Wealth vs. Income

Another source of confusion amongst the media and the general population is equating income with wealth. This includes politicians, who often espouse rhetoric that defines “rich” as a family who makes above a certain income level. As we have discussed previously, when you go to a job to earn income, you are simply trading your time and energy for currency. The currency can then be saved, invested, or spent. Wealth refers to the total accumulated assets held by a person or household at a single point in time.

The mindset that income represents wealth has distilled down to normal transactions that occur in our lives. When you purchase a house, a realtor asks “What is your price range”? A home lender then wants to know your income to determine what debt payment you can afford. Disturbingly, people often want to know the maximum debt payment for which they qualify. Instead, they should be asking what they require in a house, i.e. the number of bedrooms, stories, acreage, amenities, etc. This backward thought process has also consumed vehicle purchases. It was recently reported that about a third of auto loans taken out on new vehicles in the first half of 2019 were for terms of 6 years or longer! In other words, people have decided to stretch out loan terms to have a payment they can “afford” to create the illusion of being wealthy by virtue of a nice car. Basically, one will still be making payments on a rapidly depreciating asset while they are making necessary maintenance repairs well after the warranty expires. In short, peak insanity.

We have an entire generation of people that have grown up with this mindset, and worse, think that it is normal and acceptable. It is not. The foundation of building wealth has been and will continue to be living within your means. What I describe above is the antithesis of that. Some questions to ponder when shopping for your next house or car. In the case of a house, can you make a 30-50% down payment instead of the normal 20% or less? Have you considered that the total cost of homeownership is 30-40% more than just your mortgage payment and taxes? When buying a car, have you considering buying used rather than new? Can you pay cash for the entire purchase? If the answer to any of the above questions is no, you may want to reconsider.

Money vs. Currency

Why am I working more for less?

One of the biggest sources of confusion amongst the general population is the difference between currency and money. This is in spite of people spending most of their adult lives trying to make money. In this endless pursuit, they often wonder why they are struggling to make ends meet, why they always seem to be on a hamster wheel. So, first, what is money?

“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” – John Kenneth Galbraith

Money IS any tradeable asset with tangible value. Money is your house. Money is your car. Money is an investment property. It can also be a service, a piece of metal, water, or food. Money, is NOT, contrary to popular opinion, the dollars in your wallet or purse. Well, aside from your ability to burn it to start a fire or use it as paper to write down ideas. The dollars in your wallet are in fact, currency. Currency is used for convenience. For example, you can not carry your house around. Without money, i.e. assets, currency has near-zero value.

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” – Vladimir Lenin, as quoted by John Maynard Keynes

In other words, people do not realize the importance of currency as a variable in their lives. A related misconception is the belief that inflation is rising prices. Incorrect. Rising prices are a symptom of inflation. Inflation is an increase in the supply of currency. What are prices, and why can they fluctuate so dramatically? Prices are the supply of currency divided by the total money supply (tangible assets). Therefore, PRICES = CURRENCY / MONEY. Who controls the increase and decrease in the supply of currency? The private Federal Reserve Corporation. How do they do that? Usually, they do it thru fractional reserve lending. Since the great financial crisis, however, the Federal Reserve’s ability to increase the currency supply through fractional reserve lending has been muted. Why? Lack of eligible, marginal borrowers. In other words, people are broke and already saturated with debt. The Fed still has one very eager borrower, however. The U.S. Government. More on that in another post. The Fed has also bypassed its lending mechanism by utilizing another method to increase the currency supply: manipulating the stock market to not let prices fall substantively. How do they do that? Via an increase in “reserves” held on behalf of some of the biggest banks in the world, known as the “primary dealers”. These reserves are then leveraged to produce the liquidity necessary for constant stock market manipulation.

There is a lot to unpack in what I stated above but the moral of the story is as follows. The Fed can influence PRICES dramatically by increasing (INFLATION) or decreasing (DEFLATION) the currency in circulation. These changes in the currency then increase or decrease claims or demand for tangible assets, i.e. MONEY. Further, the general public’s lack of knowledge regarding this process puts most people at a significant disadvantage economically.