Money and Wealth

To continue from my last blog, this time, let's talk about wealth.

Wealth is another one of those tricky ones, as it's also mostly relative. Wealth can, broadly speaking, refer to two things. The first is that someone is considered wealthy when they have a lot of what they value ("he hasn't a dime, but his family is happy" implies he's wealthy, even if it's just wealth in heart rather than a sum of money). The second is when people have a lot of what is generally considered to have a lot of value. For example, ALL people value shelter, ergo someone who had shelter in a community where nobody had any would be considered wealthier. The same goes for other broad, social things, like having fancy or nutritious food, a lot of shelter, at least one form of transportation (like a car), a refrigerator, washing machine, and a host of things that fit the Norman Rockwell vision of the American Dream.

It is important to remember that wealth is NOT money. Money, is an arbitrary human construct that allows us to quantify wealth when talking with other people about it. It is understandable to see why people think that money IS wealth, but it's important to remember that when we do crazy stuff with money, we're not affecting wealth at parity.

The first major difference is how wealth and money are made. Wealth, generally speaking, is generated through the creation of objects, or a continuous service. For example, you have running water and sanitation in your house. This standard of living increase is an actual part of wealth (especially if no one else around you did). Likewise, wealthier people are those who have better houses, cars or estates (goods), or better nutrition, health, or comfort or convenience (services). In any case, wealth generation is ultimately a creative process (even if it's just maintenance).

It is also divorced from money. If inflation suddenly caused the price of goods to increase by 100%, would the usefulness of the house (the value you place in it) as a shelter increase or decrease? Likewise, if your savings account were wiped out, what would that do to your car's ability to get you to work? The answer to these questions, of course, is "nothing". The only effect that price has on the wealth of a product or service is when people think that something is worth more or less because the price is different. Certainly, however, this confusion barely changes the wealth of only the smallest section of things (if any).

What is important here is that wealth is ultimately a by-product of production, whether of the durable, like refrigeration or sanitation systems, or the non-durable, like a haircut.

Money, on the other hand, is a very different beast. Money is created when people say that there is more money. The Federal Reserve, for example, recently increased the money supply by 1 trillion dollars. They may not have even printed a single new bill (due to most money being handled electronically), but yet the money supply drastically rose. Another way that money is created is through interest. If I borrow $10, and I need to pay $11 back, there is ultimately $1 more in the system that was magically created. Of course, this interest can be leveraged to extreme levels where debt upon debt upon debt creates a tower of money.

This creates an interesting set of issues. The first, of course, is "who should create more money?" If everyone could simply make more money, the value of the money would decrease instantly and drastically. Given the same amount of wealth and a higher amount of money (and a market system that allows for the transparency to see what those two numbers are), the prices will go up if the money amount goes up while the wealth amount stays the same. This, of course, is inflation.

The second, and more important question is "who should get the new money?". Obviously, when the Fed increased the money supply by a trillion dollars, they didn't do it by simply adding $3 to every American's checking account. Instead, the money is going to be mostly going into banks, and into the government itself. Likewise, when you create money through loans, the person who loaned you the money gets all of the increase in the money supply.

This is important because of inflation. When the money supply goes up, the prices of everything goes up (albeit, unevenly). So while everything becomes more expensive, only some people get more money. While some people are magicians with money, most people who get some of that new money only get enough to cover for the inflation that they caused by making more money. For example, if most bank savings account rates were 1%, and their loan rates were 10%, then they would be increasing inflation by 10% (because that's the amount of new money over the same amount of wealth), while the bank itself only actually makes 9%, because it has to pay me some. This is oversimplified, of course, but even stocks, which are considered one of the most risky ways to store your money, only goes up about 6% a year, while inflation goes up and reduces the wealth-aquiring power of that money by 3%: half of the gain. Currently, the Federal Government returns just about 0% to its investors, and banks do only slightly better (compared to the -30% of stocks last year).

As such, it's less of a case of the people who make and keep money richer, while the rest of us stay the same, it's that the people who make the money stay the same, and the rest of us get poorer. In the struggle to get ahead, people are actually just staying where they are while they push everyone else behind.

Ethical questions aside for a moment, this is clearly a bad system. What we want is a system whereby people can become wealthier, rather than just richer (have more money). Instead, we have a system where people's wealth levels stay the same, or go down as their money doesn't go as far.

This can be seen by a disturbing trend in America. My grandfather worked hard, and was able to support a wife and several children, all while being able to accrue new wealth as technology provided it. My father worked hard, and was able to support a wife and a couple of children, but not with a whole lot of bells or whistles, and he had a good, white-collar technology job (compared to my small-farm grandpa). I have to work a part time job AND my wife has to work. Not only can we not dare to think about how much children would cost us, but we're not able to accrue as much wealth as our parents (we can't afford cable TV, 2 cars, etc.) The rate at which people even younger than me return home and live with their parents when they are done with their run through the education system (including college) is absolutely massive compared to my parent's generation, and nigh infinitely more than the near zero of my grandparents. The fact that most households have to have both parents employed just to get by also shows this trend.

In short, people are working harder and harder for more and more money that gets them less and less wealth. Billions of families live paycheck to paycheck, even in the developed world. Americans may make thousands of times more money than an equivalent worker in Africa, but they're both just a few paychecks away from their families literally starving and being homeless. As the CPI continues to soar, it's clear that the system is broken, and the more we put into it, the more broken it gets.

Then, of course, there is the hitherto avoided ethical question. "Who sould have more wealth?" and "Who should see their wealth decline?". Currently, the answer seems to be "Those who are movie stars or who can commit fraud on Wall Street" and "everybody who isn't in the first camp", respectively. Is this what we want? If fraud and celebrity status and professional sports are the only thing that gets you ahead, and everything else causes you to lose, doesn't that just teach us (and our next generation) that if you can't play football, you should learn white-collar crime?

Instead, we should have different values, and have a system that gives wealth (NOT just money) to those who participate in those values. If we value teachers, we should give them more wealth, rather than just hoping that a little more money will fix the problem. Likewise, we should be encouraging behavior that increases the wealth of others, rather than penalizing laborers by sending their jobs overseas, just so someone else can have more money. Yes, money can be used to acquire wealth in individual instances, but due to the fake nature of money, it's not stable or certain (other than it's certain to get you less wealth over time).

It seems to me to be a simple confusion in priorities along with a confusion that the capitalist notion of "make more money" automatically results in "have a higher standard of living". While that may be true for those with a LOT of money, the vast majority of everyone else only sees the decline. While the re-enactment of usury laws may be a tad harsh, it seems to me that people need to be un-brainwashed from the idea of making money for money's sake, so that those who only have a little aren't pushed too far behind.