Money vs. Wealth

What happens when you pump money into a society?

A society’s productivity (real GDP) grows slowly. Over time, the prodoctivity accumulated into wealth. Part of the wealth is liquid: money in various forms. Money serves to convert one form of wealth (oil, gold) to another (cars, clothes). Wealth itself fuels productivity (called capital then) and generated more wealth.

There is a flaw in this system. The government prints currency, a main form of money, that does not associate with real wealth directly. When the government pumps money into the society, the total wealth of the society remains the same. This surely brings on inflation, but with a delayed effect. In the interim, people think they have more wealth and upgrade their lifestyle. When the reality arrives, they would have consumed too much, depleted their previously accumulated wealth, and ended up poorer than before.

Sub-prime crisis is exactly that. Those easy loans essentially pumped money into the system in the form of credits. Give that to a consumption based society like the USA, it ended up with the whole nation much poorer than before: they consumed way too much than they should have.

There are only two real solutions: infuse wealth from outside of the society, like China, or work to make up the deficit, like Japan is trying to. The US is a highly productive society. It can re-generate the wealth. But before that, the society simply must deal with the fact that they are now not so wealthy. The lifestyle of the rich must stop.

Paulson, Bush, Congress, Obama, and McCain all knew that these $700 billions is just pumping more money. It delays the harsh reality by faking the wealth the society does not have.

Wall Street is full of smart investors. They knew the money is temporary and fragile. They will do what they do best: invest by putting the money on secure and promising projects. But look around. Oil comes from mid-east. Manufactured goods are made in China. IT services were off-shored to India. What’s left in the US to invest?

The bail-out will not heal the US economy; it only gives the addict a quick fix. They money will quickly flow out of the country. It is a big soft landing pad that serves only politicians and short-sighted citizens.