UNITS OF WEALTH

INTRODUCING TRUE INTEREST

The meaning of Wealth

True interest is, by a more traditional name, the marginal rate of interest above AEG%. This is a bit like saying that the real interest is the marginal rate above prices inflation. It is easier to say true or real interest than to say 'the marginal rate of interest above the relevant index'.

True Interest is important because if you have a year's income saved and you lend it to someone, then if the interest rate keeps pace with AEG% and there are no taxes or costs, you will get back one year's income at the new, higher level of average incomes - but not one year of your own income which may have risen by a different amount.

There is an illustration of this in FIG 2 of the ILLUSTRATIONS page, and other illustrations can be seen where because the true rate of interest is negative less income is repaid than has been borrowed. This means that the borrower gets,  say 4 years' income and repays 3 years' income and then has a year's income to spend that was expected to be spent in repaying the mortgage. The lender loses a year's income and so there has been a transfer of wealth from the lender to the borrower. Wealth (spendable income) did not vanish - it moved.

The index used makes a difference to the figures but for the investor what matters is the average income and keeping pace with that.

In the same way, if you invest in an index-linked (to prices) Bond you are lending your money and when you get it back you will get back enough money to buy the same basket of goods and services that you could have bought if you had not lent the money. It is just that you would have bought a different basket and your preferred basket would not have risen at the same rate as the index of prices.

Individuals are not average people. But an index is still helpful. Just as an index of prices can be used to give a measure of the value of money as far as purchasing power is concerned, so an index of average incomes (or GDP which is aggregate income) might give a measure of wealth or the share of GDP which a person has earned and wants to keep. NOTE - one economist screamed that GDP figures get manipulated - well people are free to create another index if they want to.

If the interest rate or the indexation is less than AEG% (negative true interest) then, even if it keeps pace with prices, you might get back only half a year's income. In that case the average borrower has taken and used a year's income and then he/she has another half year's income to spend.

The half year's income (wealth) is not lost, it is transferred.

UNITS OF WEALTH
So if we want a unit of wealth we might ask what is the National Average Income (NAE) per working person per annum? That would be a sensible unit of wealth. I have called that unit, 1 NAE = One National Average Earnings.

MANAGED FUNDS
I do not often refer to NAEs but if you were to be managing a pension fund you would be wanting to preserve the NAEs that you had under management. And you might, as a salesman, want to suggest to the clients that you could define the cost of their pension in units of NAE and that your fund, having invested in bonds linked to AEG% p.a., could preserve those units of AEG and maybe add value to them. That option does not currently exist. There are no such index-linked funds.

COMMUNITY WEALTH
Wealth gets transferred from one section of the community to another section all the time in various ways. Thus if the true return that you get from buying shares at one price, transferring wealth to the one that sold them to you and then selling those same shares to another person at another price, a person who uses income or stored income (wealth) to buy them from you, then you get a transfer of wealth, the amount of which depends upon the true rate of return obtained or the difference between the NAE you spent to acquire the investment and the NAE that someone paid you to release it. Or it can be measured in that way.

The same applies to property purchases and fixed interest bonds and much else besides. All of these move wealth around the community. What we are seeking in our design for the economy, is that wealth gets transferred for a good reason and not because of something that distorted the value, the price, or the cost.

RESEARCH OPTION
Students may like to make a list of such things which will mainly comprise debts of all kinds, equities, property, taxation, and Quantitative Easing, and Money Creation of all kinds. Consider how much wealth may be flowing through each medium, where from and where to. What is the maximum rate of transfer from younger to older and so forth? What can we learn from such studies? 

Given that there is a limit to the amount of transfer of wealth that can take place, some enthused academics may want to draw a picture of what is going on and draw some conclusions  Let me know if that interests you, define the scope and the objective of your paper, let me know, and I will allocate the research to you by telling any new student that the area is already being researched.