In the 1930’s following the Great Depression, many people pondered over where all that wealth had gone to in 1929. Following the crash in 2008, people looked at the severe falls in property values and in bank shares; they saw governments were forced to bail out the banks and inevitably they too asked, where has all the money gone to?
he reality is that inflated asset prices are not real wealth and they can disappear almost over-night, as they did in 1929 and again in 2008.
In 1930, when people realised that simply inflating asset prices doesn’t create real wealth, they came up with the Gross Domestic Product [GDP] measure in order to track real wealth creation in the economy.
The transfer of existing assets, like stocks and real estate, doesn’t create real wealth and therefore does not add to GDP.
The real wealth in the economy is measured by GDP. Wealth is anything of value such as physical goods, land, gold or food.
The difference between something and its improved form can also be wealth so if you turn land into a garden you create wealth, or if you turn wood into a chair, you create wealth.
Information or knowledge is wealth as is services rendered such as the services of an actor or a dentist.
Money is a commodity used to assign value to objects so they can be easily traded and its value lies in its ease of exchange, its availability, durability and it can be used to pay off debt.
Wealth can exist without money and can increase greatly without any increase in money.
Wealth creation is when we create something new from a number of inputs by applying our brains and our labour. We can realise the value of the new object if we sell it to someone else for money and hopefully at a profit.
It is no wonder the global economy is going nowhere when everyone is faffing about inflating asset prices rather than creating real wealth.
Making money and creating real wealth are two very different things.