’
and ‘CPI’, or ‘productivity’ served up to us by the bureaucrats, while it teaches us to
beyond the immediate effects of any spontaneous change or imposed policy shift.
Among other benefits, this makes us Austrians suspicious of the whole spectrum of
fancy financial engineering marketed to the public – an approach which always sounds
impressive, with its scientific-sounding reliance on ‘back-tested’ models and volatility-
based ‘Value-at-Risk’ assessments to guide investment policy, but which is really no

A conversation with Sean Corrigan ⎜ Page 2

more than an abstruse way of saying Tomorrow will look much like Yesterday, when
all the evidence of history is that it never quite manages this feat!

Q: You have written a great deal over the past few years on the nature of capital in
view of theory and changes in our world. Make it simpler for us: what is money or
wealth and has this changed from what we used to think?

A: I will try. If you have a $10 bill in your pocket which you have earned honestly, you
have a token which says you added wealth to another’s life, but you have yet to decide
in what form to take your true reward. Now, if you buy a few gallons of gas with it,
you have converted the money into ‘wealth’- that is, into a good which is ‘scarce’ and
which is valued by you and by others for its inherent qualities.

Q: Help me out here, why is gas ‘scarce’?

A: An economist might say it is ‘scarce’ because it has a price, but I suspect that answer
would not satisfy you too much!

Q: Make it a little simpler.

A: I am only using gas as an example here, but the point is that the quality of scarcity
means that gas is not created costlessly and that it is not available without limit.
‘Scarcity’ here is a technical term which must not be confused with shortage. Free
markets ration scarce goods via the price mechanism: only Providence – or that less
benign deity, the State, can ever create an actual shortage! Gas, then, may seem to be
readily available at the price at which it is offered today –there is no ‘shortage’ of it -
but that price must, in the long-run, reflect the extraordinary amount of effort, of capital
resource, of human sweat and intellectual input, needed to take it out of the depths of
the ocean, to refine it, ship it and arrange for you to be able to pump it into your
Hummer – in other words, it is ‘scarce’.

Q: Thank you. Please go on.

A: If you now use the gas to drive to the beach for a day out, or use it to light your
barbecue, you have consumed it once and for all and so you must see that while we
obviously acquire wealth in the first place in order to gratify our desires, consuming it
does just that – it exhausts it, once and for all.

Q: Makes sense to me.

A: If, however, we use the gas in the course of picking up goods to stock in our corner
store, or in running a power lathe to make an ax handle, we are using up this material
in a productive fashion. Now, though we may have consumed the gas itself, we have
replaced it with another, potentially more valuable, form of wealth – the wares in our
store-room, or the tool with which we will cut timber, to sell direct or with which to
build something, in turn. You must see that the initial decision to buy gas has now been
seen to have been nothing less than an investment and this has led to the formation of
capital – whether circulating capital such as goods-in-process or inventory – or fixed

A conversation with Sean Corrigan ⎜ Page 3

capital; plant and equipment. The gas itself has been used up just the same, but its
consumption has now been productive – it has led to the creation of some other form of
wealth in its place – not exhaustive – as it was when we grilled our dinner with it.

Getting the balance wrong between these two uses lies at the root of much of our
economic woe and the inability to distinguish between them – so that we parrot
nonsense like, ‘the consumer is seven-tenths of the economy’ – is the occasion for most
of the wrong-headed interference by central banks and governments who think that
‘consumption’ must always be stimulated, no matter how wastefully, or at whatever
cost to our financial status. To sum up this matter of the difference between ‘money’
and wealth’; nowadays, sadly, too many people believe a bank balance represents
‘wealth’ - even if this balance was instantly conjured into being by the bank writing us
down for a loan. In the topsy-turvy world in which we live today, consumption of the
exhaustive kind - not production - is supposed to bring us prosperity and possessing a
credit line (i.e. the ability to go into debt and so to pre-empt tomorrow’s creation of
wealth) is seen as a mark of our riches!

Q: As one looks around, he sees what appears to be an incredible love affair with
‘things financial’—perhaps to the point of absurdity. As I can vaguely remember the
lives of my parents and grandparents, this was not the case in years past. What has
changed? And is this good or bad?

A: ‘All things in moderation’ is as sound a precept in finance as it is in dietary science. I

sometimes point to the contrast between today’s Casino economy – with a pawn shop
outside every saloon – and our Father’s Machine Shop economy – with a savings bank
at the corner of every block. Having an enhanced ability to lend or to borrow and
having more liquid and transparent markets through which to raise and in which to
place funds is obviously a benefit, but when there is no connection between the amount
of credit extended and the volume of savings voluntarily made beforehand, and when
finance becomes both a speculative end in itself, as well as a means by which to confuse
those to whom greedy executives and self-enriching directors have a duty of trust, then
matters have clearly gone too far.

Q: You once described General Motors as a giant finance house with a garage in back.
But, if the idea is to make a profit, and if industry is making a profit, does it matter
how? I mean, isn’t profitability the sine qua non of capitalism? If companies can deliver
these by financial means and if individuals want to speculate in index funds and so
long as the activity is profitable for both, what difference does it make?

A: Buffett himself had words to say on this score, a year or two back, when he asked
how it was that people, who had simply borrowed money to dabble in the market and
had then sat back while their actions and those of all their neighbors, who were out
doing the same thing, drove ALL stock prices higher, could come to believe that they
had miraculously all become wealthier. After all, nobody here had actually DONE
anything. No-one had hoed a row of beans, or cut out the pattern for a dress. No-one
had invented a better beer can, or had shipped some mineral from where it was
relatively cheap to where it was more urgently wanted and thus, more highly priced.

A conversation with Sean Corrigan ⎜ Page 4

In fact, the main reason that stock prices had risen was because they were among the
prime beneficiaries of the ongoing monetary inflation which was taking place, so all
that was happening was that much the same amount of genuine ‘wealth’ was being
measured by a yardstick onto which the Fed and its peers, via the agency of the banks
and brokers, were cramming more and smaller inches. This way, people came to
believe they had a few extra of these new ‘yards’ of cloth, but, in fact, they had no more
material than before with which to cover their nakedness – indeed, since they now
owed more money than ever before – much of the cloth they did have was effectively
pledged to someone else instead.

Q: Now, aren’t you just dismissing the business of finance in general?

A: Look, finance is supposed to be a facilitator of wealth creation: it should never

become an end in itself, for, then, all we end up doing is to indulge in the same illusion
as that of a gambler on a hot streak who boasts of his riches while eagerly ploughing his
winnings back into the same game of craps. Sooner, or later, he’s going to shoot snake
eyes and, sooner or later, in a business, or under an investment policy, based on
nothing more than the effects of financial manipulation, all but the lucky few and the
even more uncommon number of instinctive traders, will also wake up to the true
import of the adage that while assets may go down, as well as up, in price, liabilities
always have 100 cents in every dollar.

Q: If a man was dropped from Mars and his job was to read the financial press, he’d
undoubtedly be amazed at the divergence of opinion that exists among those who
profess or imply expertise. Frankly, he’d be confused by the conflicting voices. Why is
this and how can a person with genuine interest ‘separate the wheat from the chaff’, so
to speak?

A: Remember that, by and large, if you wouldn’t run your own household, or manage
your own family firm in the way the ‘experts’ suppose they can direct that mythical
beast known as the ‘Economy’, then you are probably right and they are probably
wrong, no matter which Wall Street firm, government department or academic faculty
they hail from! Be suspicious of people who say more government involvement is
better and that cheaper and more available money is the answer to all ills.

As to the first, consider what the very different consequences were of the Russians
following Marx and the Americans initially following Jefferson. As to the second, ask
yourself whether we could possibly all be better off if we all, simultaneously, took out a
pen and added another nought to the end of the denomination of each dollar bill in our
pockets. Finally, bear Henry Hazlitt’s famous ‘One Lesson’ in mind: namely that ‘the art
of economics consists in looking not merely at the immediate, but at the longer, effects
of any policy; it consists in tracing the consequences not merely for one group, but for
ALL groups’.

Q. What do you mean?

A: Well, you never win at chess simply by working out your next move. Unfortunately,
those who prognosticate on the economy are not grandmasters, who can look ahead ten

A conversation with Sean Corrigan ⎜ Page 5

or twenty moves, but, all too often the lobbyists for Attacks on Queens, Inc., or the
envious who say it’s the Pawn’s turn to move, or the contractors who make money
shifting Enemy Rooks to safer places, you see? You can be sure that there will be many
more far-reaching implications to any policy than most pundits allow and your only
course is to try to think them through as far as you can.

Q: Your firm’s focus is stated to be in ‘capital preservation.’ Let’s be honest, isn’t this a
bit old-fashioned and simplistic? What do you expect to gain from merely preserving
capital?

A: I like the use of the word ‘merely’. The people who deride that concept as quaint or
trite should try it sometime!

Q: Sorry, but it is old-fashioned, isn’t it?

A: There used to be an old aphorism that the stock market wasn’t a place where you
should look to acquire wealth, but rather the place where you should try to preserve it
from taxes and the ravages of inflation – not a view many would find too comfortable
today!

Q: Why not?

A: To ‘preserve’ capital is to make sure that the wealth we have won up until today is
still there for us, whatever the phase of the business cycle, whatever the follies of the
herd, whatever the depredations of the government, when we, our children, or those
causes we have endowed need to call upon it. This is a task much easier to enunciate
than to fulfil, in a world of hot money, shifting exchange rates, recurring investment
manias, financial chicanery, political malice, legal predation, and a whole host of other
risks, and this quest is one that is rarely undertaken – whether through the ignorance of
the managers of funds, or because of the cupidity or lack of consideration of those
funds’ investors.

Q: But, I mean, why ‘preservation’ when you have so many choices for capital growth?
Can a whole financial industry be wrong?

A: And why can’t the bulk of the industry be wrong, especially, when it suffers not only
from false economic reasoning, but, more importantly, from irreconcilable conflicts of
interest?

Q: I was trying to focus on the ‘growth’ part as against your ‘preservation.’

A: Ok, so what do we mean by ‘growth’ and why is ‘growth’ seen as such an essential
ingredient of a portfolio that we pursue it all costs, even up to the perpetration of
accounting fraud. By ‘growth’, of course, we all too often simply mean an increase in
the share price – hence the whole sorry history of firms destroying themselves and
corrupting their executives (ethically, if not always criminally) by using financial
jiggery-pokery to conjure up ‘earnings’ whose main selling point on Wall Street is that
they barely fluctuate about a steadily upward trend…

A conversation with Sean Corrigan ⎜ Page 6

Q: Surely something impossible in real life...

A: Exactly. Take the case instead of an isolated community in which there is just one
baker’s shop. If the honest and hard-working baker can produce enough bread to feed
his customers, year in and year out: if the proceeds of his sales are always enough to
buy in his flour and coal and to repair, replace, and occasionally to upgrade, his ovens
and his shop premises; if he can also compensate his staff; if, all that having been seen
to, he can rely upon having enough left over to feed himself and his family, the baker
has clearly secured his livelihood in the face of all foreseeable events. Now it should be
obvious that there has been no hint of ‘growth’ here, yet certainly, we might wish to
have a share in the baker’s business to likewise enjoy such relative security– though we
would be very careful indeed to make sure we judged the price we paid to be
commensurate with the prospective income.

Q: Sounds like a great business.

A: Yes, but now enter a stock promoter, a Wharton MBA, and a Harvard Law School
graduate and the next thing you know, there would be no-one who would think it
foolish that the baker should borrow money to buy two ovens, in place of his single
one. Soon, no-one would be left to suggest that he should not be seeking to merge his
business with the miller, or the butcher - or even with the man who paints his store.
Nor would anyone would desist from trying to persuade him that he would gain more
sales through extending credit to his customers, especially if the loans could be
repackaged and booked elsewhere so none might suspect he was impairing his own
creditworthiness as he did. Before long, there would be a rush to enter into an auction
to try to bid the shop away from him, almost irrespective of the price paid – indeed, the
auction would be characterized by ever more urgent bids, the higher the price had
already risen! ‘Growth’ and increased ‘shareholder value’ would now be the buzz
words and there would be a brief glow of self-congratulation among the baker’s
stockholders, large and small, while our trio of financial interlopers would be growing
fat on fees and commissions.

Q: So, what’s wrong with that?

A: To start with, nothing suggests that the bakery would henceforth turn out any extra
loaves, or that, if it did, that these would command greater aggregate revenues in the
marketplace than before. Sadly, then, the fetish for ‘growth’ would have left a great
many of its cult-followers to endure either lessened returns, or outright losses and, if
things were to go really awry, the upshot might even be that the baker, who had
devoted more time and money to making his share price, rather than his breakfast rolls,
rise, might be forced out of business in the inevitable collapse, so that the people of the
village might not only be monetarily the poorer, but more hungry, too.

Q: Surely there is a kind of growth that you do like, no?

A: Indeed, growth is clearly something to be welcomed, but it should be the growth of a

sturdy oak, deeply-rooted on a fertile and well-watered hillside: a tree, whose rings

A conversation with Sean Corrigan ⎜ Page 7

might thicken a little more in good years than in poor, but which will continue to
spread a little wider and to climb a little higher throughout all the long ages,
impervious to all but the most savage tempest. But what we must never do is to listen
to the blandishments of the seed catalogue salesman and to overlook the staid old oak
for the newly-planted and exotic saplings stippling the field below, whose expected
rapid gain in height will be only the result of extensive irrigation, the liberal application
of fertilizer, and a constant dousing in pesticides. This crop – often grown precisely
because it is new, or because it is the subject of a passing dietary fad, but which is
inherently sickly and prey to all the vicissitudes of the season - may seem to ‘grow’
faster initially, but, it is one whose harvest of fruit is far too uncertain in both quantity
and value (as fickle tastes inevitably change) to be the focus of a wise programme of
investment.

Q: Is there a main thrust to this thinking?

A: Well, as the Austrians are often at pains to point out, by and large the only way to
preserve capital in the long run is to identify honest, hard-working and far-sighted
entrepreneurs in whom to invest– men who can peer that little bit more acutely into the
fog of Tomorrow and who can take one’s own wealth – often acquired through one’s
own prior entrepreneurialism – first to nurture it, then to multiply it by best and most
profitably serving the identified needs of their customers. So, we can only ultimately
preserve our own capital by making it contribute in some way to the improvement of
the general commonwealth. Not a bad objective to which to adhere, I’d say!

Q: So, are you really mixing a bit of Ludwig von Mises with a dash of Graham and
Dodd here?

A: That seems a neat way to sum it all up. □

11 May 2004
admin@sagecapital.com
www.sagecapital.com

A conversation with Sean Corrigan ⎜ Page 8