The rich get richer

Date: 26 Dec 14
By: Frank Gue, B.c., MBA, P.Eng.,
2252 Joyce St.,
Burlington, ON L7R 2B5
905 634 9538
Date: 26 Dec 14
By: Frank Gue, B.c., MBA, P.Eng.,
2252 Joyce St.,
Burlington, ON L7R 2B5
905 634 9538
For: Editors, The Economist, London, UK

Dear Editors:

Consider your chart on P. 73, showing a remarkable six-fold spike in China’s stock market index.

Let some imaginary economy hold $200 of real goods in inventory. There are two investors, Ching and Chung, each with $100 to invest. Let wealthy, cunning financier Ching, with good, high-priced advice per Piketty, invest $100 on Jan. 1, 2006, and cash-out for $600 in July of 2007. The less prescient Chung, obeying instead the Lemming Law, invests his $100 in July, 2007 just when Ching is selling his, and sells it with the other lemmings for $20 in October of 2008. At the end of this scenario, Ching has enjoyed a 500% increase but poor, unfortunate lemming Chung has suffered an 80% loss. Ching now has a $600 claim on current production, while Chung has only a $20 claim, neither having exchanged one penny’s worth of actual, real goods, but only digital dots somewhere in the Cloud. Clearly, the six-fold spike in the index had nothing whatever to do with anything in the real economy; yet Ching now enjoys a $600 claim on it while Chung can claim only $20, a total between them of $620.

Now, if Ching and Chung decide to exercise their claims on the same day by buying up the $200 of real goods in inventory, Ching would be able to buy 600/620 = 96% of it or $194, while Chung could buy only 20/620 = $6 of it. What a dramatic change from $100 each! And what an impact on inflation!

This useful reductio ad absurdum may, despite its oversimplification and despite its ignoring endless confounding factors, point out one important reason why “the rich get richer” etc.

Barter may well be a hopelessly ineffective exchange mechanism; but its successor, money, acting merely as an accessory to inequitization, has grave shortcomings not yet fully recognized or provided for in our economies.

Cheers,

F.

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