News & Politics

Clairwil
"You cannot multiply wealth by dividing it."
February 8, 2013 at 3:33 PM

This is a spin-off from gsprofval's post: 5 Truths You CANNOT Disagaree With

in which 'truth' #4 is:

You cannot multiply wealth by dividing it.

If you have $100 then it makes no difference whether you keep it in a single account, or if instead you divide it, so you have $50 in one account and $50 in a second account.

If we now allow time to pass, and the interest rates on the accounts varies depending on how much is in the account, (for example, if you earn 5% on balances over $80, but only 2% on balances under $80), then it will make a difference.  However, as long as the interest rate is positive (and above the rate of inflation), your wealth will still be multiplying, even if you have divided it.

A better example than dividing it between different bank accounts in the same bank is moving half to a different bank, or putting half into the stock market.   If you do this correctly, you can get a higher return for the same level of risk (or a similar return, but for a lower level of risk).  Dividing wealth is often the sensible prudent thing to do.

On a different level, the same thing happens in families.   You could give all the wealth to the person you think it best at investing, but in the long run using that strategy it only takes one mistake and the entire dynasty's wealth is squandered.  A safer route is to divide the wealth among different family members, letting each increase the part of the pool they are responsible for, as best they can.  Some will fail, and some will do fantastically; and if you don't have a family full of fools, when it comes to divide things out among the next generation, the total wealth of the dynasty will have increased.

We can take this reasoning a step further.  It doesn't make sense, on a national level, to leave 80% of the country's wealth in the hands of only 20% of the population.  You'll get a better rate of return by spreading things out sufficiently for most people to stop living hand-to-mouth, buying things that are cheap rather than things that are efficient.

NOTE 1:

A $10 pair of shoes that lasts 1 year is cheaper than a $20 pair of shoes that last 5 years, but the latter is a more efficient use of money.

NOTE 2:

I made up the 20%:80% figure, because I can't remember the correct numbers off hand.

Replies

  • Carpy
    by Carpy
    February 8, 2013 at 4:41 PM
    Nice math lesson, but that isn't quite what they mean.
  • erika9009
    February 8, 2013 at 5:41 PM

    Since when has math ever entered in to the narcissistic view of most politicians?????   The Dems mostly, but Repub are sure guilty of this too.....................Mr Governator.....


    What this really comes down to is a way for politicians to buy votes from the people they give the tax money to.


  • mikiemom
    February 8, 2013 at 6:19 PM

    very true  - they won't get it.

  • DSamuels
    February 8, 2013 at 7:54 PM

     It doesn't make sense, on a national level, to leave 80% of the country's wealth in the hands of only 20% of the population.  You'll get a better rate of return by spreading things out sufficiently for most people to stop living hand-to-mouth, buying things that are cheap rather than things that are efficient.

    How do you think that should be changed? Are you going to set a ceiling on how much people can make? Are you decide how much money someone can have and then take the amount over that and give it to people that don't have as much? Doesn't buying "efficient" mean people might spend more, but less often. What happens to the people that make the cheap goods, do they go out of business?

  • Clairwil
    February 9, 2013 at 4:00 AM
    Quoting Carpy:

    Nice math lesson, but that isn't quite what they mean.

    What does it mean to you?

  • Clairwil
    February 9, 2013 at 4:03 AM
    Quoting DSamuels:

    Quoting Clairwil:

    It doesn't make sense, on a national level, to leave 80% of the country's wealth in the hands of only 20% of the population.  You'll get a better rate of return by spreading things out sufficiently for most people to stop living hand-to-mouth, buying things that are cheap rather than things that are efficient.

    How do you think that should be changed?

    Don't abolish inheritance tax.  The lower the inheritance tax, the greater the tendency for the wealth of a nation to concentrate in fewer and fewer hands, over several generations.


  • Clairwil
    February 9, 2013 at 4:06 AM
    Quoting DSamuels:

    Are you going to set a ceiling on how much people can make?

    No, it isn't a zero sum game.

    But it is disgraceful how many people finish their childhood in America without a decent education, for reasons that are highly correlated with the wealth of their parents.   That link needs to be smashed.


  • Clairwil
    February 9, 2013 at 4:08 AM
    Quoting DSamuels:

     What happens to the people that make the cheap goods, do they go out of business?

    The same thing that happens when the market changes for any other reason.  The company adapts or dies, and new companies arise to fill any holes left.


  • autodidact
    February 9, 2013 at 4:19 AM

    you also can't have an economy with cash hoarding

    http://online.wsj.com/article/SB10001424053111903927204576574720017009568.html

  • autodidact
    February 9, 2013 at 4:23 AM

    Expanding a business and hiring more people is a tax write off. No business owner uses an after tax write off to expand a business, but uses it to buy a boat, second house, send the kids to college, play in the stock market, or buy real estate, that inflates prices for everyone else. But when taxes were high businesses invested in themselves and used their money productively in the economy, hiring more people. Investing in their business increased the worth of that business when sold at a low capital gains rate.

    http://www.thomhartmann.com/users/dan4liberty/blog/2012/08/californias-golden-age-high-taxes-and-greatest-growth

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