What is wealth?
Brent Tantillo • October 24, 2009 • Uncategorized
According to the Economist, the heart of this recent economic crisis is the fundamental confusion about the nature of wealth: is home equity wealth or is it gold that we should value? According to Buttonwood:
Wealth consists of the goods and products we wish to consume or of things (factories, machinery, an educated workforce) that give us the ability to produce more such goods and services. Financial assets arise from the desire to postpone consumption so that money can be saved, either for precautionary reasons or to invest so that more goods and services can be consumed in the future.
Looked at in that way, financial assets are not “wealth” but a claim on real wealth. If those claims multiply or rise in price, that does not mean aggregate wealth has increased. If a pizza is cut into eight instead of four slices, there is no more food to eat. If everyone sitting at the table is given shares in the pizza and the share price rises from $1 to $2, the meal will still be no bigger.
And therein lies the problem with mortgage backed securities, and many other financial tools that are being marketed, is that they really don’t increase wealth, but rather they increase the number of people having claim to these assets. Which is the reason why many prefer to have money in hard assets, i.e. land, precious metals (but not claims to precious metals). In a healthy economy, where people are paying their mortgages, these financial tools didn’t seem like such a bad idea, however once the housing bubble burst, the multiple banks and individuals owning mortgage backed securities were left holding the bag. Buttonwood asks an important questions as we evaluate our policymakers’ plans for bailouts of the economy:
Thinking about wealth in this way is also useful when assessing rescue packages for the economy. Will these policies boost the amount of goods and services the economy produces in the long run, or will they have consequences that actually restrict economic activity? Does quantitative easing really boost wealth or simply create more claims on the same underlying pool of assets?
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