Virtual Wealth Versus Real Wealth

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The rich are getting richer. According to the last Bloomberg list, the fortune of the 300 wealthiest people in the world increased by $524 billion in 2013, reaching a total of $3.7 trillion, while Bill Gates, number one on the list, saw his personal wealth increase by $15.8 billion, which makes him now worth $78.6 billion. Let’s bring out the champagne!

Well, the middle-class will not be drinking champagne… In the United States, there are close to 50 million people on food stamps, almost double the numbers preceding the 2008 crisis. Why are things so distorted? Some would like the « filthy rich » to pay, but that wouldn’t do any good (an integral re-distribution of those $524 billion to the world’s middle class would be but a drop of water for each family!). Also, it would hide the real problem.

Essentially, the rich have gotten richer because their assets consist of stock shares, and the stock markets have done well in 2013. This is the main reason. But the rise in shares has much less to do with the real performance of businesses (which would be reflected in the middle class) than with the Fed + BoJ + ECB QE plans. A lot of this « free » money (0% int.) sees its way to the stock markets which react by (don’t hold your breath…) going up! Well, actually, this money is without interest for banks being refinanced by their central bank, but not for households and businesses that wish to borrow and have to pay the full rate, of course, to their bank.

This is known as the Cantillon effect, from the Irish economist of the 18th century who first brought the phenomenon to light. It has become a key concept of the Austrian School, and Ron Paul has often denounced this pervert effect of quantitative easing that causes an artificial « wealth effect » for the wealthiest, while the middle-class earnings are not improving. This analysis is worth its salt : as a matter of fact, one doesn’t need to be a marxist or a statist or even a fan of the « Occupy Wall Street » movement to be against this unjustified distortion of wealth and income. A liberal (in the Austrian sense) analysis can aptly explain this phenomenon and bring forward an answer (sound money management) that could solve this problem at its roots without intervening in the markets.

All this wealth is mostly artificial, being the result of a bubble, a stock market bubble. A virtual wealth that may well be lost should the stock market reverse… The moral of the story : Wealth cannot be measured by a single number, especially if it’s accounted for in an overly-printed money; this is all too volatile. One must ask, what is real wealth made of? A piece of advice : gold cannot be printed, so there is no Cantillon effect possible with it!

Happy New Year to all for 2014!


Philippe Herlin – Researcher in finance and junior lecturer at the Conservatoire National des Arts et Métiers in Paris / Member of the Editorial Team / @Philippeherlin / Facebook

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