There is More to Wealth than Money

Some Fridays are better than others. Today is not going to be pretty. Like a character that refuses to die in a bad horror movie, the U.S. job market posted some shocking June numbers. It has revived the dormant nightmare that this may be a long “L” shaped recession. Or even worse, a double-dipper, with the second dip just getting started.

The U.S. Labor Department Reported that around 467,000 Americans lost their jobs in June. This was unwelcome news. The data had been getting less bad every month since January. Then the June numbers rocked up, fell out, and took stocks down with them. This is causing everyone with a pulse (and most with a brain) to have second thoughts about just how good things are-or how much worse they might get.

The S&P and the Dow both fell nearly three percent. Oil and gold were down too. About the only thing up were Treasury bonds and notes. Speaking of which, the U.S. will auction another $73 billion of those next week. Wednesday’s auction is for $19 billion in ten-year notes while $11 billion in 30-year bonds go on sale Thursday.

The Aussie futures are pointing to an open about two percent lower on the S&P ASX/200. And why wouldn’t they? If the jobless rate in American-9.5%–has reached a 26-year high, might that mean Australia’s labour market (the whole economy even) is in danger of swooning again?

“You may have green shoots, whatever you want to call them, you may have temporary relief, but you are still in a world that’s breaking,” Black Swan author Nassim Taleb told CNBC’s Squawk Box. “Anything that’s fragile like the financial system will eventually crash, he said…We’re in the middle of a crash…So if I’m going to forecast something, it is that it’s going to get worse, not better.”

Taleb’s point is not a popular one. But it is a realistic one. The fiat money, leveraged finance Western financial system went global in the last twenty years, providing an epic rise in asset prices (and the debt used to purchase them). There’s no doubt that real goods and services have traded hands with world growth. But now we wonder how much of that is sustainable when you take the credit away.

Did we use phoney money to build a world with completely unrealistic levels of growth? Were trillions of dollars of capital allocated based on final demand that was artificially pumped up by credit, currency manipulation (low U.S. interest rates and global dollar pegging), and government stimulation?

Yes we did!

Mind you, the crash of the financial system is not the end of the world. It is a massive calamity to be sure, wiping out the value of retirement assets many people were counting on to make it through their golden years. But as many readers have reminded us in the last few months, there is more to life than money.

Fair enough. But there is more to wealth than money too! Peace of mind, having your assets in forms that can’t be inflated away or won’t suffer from debt deflation…we would count these as “wealth” at a time like this.

That brings us back to the problem growing at the back of our mind yesterday. Can a massive deflating credit bubble nullify the liquidity measures by central bankers, which are puny in comparison to the nominal value of the assets at risk? “Yes you can!,” comes the answer from some of the friends we put the question to.

“I’m tempted to disagree that expansion in govt credit won’t reach the economy and therefore won’t be inflationary,” replied Money Morning editor Kris Sayce. “I’m not mistaken, the Fed is buying up these ‘assets’ in order to take them off the banks and also to help price them. If the Fed didn’t do this then the banks wouldn’t be able to lend extra money to customers as they would breach their lending limits.”

“It’s not so much that the Fed is directly feeding the banks money which flows through to the economy, it’s more that the Fed is feeding the banks money which allows them to expand lending which they otherwise wouldn’t be able to do. Thus at the very least is preventing prices from falling, or from falling as much as they ordinarily would without the intervention. In effect there is more money flowing in than there otherwise would be. There already IS inflation.”

Another colleague in the States replied that, “I am leaning more and more to the idea that the credit-based stuff will deflate (real estate, stock prices) but the cash-based stuff could rise (like foodstuffs, energy). In a way, it’s not a debate about inflation or deflation, but which assets inflate and which deflate. There might be a strong dichotomy within the economy between the two.”

To the extent that you cannot eat a mortgage-backed security, we see the wisdom in this view. The world has a lot of people. They have a lot of real needs. Regardless of the value of derivatives and opaque financial assets, a certain level of economic activity for a certain kind of tangible good will still be there. The challenge for investors is to determine if you can profit from this in traditional ways (stocks and bonds) or if you have to venture into less traditional asset classes and forms of ownership (land, real commodities, precious metals).

And of course, the thesis could be incorrect. If credit is not money-or if the large lending and government guarantee programs don’t reignite a lending boom in the real economy-then you may simply see a lot of wealth disappear down the memory hole.

Finally, a mystery Aussie commentator who wishes to remain anonymous but whom you may hear from in the future in this space sent a philosophical yet practical reply.

“What is money? Currently, that’s what the Federal Reserve (and other central banks) put in the reserve accounts of their member banks. The banks then use this as a base to create their own money, or ‘like money’. I guess this is also known as credit. So yes, credit is not money.

“And this bank credit is now contracting as the natural force of the market tries to drive prices lower and correct the boom. The Fed is offsetting this process by swapping ‘money’ (fed funds) for the impaired assets. But the banks are sitting on the cash, and obviously do not have the risk appetite (or the demand) to lend it out.”

“So at this point additional base money is not being lent out as inflationary ‘like money’. I’m not sure the Fed has the mechanism to make out and out purchases of assets other than through lending facilities, unless they are Treasury or Agency purchases. As far as I’m aware, the Fed can only distribute its newly created money through the banking system, and no other way. The banks have always been the source of inflation, and then need to lend to create this. They will probably use their excess reserves to buy Treasury’s in the coming years, and then the Fed can but the Treasury’s back off them in time. This will be inflationary.”

“Where does gold come into it? Well, gold is real money….chosen independently by the people. As trust in the US dollar continues to evaporate, demand for gold will increase. At some point gold will again be referred to as money. Because the amount of credit (debt) in the world dwarfs the amount of gold, and because gold will be a legitimate extinguisher of the debt, gold will likely rise massively to have the capacity to extinguish the debt. This is a process unfolding over years though.

“A rising gold price is actually deflationary in that it represents a rise in the purchasing power of money. So I think deflation is the ultimate force that cures this massive credit bubble…outright deflation if long term faith in the US dollar remains, or gold price induced deflation should the bottom fall out of US dollar trust. The quantity of US dollars may be rising at the moment but the real turning point will be when the perceived quality of the dollar declines.”

Hmm. Gold rising indicates the rising value of cash…because gold is money. But if money is not wealth…and gold is money…does this mean gold is not wealth? Now there is something to think about over the weekend. Our thoughts on Monday…

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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9 Comments on "There is More to Wealth than Money"

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“Hmm. Gold rising indicates the rising value of cash…because gold is money. But if money is not wealth…and gold is money…does this mean gold is not wealth? Now there is something to think about over the weekend. Our thoughts on Monday…”

Dan you’re doing my head in!!! Gold and money is just a form in which there is transfer of one form of energy to another. If you’re starving, you’ll swap a gold bar for some kfc. The perception of wealth is in your head.

Annie: But is kfc food? And Dan, should not the value of dollars be inversely related to the value of gold? If gold is cheap (in dollar value), does this not suggest that money is valuable? Reading your article you seemed to imply the opposite. One problem with gold is that there are large amounts on the loose (not in bank vaults, largely as jewellery) so that if a gold standard was reintroduced, there would be a rather dramatic shift in wealth that could cause tensions. For this reason I suspect that there might be many different metals used as… Read more »
Biker Pete

Yeah, we Aussies are indeed wealthy, Annie. Once a week we count our blessings… and fall asleep before we can finish counting. Why count sheep in a land where they outnumber humankind?! :)

Greg Atkinson
Gold is subject to the same pricing pressures as anything else. It is only worth what it is now because there are more buyers than sellers not because of any intrinsic value. Gold could go much higher if buyers continue to buy, but it could also fall quickly if sellers start to outnumber buyers. If you were on a sinking ship then life jackets would be worth more to you than a bar of gold…it is all relative :) Just remember this, gold production costs are around $500 or so an ounce. So if you buy now you would want… Read more »

Greg, on that point, and beyond (re: manipulation of the gold market) I found an interesting website: – Gold Anti-Trust Action Committee – it seems some wealthy gold traders were cheated out of their fortunes and weren’t particularly happy about it.


hahaha Dan, good question about kfc. Still trying to work it out. Having said that, I get a craving every six months or so for it, cave in and regret it every time!! And yes Biker Pete, here in the land of drought and flooding plains we should indeed count our blessings. I do everyday.

Am seriously considering silver as a good buy at the moment. Always needed for technology and could be more popular in the future if gold keeps dilly dallying.

I dont know if this helps Annie but it is at least possible that silver could see some lower prices in the current deflationary environment. I have aquired some silver too a while back when relatively cheap but am hoping for a chance to buy a little more if this takes place. I only expect silver to go down with the current deflationary events unfolding- more mortgage forecloseures and resumption of cyclic bear market in stocks. This reasoning due in part to silvers industrial useage. So I look back to November 08 and silver was around $9 US. I’m hoping… Read more »
As has been noted above, “wealth” and “value” are completely subjective concepts that depend on society’s perceptions. These can and do change and we may be on the brink of major change currently. Monetary inflation is caused by NEW money entering the system and the only legal way this happens is when central banks “expand their (im)balance sheets and create it. This new money is the SAME stuff whether it is a loan, a purchase of MBS, purchase of long term bonds(quantitative easing)or purchase of short term securities (to reduce interest rates). I think your US colleague has hit the… Read more »

rising gold is inflationary not delfationary cuz it means u need more dollars to buy the same gold.. = dollar less valuable = goods more expensive.

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