What has happened? Real wealth in terms of ownership and hard earned money in the bank has been destroyed by virtual wealth, simply put, because we relied on borrowing too much. The crisis started as an insolvency crisis, which became a liquidity crisis, which grew into a financial crisis until it finally became a full blown economic crisis. Virtual wealth – loans that were securitized to draw loans – started to collapse consumer credit – loans against collateral. Banks could no longer provide loans. Many people who finally realized that they were not going to make ends meet, withdrew from their financial obligations and went bankrupt. With the securitized loans gone, no more money was invested in financial institutions. Jobs were lost because enterprises could no longer get necessary loans to maintain productivity and invest in machinery. The State had to provide real wealth – tax payers’ dollars and euro’s – as a security against a collapse of the economy. We don’t know whether this will work or not. We can be sure about one thing, though. Virtual wealth is destroying real wealth.
What do I mean by this? What is real and what is virtual wealth? Real wealthis your hard earned money in the bank or your ownership of solid, saleable goods that have rising or stable prices on the market. Real wealth is based on the assumption that you can get value for your money, and that you actually earned the money that you use to get what you want.
Connected with it is the notion of real value.When a house is built, a fair price would be a reasonable compensation for investment costs, labour and the specifics of its usage. Its price, its real value expressed in dollars, would ultimately be based on an objective assessment of it as an object to be utilized from the point of view of real needs. A virtual value is (has to be, because of our market system) attached to an object, when we only take into account what people are willing to pay for it. Then the object is just taken to be a commodity. The price of a thing, in itself always a virtual value, depends increasingly just on the market, and not directly on any intrinsic or “objective” value. We would have no way of assessing such a value outside of the market mechanism.
But as long as prices are firmly connected to the real wealth the buyer has to offer, the market-price remains somehow connected to the real world. The price of a house would then also represent a reality, both in terms of itself as an object and in terms of the buyer’s ability to pay for it. If however it can be based on the illusion of future earnings, and the willingness of financial institutions to lend money against overpriced collateral, – on “faith”, therefore, on credit alone – it gets removed from reality. And that is where virtual wealth comes in, replacing the real value of a thing with a purely virtual value and replacing the real earnings with the illusory prospect of ever rising wages.
Virtual wealth is simply money that you can spend without having to earn it first. It is credit. It is money that you can borrow because someonetrustsin the fact that you will earn this money at a later date and that you won’t need the money so much at that moment that you can use it to repay your loan and pay interest. It is assumed that you will make more money in the future than in the present, so that you are able to pay interest on your loan. Of course interest is earned by doing nothing with your money because you don’t need it, by simply making it available to someone else. Virtual wealth is therefore simply money that you are expected to earn in the future and that you are able to use right now because of this trust.
Wealth however is intrinsically not there to be amassed. Its function is consumption. It has to be spent to “do” anything. What wealth does in the process, is to provide a measure of success by the level of consumption that you can achieve. The more you can spend, the more successful you are, and the more success you can show, the more you can enjoy life. For one and a half century, Americans and Europeans alike have experienced an enormous rise in the expectancy of consumption. Several generations have been brought up with the idea that consumption defines your value as a person. You are what you are because of the car you drive, the house you own and the destination of your holidays. Why could people continue to think like this for so long?