This is the Age of Speculation

Remember when a house was something you lived in? And when shares were a claim on dividends? We don’t. But those days are making a comeback.

You live in the age of speculation, where you have to buy stuff to get rich. Which is inherently odd. How could buying stuff make you richer? Unless it’s a productive asset like an apple tree that makes apples, or a cow that makes milk, surely stuff doesn’t make your richer in and of itself?

Actually in this day and age you can buy stuff and it goes up in price, even if it doesn’t actually change. Heck, a house depreciates over time and it still goes up in price every year…in Australia anyway.

But take money out of the economy and you’ll realise that buying stuff doesn’t make you richer. Lifting the monetary veil, as economists say, and dealing in real stuff only, will make you realise the facade. The house that doubled in price is the same house. Probably with a few cracks to boot.

Adding in money, debt and inflation just highlights how inequality grows and insiders become richer. It creates a situation where borrowing to buy stuff becomes profitable. That’s also inherently odd. Borrowing worsens your financial position. It’s all about investing those borrowings into something that is productive.

But when borrowing to buy just about anything regardless of returns is what makes you wealthy, such as negatively geared property investments or internet stocks with no earnings, then borrowing capacity is the key to riches. And the rich have the most borrowing capacity.

So money, debt and inflation cause a redistribution of wealth, not an enhancement. At least in the age of speculation that’s their effect.

This housing ladder type of wealth accumulation remains a treadmill in real terms — once you take out money and look at the real world. Speculating on assets is a kind of zero sum game. You’re not actually getting anywhere — measured in real stuff — if you buy a house and it gets more expensive. And yet, financial wheeling and dealing is the source of Australia’s wealth because that’s measured in money, not real stuff.

Read the rest of this article at The Daily Reckoning