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Net Financial Asset

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Cullen,

I am asking this because I want to know that the financial market we are currently living in is zero sum game or not.

You have published an article saying that stock market is not zero sum game. But stock market is just tiny part of whole market.

Now I want to go beyond than that. The question: is it possible for every individual and/or institution who join in whole financial market game to have NET financial asset which means it's not necessary for someone/institution else to lose their financial asset ?

P.S. We can assume government is not involving in the game.

Financial assets and liabilities always net out to zero at the aggregate level. If everyone in the system held the exact same quantity of financial assets then our net worths would be quantified by how much NON-financial assets we have. The person with the most houses, cars, etc would be the richest since our net worths are really just the quantity of NON-financial assets (because financial assets net to zero).

Of course, that's not how the system works. The economy is a bit like a game of poker where the pool can grow. A game of poker is a zero sum game because the pool size is fixed. You can only exchange the chips we have on the table. But the economy is endogenous. It can grow and expand as people innovate and produce. It isn't zero sum because of this aspect. I don't need to take from someone else to build a house and sell it to someone else for a profit.

Now, income distribution will always be uneven specifically because of this. Some people want to build houses and sell them. Other people just want to sit in their house and sleep. The people who build and sell houses will end up with more of the aggregate income. The people who sleep in their houses will end up with less. The problem arises when the house builder saves too much of his/her income and other people all have to keep going into debt to sustain their living standards. In that case the system very much does not support everyone having a positive net worth. That's kind of what we're seeing today.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Can I conclude if everyone is innovative enough in the game, then all participants are able to have positive financial net worth ?

Depends on how we measure “net worth”. If we do it properly and measure it in terms of pure non-financial assets then yes, everyone could theoretically hold a positive net quantity of non-financial assets. But the reality is that we use financial assets to measure and obtain non-financial assets and those assets, because of their very uneven distribution, will always leave many people holding more liabilities than assets. On the other hand, the average or median net worth should be positive, but there will be many people in the bottom quintile of a monetary system who have negative net worths mainly because the distribution of the assets will tend to be towards the upper quintile.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Sorry Cullen, what I am saying is excluding non-financial assets. Of course non-financial assets must exist in real life. But I just want to focus on the behaviour of financial system.

This is rather hypothetical though. I imagine all people just playing financial game throughout their life. So, is it possible for everyone to have positive financial net worth given that all components in assets as well as liabilities are financial only ?

If we take financial net worth to mean financial assets minus financial liabilities then yes, theoretically, the distribution could be such that everyone owns some equity in the system. But operationally that isn’t a reasonable outcome because that would mean that there’s no incentive to actually create the equity in the first place. I mean, if I have $100 in assets, $90 in liabilities and equity of $10, but the govt is going to tax my equity gains of 100% every year so that someone else can have those gains then why would I even try to produce any equity? I wouldn’t. So no, I would argue that inequality is an inherent trait of capitalism as it’s the very incentive model that makes the whole system actually work in the first place.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Are you saying if my equity is backed purely by financial assets, then I wouldn't have any incentive to put equity because it is subject to tax, meanwhile if it is backed also by NON-financial assets, then it might not be taxed ?

Are you saying if my equity is backed purely by financial assets, then I wouldn't have any incentive to put equity because it is subject to tax, meanwhile if it is backed also by NON-financial assets, then it might not be taxed ?

Any thought Cullen ?

Not sure what you’re asking. Financial assets mostly represent non-financial assets.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

If we take financial net worth to mean financial assets minus financial liabilities then yes, theoretically, the distribution could be such that everyone owns some equity in the system. But operationally that isn’t a reasonable outcome because that would mean that there’s no incentive to actually create the equity in the first place. I mean, if I have $100 in assets, $90 in liabilities and equity of $10, but the govt is going to tax my equity gains of 100% every year so that someone else can have those gains then why would I even try to produce any equity? I wouldn’t. So no, I would argue that inequality is an inherent trait of capitalism as it’s the very incentive model that makes the whole system actually work in the first place.

As you mentioned above, theoretically everyone in the system could have positive financial net worth. However, you assert if the equity is fully backed by financial assets, then its gains could be taxed for 100% so it would disincentivize people to hold it, right ? I am asking whether the only practical way for everyone to have real positive net worth is by backing equity with non-financial assets also, as non-financial assets gains might not be taxed for significant amount. Is that so ?

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