Billionaires

[Gameface]

I think what some people are asking, and I'd like to know as well, when there is more total value (or perceived value) is more currency printed? Does it even matter how much currency exists if most, especially large, financial transactions take place electronically? And if every billionaire suddenly wanted to carry their cash around as cash, how would that work? Would simply trying to get physical currency for the vast majority of wealth in the world have an affect on how much wealth was in the world? And I understand that much of this value is on paper, but for a person to buy stock they have to have access to that amount of cash, do they not?

 

[moevillini]

Like god?

 

[moevillini]

.... And I understand that much of this value is on paper, but for a person to buy stock they have to have access to that amount of cash, do they not?

you would sort of think so, but then again, think about 401K's where your company puts in so much every month as a contribution - it's not really cash they're using - maybe they are giving employees shares of company stock whose value will fluctuate? So no actual cash changed hands.

 

[b_line]

In the case of amazon, there is both perceived value that is added and real value in the fact that is true profit has become a massive number that can not be argued against.

I think the added value to bezos net worth came in both forms. You can say the value is not tangible when talking about what his business could sell for, but the real value is in his bank account.

 

[Joe Bagadonuts]

I think what some people are asking, and I'd like to know as well, when there is more total value (or perceived value) is more currency printed? Does it even matter how much currency exists if most, especially large, financial transactions take place electronically? And if every billionaire suddenly wanted to carry their cash around as cash, how would that work? Would simply trying to get physical currency for the vast majority of wealth in the world have an affect on how much wealth was in the world? And I understand that much of this value is on paper, but for a person to buy stock they have to have access to that amount of cash, do they not?

Paper money is merely a placeholder for value. It has no value itself, even though we associate value with it. No billionaire would ever want to convert very much of his/her value at any one time to paper currency because that is the least useful place to put it. And think about the process by which this would happen if it did. The billionaire would have to sell his assets (his factory, his farm, his oil well) to someone else for an agreed upon price. The price is set exactly as described in the Apple example above, based on the buyer's faith in the asset's future.

In the real world, though, the only rational reason for converting value to paper money is as a means to exchange the value for goods or services. Only a small percentage of the value in the economy is represented by actual paper dollars. When an investor talks about buying dollars what they really mean is putting their money into bank-like investments where they earn interest for allowing others to use their money.

So, no, currency does not need to be printed in order for value to be created. Currency is simply a method for exchanging value. As far as the amount necessary, there just has to be enough that when I want to convert my value in a liquid asset to currency that I can immediately do it. If I go down to the bank and ask to convert my account to actual cash, and they say, "Sorry, we're out," then all hell breaks loose. And the reason it breaks loose is not because the value of paper dollars has changed at all (they are essentially worthless and always will be). It is because my faith in the dollar has changed.

 

[Joe Bagadonuts]

Like god?

Like everything.

 

[Joe Bagadonuts]

In the case of amazon, there is both perceived value that is added and real value in the fact that is true profit has become a massive number that can not be argued against.

I think the added value to bezos net worth came in both forms. You can say the value is not tangible when talking about what his business could sell for, but the real value is in his bank account.

The people who are buying the products that Bezos sells are, in reality, doing the exact same thing that the stock purchasers are. They are evaluating an asset and coming to a decision of how much value they are willing to part with in exchange. If they value the asset at less than Bezos is selling it for they buy. If not, they don't. If Bezos marks a particular books price up to quadruple the traditional selling price of a similar book, but for some reason there is a pool of buyers who believes that asset is of that much value, he will make a killing because their investment (through the act of purchasing) is inflating the value of his assets in exactly the same way that the stock purchase did.

If you don't believe me on this then please explain the high dollar amounts that were once exchanged for "limited edition" Beanie Babies or Pokemon cards or any other asset that has gone through a buying craze of that type. Eventually you are going to see that it was actually the buyer's current level of faith in the value of the asset that they were trading money for. ("Ooooh, I would look good in that jacket, so therefore it is worth a lot of money to me right now, in the moment I am thinking this thought.")

 

[Gameface]

Paper money is merely a placeholder for value. It has no value itself, even though we associate value with it. No billionaire would ever want to convert very much of his/her value at any one time to paper currency because that is the least useful place to put it. And think about the process by which this would happen if it did. The billionaire would have to sell his assets (his factory, his farm, his oil well) to someone else for an agreed upon price. The price is set exactly as described in the Apple example above, based on the buyer's faith in the asset's future.

In the real world, though, the only rational reason for converting value to paper money is as a means to exchange the value for goods or services. Only a small percentage of the value in the economy is represented by actual paper dollars. When an investor talks about buying dollars what they really mean is putting their money into bank-like investments where they earn interest for allowing others to use their money.

So, no, currency does not need to be printed in order for value to be created. Currency is simply a method for exchanging value. As far as the amount necessary, there just has to be enough that when I want to convert my value in a liquid asset to currency that I can immediately do it. If I go down to the bank and ask to convert my account to actual cash, and they say, "Sorry, we're out," then all hell breaks loose. And the reason it breaks loose is not because the value of paper dollars has changed at all (they are essentially worthless and always will be). It is because my faith in the dollar has changed.

The question wasn't clear I guess. Let's say every billionaire wanted to carry their liquid assets in cash? Would that have a negative effect on the economy? Obviously this is a hypothetical, please don't answer with "well, they wouldn't..."

Since their must be liquid assets available to purchase any tangible assets, where do these liquid assets come from and how do they increase?

 

[Joe Bagadonuts]

The question wasn't clear I guess. Let's say every billionaire wanted to carry their liquid assets in cash? Would that have a negative effect on the economy? Obviously this is a hypothetical, please don't answer with "well, they wouldn't..."

Since their must be liquid assets available to purchase any tangible assets, where do these liquid assets come from and how do they increase?

An oversupply of money like that would likely create massive inflation because what are they going to do with it other than compete with the rest of us for goods and services. If there is only one gallon of milk left in the store and the billionaire is willing to pay a million bucks for it while you want it for $3.25, guess who is getting the milk.

The money supply itself is managed by the central bank. Different economists have different beliefs about proper management of this process. The way people behave based upon the way they believe the system works actually impacts the way the system works. For this reason it is literally impossible to define exactly how it works because the act of successfully defining it would cause it to behave differently. It would be akin to asking a single starling why the flock moves in the patterns that it does and where it is ultimately going to go. All that each single bird knows is that it is constantly trying to get to the center of the flock because that is the position the bird perceives to be the safest. Investors are the same way. They are each constantly looking out for number one.

It's fascinating to recognize that the market participants belief or faith in the competent management of the money supply is in many ways more important than the actual competence.

 

[Gameface]

It's okay if you don't know the answer, joe.

 

[Gameface]

I guess the question is, is there enough wealth in the world to buy all the wealth in the world? I think the answer is no. As soon as people try to move too much of their imaginary wealth the value of that wealth would wither away.

There is not enough cash to cover all the cash people have access to.

But it's odd. Obviously I get a paycheck and I can turn that into cash. Most people are like me in that way. But most wealth is not paid via a paycheck. But a company has to have actual cash on their books to pay their employees, to pay their electric bill, to pay their suppliers, to purchase real property, to acquire other companies. All that takes cash on the books or a bank that will pay cash and give the company credit. But these banks can't just offer loans on money they don't have. They have to have access to that cash in one form or another. So, I'm just wondering, does the fed have a way to meet the demand for liquid assets as it grows?

And if anyone else wants to take a crack at the hypothetic (hint, this is not a realistic scenario and has nothing to do with a billionaire paying a million dollars for a gallon of milk), if all the billionaires in the world wanted to pile their cash in their front room so they could look at it for a day, all on the same day, before putting it all back in the bank, would there be enough cash in the world to cover it?

 

[Gameface]

I'm surprised that Moe is essentially saying there is no wealth creation. Obviously there has to be. There are around 7 billion people on the planet. There is more stuff out there than ever before. All of it has value, some of it real and some of it perceived. But none the less, there are more people doing more stuff and owning more goods and consuming more services. If wealth was not created we'd all be sharing the same dollar bill because 100 years ago there was nowhere near as much wealth, or people or goods around. So clearly turning a dirt field into crops, or forming metal into a hammer, or taking wood and turning it into a house, you're creating something valuable where it didn't exist before.