Financial wealth is a subset of wealth, in the same way that dollars are a subset of financial wealth, and weasels are a subset of mammals.
Definition of financial wealth, definition at Economic Glossary
Well, if it’s a subset then how can this be true.
I guess real wealth can also be conjured out of thin air - since financial wealth is a subset of it. 
I only read a little… but it’s a terrible article.
A nation’s money supply doesn’t represent its wealth. It doesn’t represent the “the sum total of goods, services, and resources” available within the nation. And it doesn’t need to have a “fixed value relative to the number/amount of goods, services, and resources within the nation.” (Assuming anybody even knew what that “number/amount” was.)
And of course, dollars are debts, in the sense that every one of them is a liability on someone, and an asset to someone else. Even if you wanted to leave out Fed liabilities, as Hellestal does, that still leaves all the rest of the money, which is a liability on commercial banks.
Truly execrable.
I would try a different author: (paraphrasing) “It is not gold or silver (or the money supply) that determines the wealth of a nation, but the productivity of its people.” (Adam Smith.)
Of course, The Wealth of Nations WAS written BEFORE Milton Friedman, so…
AHAHAHA. Jesus you are comical. I’ve caught you in 2 - count 'em TWO - blatant contradictions and yet you continue like the energizer bunny of bullshit. It’s just unfathomable. I think I might need to start a pit thread for you when I’m feeling more creative and I can do a ‘best of LinusK’ compilation.
Until then, every time you post I’m going to reference this latest contradiction and ask you to explain it. I’m going to do that until you can either manage to show how it is that you didn’t obviously and blatantly contradict yourself or admit your error.
So I thought it might be fun, given that the thread’s seemed to have reached the end of its natural cycle, to sum up; especially given how circumlocutory, not to mention digressive, the thread has been.
The thread’s theme is - or was supposed to have been - economic fallacies.
The following’s a non-exhaustive summary.
1.)There’s no money in the stock market (or any market). The problem is that people think, or at least some people think, that if money goes into one asset (like the stock market) that takes away money available for investment in other markets. Common expressions include, “The stock market’s going down, as people rush to put money into gold,” for example. Or, “The stock market’s rising because people are putting more money into stocks.” Another question you’ll see is: “When the stock market goes down, where does the money go?”
Actually, for every buyer there’s a seller, and vice-versa, so the amount of money being spent on stocks or gold or anything else always exactly equals the amount that’s being paid. Money in = money out.
2.) The market is a “wealth-building machine”. If the amount of money going into the market is always the same as the amount going out, why do they call the market a “wealth-building machine”? The answer is that while the market is not actually generating any money, or any real wealth of any kind, increasing the value of the things being traded makes people feel richer. The analogy I originally used was a group of people trading pebbles. So long as the pebble market is going up, people feel wealthier. Their financial net worth goes up. The pebble itself hasn’t improved. It’s not shinier. It’s not bigger. But it is worth more. A special kind of wealth has been created: financial wealth. Financial wealth is based on no more or no less than the collective opinion of the market-participants of the value of the pebble.
Of course, financial wealth ultimately depends on someone, somewhere, paying more for the pebble than you did. It is, in a sense, an obligation we pass on to our grandchildren: to pay more for our assets than we did. Otherwise, there’s no net gain. The bargain is that your grandchildren will pay more for your pebbles, or gold, or stocks, or whatever, than what you did. If they don’t, the “wealth creating machine” will turns into the “wealth destroying machine”.
Simplicio pointed out that while stocks don’t create real wealth, corporations do. And he’s absolutely right about that. Companies make many useful and valuable things, that represent real wealth. My point is just that, despite the huge number of hours and enormous amount of effort and resources that go into it, trading stocks creates (at most) financial wealth, not real wealth.
bldysabba said that while market trading itself may not create real wealth, the existence of the market provides liquidity to initial investors, who might otherwise be less likely to fund start-ups. He’s right about that too.
deltasigma said: “You obviously don’t read any financial publications or know anything about finance. I provided a link earlier to something called asset rotation. It would behoove you to find that and read it.”
The article, however, was about asset allocation, not rotation, and didn’t support what he was saying (so far as I could tell).
deltasigma insisted that money was “real wealth”. Which maybe qualifies as another myth. (#3)
Money is financial weal, not real wealth:
Definition of financial wealth, definition at Economic Glossary
Voyager said “The stock market has at least something to do with intrinsic value - that is why people read balance sheets.”
He’s right of course. Which is why the 1% of investors who read balance sheets think they have an advantage over the others. (And maybe they do. After all, Buffet is one, right?) But anyway, that some investors have an advantage over others doesn’t take anything away from it being a zero-sum game. (Setting aside dividends, of course.)
deltasigma said " dollars are media of exchange that are created ab nihilo and return to the void in the same way. The idea of money as debt is a complete fallacy. It’s nothing more than a chit, a bookmark, a place keeper."
Which would be another fallacy. (#4) Every dollar that is an asset to someone, somewhere, is a corresponding liability to someone else. Even if you accept Hellestal’s argument that the Fed’s liabilities don’t really count - which I don’t - that still leaves every dollar on deposit at every commercial bank in the world - all of which are liabilities.
deltasigma’s right that dollars appear out of nowhere and disappear the same way: but the way they appear is when a bank makes a loan, and disappear when the loan is paid. That’s how liabilities and assets stay matched.
Another fallacy, (#5) from post 213: Commercial banks are “hoarding” all the additional liquidity created by the Fed in the last few years. In fact, commercial banks, collectively, have no control whatsoever over the amount of reserves in Federal reserve accounts. They can try to shift them from one bank’s account to another, but it’s a game of hot potato - in the end, somebody - some bank - has to hold the reserves. The attempts by commercial banks to rid themselves of excess reserves forces down interest rates (which is one of reasons for what the Feds doing in the first place) but it cannot reduce the total amount. When a bank lends, it doesn’t lend Fed money - it creates new commercial bank money in the form of new deposits (liabilities on the bank) and new assets - the promises on the part of the debtors to pay back the loans, with interest. Commercial bank lending has no effect on the total amount of federal reserves in cereal reserve accounts. That number is totally under the control of the Fed.
The next to last thing I’d add is fractional reserve banking. I know it’s taught in Econ 101, bit I’d nevertheless argue it’s an unnecessary fiction. Banks increase the money supply by making loans. The Fed can influence the process by raising interest rates, which discourages people from borrowing. Or it can decrease rates, which (sometimes) encourages people to borrow. But the idea there’s a reliable equation based on the reserve requirement that accurately or reliably predicts commercial bank lending is simply wrong.
Finally: deltasigma, both “real” wealth and “financial wealth” are subsets of wealth. And you’re right - if this is what you were trying to imply - that some things can be both “real” wealth, like a house (which can serve as a place to live) and also financial wealth (an investment, which you hope will increase in value).
Since Linus still can’t figure out how to use google apparently and still hasn’t provided any cites, I’m not going waste a lot of time on this. Anyone who’s interested can look at my previous posts and the multitude of cites I’ve provided in support of the statements I’ve made. Anything that I haven’t adequately supported, just let me know and I’ll see what I can do. It’s certainly more than Linus will do for you.
Even the morons on CNBC don’t think that but if you want to pretend SOME people do, sure, I’m sure some also believe in the tooth fairy.
The market reflects the growing value of investments as opposed to assets. There is a difference between those which I’ve already explained.
Gold is an asset. Stocks are investment. This is how you repeatedly demonstrate your ignorance.
And you’re just figuring this out now I see. That’s pretty fucking funny. But it was an honest mistake on my part. Here, try this link – not that you’ll actually read it (any more than you did the other 3 paragraph “article”). But if you’d pursued it, you would have seen that asset allocation and asset rotation are linked. What I was talking about though was rotation on a more macro scale. If you had ever listened to or read any financial publications of any kind – EVER – you would have heard the term. I heard constantly over the past couple of years when markets were choppy.
What I said was that real wealth is measured in currency. If have trouble with these concepts I’ll try to explain them.
(Setting aside dividends, of course.)
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What do you think ‘zero sum game’ means? Because it definitely doesn’t mean what you’re hoping it means unless all you mean to say is that for every buyer there’s a seller and vice-versa. But that’s hardly what we want to call an astute observation now is it?
cite? You don’t anyone is actually taking your word for anything do you?
cite?
They’re call EXCESS reserves. If you had looked at the chart I linked too, it was plainly labeled as such. Do you understand what “excess” means?
It doesn’t do it reliably. That’s why there’s a theoretical multiplier and an observed multiplier. Try to pay attention.
Yawn.
I think it took me longer to format that than to actually reply.
A bank makes a loan. They debit assets for the new loan they possess, simultaneously crediting liabilities to create the deposit. The owner of the deposit immediately cashes the entire sum of the loan. Short on Benjamins, the bank then draws down its account at the Fed to restock its vault to meet any future cash obligations. The cash is never, on net, redeposited in any other bank.
I believe that just about anybody would describe this situation as commercial bank lending resulting in a decrease in the total amount of reserves in Fed accounts.
This is accurate to reality, by the way. Currency in circulation has increased from around 0.8 trillion in 2008 to 1.2 trillion now, a big chunk of that cash withdrawn from the banking system which, on net, hasn’t been sent back to the Fed to credit reserve accounts.
So what, you’re now claiming that the Fed can deny private banks the right to draw down their reserve accounts in exchange for currency? Or deny depositors the right to cash their deposits?
Except for the first ledger entry that records a new loan, assets and liabilities are essentially never matched.
But that would take some explaining and you don’t read carefully, and I doubt anyone else is interested.
But as you’ve pointed out, the observed multiplier is currently less than 1 (around .75) and historically it’s closer to 2 or 3.
I’m not quite sure what you mean by this, particularly “crediting liabilities.” I would have said the bank creates a new liability on itself (for example, by increasing the amount in the borrower’s account) while simultaneously adding an asset to its own balance sheet (the discounted value of the loan).
I agree that whenever cash leaves the banking system, that reduces the amount of dollars in Federal Reserve accounts, on a dollar-for-dollar basis. I’d argue, though, that it’s bank customers who decide how much cash to hold in the form of Federal Reserve Notes, not banks, and that that decision doesn’t have much to do with borrowing. (In fact, it’d be strange for someone to borrow money in order to hold it as currency.)
But you’re right, increases in the amount of currency circulating decreases the amount of reserves in reserve accounts. They are both, of course, just different forms of liabilities on the Fed, and the Fed can always increase reserve account balances if it thinks too many people are holding cash.
You’re right. Of course, the Fed also increased Reserve account balances by a much larger amount, over the same period.
No, I’m saying of the Fed wants the amount of Reserves to be $X, then that’s the amount it will be. It manipulates the amount by buying selling its assets - Treasuries, or other securities. It can do that despite the fact that people hold some Fed liabilities as currency, and despite the fact the amount they hold as currency changes from week to week and month to month.
I appreciate the gratuitous insult, but if you think dollar liabilities and assets are not evenly matched, I’d be pleased to hear the explanation.
I’m using the vocabulary of rudimentary double-entry accounting.
It’s called double-entry because there are always two entries done together. One entry is the debit. The other entry is the credit. Those are the names. Liabilities are entered as credits, a fact so basic it’s listed in the dictionary (definition 2 d (1)). Naturally, there must also be a corresponding debit entered simultaneously somewhere else. Two entries, debit and credit.
This is the core concept of double-entry bookkeeping. What you’re telling us here is that you don’t even know the names of the two entries.
What you said was, and I quote: “That number is totally under the control of the Fed.”
As a practical matter, there is no possible way for the Fed to keep reserves at precisely X dollars at all times. It is not “totally” under their control, just as they can’t keep interest rates at precisely the rate they want. There are broad market forces at work, and there will always be volatility around any chosen target. Even if they targeted bank reserves (and they don’t), they wouldn’t have total control.
In more extreme cases, for example if their assets dropped to essentially no value, they would have essentially no control.
There was no insult anywhere, gratuitous or otherwise.
You’d know that if you read more carefully.
Why don’t you open a book?
I don’t make any demands on people that they must be credentialed experts for me to listen to them. I don’t demand that they have any special degree. I just want them to have done at least a little bit of research before they shoot their damn mouths off. That means that if you’re going to talk about bank ledgers, then yes, I expect you to know how a ledger works. Anyone who opines on the subject of accounting should know what a debit is and what a credit is, since those are the two entries referred to in the double-entry system. There are even free texts, like the online Principles of Accounting.
Banks create monetary liabilities without creating any loans all the time, literally every single working day. They will also decrease their deposit liabilities, thus destroying private-bank-money, again without touching any loan balance. Happens all the time. It’s as common as dirt. The size of the loan asset also often changes without any connection to the amount of deposit liabilities. This is all part of the normal operation of being a bank.
But I can’t teach you freshman financial accounting, let alone the peculiarities of banking. I’m always happy to explain things to anyone who asks honest questions, but I’m not here to remedy your nonexistent accounting education. Put some effort in. Learn the basic words. I can fill in the blanks but I can’t remedy a blank slate.
So I hear your frustration over my question about crediting liabilities.
But I didn’t see you say anything about my own way of phrasing it: “I would have said the bank creates a new liability on itself (for example, by increasing the amount in the borrower’s account) while simultaneously adding an asset to its own balance sheet (the discounted value of the loan).”
So can we agree we agree on the basic concept?
Except on my credit card and other bank statements, where credits are shown as credits, and liabilities are debits. Or rather, debits are liabilities. I’m not offering that as a defense, rather just as evidence that the terms can be confusing.
I want to make it clear I’m not questioning your terminology. I would point out, however, that 2(d)1 is actually the fifth definition under “credit”. The first financial definition (2a) is: “the balance in a person’s favor in an account”
Nevertheless, they can buy and sell securities, to increase or decrease reserves, whenever they want, and they can do it pretty quickly. (Certainly within hours, if not minutes, right?)
On that case, we’d all be in a world of hurt. But that’s my argument for why the Fed needs to buy actual, valuable securities, right?
Good to know.
If you’re genuinely interested, I’ll give you my reading list.
I’d like to take this opportunity to point out that in addition to not listening to people who “shoot their mouth off”’ you also don’t have to listen to anyone, ever. You don’t even have to give a justification, if you don’t want.
What I was asking about was whether dollar assets are matched up with dollar liabilities. I understand banks adjust the value of their loan portfolios all the time, and sometimes even go out of business altogether. But isn’t all of that part of the process of matching assets with liabilities? Isn’t that the reason those things happen?
You really shouldn’t feel under an obligation to do any more than you feel like doing. If you feel like I’m too ignorant to talk to, you shouldn’t feel like you’re under some obligation to continue to do it anyway. There’s no obligation, anywhere, that you post anything on Straight Dope, much less on my particular threads.
I’ll miss your contributions, even if your are sometimes unreasonably irritable, but whatever. You certainly shouldn’t be posting here just for my entertainment. (Even though, I admit, it’d be a little less entertaining.)