What Is Wealth?

I like to read farmer John Burns' comments on Market Talk.  What he says just makes a lot of sense to me.  I keep wondering when our U.S. monetary system is going to fail?  No one knows but I like to keep up with what others think who follow the system much closer than I do.  Agronomy is my passion, not money.

But we all use money as a tool to live.  I've used more tool money the last ten years than I ever dreamed I would.  Larger scale farming requires that.  Farmers always looked wealthy with land and livestock and machinery.  After a lifetime of farming though, a farmer looks asset rich and was always cash poor.  There never is enough cash to do all the things that could be done but we try.

Stocks and bonds are a different beast, and different too.  Here is what John said about wealth:

"The question that comes to my mind is, "What wealth?"

Wealth is created by producing something that fills the needs of consumers. Financialization(does he mean the monetary system?) does not create wealth. In fact, it diminishes it in that the people promoting it are taking a cut while not contributing to production.

People that hold lots of government bonds might feel wealthy. But what are bonds? Are they real wealth? I would say that they are a paper promise to future wealth. They are a promise that at some future point taxes will be raised that will pay the bonds off. But what rate of taxation in the future can ever pay off the debt owed? Government bonds require FUTURE earnings to create tax revenues so that the earnings not only supply the then current government needs, but are surplus to the degree that the bonds can also be retired. So I would discount all government bonds as not being wealth at all. They are just promises to wealth in the future that the government has to be able to honor.

So a lot of bond holders that think they have wealth may be disappointed if the government can not meet its obligations (promises) or chooses to simply create new money out of nothing to pay them off rather than use real created wealth. In this way, the wealth is only a diluted portion of the original promise.

Stocks have value in that companies produce products and make a profit. The stockholders have a claim on this stream of profits from the companies. But if the price of the stock gets bid up for no other reason than the Fed has created huge amounts of new fiat money that the TBTF member banks then leverage up to prop trade, how lasting will this supposedly higher level of "wealth" be? Can the Fed ever live up to its promise of calling back in all the liquidity while stocks still stay at nosebleed prices? And if the Fed does not call it back in, eventually the additional base money will find its way into price inflation if the economy ever starts to pick up any speed and the banks start the fractional reserve lending money expansion again. How can the "wealth" be doubled in the stock market when companies are producing no more?

I think a big portion of what we believe to be "wealth" is no more than an illusion created by years of new money creation and years of financialization of assets. Like a game of musical chairs, only the one who sits down quick enough every time wins the game.

I think when we find the music stops, a lot of perceived "wealth" will go right back where it came from, thin air."

It's only John's opinion but I value that.  He understands the U.S. monetary system a whole lot better than I do.  A farm, now that is wealth to me!

Ed Winkle