Our monetary system is doomed (2): How is wealth “printed” from thin air?

The previous post introduces how money is created from thin air. In this post, we examine how wealth is created. First, we present an incomplete theory that fails to explain some economic data, then argue that wealth can be created from thin air via a speculative channel.

Traditional Theory

Traditional theory suggests that wealth is accumulated from the saving of income. Image a person constantly saving a certain percentage of his income; his total wealth is his accumulated saving. Considering the country or global perspective, the sum of all accumulated saving from each entity forms the total wealth. However, this theory needed to explain the following statistical data.

Global wealth grew significantly during COVID.

COVID has become a perfect natural experiment for testing this theory. Unintuitively, global wealth grew significantly in 2020 when economic activity took a severe hit by COVID. Specifically, the global GDP went down by -3.1%¹ (suggesting the global income reduces by 3.1%, as GDP measures the total income), yet global wealth increased by 4.1%².

Figure 1 demonstrates the growth of wealth relative to GDP by country. Surprisingly, the countries most affected by COVID (measures in loss of GDP) did disproportionally well in wealth terms. Belgium, Canada, Singapore, and the United Kingdom, among the worst-affected countries with an average GDP loss of 7.1%, achieved unusually high wealth gains averaging 7.7%.

Those numbers suggest that, at least in the short run, the wealth growth can be irrelevant to GDP (income). Thus, it denies the theory that wealth is solely accumulated from saving.

Return on capital exceeds the growth rate.

How about in the long run? Thanks to Thomas Piketty, we have the long-term data. In the long run, the return on capital³ (before the tax) is always higher than the GDP growth rate, as presented in Figure 2. Although Thomas Piketty presented this historical fact in his 696 pages of the book Capital in the Twenty-First Century, he still needs to explain why the return on capital can exceed the growth rate.

Create wealth from thin air

The following explains how wealth can be decoupled from the GDP. It is worth emphasizing that I do not deny the channel that wealth is accumulated from saving but suggest an additional speculative channel creating wealth, which explains how it is possible that wealth growth can be irrelevant to GDP.

Imagine a fictional community with ten identical houses. Ten households purchased those ten houses at the price of \$100,000 initially. Assuming they do not take mortgages to buy those houses, thus \$1,000,000 is the total wealth of this community. One day, one of the households sold his house for \$200,000 to a speculator. This single transaction would influence other houses’ values: the market would value other houses at \$200,000, too, rather than \$100,000. Suddenly, everyone in the community becomes richer, and the total wealth of the community increases from \$1,000,000 to \$2,000,000. In this fictional example, the houses remain the same, but an additional \$1,000,000 worth of wealth is created from thin air.

The stock works similarly. Imagine a fictional company that went to IPO and issued 10,000,000 shares. If investors believe in the company and buy those shares at \$10 per share for 1,000,000 shares. This action determines that the company is now worth \$100,000,000. Those \$100,000,000 is the wealth created from thin air and a net wealth gain for the society.

If you think those two examples are too unrealistic, that the price changes must reflex some fundamentals of the assets, and do not believe that wealth can be created from thin air, consider the example of Bitcoin. Bitcoin, in a way, is just some digital information stored in some computers around the world. It has the intrinsic value of zero, as holding it does not generate any return. Thus, it is unsurprising that some economists predict that Bitcoin’s value will eventually become zero. Yet, we never see Bitcoin value become zero. All the Bitcoin value is created from thin air.

Through those three examples, I hope you are convinced that wealth could be created from thin air. Of course, the opposite can happen too. When the value of the assets (like housing, stock, or Bitcoin) decreases, the wealth is destroyed. When this happens, everybody feels poorer. In a fair world, speculative wealth creation and destruction should come at equal probability. However, in reality, wealth creation is far more likely to happen than wealth destruction, as we like to be richer altogether rather than poor altogether.

Proletariat vs. Bourgeoisie

We can naturally divide people into two classes: those who have the wealth to participate in the game of wealth creation (Bourgeoisie) and those who do not have wealth and have to earn a wage for a living (Proletariat). As the historical data suggest, the return on capital is always higher than the GDP growth; thus, it is not difficult for the bourgeoisie to find some good investment opportunities to benefit from the wealth creation process and use those benefits to enjoy life. On the other hand, the proletariat is in an unfair position, as they must constantly work hard to earn a wage for a living. If you want an easy life, please join the bourgeoisie group.

Everyone has the “printer” for wealth

Unlike money, which only commercial or central banks can “print”, everyone has the “printer” to create wealth. How the richest people in the world have so much wealth not because they earn a good wage through hard work but create giant amout of wealth from thin air. If you want to “print” wealth, you need to have a good story and then fictionalize the story into shares (for a company) or tokens (for a cryptocurrency project). If people believe the story and begin to buy those shares or tokens, you have successfully “printed” the wealth from thin air.

Is there a limitation to this speculative wealth creation overall? How does money influence wealth creation? The next blog post answers those questions.