We get a lot of email here at The Motley Fool. Lots of people want to give us feedback, correct our errors, and encourage us to buy products that will enhance our private lives. But we also get a lot of questions. Here's an example:
My roommate and I were having a discussion last night about the market.... Since money can be neither created or destroyed, how can the market keep growing? Basically, since anyone with a portfolio is "winning" to the tune of around 11% minus inflation, who's losing?
What a great question. The answer is no one has to lose.
But, first, let's back up. It's energy that can neither be created nor destroyed. Money is created and destroyed all the time. But when the stock market grows by 11%, it's not money per se that is being created, it's goods and services. Dollars are just a way to measure what is going on. Beads, wampum, pieces of paper, or electrons flowing through the guts of a bank's computer, money is just an accounting system.
But I understand what you're saying. You're thinking, 10 years ago the stock market was worth X trillion dollars and now it's worth X+Y trillion dollars. I know that the U.S. government didn't print an extra Y trillion dollars or we would have runaway inflation, so where did the Y trillion come from?
The answer is simple: sweat and brains. Or, in more polite terms: productivity. The increase in the value of all those companies comes down to human work and human ingenuity.
Over decades (and centuries, too) there has been a steady growth in the value of businesses the world over. That 11% growth you mention is the average growth of the U.S. stock market over the last 75 years or so. Not to be picky, but I also have to take issue with "anyone with a portfolio is 'winning' to the tune of around 11%, minus inflation."
Let's assume you meant that anyone who matched the market over a long time period experienced growth in his or her portfolio that averaged around 11% per year, greatly exceeding the inflation rate. Or, even more to the point, the market itself grew at that rate. How can the market get bigger without something else getting smaller?
The increase in the value of our stock market, and our economy as a whole, comes from people working harder and working smarter -- finding more efficient ways to do the same thing.
Let's try an agricultural example. When farmer Ted plants a field of corn by hand, harvests it, and sells it, he isn't selling corn. He's selling sweat. (Maybe we should have stuck with an air-conditioned, high-tech example.) Sweat, known in polite economic circles as labor, is what turned a few seeds into a crop others were willing to pay for.
If our tired and sweaty farmer decides to use the money he made from his labor to buy a tractor, his labor might suddenly be worth, say, 100 times as much because the same amount of sweat produces 100 times as much corn. Using brains (good business decisions and technology) magnifies productivity.
Money is just a way to account for, to measure, the value of goods and services that people produce when they work. So as long as the money that is "printed" doesn't exceed the value of what a country's collective labor has produced, creating more of it to help us account for what has been produced can't cause inflation.
Now, it's true that every trade has a winner and a loser, but investing in the market as a whole, as with index funds, gets you out of that game and lets you participate in the growth of our whole economy. Economic growth is the best game there is. No one has to lose. The system doesn't have to break even. It can just keep growing.
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