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Producing "Real" Assets.  Who is Paying for Them? Thumbnail

Producing "Real" Assets. Who is Paying for Them?

“There is no such thing as a free lunch.”

-Origin unknown but popularized by Milton Friedman in the 1960s

 

During my last two years of college, while majoring in Economics, I had a poster with the above quote on a picture of a fish about to eat a smaller fish who is about to eat an even smaller fish and so on.   The truth of this statement seems (or at least once did!) self-evident.  Imagine you live alone on an island.  Everything you have to eat, everything you wear, every tool you have, etc. you have to make or get yourself.  Your total wealth is the sum of all your efforts.  If you have a partner on the island, your combined wealth is the sum of what you both produce.  Add a third person, a fourth, and ultimately a billionth, and this doesn’t change!  

Now that common sense is under assault from many sides, often from important and trusted institutions.  Take “Quantitative Easing”, or QE, first instituted in the U.S. in 2011.  In QE, the Treasury prints a piece of paper (a bond) -- of course, now they do not actually “print” bonds, it’s all electronic, but let’s pretend.  The Federal Reserve then prints more paper (money) to buy this bond (from the Treasury or in the market after the Treasury has sold it to a dealer) and hold it.  The Treasury then spends this money.  Supposedly this boosts economic growth.  The only thing that really has happened is that the money supply has been increased.   Imagine our island again.  Suppose the inhabitants of our island use clam shells as a universal numeraire (that is, money).  Suppose one day the islanders discover a huge cache of clam shells; is everyone richer?  They still have the same “real” stuff as before.

More recently, we have been told by politicians, media pundits, and even some economists that the Government can spend trillions (with a “t”) on goods and services and it will be “free”, that it will really cost nothing – financed by smoke-and-mirror tricks like QE.  Remember the suggestion --- recently posited by “serious” economists -- that the Government just mint $1 trillion coins (why stop there?) and deposit them with the Fed?  Where will the “real” stuff come from?

A story on CNBC recently featured an economist who said every American could be rich in a few years by buying Bitcoin (I don’t like to call out names, but you can Google it).  We’ve discussed what Bitcoin is and isn’t in other pieces (and will probably address it again), but regardless of what it is, how can we all get rich buying it (or anything else for that matter)?  Several reputable investment firms and economists (again, easy to find) suggest that 5-15% of portfolios should be allocated to Bitcoin (or other cryptocurrencies).  There is approximately $100 trillion in investable assets in the world.  There are currently around 19 million Bitcoins in circulation (and the maximum ever is 21 million).  If 10% of investable assets were in Bitcoin this would imply a minimum price of well over $500,000 per coin.  If that happened, are we all rich?

We can (as the people on our island can) and should discuss how society divides up the “real” stuff we all produce. This, in fact, may be the most important function of government.  But like every fish on my poster, someone ultimately has to pay for lunch -- we have not yet mastered producing real things out of thin air.

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