Sunday, October 24, 2010

Money is a Zero Sum Game

I heard a stupid phrase on a TV news show: The announcer said: "Money is not a zero sum game."

I suspect the announcer meant to say: "Economics is not a zero sum game."

But the sentence gave me pause.

People who fail to understand the difference between money and the real economy are apt come up with destructive economic policy.

As you see. Money is a zero sum game.

It has to be a zero sum game to work.

The goal of a monetary system is to create a stable unit of measurement for trading goods.

With a stable unit of measurement, I can place a monetary value on my efforts. You can place a value on your efforts. This information simplifies the transaction of goods and services.

The stability of money comes from the limited supply of money. The value of the dollar bill in my pocket is determined by the total amount of money in circulation.

A central bank can affect the value of money by printing more money or by taking money out of circulation.

In the American economic system, the Federal Reserve carefully monitors the monetary supply with a variety of tools to gauge inflation and economic growth. One tool is to create a basket of goods. On a regular basis, the Feds will tally up the basket of goods to measure inflation. If the currency is deflating, the feds can put more money into the system, if inflation is high, they can pull money out the system.

NOTE: The Federal Reserve created a funky fractional reserve banking system. They create money by lending to banks which then make multiple loans backed by the same dollar.

Some people think a steady rate of inflation is good. As such, the Feds gradually increase the money supply. This gradual increase in the monetary supply devalues the dollar in your pocket. A 2010 dollar has less purchasing power than a 1913 nickel. (The New American has a graph of inflation).

When the Federal Reserve was passed, a dollar bill was about as common as a hundred dollar bill is today.

Inflation works a little bit like a tax. The newly printed dollar is as good as the rest of the money in the system. The on the inside of the money creation system get quite wealthy.

Much of the concentration of wealth in our society is a direct result of the Federal Reserve.

A fractional reserve banking system also has the perverse effect of multiplying the debt in the nation.

The Federal Reserve was created by large banks. The Federal Reserve Act was written by a Senator Nelson Aldrich. His daughter married John D. Rockefeller and produced Nelson Aldrich Rockefeller who became vice president under Ford.

Folks of the Austrian School of Economics prefer the gold standard. The gold standard fixes the price of a currency to the precious metal gold and effectively caps the monetary supply.

Back to the thesis of this post.

The economy at large is not a zero sum game. As people reinvest the gains from the intelligent use of their resources, they effectively create more resources and more wealth.

Money is simply a tool that facilitates trade. The ideal money supply is stable. This stability comes from caps on the money supply.

While it is possible to create prosperity through the re-investment of real resources, attempts to make money from money results in inflation (devaluation of the currency).

Now, here is the problem: Our financial education takes place in schools which are detached from real world economics. As such, our scholars are drawn into studying the vagaries of money at the cost of real world economics.

Our economists, banks and financial institutions have created a vacuous system that creates billions of dollars in paper profits by trading trillions of dollars in paper money and derivatives of paper money. This fake economy has grown to such an extent that it is systematically choking and destroying the real economy that produces wealth.

Schemes that try to create money from money result in inflation which has the same effect on the real economy as a tax.

A Note on Capitalism

I really hate the term "capitalism." The term came into widespread use with the translation of Marx's "Das Kapital" into English. The term capital refers to both physical resources in the real world and to the abstract representation of capital in the monetary system.

Money and real world resources are separate entities obeying different mathematical laws. One can produce wealth by reinvesting real resource. Money is a zero sum game. Games where people make money from money diminish society as a whole.

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