I received this thoughtful comment from a reader on SeekingAlpha, and thought I would respond with a post. He’s asking about my article on The division between capital & labor matters now more than ever
Joe, It seems to me that in addition to the two roles you mention for the role of money, one;1) a medium of exchange and 2) a store of value, there is a third role which is much more important than the two you mention is 3) the primary creator of wealth.
If I think of “earning rents based on moneys invested”, determining the value of stocks beyond any real value (Tesla like bubbles, company valuation well beyond 10 times earnings), profits made on money treated like commodities, %age fees on the $100 trillion derivative trading business, etc, etc, etc, the whole financial industry, money made with money, what does it have to do with value created?
These are the not so innocent questions of an uninformed observer who would like to understand the world he lives in.
Since you seem to understand some of the role of money and you are kind to your readers in answering their questions, please try to enlighten me on an other question I have asked before without getting an answer.
In Forbes Sept 2014 there was an article reporting that the top 100 American billionaires with total assets of $1.48 trillion have increased their wealth by 20% per year for the last two years, amounting to a gain of over $500 billion. The cumulative growth of the US economy in the last six years amounted to about the same $500 billion. This $500 billion was made by the wealth creating ability of “money”
Why should this 0.0001% invest their money to create jobs, when you can only make real money with money?
Than one SA author pointed out that wealth created by these 100 billionaires is not even counted in the GDP since assets are not counted.
But I also ran companies for a time. I understand the difference between income and shareholders value, “assets”. But we could only increase shareholders value from operations, by bringing profits after taxes down to assets.
We are only talking about the change in assets in the last two years, which presumably were their after tax profits, so it should have shown up in the GDP, OK not as assets, but as income.
So where does this leave the rest of us who can only earn a living with our labor and sweat? If we curbed or changed the role of money could we reduce inequality?
This is interesting, and I just watched a documentary on Netflix called “Money for Nothing: Inside the Federal Reserve”, which makes the same point – Fed money creation is lining the pockets of the wealthy.
In a sense, this is true. Any owner of assets whose value is determined by interest rates will have benefited tremendously from Fed policy. House prices have reflated because mortgages cost less. Stocks are up because bonds return practically nothing.
The comment is correct in the sense that there are fewer opportunities to produce stuff with more labor. The investment opportunities companies are pursuing now are share buybacks, not plant expansion. The reason is insufficient aggregate demand. With wages stagnant and household debt high, people don’t want to spend their money. They (rightfully) want to save.
In order for the Fed to create enough nominal demand so that wages start going up (which will then mean real debt becomes less of a burden, spending increases and investment opportunities for companies open up), it needs to force our wage inflation expectations higher. But with so much more labor in the world (China and India) operating so much more productively (IT revolution), it’s hard to create wage inflation.
But you can do it. As I say in this article, you just have to push past the asset inflation that will inevitably happen to get to get there. After all, there are many more workers in the world compared to ownership certificates (hundreds of millions more workers able to produce more with better technology while shares are being bought back and retired).
What that means in practice is that, for a while, the rich will indeed get richer because they own a lot of the assets. But only when there is meaningful wage inflation (and growth in nominal demand) will interest rates be able to return to something like “normal”. And only when interest rates look normal again will stock prices / home prices become more fairly valued.