At a given time t, the total production within an economy is distributed according to payments made by purchasers. Calling the sum of these payments the dollar expression of production, the corresponding goods expression of purchases is the total production expressed as a very large goods bundle. Neither term implies actual value. The only determinant of actual value is a detailed analysis of the goods bundle itself by experts who can evaluate the total social benefit of each good. For sake of simplicity, services provided are also considered part of production. The term "goods" will refer to both goods and services.
Alongside the acts of production are speculative sales. Speculation is defined as "ownership for the purpose other than use or consumption". An object, such as an ox, could be purchased simultaneously for production (use of the ox for plowing), speculation (sell if prices reach a certain level) or consumption (eat if food is not available). Similarly, homes are purchased for both use (to live in) and for resale (under the assumption that property prices will rise). The holding of money, such as in a savings account, or any other asset, is also an act of speculation. The act of holding is, essentially, "exchange with oneself". The sum of production purchases and speculative purchases at time t is the entirety of economic exchange at that time period. Furthermore, the total supply of money within an economy therefore participates in exchange in each time period.
Suppose that the supply of money within an economy increases at a rate greater than the total level of production. Then it must follow that speculation within that economy increases. Similarly, if production booms at a greater rate than expansion of the money supply, the number of speculative exchanges must decrease. Here, "level of production" refers to actual production and not production capacity, while "money supply" refers to actual currency in circulation and bank accounts (m1). It is premature at this juncture to make policy recommendations, because increases in the money supply can be made in a variety of ways, some of which can spur increased production in excess of the increase in money supply.
In any market, some individuals will have large, speculative holdings, and will hereafter be referred to as "wealthy". What conditions must persist over time for these speculative holdings to diminish? Similarly, what conditions must persist for these holdings to increase? Which of the two scenarios are more likely?
These questions are answered by looking at the essential choice that the wealthy have in the investment of their money. Either they invest in a productive enterprise by purchasing capital for use by that enterprise, or they invest in speculative enterprise by purchasing assets that they believe will appreciate in value. The act of simply holding onto money is tantamount to saying that all other investments are inferior, i.e. that money will increase in value.
In a situation where the economy is rapidly expanding, speculative holding tends to fall behind productive investment in terms of profit levels. Therefore, the wealthy can be expected to reduce their speculative holdings during such periods, instead investing in capital. Conversely, the wealthy will tend to withdraw capital and invest in speculative holdings during economic downturns. Despite the use of the term "Speculation" to describe non-productive investments of money, it is speculation that gives more stable (lower risk) returns to the investor, at least with respect to general market trends. Part of this risk equation is the magnification of economic events at the level of production relative to the level of simple wealth holding. The wealthy will obtain peak wealth levels by switching to speculation at the exact point of market reversal. This ensures that even as wages fall for workers, the prices of goods and rental costs do not fall proportionately (due to decreases in number of suppliers and increases in speculation in land). Thus, workers are impoverished and must consume less, leading to a decrease in prices of all speculative assets and eventually uniform deflation. This process of decay continues without any theoretical bottom, however in practice governments change policies, new technologies are developed, or wars and revolutions occur. In a broad sense, the wealthy class will only diminish in wealth concentration as a result of unexpected losses, which are correlated with changes in the direction of the general economic trend - the frequency of which principally depends on government action, as described below.
Two key features of modern economies are the dependence of the vast majority on the market for their subsistence and the use of fiat monetary systems. Historically, two different factors moderated the inescapable spiral described above: 1. The agrarian economic system, and 2. The precious metal economies. These two had particular synergies, such as feudal patterns of land ownership and the "free market" expansion of currency supplies which served to reverse economic trends. However, these counterbalances have now been totally removed from our present economies. Instead, we have a government system in which a fiat money system is implemented in a dishonest way where national governments essentially pretend to be bound by invisible rules which force them to maintain a fairly limited expansion to actual currency supplies. Furthermore, political leaders tend to know little to nothing about the economy, and of course there are virtually no academics who can honestly claim to know much more. It is therefore an operation of pure chance that brings a modern society out of economic slump.
Ironically, the cycles of growth and collapse are initiated by an underappreciated phenomenon called saturation. In a "goods saturation" collapse scenario, additional wages cannot motivate increased purchasing. Wage workers instead become speculators, accelerating any pyramidal effects already occurring within the economy. In a "speculation saturation" growth scenario, available speculative assets suffer from a relative deflation in value due to vastly overinflated prices and widespread cost of living inflation. Investors have no choice but to invest in industry in order to preserve their wealth.
A prescription for our own economy in this situation follows from the identification of our stage within this crisis: we are currently facing a non-inflationary collapse of production capacity. It is a slow moving crisis that in many ways began in the 1980s. To address it, we must devise a way to destabilize the prices of fixed assets like real estate and bonds. A rather painless way to do this is simply to reduce their opportunity cost, that is, to expand the money supply through giveaways as part of social welfare programs. The additional spending that such policies would engender would make productive investment more profitable than mere speculation, and the economic trend could be reversed.