Contact us
CALL US NOW 1-888-GOLD-160

Money Is Not Wealth

  by    0   1

When governments started locking down the economy in response to coronavirus, the Federal Reserve sprung into action. First, it slashed interest rates to zero. Then it quickly launched what we’ve dubbed QE infinity. In effect, that meant printing trillions of dollars out of thin air and pumping them into the economy.

Meanwhile, the US government did its part, passing a massive stimulus bill – pumping trillions of dollars of borrowed money into the economy. Of course, the Fed monetized a big chunk of that debt via QE infinity. So, in effect, the federal government joined forces with the central bank to pump trillions of dollars out of thin air into the economy.

To sum up, the primary response to effectively shutting down the economy was to simply create new money and hand it out. Viola! Problem solved. Despite the fact nobody was working, services weren’t being provided and products weren’t being produced, it was OK because everybody still had plenty of dollars in their pockets.

It seems self-evident that despite the windfall, people weren’t really better off after being locked down for weeks on end. So, why do so many people buy money printing as a legitimate cure for economic woes?

Economist Bryce McBride argues that this monetary myth-making is rooted in a fundamental misunderstanding of money. Most people confuse money with wealth.

After all, aren’t people with a lot of money considered wealthy? However, while wealth and money are often found together, they are very different in their character and importance.”

Think about it for a moment. A dollar bill doesn’t really have any use. I suppose you could burn it if you’re cold. Or you could use it to write a note to your kids. But in-and-of-itself, physical (fiat) money doesn’t have much utility. Its only purpose, is to facilitate the exchange of goods and services – real wealth. You could have hundreds of $100 bills, but if there are no products to buy, or if nobody is offering any service, the money is worthless. A healthy economy needs actual wealth, not just a big fat pile of money.

Here’s how McBride defines wealth.

Useful goods and services and, perhaps more crucially, the productive resources needed to create useful goods and services, are wealth. A loaf of bread is wealth, as are the farms, factories, and human labor and ingenuity that are needed to grow and process the crops necessary to produce it.”

On the other hand, money is a tool that effectively transforms one kind of wealth into another.

For instance, your skills and ability to perform work are a form of wealth. So is the food you eat. The money paid to you in wages which you, in turn, pass along to the grocery store performs the simple yet crucial task of efficiently transforming your labor into food.”

If you grasp these principles, it should become clear that having a lot of money isn’t particularly helpful if there is no actual wealth.

Of course, there is always wealth. As McBride points out, our ability to work is a form of wealth. Tools, land, clothing – they are all forms of wealth. In fact, we are surrounded by wealth.

It should be clear that the amount of wealth in an economy is much greater than the amount of money, as wealth only periodically and for a short time period turns into money before, usually, being turned into another form of wealth. To illustrate, imagine a small business owner who retires and sells her business. She is unlikely to keep the sale proceeds in her bank account or under her mattress. Instead, she will probably use the money to invest in other businesses (either directly or through the stock market) in order to generate income for retirement. And, of course we all know that it seems like no time at all before our pay packets are transformed into food, housing, gasoline, and the other necessities of life.”

Clearly, simply expanding the supply of money doesn’t make us wealthier. In fact, it’s harmful. Every dollar created by the central bank devalues the dollar in your hand. Money creation – inflation – means more money chasing the same amount of wealth. In the long run, that leads to rising prices. Nobody is really any better off. As things come back to equilibrium, you have more dollars, but it takes more dollars to acquire goods and services. You’re not wealthier.

The seemingly low levels of price inflation despite massive real inflation over the last couple of decades have led people to believe money printing isn’t that harmful. In fact, a lot of people argue we can just keep right on printing money in order to pay for infrastructure, renewable energy, healthcare, or whatever else we need. McBride argues that this is dangerous thinking, and it makes the elementary error of mistaking money for wealth.

Creating trillions of dollars of new money will not create the skilled labor or the other productive resources needed to achieve these ends, especially as in modern times most new money is created by banks issuing loans for property and other forms of speculation. Instead, at best it will simply direct wealth and productive resources away from those most able to use them wisely into the hands of those most likely to mismanage them. At worst, it threatens the viability of productive enterprises altogether.”

McBride returns to our small businessperson to illustrate how money printing threatens the economy.

If a large quantity of new money were to enter the economy during the time in which she sold up, the price of alternative forms of wealth would be sure to rise. Rising stock markets even amid the economic wreckage wrought by the pandemic and associated lockdowns are evidence of the impact of money creation on asset prices. Unfortunately for our retiree, her money, generated from the sale of real wealth, is now competing with newly created money, created from nothing, to purchase income-generating assets. Her business wealth will not, therefore, be able to purchase as much wealth in other forms as would have been the case had new money not been created.

More troublingly, though, wealth is being reallocated away from a person who has demonstrated his or her ability to create and preserve wealth and toward people who, as well-connected insiders with access to unlimited sums of newly created money, have every incentive to be reckless.

Money is a tool – like a hammer. It has a specific function. But just because we need one hammer doesn’t mean we need 100.

As McBride emphasizes, money is not wealth. “It performs a useful service when it facilitates the exchange of different forms of wealth.”

Under our current monetary system, though, the power of money has grown to the point where it is no longer a servant of wealth but instead, it’s master and destroyer. Given this, the continued and accelerated creation of money, while sold as a means by which we might create a better society, is more likely to lead us in precisely the opposite direction.”

Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!

Related Posts

US Senator Allegedly Bribed With Gold

Last week, a federal grand jury indicted Democrat Senator Bob Menendez and his wife Nadine Arslanian Menendez on bribery charges. According to the indictment, the senator and his wife took bribes, including 13 gold bars, from three New Jersey businessmen with Egyptian ties.


Japanese Go on Gold-Buying Spree as Price Inflation Runs Rampant

With price inflation running rampant in Japan, Japanese households are rushing to buy gold. The sudden surge in demand, along with the devaluation of the yen, has driven the price of gold to record highs in yen terms.


Banks Borrowed Another $2.2 Billion from Bank Bailout Program in August

The Federal Reserve continues to bail out US banks as the financial crisis that kicked off last March continues to smolder behind the walls. Banks borrowed an additional $2.2 billion from the Federal Reserve’s bank bailout program in August. This was on top of the $3.7 billion they borrowed in July.


The Ticking Time Bomb Gets Closer to Zero as the National Debt Quietly Blows Past $33 Trillion

Do you hear that? It’s a ticking time bomb. Last Friday, the national debt quietly blew above $33 trillion. As of September 15, the outstanding federal debt stood at a cool $33,044,858,730,468.04.


US Government Runs Budget Surplus in August But It’s Not Really Good News

The federal government charted a surprising budget surplus in August. But don’t be fooled. The feds didn’t miraculously fix their deficit problem. The Biden administration continued to spend money at an unsustainable pace last month. The surplus was merely a function of the reversal of student loan forgiveness.


About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
View all posts by

Comments are closed.

Call Now