Daily Archives: January 18, 2012

Wealth: Zero Sum or Open Ended?

With regard to the comments on this post…

http://critical-thinker.net/?p=989#comments

First, I would NEVER advocate or imply violence. I will leave that to gun toting revolutionaries on the right – “the blood of patriots and tyrants” folks. I pay taxes to support police and military to make sure violence is NOT how we solve problems in this country.

Second, I do not think wealth is a zero sum game in the short term…

Let’s think of wealth in terms of intrinsic value and monetary value for a moment. Recently, the monetary value of gold has gone from several hundred dollars an ounce to over two thousand dollars an ounce. An ounce has not changed. There is no change in the world’s supply of gold. The cost of getting the gold, production, is relatively the same. The only thing that has changed is that people have this idea that gold is more valuable now due to worldwide economic crisis. The price that folks are willing to pay for gold has gone up dramatically without any substantial change in the supply of gold. It takes time to dig new mines and ramp up production. The inflation of the cost of gold is a market bubble. If you are considering a market bubble an increase in wealth then when the bubble bursts, by the same logic, you should consider the decrease in the cost of gold as a wealth decrease. The 30 trillion dollar super bubble in the last decade for credit default swaps would also increase the world’s wealth during the last decade and decrease it after the collapse. In other words, wealth by this definition is just as likely to increase as it is to decrease. If the intrinsic value of gold is thought in terms of the cost of getting it out of the ground, production, then that has remained relatively constant – it generally does not change very quickly. It is not subject to the whims of the market and value perception. If wealth is measured this way then wealth creation is much more stable in terms of intrinsic value. The question of wealth creation revolves around real value and perceived value.

Real value has to do with the cost of production or cost of delivering the service. Perceived value is subject to such things as market manipulation (as the diamond market illustrates), the values of competing currencies and market bubbles. What is more, ‘inflation’ is the attempt to quantify the difference between intrinsic value and “inflated” value. Additionally, on one hand, the right complains about the Fed printing more money and on the other hand wants to count perceived value as ‘wealth creation’. Why wouldn’t the Fed printing more money be considered wealth creation as well? I do not think you can have it both ways without contradicting yourself.

When financial products like the credit default swaps (CDS) are created they put together existing mortgages of various risk calculations and sell them as new products, they are not new products; they are a re-packaging of an existing product. In the super bubble of the last decade the 30 trillion dollar need for new mortgages did create more mortgages but the intrinsic value of the newly created mortgages went down due to the extremely heavy draw from the CDS super bubble (see https://www.mixermuse.com/blog/2012/01/11/the-great-recession-how-the-free-market-got-rigged/). The beast had to get fed and went from sirloin steaks to any ‘ol piece of crap. This negative draw that adversely affected the mortgage market created liar loans and vastly increased the private mortgage market over the GSE market share during the last decade. Mortgages were being handed out like candy (relatively speaking not by the GSEs but by the private mortgage market; the GSEs were way behind in this game) – did this increase wealth (can’t have it both ways)?

Even Greenspan, a Republican, explicitly stated that he vastly underestimated this negative draw from re-packaged wealth and its devastating effect on the real value of the market. So, these bubbles can actually create fake value, fake wealth and guess who takes the brunt of it – the taxpayer and – the pyramid schemes last entrant; the ones that had all the risk of variable rate and liar loans with no increasing real estate market to sell the house into to keep from getting upside down on the loan. A pyramid scheme is not wealth creation – it is a con that shifts all the investment risk down. The CDS super bubble was primarily private market, ‘free market’ capitalism. To blame it on the government is a straw man that deflects the real source of the problem and therefore, keeps us from learning from the past – you know the consequences of that…

To conclude, the convenient stereotype that liberals believe in a zero sum game may make one feel better about one’s ideology and the open ended view of wealth creation but as I have shown, the real issue of wealth and wealth creation is much more involved than ‘zero sum’ or ‘open ended’. It is a bumpy, messy process that has more to do with perceived value than real value. When liberals talk about the historical disparity between the haves and have nots it is in light of this bumpy, messy process and how the loser seems to be once again the low guy on the pyramid scheme not the guys that got in early and have their ‘created wealth’ going out of the stratosphere.