Billionaires

[b_line]

So I was reading the Forbes 500 list the other day, and I was pretty surprised at the wealth that has ballooned for the richest portion of people in the world. More than 500 people in this world are worth more than $3 billion. 10 years ago, the bottom of the same list had people not even worth $1 billion. I read that the current net worth of all the billionaires is close to $7.1 trillion, as opposed to $4.6 trillion in 2012. Crazy.

Much of the new money comes from new Chinese billionaires, but a lot of the rich around the world have increased their net worth by huge percentages in the past few years, or even the past decade.

I don't know a lot about why wealth distribution is the way it is, and I don't have any judgement calls on it. I am very curious as to how this happens, though. Among the richest of these guys, some people lose or gain huge amounts of money in just a single year. For example, Jeff Bezos (Amazon.com) gained $16.5 billion in just one year!

It is interesting to see the driving factors behind them gaining so much money so quickly. It is pretty apparent that Amazon.com has changed a lot about the way Americans live, with super quick delivery and the ease of shopping, but what about the other guys? How do they make so many people give them so much money in such a short amount of time? It's almost like mass hysteria, all these people going wild over some new thing, and throwing money at these guys. The whole phenomenon is kind of blowing my mind.

 

[Gameface]

So I was reading the Forbes 500 list the other day, and I was pretty surprised at the wealth that has ballooned for the richest portion of people in the world. More than 500 people in this world are worth more than $3 billion. 10 years ago, the bottom of the same list had people not even worth $1 billion. I read that the current net worth of all the billionaires is close to $7.1 trillion, as opposed to $4.6 trillion in 2012. Crazy.

Much of the new money comes from new Chinese billionaires, but a lot of the rich around the world have increased their net worth by huge percentages in the past few years, or even the past decade.

I don't know a lot about why wealth distribution is the way it is, and I don't have any judgement calls on it. I am very curious as to how this happens, though. Among the richest of these guys, some people lose or gain huge amounts of money in just a single year. For example, Jeff Bezos (Amazon.com) gained $16.5 billion in just one year!

It is interesting to see the driving factors behind them gaining so much money so quickly. It is pretty apparent that Amazon.com has changed a lot about the way Americans live, with super quick delivery and the ease of shopping, but what about the other guys? How do they make so many people give them so much money in such a short amount of time? It's almost like mass hysteria, all these people going wild over some new thing, and throwing money at these guys. The whole phenomenon is kind of blowing my mind.

I'm far from an expert, but with an increasingly connected world if you have something desirable you're gonna be able to get out to more people in more parts of the world than ever. So, there you go.

 

[Joe Bagadonuts]

Parts of the premise of your question is wrong. A huge amount of wealth is not created by others giving money. When share prices go up guys like Bezos who own a large percentage of the shares of a company can make an absolute killing on paper.

A lot has been written on the disparity between the rich and the poor or middle class, but it's also important to note that, in nearly all cases, the amount of money the wealthy have does not impact the amount of money that people in other classes have. This is not a zero sum game. Wealth can be created from nothing. So if your mentality is that wealth ought to be fairly distributed you will consistently see injustices in any free enterprise system, whereas if your mentality is that we live in a world of abundance it will ultimately not matter that someone else is wealthier than you are because each of us has the ability to create our own abundance.

There are many ironies of economics and one of them is that an individual's perception of their personal wealth is often more related to the wealth of those they associate with or compare themselves to (how do they measure up, keeping up with the Jonses) than it is to where they actually stand in the spectrum of all wealth. If you look around yourself you will probably be able to see many examples of this. I will never forget how much wealth and abundance I saw in one particular African village I visited. Nobody there had anything if you measure their wealth by American standards, yet they seemed to believe they were the richest men in the world and they exuded a level of joy that I don't know if I've ever seen among a group of so-called wealthy.

One thing about the creation of wealth is clear. If high net worth is an important goal to you then you would do very well to put yourself on the owner/investor side of the ledger and get off of the renter/borrower side.

 

[Carbon13]

A little off topic but a buddy of mine has a brother who is a portfolio manager in San Francisco. Apparently he has been making 8-figures since he was 27 years old. Hes 31 now and looking for new work in the high 8-figs. Pretty wild the kind of money thrown around in the financial world.

 

[moevillini]

The above two posts are pretty spot-on in my opinion

Although I'm not sure whether wealth can be created anymore than it can be destroyed (other than on paper, which is where much of it is) - mostly it'a transfer game.

 

[Joe Bagadonuts]

The above two posts are pretty spot-on in my opinion

Although I'm not sure whether wealth can be created anymore than it can be destroyed (other than on paper, which is where much of it is) - mostly it'a transfer game.

Everything can be and is created. Wealth is no different. Take a look at the value of an enormous corporation like Apple. Where did that value come from? It was literally created from nothing more than imagination. Forward thinking people dreamed of products like iPhones and Mac computers, etc., and then they brought them to life by building these amazing objects out of resources, all of which would have no value whatsoever if not for technology that bestowed value upon them. Where did this technology come from? Imagination.

Do you believe that resources have intrinsic value? Did you know that prior to the invention of the internal combustion engine that oil was thought of as nothing but a nuisance? It bubbled up from the ground here and there polluting otherwise pristine land and streams. Nobody wanted land with oil on it, and no one imagined that there was a whole bunch more of it under the ground or that anyone would ever want to access it even if there was. But technology transformed this useless dirty slimy goo into what many people now believe to be one of the most valuable resources on earth.

And then technology created better and better ways to extract it from the ground, to refine it, and to use it. Many people are stunned to learn that today, despite all the hand wringing over depleting oil reserves, the known resources of oil in terms of years of burnable fuel are currently greater than they have ever been in the history of the world. We literally have more years worth of available oil resources than we have ever had, despite the fact that we are simultaneously burning far more oil in far more places that we ever have in the history of mankind. And on top of that,despite what you've probably heard, it doesn't matter if we ever run out. This is because, if that were to happen, technologies would emerge to solve the problem by replacing it with other resources that are also likely currently worth nothing.

If you follow this pathway back to the origins of mankind you would discover that our first energy resource was wood, and there was a time when the English were in a panic because somebody figured out that it was going to be impossible for the supply of wood to keep up with the ever increasing demand. Not only wouldn't people be able to heat their homes, but they wouldn't even have anything to build those homes out of, nor would they be able to build the furniture that was needed inside of the homes. But did we ever actually run out of wood? Not even close... and we never will. This despite the fact that some people want you to believe that we need to conserve paper in order to save forests - the notion is patently ridiculous.

If you are willing to take a close look at the way economics really works you will probably discover that a lot of the things you have been led to believe for your entire life simply are not true.

 

[babe]

Joe has it right.

A few hundred years ago, there was a tulip bubble. No, really. The Dutch went nuts over tulips. It was just like our Stocks and other bubble markets. Certain special tulips were priced astronomically.

Wealth is an imaginary notion that goes on in our heads, but tulips and gold. . . .and convenient tech. . .are actually real, and we can find or create stuff people will value.

I know most folks who sit in front of TVs at night and work routine monkey. . trained-to -the task....service or professional jobs will spend their lives reciting governance mantras and taking menial wages, but real players in a Keynsian inflationary spiral will drag huge inflated net worths to their extinction in the Big Bang deflation apocalypse that's coming.

 

[Carbon13]

Could someone explain to me the process by which more value is created? Does the federal government have to print more dollars to validate that apple increased value to the economy? Is the value of the dollar just amplified when a company like apple comes along? When i make a ginger bread, have i somehow added 30 cents to the economy without my knowledge? What is the actual physical process that happens when we bestow value on something and grow the economy?

 

[Joe Bagadonuts]

Could someone explain to me the process by which more value is created? Does the federal government have to print more dollars to validate that apple increased value to the economy? Is the value of the dollar just amplified when a company like apple comes along? When i make a ginger bread, have i somehow added 30 cents to the economy without my knowledge? What is the actual physical process that happens when we bestow value on something and grow the economy?

Value = faith in the future
Whether it's a stock price, a home value, a corn future or anything else, the price of a commodity is set through the interaction of what a buyer is willing to pay and a seller is willing to sell for. Going back to the Apple example, the vast majority of shares of the company are not currently on the market, but if a new product announcement occurs causing the overall faith in the future of the company to increase sellers will refuse to part with the asset at it's former price and they will hold on until buyers offer a new price that is worth more to the current holder of the stock (in that particular buyer's mind) than retaining the stock would be.

In the above scenario if there were a billion shares of a particular stock outstanding, and if that fraction who is currently willing to sell demanded one more dollar per share, and there was a sufficient pool of buyers willing to pay it, the value of the corporation would instantaneously increase by a billion dollars, even though the vast, vast majority of shareholders did nothing but hold on to their stock.

On the other hand, if investors lost complete faith in the future of this company the value would disappear in a heartbeat.

 

[moevillini]

I understand, but I'm still not convinced to what degree new wealth is absolutely created and to what degree it's transferred on paper.

If everybody tried to liquidate their shares in AAPL at once, a lot of that wealth would rapidly disappear.

Look at all the wealth that was created when folks were overspending on housing due to loose lending standards and the easy availability of credit. Where is that wealth now?

I'm just not sure what are the absolutes here.

 

[Joe Bagadonuts]

I understand, but I'm still convinced to what degree new wealth is absolutely created and to what degree it's transferred in paper.

If everybody tried to liquidate their shares in AAPL at once, a lot of that wealth would rapidly disappear.

This is absolutely true because what babe said earlier is entirely correct (though difficult to really grasp). Wealth is an imaginary concept. It only exists to the extent that we agree that it exists.

 

[Saint Cy of JFC]

This is absolutely true because what babe said earlier is entirely correct (though difficult to really grasp). Wealth is an imaginary concept. It only exists to the extent that we agree that it exists.

 

[Gameface]

I think what some people are asking, and I'd like to know as well, when there is more total value (or perceived value) is more currency printed? Does it even matter how much currency exists if most, especially large, financial transactions take place electronically? And if every billionaire suddenly wanted to carry their cash around as cash, how would that work? Would simply trying to get physical currency for the vast majority of wealth in the world have an affect on how much wealth was in the world? And I understand that much of this value is on paper, but for a person to buy stock they have to have access to that amount of cash, do they not?

 

[moevillini]

Like god?

 

[moevillini]

.... And I understand that much of this value is on paper, but for a person to buy stock they have to have access to that amount of cash, do they not?

you would sort of think so, but then again, think about 401K's where your company puts in so much every month as a contribution - it's not really cash they're using - maybe they are giving employees shares of company stock whose value will fluctuate? So no actual cash changed hands.

 

[b_line]

In the case of amazon, there is both perceived value that is added and real value in the fact that is true profit has become a massive number that can not be argued against.

I think the added value to bezos net worth came in both forms. You can say the value is not tangible when talking about what his business could sell for, but the real value is in his bank account.

 

[Joe Bagadonuts]

I think what some people are asking, and I'd like to know as well, when there is more total value (or perceived value) is more currency printed? Does it even matter how much currency exists if most, especially large, financial transactions take place electronically? And if every billionaire suddenly wanted to carry their cash around as cash, how would that work? Would simply trying to get physical currency for the vast majority of wealth in the world have an affect on how much wealth was in the world? And I understand that much of this value is on paper, but for a person to buy stock they have to have access to that amount of cash, do they not?

Paper money is merely a placeholder for value. It has no value itself, even though we associate value with it. No billionaire would ever want to convert very much of his/her value at any one time to paper currency because that is the least useful place to put it. And think about the process by which this would happen if it did. The billionaire would have to sell his assets (his factory, his farm, his oil well) to someone else for an agreed upon price. The price is set exactly as described in the Apple example above, based on the buyer's faith in the asset's future.

In the real world, though, the only rational reason for converting value to paper money is as a means to exchange the value for goods or services. Only a small percentage of the value in the economy is represented by actual paper dollars. When an investor talks about buying dollars what they really mean is putting their money into bank-like investments where they earn interest for allowing others to use their money.

So, no, currency does not need to be printed in order for value to be created. Currency is simply a method for exchanging value. As far as the amount necessary, there just has to be enough that when I want to convert my value in a liquid asset to currency that I can immediately do it. If I go down to the bank and ask to convert my account to actual cash, and they say, "Sorry, we're out," then all hell breaks loose. And the reason it breaks loose is not because the value of paper dollars has changed at all (they are essentially worthless and always will be). It is because my faith in the dollar has changed.

 

[Joe Bagadonuts]

Like god?

Like everything.

 

[Joe Bagadonuts]

In the case of amazon, there is both perceived value that is added and real value in the fact that is true profit has become a massive number that can not be argued against.

I think the added value to bezos net worth came in both forms. You can say the value is not tangible when talking about what his business could sell for, but the real value is in his bank account.

The people who are buying the products that Bezos sells are, in reality, doing the exact same thing that the stock purchasers are. They are evaluating an asset and coming to a decision of how much value they are willing to part with in exchange. If they value the asset at less than Bezos is selling it for they buy. If not, they don't. If Bezos marks a particular books price up to quadruple the traditional selling price of a similar book, but for some reason there is a pool of buyers who believes that asset is of that much value, he will make a killing because their investment (through the act of purchasing) is inflating the value of his assets in exactly the same way that the stock purchase did.

If you don't believe me on this then please explain the high dollar amounts that were once exchanged for "limited edition" Beanie Babies or Pokemon cards or any other asset that has gone through a buying craze of that type. Eventually you are going to see that it was actually the buyer's current level of faith in the value of the asset that they were trading money for. ("Ooooh, I would look good in that jacket, so therefore it is worth a lot of money to me right now, in the moment I am thinking this thought.")

 

[Gameface]

Paper money is merely a placeholder for value. It has no value itself, even though we associate value with it. No billionaire would ever want to convert very much of his/her value at any one time to paper currency because that is the least useful place to put it. And think about the process by which this would happen if it did. The billionaire would have to sell his assets (his factory, his farm, his oil well) to someone else for an agreed upon price. The price is set exactly as described in the Apple example above, based on the buyer's faith in the asset's future.

In the real world, though, the only rational reason for converting value to paper money is as a means to exchange the value for goods or services. Only a small percentage of the value in the economy is represented by actual paper dollars. When an investor talks about buying dollars what they really mean is putting their money into bank-like investments where they earn interest for allowing others to use their money.

So, no, currency does not need to be printed in order for value to be created. Currency is simply a method for exchanging value. As far as the amount necessary, there just has to be enough that when I want to convert my value in a liquid asset to currency that I can immediately do it. If I go down to the bank and ask to convert my account to actual cash, and they say, "Sorry, we're out," then all hell breaks loose. And the reason it breaks loose is not because the value of paper dollars has changed at all (they are essentially worthless and always will be). It is because my faith in the dollar has changed.

The question wasn't clear I guess. Let's say every billionaire wanted to carry their liquid assets in cash? Would that have a negative effect on the economy? Obviously this is a hypothetical, please don't answer with "well, they wouldn't..."

Since their must be liquid assets available to purchase any tangible assets, where do these liquid assets come from and how do they increase?