On March 23, 2009, the Dow jumped 497 points, capping one of the biggest market rallies in history. In less than two weeks the Dow had advanced 1,228 points.
As I write this in April 2009, Wall Street is still rallying. Some think the worst is over and are rushing back into the stock market. Others think the rally is a bear market rally, or as I like to call it, a sucker’s rally. A sucker’s rally sucks in people who think the market has bottomed and hope to snatch up cheap stocks, catching the next elevator ride up. And the elevator does go up—for a little while, but then without warning the bear cuts the elevator cable. Greed turns into panic as the elevator falls even faster than it went up.
Today, people are asking, “Is the crisis over? Is the economy coming back?”
My reply is, “No, the economy is not coming back. The economy has moved on, and the people asking if it’s coming back are being left behind.”
Before moving on to the practical applications in Part Two of Rich Dad’s Conspiracy of the Rich, this chapter will explain how the world came out of the last depression, in spite of government intervention, and explore the implications of that past for our present. By knowing a little about history, the present will become clearer, and you will be better able to see the future.
Reader Comment
The economy will not come back to be exactly what it was; it will change and evolve as it always has. Positive or negative—only time will tell, but we are all here to prepare ourselves for prosperity no matter which way the economy as a whole goes.
—Jerome Fazzari
As we discussed earlier in the book, the U.S. economy didn’t recover from the Great Depression until 1954, when the Dow finally reached its previous high of 381. A few reasons why the economy improved in 1954 are:
1. The World War II generation was settling down. When the war ended, soldiers came home, went to college, got married, and had kids. By the 1950s a housing and baby boom was on.
2. The first credit card was introduced in 1951, and shopping became a national sport. With the advent of the suburbs, shopping centers sprang up like weeds.
3. Interstate highways were built, and the auto industry boomed. Drive-ins became the place where kids hung out, and the fast-food industry was born. In 1953, McDonald’s began franchising and became the shining star of the new fast-food industry.
4. Television became a national phenomenon, and the baby boomers were the first generation raised by TV. Entertainment came to life on The Ed Sullivan Show, and sports stars became the new mega-rich. Advertising took on a whole new dimension in people’s daily lives.
5. Boeing introduced the 707, and the jet age arrived. Being a pilot or a flight attendant suddenly became a glamour job. Larger airports were built to accommodate increased demand for air travel, and mega-airports became an industry unto themselves. Hotels and destination resorts sprang up to meet the demand of road-weary travelers, and tourism thrived. My rich dad became very rich as lower fares and faster travel brought tourists to Hawaii.
6. Workers could expect company pensions and healthcare for life. Without the expense of retirement savings and healthcare premiums, workers could spend money more freely.
7. China was a poor communist country.
8. America was the new financial and military power.
In 2009, many of the factors that spurred on the new economy fifty-five years ago are now fading:
1. Baby boomers are retiring and beginning to collect Social Security and Medicare alongside their World War II–generation parents.
2. The suburbs are ground zero for the subprime mess. As suburbs struggle, major shopping centers face trouble and retailers close their doors while online shopping is taking off.
3. Our highways and bridges are in need of major repair. The auto industry is dying and outdated. An old saying goes, “As GM goes, so goes the nation.” That saying is truer today than ever.
4. Television networks are losing advertisers—many of which are leaving for the web.
5. Major airlines such as Pan American are history, and giants such as United Airlines are on life support. Today, people can sit at their desk and visit with people all over the world via the Internet.
6. People are living longer, but many are overweight and in poor health. Diabetes is the new cancer, and our medical system is going broke. The high cost of healthcare is causing many businesses to close, which costs more jobs.
7. Pension plans are going broke. Few workers have company pensions or healthcare coverage after they retire. This will be a disaster for government programs as 78 million baby boomers become dependent upon America’s Medicare and Social Security systems.
8. China will soon be the richest country on earth. China is now asking that the U.S. dollar no longer be the reserve currency of the world. If that happens, America is toast.
9. America is now the biggest debtor nation on earth, and its military is overextended.
So, again, is the economy coming back? I don’t think so. The boom economy that pulled us out of the last depression is dying. Millions of people are being left behind as they wait for the old economy to come back. Unemployment is rising as people’s jobs are becoming obsolete, often replaced by technology or outsourced to a nation with a cheaper labor pool. This means there will be an even greater divide between the haves and have-nots, the rich and the poor. The middle class will shrink like the polar ice caps.
Many of us have seen, either in person or on television, poverty and the shantytowns where the very poor live. No matter how many times I see poverty, it never fails to make me pause and wonder how to solve this issue.
If you ever have a chance to go to Cape Town, South Africa, please do. Cape Town is one of the most beautiful cities in the world. It is a rich and modern city. It is exciting and vibrant. And I believe you can see the future of the world in Cape Town. Driving in from the airport, all you see are miles and miles of shantytowns and hundreds of thousands of people barely surviving on the boundary of civilized life. When I drive past the shantytowns and approach gorgeous Cape Town, I often wonder if I am looking at the future of America. I wonder if one day our middle class will be living in shantytowns.
Reader Comments
As an older baby boomer looking at retirement on my horizon, I feel mostly pessimistic. It is hard to imagine recouping my losses before my health gives out. I am concerned about what quality of life I will have in my older age, especially since we are living longer.
—jeuell52
Because I love a challenge, I am optimistic and very curious about the future. Americans will bounce back in a new way. It will take time and a complete mind shift, I imagine.
—annebecker
Today, one reason the middle class is losing ground and the gap between rich and poor is growing can be found in the differences between the crash of 1987 and the crash of 2007.
On October 19, 1987, I was on a flight from Los Angeles to Sydney, Australia. When the plane landed in Honolulu to refuel, I stepped off the plane to call a friend from a payphone in the terminal.
“Did you hear the stock market crashed?” my friend asked.
“No, I didn’t,” I replied. “I’ve been flying.”
“It’s a big one,” he said. “The Dow dropped 23 percent today. A lot of people were wiped out.”
“That’s not good for those people, but it’s good news for me,” I replied. “It’s time to get rich.”
From 1987 to 1994, my wife, Kim, and I worked hard at building our business and investing all the money we had. Many friends and relatives thought we had lost our minds. They were in hiding and waiting for the economy to come back. Instead of investing, they were stuffing their money in mattresses. By 1994, Kim and I were financially free and in position to make tremendous profits as the next bull market took off in 1995. Many of our friends that did nothing are still in financial trouble to this day.
Reader Comment
Yes, I remember 1987… it was the time I decided to become more independent and resigned my job to start contracting. I rolled my Super over into a private fund at the suggestion of my accountant. I remember questioning why it was all going into one managed fund, and not split up into two or three. He said it wasn’t really worth it for “such a small amount.” That was a few months before the market crash and my hard-earned (ten years’ worth) of Super was halved in an instant. My financial intelligence training hadn’t even begun.
—10 billion
The crash of 2007 is different than the crash of 1987. I do not know if the markets will come back the way they have in the past. Many of the industries that caused the last boom in 1954 are now dying. This time things are different.
The big difference between the 1987 crash and the 2007 crash is the rise of the Internet. The Internet is changing everything. Along with a toxic dollar and bankrupt government, the Internet is one of the primary causes of people being left behind, causing unemployment to increase.
I believe the Internet is bringing a shift to the world a million times more profound than Columbus discovering America in 1492. Just as explorers like Columbus opened the world to new wealth, the Internet is opening even larger worlds of wealth to today’s explorers.
Yet there is significant difference between Columbus and the Internet. People could see the changes that Columbus brought. They could see ships, cargoes of plundered wealth, and drawings of natives and their land.
We cannot see the world of the Internet with our eyes. The world of the Internet is invisible, and we have to see it with our minds. And that is why people are being left behind. They cannot see the changes that are remaking their world. In their blindness, they are becoming obsolete.
Dr. Buckminster Fuller once said that when change went invisible, the speed of that change would increase exponentially—a concept he termed in an article accelerating acceleration. An example he used was the rapid advance of aviation technology. Think about how amazingly fast flight technology has expanded in the past century. In 1903, the Wright Brothers flew the very first sustained airplane flight. In 1969, we put the first man on the moon. And now today, we have space shuttles that travel 17,320 miles per hour and that will soon be capable of flying to Mars. That is an example of accelerating acceleration. Technology, and how that technology affects business, is changing at such a rapid pace it is nearly impossible to keep up.
During one of his lectures in the early 1980s, Bucky Fuller talked about a new technology that would explode before the end of the decade. By tracking the rate at which technology advanced, he claimed he could predict the future. One particular statement from his lecture stuck with me. He said, “We are entering the world of the invisible.” Clarifying, he said, “When you lie on your back and look up at the clouds, you do not see the clouds moving. Only after closing your eyes for a while, and then looking up again, do you notice the change.”
Dr. Fuller was concerned. His message was that soon millions of people would be out of work. They would be put out of work by technology and inventions that operated well outside their vision. I remember his words well: “You cannot get out of the way of things you cannot see moving toward you,” he said.
As an example of what he was speaking of, he talked about the evolution from horses to automobiles. He said, “Humans could see the automobile. They could see that change. If a car came toward them, they could get out of the way.” Because they could see the car, they could adapt and make changes to their lives. But future inventions, he claimed, would be invisible. So humans would not see what was changing their lives. He finished his point by simply stating, “Humans are being run over by what they cannot see.”
Today, people are being run over and made obsolete by technological innovations they cannot see and that they do not understand. Millions of people are unemployed because their skill set is no longer needed. They are obsolete.
In the 1970s, when I began my first business, I soon became a multimillion-mile traveler with United and Pan American Airlines. Today, I get more business done sitting in my office and using the web to reach more people in less time, and with less energy—all for a lot less money. While I make more money, the airlines suffer, because business travelers like me have found a faster, less expensive way to transact business with people all over the world.
In 1969, I graduated from the U.S. Merchant Marine Academy at Kings Point, New York. At the time, we were the highest paid graduates in the world. Many of my classmates graduated and immediately began earning $80,000 to $150,000 a year if they sailed on freighters in the Vietnam War zone. That was not a bad starting pay for twenty-two-year-old kids.
After graduation, I sailed for Standard Oil on a tanker for a few months. But when my brother joined the military to go and fight in the Vietnam War, I quit my high-paying job and volunteered to fly for the Marine Corps. My income went from nearly $5,000 a month to $200 a month. It was a shock.
Today, some of my classmates are still sailing. Many make about $400,000 a year and will retire on about $200,000 a year. Not a bad return on their college education.
Instead of going back to sailing after the war or flying for the airlines, I chose to become an entrepreneur. Today, I’m reaping the benefits of that choice.
There are two primary differences between my classmates and me. The first difference is that most of my work is 90 percent mental and most of theirs is 90 percent physical. They have to sail ships to get paid. I make money even when I’m sleeping. The second difference is the rate of transaction speed. My classmates work five days a week and get paid by the month. I work 24/7, 365 days a year, and I get paid by the minute. Even if I stopped working, money would still come in. I will explain how I do this in upcoming chapters.
Once I understood what Dr. Fuller meant by accelerating acceleration, I took decisive action to stay ahead of the curve. I have no plans to become obsolete. I’m not waiting for the economy to come back. I’m working hard staying ahead of the accelerating economy.
As we discussed throughout Part One, the seeds of today’s financial crisis were planted, in my opinion, with the hijacking of the U.S. education system in 1903. Today, we still do not have adequate financial education in our schools.
During the dark days of American slavery, slaves were forbidden to be educated. In some states, it was a crime to teach slaves to read and write. An educated slave class was a dangerous slave class. Today, we fail to teach kids to be financially literate. It is another way of creating slaves—wage slaves.
Immediately after leaving school, most kids begin to look for a job, save money, buy a house, and invest for the long term in a well-diversified portfolio of mutual funds.
Now that millions are losing their jobs, what do they do? They go back to school to get retrained, look for a new job, try to save money, pay their mortgage, and invest for their retirement in mutual funds. And they teach their kids to do the same.
Ivan Pavlov won a Nobel Prize in 1904 in Physiology and Medicine for his research on the digestive system of dogs. Today, when we hear the term Pavlov’s dogs, it refers to conditioned response. Going to school to get a high-paying job, saving your money for a house, and investing in a diversified portfolio of stocks and mutual funds is an example of a conditioned response. Many people cannot articulate why they do these things. They simply do it because it is what they were taught, a conditioned response.
In 1973, I returned from the Vietnam War and found my poor dad at home, alone and unemployed. He had run for lieutenant governor of Hawaii and lost. Although he was a smart, well-educated, and hardworking man, he was finished at age fifty. He was a star in the education system but ill-equipped for the world of business and politics. He could survive in school but not on the street.
His advice to me was to go back to school, get my PhD, and then get a job with the government. Although I loved my dad dearly, I knew his life was not my life. Leaving his home, I drove to Waikiki and at the age of twenty-seven once again became an apprentice of my rich dad. That was one of the smartest decisions I have ever made. I was breaking a conditioned response of an employee to become an entrepreneur.
History is full of success stories of those who ignored conditioned responses and forged their own path. The Wright Brothers and Henry Ford never finished high school. Bill Gates, Michael Dell, and Steve Jobs never finished college. Sergey Brin of Google suspended his PhD studies at Stanford. Mark Zuckerberg started Facebook in his dorm room at Harvard, traveled to California, and never returned to finish his education. All of these world-changers dropped out of school because they no longer needed to look for a job. They had an idea and the courage to act on that idea. They started businesses and created jobs for others. Today, entrepreneurship is exploding all over the world. More important, the most successful entrepreneurs understand that we are in the information age. They have the vision to see the changes happening that most do not.
Today, we have a new generation that is going to change the future. This generation is composed of kids born after 1990. These are kids who have only known a world with the Internet. They are not the same as people born before 1990; they were born into a different world and will create a different future. What the future will look like, I do not know exactly—I just know the future they see is not the future I see.
What I do know is that the gap between the rich and poor will continue to expand. The idea of a high-paying job for life is becoming ridiculous as low-wage countries compete globally and as companies exchange ideas across oceans at the speed of light. Jobs tend to migrate to countries with the lowest cost of labor. I predict that young entrepreneurs equipped with low-cost PDAs and access to the Internet will soon rise out of shantytowns and transform the world. The rich and complacent will find their world of luxury disturbed as young and hungry entrepreneurs change the future of the world—some from shantytowns.
In the Industrial Age, the rich nations of the world controlled the world’s natural resources such as oil, metals, lumber, and food. As the Information Age grows, no longer will the rich and powerful nations have a monopoly on the world’s true natural resource—our minds. In the invisible world of the Internet, the geniuses of the world will be unleashed, and class lines that are centuries old will be erased. A new mega-rich will rise.
With the arrival of the new economy, there will be an explosion of new wealth. There will be new millionaires and billionaires. Money will be made at ultrahigh speed. The question is, Will you be one of the new rich, or one of the new poor? Back in the 1950s, my rich dad saw the new economy and took action. My poor dad was crushed by the new economy. He chose financial security rather than financial freedom—and in the end, he had neither.
The stock market will eventually come back, but remember that it took from 1929 to 1954 for the market to return to the all-time high of 381. When the stock market does come back, there will be new companies making up the Dow. New blue chips will dominate. The real estate market will eventually come back when populations grow and jobs finally return. But there will be new families living in the old mansions. And there will also be many more homeless people.
But the old economy, the economy as we knew it, is not coming back. The economy has moved on. The old economy born around 1954 is dying. A new economy is being born, an economy that will be led by kids born after 1990, young people who only know the invisible, high-speed world of the web.
While Donald Trump and I were working on our book Why We Want You to Be Rich, a book about the shrinking middle class, Donald said something to me that hit home: “I have a lot of classmates who were much smarter than me, but I make more money than they do. One reason is because I am an entrepreneur and they became employees working for big companies. Another reason is because they went to work for the wrong industry. They went to work for dying industries.”
Listening to his words, I reflected upon my own life. If I had followed my poor dad’s advice, I, too, would have been an employee in dying industries. Today, graduates from the U.S. Merchant Marine Academy have a difficult time finding jobs. The reason the U.S. Merchant Marine Cadet Corps is dying is the same reason General Motors is dying. The pay for Merchant Marine officers is so high that the shipping companies have moved their ships to countries with lower wages. The labor unions priced themselves out of a job.
As Donald and I sat in his office overlooking Central Park and Fifth Avenue, I realized I would not be sitting where I was if I had followed my poor dad’s advice—a philosophy he developed from his experience in the last depression. As the possibility of a new depression looms, rather than feel fear, Donald and I are preparing for the challenges and tough times ahead. We have gone through tough times before, and each time we have come out smarter and even richer.
In April 2009, as I write this, the world is feeling better about the economy. People are becoming more optimistic. The stock market is rallying. Cash is flowing out of gold and savings accounts, and back into the stock market. As stated earlier, I believe it is only a bear market rally—a sucker’s rally—one of the most vicious of all market rallies, but I could be wrong.
I feel the worst is not yet over for the following reasons.
1. Old industries are dying. Many older people depend upon the dividends paid by these old companies. In this crisis, with earnings dropping, many businesses are cutting dividends. GE cut its dividend by 68 percent and JPMorgan cut its by 86 percent. That means if you are a retiree who was living on $1,000 a month from GE’s dividend, today you’re receiving $320 instead. If you were living on dividends from JPMorgan, you’re living on $140 rather than $1,000.
2. Taxes will rise. As the United States continues to print trillions of dollars, our kids and grandkids will pay for this mess with rising taxes. Taxes often punish producers and reward the crooked, lazy, or incompetent.
For instance, the White House announced a cap on tax-deductible charitable donations, which will most negatively affect the wealthy. In 2006, four million Americans earned gross incomes of $200,000 or more. They accounted for less than 3 percent of all Americans, yet they donated 44 percent of all charitable donations. This cap on tax deductions means many charities will close, and millions more will need government help, which will cause the government to again raise taxes.
There is a growing mood in this country to “get” the rich. This sentiment is embodied in the action of Congressman Jerry McNerney (D-CA), asking for a 90 percent tax rate on wealthy people. The mobs are out to punish the working rich—those who pay taxes, create jobs, and make charitable donations. The real rich, those who influence the politicians and the Federal Reserve, are untouched.
3. The United States is the biggest debtor nation in the world. The gross domestic product (GDP) of the United States is over $14 trillion. The total dollar sum of all the bailout programs rolled out early this year is about half that amount.
4. China is threatening the reserve status of the U.S. dollar. In March 2009, China began talking in earnest about abandoning the U.S. dollar as the world’s reserve currency. In the long run, this means the United States may not be able to pay its bills with Monopoly money.
5. The U.S. consumer is loaded with debt and strapped for cash. About 70 percent of the U.S. economy is spurred by consumer spending, according to the Bureau of Labor Statistics, and almost every country in the world relies on the power of the U.S. consumer for the strength of their economy. U.S. consumers have stopped spending, which means the world suffers. Without much in savings, the average American cannot withstand a long recession. If the recession lingers and the U.S. consumer runs out of money, the world will slide into a depression.
6. Unemployment is rising. Every business in the world, big or small, is trying to reduce overhead. One of the quickest and easiest ways to do this is to reduce payroll liability by laying off employees.
As of March 2009, the official unemployment rate was 8.5 percent. During that month, approximately 694,000 jobs were lost in the United States, according to the Bureau of Labor Statistics. However, that unemployment statistic does not count the unemployed people who haven’t looked for a job in thirty days, or those working part-time jobs while waiting for full-time work. When you add those people into the official number, the real unemployment rate was 19.1 percent, according to Shadowstats.com. During the Great Depression, unemployment reached 24 percent. At this rate, we will be there soon.
7. Technology is invisible and relatively inexpensive. Today, businesses can do more business with fewer employees and thus become more profitable. This will lead to more unemployment.
8. Our school systems have not prepared students for the Information Age. Technology and its applications are changing so fast that college graduates are not equipped to succeed in the marketplace. Today, most college graduates are obsolete the minute they receive their diploma.
9. Frugality is now cool. For thirty years, people went into debt in order to look rich. It was hip to sport the latest designer handbag or drive an expensive car. Today, the opposite is true. People are proud to be frugal and are spending money more wisely. This will only add fuel to the economic crisis. As you know from Part One of this book, the only way the economy can expand is by us getting into debt. Being frugal may be cool, but it will not help the economy. When we as a country stop spending, unemployment rises and small businesses fail.
There is an old joke that goes like this: Two friends were walking in the woods when a bear suddenly jumped out and came at them.
“Do you think we can outrun the bear?” one friend asked.
To which his friend replied, “I don’t have to outrun the bear. I only have to outrun you.”
In my opinion, this is like the world we live in today. Many businesses will fail, and the strong will survive and emerge stronger. Unfortunately, many of my fellow baby boomers are not prepared for the future. Many have taken life too easy for too long. Many are in poor health and without sustainable wealth. Many have no health insurance just as government hospital programs are running out of money.
I believe we are entering a long and hard financial winter. The good news is that spring will come, flowers will bloom, and new life will be born. Eventually, we will come out of this financial crisis, but unfortunately, millions of people will be permanently left behind. For their sake, I hope the president can save them.
In my opinion, it matters little what the politicians do to save the economy. In the end, they are going to save the rich in the name of bailing out the economy.
What really matters is what you are going to do to save yourself. You do not need to outrun the bear; you just have to outrun those who are waiting to be saved.
There is good news for those who are ready to move on into a brave new world: This is the best of times for those willing to study, learn quickly, work hard, and not join the chorus of negative people. Learn from the past to succeed in the future. This is your time to become rich—if you want it to be.
Before going further with Part Two, let’s review the five new rules of money we have covered so far. They are essential to beating the conspiracy at their own game.
New Rule of Money #1: Money is knowledge. Today, traditional assets do not make you rich or financially secure. You can lose money on businesses, real estate, stocks, bonds, commodities, and even gold. Knowledge makes you rich and a lack of knowledge makes you poor. In this brave new world, it is your knowledge that is the new money.
Part Two is about increasing your financial knowledge.
New Rule of Money #2: Learn how to use debt. After 1971, the U.S. dollar switched from being an asset to being a liability—debt. Debt exploded because the banks could create more money by creating more debt. Our current subprime mess was caused by subprime borrowers and subprime banks. Obviously, both the poor and the rich need to learn to use debt better.
Debt is not bad. Misuse of debt is bad. Debt can make you rich, and debt can make you poor. If you want to get ahead financially, you need to learn to use debt, not abuse it.
Part Two is about learning how to use good debt to make your life richer and to position yourself to be financially secure.
New Rule of Money #3: Learn to control cash flow. After the dollar became debt, the name of the game was getting you and me into debt. When you are in debt, your cash flows from you to others. Today, many people are in financial trouble because they have too much cash flowing out of their pockets and very little money flowing into their pockets. If you are going to be financially secure, you need to learn to have more cash flowing into your pockets.
Part Two of this book will be about taking control of your cash flow, both going in and going out.
New Rule of Money #4: Prepare for bad times and you will only know good times. The last depression made my rich dad very rich and made my poor dad very poor. One dad saw the depression as an opportunity, and the other saw it as a crisis.
My generation, the baby boomers, has only known good times. Many are not prepared for the bad times. I am doing well today because I began preparing for bad times over twenty years ago. By preparing for bad times, I do well in good times.
Part Two is about you doing well in bad times, and doing even better in good times.
New Rule of Money #5: The need for speed. Money evolved from barter to digital money as the world’s financial system picked up speed. Today, slow people are left behind. A well-positioned person can transact business 24/7. Rather than making money by the month, people can make money by the second.
As we move into Part Two of Rich Dad’s Conspiracy of the Rich, it’s important to ask yourself:
1. Are you being paid by the month, the hour, the minute, or the second?
2. Are you earning money eight hours a day or 24/7?
3. If you stop working, will money continue to come in?
4. Do you have multiple sources of income?
5. If you are an employee, are you working for an employer who is being left behind?
6. Are your friends and family moving forward or being left behind financially?
Reader Comment
I attended a few courses and read books on wealth and personal development, but I didn’t know how to create passive income. I have learned the lesson of passive income the hard way. I am self-employed, and last November I had an operation on my foot. I couldn’t work for three months, and during that time I relied on my savings. The experience has taught me the importance of passive income. I am now busy buying property and looking for investment opportunities.
—henri54
Only you can honestly answer those questions. Only you know if you are financially satisfied with your own life. Only you can daily make changes in your life.
If you are ready to make changes and plan for a brighter financial future, then the rest of this book is for you.