System Thinking — What is Wealth
Exploring the complex dynamics of wealth distribution
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In this newsletter, I want to discover how complex our world is. If you like, you can subscribe to it.
What is Wealth?
Wealth is more than just money or possessions; it’s about having the right to benefit from others’ efforts. Regardless of its form, money acts as a tool to exercise this right. In our society, we often depend on the work of others, and your claim to their labor reflects your social standing. Understanding this sheds light on how the world operates.
The rise of credit currencies over the past 50 years can be linked to the strategic use of digital methods by currency issuers. Through digital mechanisms, they foster a perception of growing wealth, motivating individuals to willingly participate in labor. As ordinary people work diligently, trusting in the value of credit currency, they unwittingly satisfy the labor claims imposed on them by others.
https://www.visualcapitalist.com/cp/how-reserve-currencies-evolved-over-120-years/
The majority of wealth disparities, exceeding 99.99%, stem not from production or innovation but from the distribution and transaction phases. Despite advancements driven by scientists, and improving industrial technology and production, the overall improvement in material wealth and living standards are improved greatly. While many enjoy a comfortable lifestyle, the widening wealth gap, especially exacerbated by real estate trends, mirrors the global phenomenon.
In the U.S., the wealthy may drive luxury cars, while others might afford more affordable options. Yet, the underlying imbalance in societal “labor claims” remains a significant issue.
Consider a scenario in the U.S. where a person buys a home through a mortgage. Initially, they take a 30-year loan for a $300,000 house, paying a $60,000 down payment. Over the years, due to economic growth and rising property values, the house has increased to $600,000. While the initial labor claims on the property were tied to a $240,000 mortgage, the increased value doubles the individual’s wealth, leaving others who haven’t participated in this market with diminished “labor claims,” even if they earn more in their jobs.
In 1990, a 25-year-old in Japan bought a house in Tokyo, known for its high housing prices. Despite Japan’s high GDP per capita, young people often had to exhaust their savings and take out 30-year loans to afford a home. Over the next three decades, housing prices declined, trapping many in debt as their incomes stagnated. This scenario highlights how individuals, depending on time and place, can either benefit or suffer in real estate transactions. The seller and the lending bank ultimately profited, while the buyer faced financial hardship.
From a labor claims perspective, money and debt function similarly. Money claims current labor, while debt claims future labor. Debt serves as an amplifier of wealth. The allure of debt is a potent tool in encouraging individuals to increase their labor contributions.
The disparities between money and debt are indicative of societal evolution and the influence of top traders.
The Concept in the Financial Market
Financial Market Asset Price Theory
The price dynamics follow a cyclical pattern driven by positive and negative feedback loops
- Price Rise and Positive Feedback — When prices surge, investors respond by buying assets, creating a positive feedback loop marked by increased demand and rising prices.
- Capital Inflow and Leveraging — Rising prices attract more capital into the market. Investors leverage, borrowing funds to amplify their purchasing power, potentially maximizing returns.
- Peak and Price Collapse — As prices reach their zenith, it signals a potential market top. Negative feedback comes into play as investors, influenced by concerns, initiate selling, triggering a downward trend.
- Selling, Negative Feedback, and Asset Liquidation — Negative feedback intensifies during selling, leading to asset price declines. Investors may liquidate assets due to apprehensions about falling prices, creating a self-reinforcing cycle.
- Bottoming Out and Price Rebound — Eventually, prices reach a bottom. Positive feedback may emerge as bargain hunters seize the opportunity to buy assets at lower prices, initiating a rebound.
Understanding these market cycles is important for investors. It allows them to navigate financial markets adeptly, making informed decisions based on the dynamic interplay of positive and negative feedback loops.
Cash Flow Theory
In financial markets, concepts shape investor behavior and economic cycles. Hedge finance prioritizes safety, aiming to cover principal and interest payments. Speculative finance is riskier, anticipates capital gains, and introduces volatility. Ponzi finance, coined by Hyman Minsky, relies on asset value appreciation for cash flow, creating vulnerability to market downturns. A Minsky moment signifies a sudden market collapse triggered by a crisis, reflecting the inherent instability of financial markets. The debt cycle, driven by debt expansion, fuels economic growth but risks over-leverage, leading to defaults and crises. Cash flow theory underscores positive cash flows for financial health, essential for stability during economic downturns.
The Role of the Central Bank
In the fiat currency era, government central banks control the money supply, playing an important role in maintaining economic order. They favor specific assets, such as real estate, government bonds, and stocks, as these enhance their credit and allow control over supply. Conversely, certain assets are disfavored due to perceived risks, while others fall into a neutral category.
Governments influence asset supply, preferring those that bolster their credit. For example, the U.S. favors stocks, China prioritizes real estate, and Japan and Europe lean towards bonds. This reflects the central banks’ role in ensuring economic stability and safeguarding the interests of influential groups in society.
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