Some people think America would be a utopia if only the wealthy would stop “hoarding their riches” like a dragon guarding its treasure. But before you grab your pitchforks and torches, remember that the source of American wealth isn’t as simple as the rich hoarding it all for themselves. It’s a little more complicated than that. But one thing is for sure; the wealthy are not using their money to buy practical things like matching socks or adulting classes.
Have you ever heard someone say that the wealthy in America are “hoarding” their wealth? Well, I just had a great conversation with one of my best friends, and we were able to bust this myth. The truth is, the idea that the wealthy are hoarding their wealth is nothing short of a myth – just like many other belief systems based on incomplete system observations.
So, what exactly does it mean to “hoard” wealth? The most obvious example would be Scrooge McDuck swimming in piles of physical coins inside his money bin. But let’s be honest; that’s just an immature example. In reality, hoarding wealth would look more like billionaires placing their money in savings accounts or government bonds – which they don’t do. If they did, they would get poorer over time due to personal expenses and inflation.
So, where does their money go? Enter the “evil” Investment Bankers. These individuals are crucial in connecting wealthy investors with firms that need capital. These are the Capital Markets or Primary Markets.
Let’s say you’re running a successful business and need additional money to expand your operations. You have two options: Debt Financing and Equity Financing. Both of these options require the help of Investment Bankers, who will analyze your firm, give it a rating and connect it with wealthy investors interested in investing.
With Debt Financing, the company will sell bonds that must be repaid with interest. With Equity Financing, the company will share a percentage of ownership in exchange for capital.
It’s important to note that Capital Markets and the Stock Market are not the same thing. The Stock Market, also known as the Secondary Market, is where owners of a company’s shares go to find someone who would like to purchase those shares.
In either case, wealthy investors give capital in exchange for something they believe will be more valuable, based on the risk they are taking. They no longer have or control that capital; the firm controls it.
When this process is successful, the most direct beneficiary is the recipient of the investment – the firm. The influx of capital will increase productivity and revenue for the firm if appropriately deployed. The secondary and tertiary beneficiaries are all the people the stronger, expanded firm employs now and even has a cascading effect from the firm outward into the local economy. These positive effects are due to the deployment of capital rather than hoarding wealth.
Of course, this process only sometimes produces winners, but understanding how it works and the role of Investment Bankers in connecting wealthy investors with firms in need of capital, can help us better understand the myth of hoarding wealth.
Updated on 4/28/2023 with Grammarly recommendations.
Update of an original post on 8/23/2022.
Christopher Padilla 
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