We often talk about how rich people are based on their income, and "rich" people under this definition often point to their overall lack of assets (because they are spending all that they have coming in and perhaps a little more) in an effort to get some sympathy and argue for a definition of "rich" based on net accumulation or wealth, rather than on income.
Right there, it's pretty clear we've got some confusion.
Obviously, we have taxes that are based on income (sales taxes, many business taxes, payroll taxes, income taxes), but we also have taxes that are based on valuation of an asset (notably, property taxes). So it's not like this is just an argument with no relevance to anyone.
Financial planners and advisors engage in an exercise with clients (you, too, can do this and pick your set of rules however you like with lots of books and articles to assist you) in which they attempt to calculate "net worth" by summing up everything they own and everything they owe. Folding green stuff and checking accounts are straightforward, accounts holding liquid assets such as stocks, bonds and funds owning same a little trickier because they are "marked to market" that is subject to change moment to moment in value, nonliquid assets (such as cars and houses) are often easier to figure out what is owing on them than it is to figure out what they are worth. Let's just pretend that stamp collections, jewelry, old books, nice furniture and art work isn't actually worth anything, because if it ever comes to the point where you need to sell it to get the money, you won't actually be able to get the money anyway, or not nearly what you think you will. Altho, hey, the process of finding out what you could get for it (and how) is enlightening, particularly in light of how you probably bought it and what you paid for it. The two experiences are often shockingly different.
Actually, if we pause for a moment, and contemplate the purchase and resale process, it illuminates where money comes from, because money comes from transactions. It always has, and it always will. That is what money is and that is what money does and that is where money comes from. Transactions. Allow me to illustrate.
I have chickens. You have goats. Because it is the 17th or 18th century, we _know_ about coins made of silver and possibly gold and perhaps copper as well, but we don't actually typically see them. Nevertheless, we know that chickens typically go for so many of a particular kind of coin (which we don't actually have, but we know about) and that goats typically go for so many of that or another kind of coin and there's some well-accepted rate of exchanging one of the kinds of coins for the others. Let's say chickens are a dollar and goats ten dollars; the rate of exchange for a ten dollar to a one dollar is exactly what you think it is. At the time, it wasn't quite this clear (paper lightens our load and clarifies the math and helps us cope with the scarcity of metals), but good enough. So when I want a goat for the holiday and you want chickens so you can have eggs for breakfast, we don't have to figure out how many chickens a goat is worth; we figure it in dollars and ten dollars and work it out from there. Really. Honestly. Don't let the barter fans confuse you, and don't be imagining that agriculture exchange in the boonies a few hundred years ago had enough metal coins around to keep it moving.
That is what money is: an accounting system, a way of keeping track. These days, we do it with digital representations and a variety of physical means of showing our authority to speak for these digital representations, because our transaction may take years to complete (30 year fixed on a house) and we don't know each other that well.
You have a house. I have a job writing articles for websites about gadgets and I design iPad apps on the side. (Not really. This is an analogy. Like the goats and the chickens.) I want a house and you want to travel. So we come to some sort of agreement in which I commit a portion of the future income from my job(s) to making payments on a loan from a bank. The bank gives you a bunch of money up front (actually, they put it in an account that you speak for). The government gets a cut and the transaction is carefully documented.
Where did the money to give to you for your house come from?
Well, it sort of comes from the future: my future income, or my future resale of the house to someone else, or the house burning down in the future and insurance paying the balance owing, or whatever. And it sort of comes from the bank, which probably takes it out of a whole bunch of people's accounts, figuring they're not all going to ask for their money at the same time. It comes from a whole lot of other people's jobs; they have money they don't want now but will need later and they'll need a lot more of it later because they, too, want to be the kind of person who can travel and not work, and so they're willing to invest money in really weird securities that carve up bank loans and reassemble them and resell them.
Money comes from transactions. The chickens and the goats with the money as a mechanism for simplifying the process of figuring how how many chickens a goat is worth is pretty clear: the transaction is completed on the spot. But as soon as the future gets dragged into it, and borrowing, and lending, never mind the slicing and dicing, it should be fairly obvious that money that existed sort of for a brief instant with the chickens and the goats is actually hanging around for a very long time with the 30 year fixed or the Pay Option ARM or whatever. If money is accounting, if money is created by transactions, then the way money accumulates is when transactions are, basically, not "completed" in the sense that our chicken and goat exchange was completed.
One more example, because it seems relevant to me often and yet we don't talk about it. Ever. If we all were very sensible, and we all saved up this frozen-in-mid-transaction money so that we could all, as elderly, ailing, non-working people could afford to buy food, shelter, health care, etc., we have to contemplate who will be on the opposite side of that transaction. What will they be charging us for the things we need to buy? Back in the bad old milleniums, adults tried to have enough children that the odds would be good that adult children would be around to care for them if they were lucky enough to live that long. That transaction had an obvious person on the other side, and the debt made sense (I change your diapers; you change mine). Does our debt make sense? Who will be on the other side of our transaction?
Makes you think the Japanese obsession with human-like robots isn't so crazy after all.
All right. I can't really leave it at that, because I brought up the net worth exercise and the brokerage accounts and it turns out there's a bit that matters a lot there. When you calculate what your portfolio is worth, or your car, or your Magritte, or whatever, you look at recent transactions (comps, in housing). When someone loans you money with that as the collateral, the comparable transaction as some leverage: one house sale down the block that lets ten people get home equity lines of credit to go buy TVs with is creating way more money than if those ten people stayed home and played Hungry, Hungry Hippo instead. Whether you think this is a good thing or a bad thing is another matter; what seems impossible to argue is that money was created. If that same house down the street is foreclosed upon and then sold under really difficult circumstances, the amount of money the ten people down the block can borrow on their homes is generally dramatically reduced. If you figure that effect over society as a whole (never mind the knock on effects as people have to sell other things under even more difficult circumstances, to avoid becoming the next foreclosure), it seems relatively obvious that vast mountains of money are destroyed.
Really, how much money would the government have to figure out a way to create (whether by borrowing and spending, or quantitative easing, or whatever), to make up for that vast amount that was destroyed?
Perhaps I'll come back in a bit and explain why inflation is extremely unlikely under such circumstances. And the difference between inflation/deflation and appreciation/depreciation. Stuff like that.
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