Is money a zero-sum game?

[Special K]

This is something I always wondered - is making or losing/spending money a zero-sum game? On a small scale, it would seem logical: people earn paychecks, and that money was deducted from their employer's accounts. That money is then spent on goods and services. The balance in the consumers' accounts goes down, and the balance of the dealer/service provider's accounts increases. That money is then used to pay their employees, and the cycle continues. It seems that the only increase or decrease in the actual supply of money would occur when the government either prints more money, or buys/sells treasuries.

I suppose it depends on how you define "money". For the purposes of this discussion, I am referring to cash or cash equivalents. Is the total outstanding balance of cash and cash equivalents fixed unless the government manipulates it? The value of stocks can rise over time, but you don't actually make any money off of that until you sell, which has to involve a transfer of cash at some level, right?

I'm sorry if the wording of my question is somewhat awkward. I'm not an econ major and this is something I have always wondered.

 

[MrChad]

In some sense, yes. You need to consider the velocity of money as well, i.e. how quickly money changes hands.

This article explains things reasonably well: http://www.sparknotes.com/econ...o/money/section2.rhtml

 

[TuxDave]

So how does appreciation fit in your idea?

I buy two identical houses for $500K each so I gave $1M to someone and now have $1M of assets. Market demand increases the value of the houses to $1M each.

Suddenly I have $2M of assets without having to exchange any money.

Edit: Maybe that wasn't the best analogy but I guess you can turn the houses into US Dollar bills and "market value" into exchange rates.....

 

[Deeko]

Originally posted by: TuxDave
So how does appreciation fit in your idea?

I buy two identical houses for $500K each so I gave $1M to someone and now have $1M of assets. Market demand increases the value of the houses to $1M each.

Suddenly I have $2M of assets without having to exchange any money.

Edit: Maybe that wasn't the best analogy but I guess you can turn the houses into US Dollar bills and "market value" into exchange rates.....

He's talking about cash. You don't have $2M in cash until you sell it and someone gives you that money.

 

[IceBergSLiM]

There is always more debt owed than cash in circulation.

 

[oznerol]

No. See: Inflation.

Barter is a zero-sum game.

 

[Special K]

Originally posted by: TuxDave
So how does appreciation fit in your idea?

I buy two identical houses for $500K each so I gave $1M to someone and now have $1M of assets. Market demand increases the value of the houses to $1M each.

Suddenly I have $2M of assets without having to exchange any money.

Edit: Maybe that wasn't the best analogy but I guess you can turn the houses into US Dollar bills and "market value" into exchange rates.....

I'm restricting the scope of my question to cash and cash equivalents. You don't actually realize the value of that house until you sell, and that money has to come from somewhere, right? If someone buys your house for $1M, they are now down $1M and you are up $1M. Or they are down some amount and a bank is down the rest, and you are up $1M.

 

[Special K]

Originally posted by: ducci
No. See: Inflation.

Barter is a zero-sum game.

Inflation is just a general rise in prices. The only way for the actual money supply to increase is for the government to either print more money or buy up treasuries, right?

 

[oznerol]

Originally posted by: Special K

Originally posted by: ducci
No. See: Inflation.

Barter is a zero-sum game.

Inflation is just a general rise in prices. The only way for the actual money supply to increase is for the government to either print more moneyor buy up treasuries, right?

Didn't you just answer your own question? "Cash" is just paper.

 

[HannibalX]

Originally posted by: Special K

Originally posted by: ducci
No. See: Inflation.

Barter is a zero-sum game.

Inflation is just a general rise in prices. The only way for the actual money supply to increase is for the government to either print more money or buy up treasuries, right?

Inflation is not really a rise in prices; it is a loss in value of currency. The price is only higher because the purchasing power of the currency is less. This is not exclusively tied to there being more physical currency in the system but that is one factor that leads to inflation.

 

[ITJunkie]

It is for me...I never seem to have any 😀

 

[TuxDave]

Originally posted by: Special K

Originally posted by: TuxDave
So how does appreciation fit in your idea?

I buy two identical houses for $500K each so I gave $1M to someone and now have $1M of assets. Market demand increases the value of the houses to $1M each.

Suddenly I have $2M of assets without having to exchange any money.

Edit: Maybe that wasn't the best analogy but I guess you can turn the houses into US Dollar bills and "market value" into exchange rates.....

I'm restricting the scope of my question to cash and cash equivalents. You don't actually realize the value of that house until you sell, and that money has to come from somewhere, right? If someone buys your house for $1M, they are now down $1M and you are up $1M. Or they are down some amount and a bank is down the rest, and you are up $1M.

Well, I'm not so sure what is classified as "cash equivalents" but I guess then if you restrict it like that it has to be zero sum.

If I gather 10 people in a closed room and they each start off with $10 each ($100 total in the system). After trading money back and forth for favors etc... there will still be $100 somewhere in the room assuming no one has created fake ones or burned their money up.

But what's does that really matter? The physical dollar bill is still there but is the "value" of that dollar bill more important in an economy. If the dollar bill in my hypothetical situation becomes worthless (because people can threaten others to get the same results), then what's the difference between having the $100 still in the room or having it all magically disappear?

 

[Foxery]

Originally posted by: TuxDave
If I gather 10 people in a closed room and they each start off with $10 each ($100 total in the system). After trading money back and forth for favors etc... there will still be $100 somewhere in the room assuming no one has created fake ones or burned their money up.

This is how most systems are originally conceived, but in the real world and on a long time scale, there are discrepancies:

1) Phyical coins/bills get lost
2) The government prints too many to replace damaged/lost ones OR prints extras intentionally to fuel inflation
3) Specific to modern first world countries: Some currency only exists in electronic form (there are no physical bills to back it). This may change due to:
...A) A computer hacker screws with someone
...B) We exchange it for foreign currency with some other nation. This is no longer a "Closed System" in the way you intended.
...C) The government and public companies issue Debt, some of which is bought by foreign investors. While this does mean that someone has ultimately paid for things, as with B, this is no longer a closed system in the way you intended.

The fluctuation of currency exchange rates may muddy this even further, but I can't wrap my head around the long-term effect.

 

[LegendKiller]

Originally posted by: Pale Rider

Originally posted by: Special K

Originally posted by: ducci
No. See: Inflation.

Barter is a zero-sum game.

Inflation is just a general rise in prices. The only way for the actual money supply to increase is for the government to either print more money or buy up treasuries, right?

Inflation is not really a rise in prices; it is a loss in value of currency. The price is only higher because the purchasing power of the currency is less. This is not exclusively tied to there being more physical currency in the system but that is one factor that leads to inflation.

Incorrect. Inflation is both.

Money is not a zero-sum game since wealth is created, not always shifted, requiring additional money to contain the wealth.

 

[Howard]

Originally posted by: ducci
No. See: Inflation.

Barter is a zero-sum game.

How is it zero sum if what you barter can be produced?

 

[Special K]

Originally posted by: LegendKiller

Originally posted by: Pale Rider

Originally posted by: Special K

Originally posted by: ducci
No. See: Inflation.

Barter is a zero-sum game.

Inflation is just a general rise in prices. The only way for the actual money supply to increase is for the government to either print more money or buy up treasuries, right?

Inflation is not really a rise in prices; it is a loss in value of currency. The price is only higher because the purchasing power of the currency is less. This is not exclusively tied to there being more physical currency in the system but that is one factor that leads to inflation.

Incorrect. Inflation is both.

Money is not a zero-sum game since wealth is created, not always shifted, requiring additional money to contain the wealth.

When you say "wealth", do you mean cash and extremely liquid investments? I wasn't counting real estate, businesses, stocks, etc., that only have a real value if sold. A transfer of cash has to take place at some point, right?

 

[ElFenix]

Originally posted by: Special K

When you say "wealth", do you mean cash and extremely liquid investments? I wasn't counting real estate, businesses, stocks, etc., that only have a real value if sold. A transfer of cash has to take place at some point, right?

illiquid assets are still wealth.


PQ = MV.

anyway, any time there is an arm's length transaction between two entities in an economy, each party believes that it will end up better off by parting with what it had and gaining what it got. so, you turn over $5 for lunch because lunch is worth more than $5 to you, and the restaurant takes your $5 because the $5 is worth more to it than the food you received. usually the transaction is mutually beneficial to each side. n

ow, if you ordered something you ended up not liking, and you'd have rather had the $5, you can see with hindsight that you didn't get as much benefit as the $5 was worth to you. the restaurant still gets it's benefit, though, so it could be that even though you were dissatisfied the satisfaction of the whole system increased.

where you get into real trouble is when both parties end up dissatisfied, which is what has happened with a lot of the sub-prime meltdown. the people in the house didn't get the benefit because now they're out of a house, and the bank didn't get the benefit because now they've got as house that isn't worth as much as the loan.

 

[dullard]

Originally posted by: TuxDave
So how does appreciation fit in your idea?

I buy two identical houses for $500K each so I gave $1M to someone and now have $1M of assets. Market demand increases the value of the houses to $1M each.

Suddenly I have $2M of assets without having to exchange any money.

Think about it further.

Currently this is what is available:
Tuxdave: has $500K * 2 = $1M cash.
Person A: has two houses.
Person B: has $2M cash.
Total: $3M cash + two houses.

After the first transaction:
Tuxdave: $1M of assets (two houses).
Person A: $1M cash (from selling the houses).
Person B: $2M cash (He/she did nothing).
Total: $3M + two houses.

After the last transaction:
Tuxdave: $2M of cash (selling the two houses).
Person A: $1M cash (He/she did nothing this round).
Person B: $2M of assets (from buying the houses).
Total: $3M + two houses.

As you can see, IF you include all relevant parties, these are all zero-sum transactions. The totals never changed. Individual transactions are essentially always zero-sum. You can have person B sell the houses later at any price you want, and as long as you include person C in all comparisons the total never changes.

In this case, your gain ($1M cash) is person B's loss. Person B could have purchased the houses outright for $1M in the first transaction but didn't. So person B implicitly lost $1M by not buying soon enough.

But money is continuously being printed and assets are continuously being produced (mining, farming, etc.) Thus, the economy as a whole is NOT zero-sum.