In these days of retail price inflation, depreciation and falling asset prices, this may be a good time to ponder on the question of what is money and what is wealth?
The accumulation of wealth is the primary purpose in life of almost all human beings who are fearful of hunger and depravation tomorrow. It is this fear of the uncertain future that we are compelled, if we can, to save for the rainy day.
It doesn't matter how you save. You mostly start by saving cash under the pillow and deposits in the bank. You save from the surplus of your income after expenditure. If you don't have an income, then you cannot save. Instead, you may have to borrow to buy food - this is where the wisdom of saving for the rainy day comes in. If you spend more than your income, then you also have to borrow. Ideally, you spend within your budget. This is the bare bone economics of income and expenditure.
The key point is that when you have savings in the bank, and you do not need that cash immediately, then you could possibly invest it in earning assets - which basically can be anything that can earn you a return, if you know where to look.
Flat Economy
But spotting earning assets is not an easy task, in normal circumstances, i.e., when the economy is going flat.
Since everybody has to have somewhere live, then residential property seems to be a good place to start. Instead of renting, you can buy your own house using a mortgage loan. Your house is an earning asset because you can save on rent and at the end of paying for the loan, the house is yours as an asset.
If you already have a house, you can also consider renting out your house and rent somewhere cheaper to stay instead, so that you can provide an income stream for yourself.
If you have lots of money, you can use your money to buy more houses than you can live and rent them out. Usually, under these circumstances, there is an increase in the supply of housing, so you can expect housing supply to exceed demand and therefore the rental would not be good enough to offset your mortgage repayment.
You can venture into stocks and shares. In a flat market, you have to know what you are doing. To buy well-managed companies in sunrise or global markets. In small economies, there are not many companies that can sustain their growth so you have to keep constant watch on company performances.
There are of course other financial assets such as government bonds, insurance products, etc., which are out there to tease out your savings from your bank account.
These are all very basic considerations in a normal but flat economy and market.
Booming Economy
In a booming economy, where the central bank follows a low-cost money policy and print money, you can expect money to be plentiful. This means (a) the banks are looking for good borrowers to lend money to; and (b) there will be asset inflation as borrowed money will be looking for assets to buy up.
It is a no brainer that in an economy when asset inflation exceeds the interest rate, one can borrow (if the bank would lend to you) and buy real estate. Your initial collateral would be your savings in the bank or the value of the house you already have (the bank willing to lend you an amount equivalent to the market value less your existing mortgage).
What the bank is doing here is a very dangerous thing because it is using inflated value as a collateral to support new loans. Dangerous because (a) it escalates loans and asset value, and (b) everything collapses once the economy stops growing and asset prices stop rising. You will appreciate that (b) is where we are today in the world, and (a) was when every investment gurus were boosting how clever they were in going into heavy debt to buy real estate.
So in a rising economy when real estate and financial asset prices are also rising in what is called asset inflation fueled by increasing expansion in loans by banks (because their executives want to take super year-end bonuses), of course, the rationale thing is to get out of money (by dissaving and borrowing) and get into very clearly earning assets. Because this move is so very clear and obvious and no brainer that even grandmas can be masters, what we get is speculation in real estate and financial assets.
Speculation is based not on real value but expectations of future value. And future value is based on the state of the economy in the future. What happens in the future depends on what happens today. If today is young, tomorrow we grow strong and healthy. If today we are grown and mature, tomorrow we will grow old and slow down. For speculators, however, because they are speculators, the future is always better than today. The future better be better than today - or else, we will be in deep trouble.
Speculation is Not Economic Growth
Speculation is not economic growth. Speculation is on asset prices where economic growth is based on output expansion. Rising asset prices can trigger future output and usually with a delay of a few months or a few years. This goes for real estate, and it goes for agriculture (e.g., musang king). In other words, speculation sets the stage for overproduction in the future.
Why overproduction? In real estate, demand is fueled by bankers who lend money out to borrowers who dream of becoming wealthy without work.
To sustain this model, there must be people who are willing to rent at the prices they ask for. Over time, with everybody buying real estate for themselves to stay because developers keep building new units, there will come a time there will be units which nobody want to rent. Because also bad location, not near rail transport, etc. Demand fall can also be triggered by fall of nominal income (salary cut) or fall in real income (petrol price increase).
Economic Growth is Productivity Gains
For the economy to sustain its growth on its own, the assets invested in must be able to generate a higher output in the future and price is sustained by increase in wages through productivity gains. This usually happens through technological advancement as well as managerial or workplace efficiency improvement.
Politics Sabotaging Economy
When the economy is doing well, is doing very well, this create economic power because businessmen now have money or rather assets (buildings or factories?) and access to banks. This challenges the power of politicians. When challenged, politicians have a tendency to flex their muscles by a stroke of the pen. With such threats of the political masters looming, businessmen and investors become nervous and fearful of the future, an uncertain future, they become petrified. The first thing they do is to stop investment. This means no new money into the economy. Second, they leave the country. This means they close shop and retrenched the workers.
Political Restructuring through Economic Consolidation
Political masters are willing to sabotage the economy when they realise the economy is heading in a direction that is not in favour to their political future. Either you die, or I die. So, you die first.
This is quite a dangerous game. First, the economy will go into a depression not only because investment slows down but there is disinvestment, i.e., less investment than before. Massive number of workers become unemployed. They become hungry and turn to the streets. There is social unrest to get the political masters to help them. But they can't help. So they want a change in government. Even if the government is changed, the economic situation would not change. Unless, investor confidence is restored. Which brings the economic structure back to square one, which is unfavourable to the political regime. So there must be a regime change.
Money & Wealth
Now, we know money is wealth, but wealth is not necessary money. The beauty of money is that it is liquid. In times of trouble, you can take money with you. (Those who feel less secure take gold bars.) You cannot carry your many condos with you. The value of your condos may have plunged, and no rental. You still owe the banks lots of money in mortgage loans.
In these troubled times, health is wealth. Peace and harmony is wealth. Peace of mind is wealth.
Money is a means to an easier life. Wealth is a burden for those who are old and have no strength to carry on.
There is no clear case for debt to be wealth. Debt is unearned wealth.
Even when you have physical assets and financial assets without debt, you cannot use them unless you have sold them and converted them to money. Cash allows you to buy food.
The way forward to life is to live a simple life, with basic needs. You will be happy.
Why ride on the backs of those who must struggle to pay rent so that you can have passive income? If you have not bought units which you cannot use, housing could be a lot cheaper and they could have been able to afford to buy their own little house.
In the end, all that is considered wealth is just a pile of bricks and steel beams.
