Monday, April 30, 2007

Wealth and Money (Part 2 of 2)

About an hour ago I wrote a short post about how wealth and money are not the same things, a fallacy Lou Dobbs falls to when he complains about the trade deficit. This is such a critical distinction I thought it was worth two posts. (I almost wrote one long article but I think it's more likely people will read two short ones. Besides, the posts are distinct enough to stand on their own.)

To cement our understanding of the distinction, let's play a game. Suppose I give you $100,000 to be spent on any consumer goods (no investments) you might like. It could be a car, a laptop, clothes, jewelry--you name it. But here's the interesting part: you have to spend it all in either 2007 or 1957 (the year Dobbs seems to cherish so much).

Keep in mind that you'll be spending it in 1957, with all the stuff that goes with it. Also keep in mind that your $100,000 is now worth $727,276.30 (after we adjust for inflation). What would you do?

I can imagine some people will buy in '57. They might love a car of the era or be a fan of the style. But most people--including myself--will take the higher prices and shop now. If you disagree, think of all the things you would buy now and then ask if you could get those half a century earlier.

But Dobbs tells us money is the ultimate source of wealth, that is people should want to buy in 1957. To him laptops, iPods, and cable television is no different than typewriters, jukeboxes, and three channels. But most people know better: more quality and volume is often worth spending a bit more.

That's what trade does: it gives us more. We send our dollars "elsewhere" but who cares? It's not about the money, it's about what you buy. If trading with foreigners makes us wealthier, then let's close the time portal and open the ports.

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