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Phantom Wealth and False Expectations

Playing money games to profit from false expectations is not the same as investing in jobs that produce real value to meet real needs
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This is the eleventh of a series of blogs based on excerpts adapted from the 2nd edition of Agenda for a New Economy: From Phantom Wealth to Real Wealth. I wrote Agenda to spur a national conversation on economic policy issues and options that are otherwise largely ignored. This blog series is intended to contribute to that conversation. —DK


Piggy Bank by Keith Ramsey

David Korten: These days, we seem to expect whatever money we don’t immediately spend to grow in perpetuity without effort.

Photo by Keith Ramsey.

It is a curious thing. Unless we stuff it in a mattress, we expect whatever money we don’t immediately spend to grow in perpetuity without effort. We do not expect the same of real wealth. Buildings must be maintained. Machinery must be replaced. Knowledge must be updated. The trust and caring of a community must be continuously renewed. Skills must be practiced. Even wild spaces must be protected from predators, particularly human ones. All of these require a real investment of our time and life energy.

Only phantom financial assets, the product of financial bubbles and fancy accounting tricks unrelated to the production of anything of real use, can grow effortlessly and perpetually—producing phantom expectations that, in the aggregate, can never be fulfilled.

Financial planner Thornton Parker has pointed out phantom wealth expectations are likely to be an issue for baby boomers who built up financial assets during the stock market boom in anticipation of a comfortable retirement. Just as their collective decision to put money into the stock market during their working years helped inflate share prices, so their collective decision to take it out during their retirement deflates those prices, leaving them in potentially desperate straits.

Wall Street’s phantom-wealth machine has created phantom expectations far in excess of the real wealth available to satisfy them.

The problem is not confined to retirement accounts. It applies as well to the endowments of foundations, universities and other nonprofits. It applies to the public trust funds of libraries and municipalities, college savings funds, the reserve accounts of insurance companies, personal trust funds and much else.

Wall Street’s phantom-wealth machine has created phantom expectations far in excess of the real wealth available to satisfy them.

Financial figures that get thrown around in relation to the credit crash and financial bailout of 2008 defy both reality and imagination. The financial assets of the richest one percent of Americans before the crash totaled $16.8 trillion, representing what they understood to be their rightful claim against the world’s real wealth. To put that in perspective, the estimated 2007 U.S. gross domestic product was $13.8 trillion and the total federal government expenditures that same year were only $2.7 trillion.

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Clearly the $16 trillion worth of financial assets that evaporated globally between mid-September and end of November 2008 as the market value of the world’s publicly traded corporations’ share prices fell by 37 percent was phantom wealth—and that was only in publicly traded stock shares. Much of that phantom wealth has since been restored by a stock market recovery, without a corresponding recovery of jobs that put people to work producing real goods and services.

Welcome to the Alice in Wonderland world of phantom expectations.

It isn’t necessary to know the details of Wall Street’s esoteric inner workings to recognize we are dealing with a system that is delinked from reality and operating with no one at the helm.

Nor does it take special genius to recognize when folks are moving around trillions of dollars in secret transactions to generate billion dollar bonuses for themselves and cannot explain in a credible way where the money is coming from or where it’s going, and cannot make a credible case it is serving a beneficial purpose, they are probably up to no good.

It isn’t necessary to know the details of Wall Street’s esoteric inner workings to recognize we are dealing with a system that is delinked from reality and operating with no one at the helm.

Beyond the more visible economic, social, and environmental consequences of Wall Street excess, it has also destroyed the integrity of the money system and created expectations that society has no means to fulfill. No one is even asking how the inevitable loss of unfulfillable expectations might be fairly distributed. A given dollar doesn’t come with a marker that tells us whether it was earned through productive labor or is a product of financial manipulation and accounting tricks.

When the Fed creates money with a wave of an accountant’s magic pen, it is creating phantom financial assets. This can be sound policy if the phantom financial assets put unemployed people to work creating real wealth by producing real goods and services of real value. If the Fed’s pen is used simply to re-inflate financial bubbles or keep Ponzi schemes afloat, it is simply playing accounting games to hide the real problem and delay the inevitable reckoning.

The sooner we realize the real nature of the problem, seek an orderly resolution of the unrealizable phantom wealth claims and give priority to directing money to where it will put people to work creating real wealth to meet real needs, the greater our hope for a viable future.

[Next: A System Designed to Crash]


David Korten author picDavid Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community, and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!

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More by David Korten:

  • War Against the Middle Class
    Why is the middle class shrinking?
  • Jobs, Not Handouts
    Wall Street's plunge shows what's wrong with phantom wealth. Why support that system when we could be creating jobs in the real economy?
  • The Illusion of Money
    Real wealth or phantom assets? David Korten explores the difference between the kind of wealth that makes life better and the phantom wealth created by financial speculation.
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