Representative money is a certificate or token that can be exchanged for the underlying commodity. For example, instead of carrying the gold commodity money with you, the gold might have been kept in a bank vault and you might carry a paper certificate that represents-or was “backed”-by the gold in the vault.
If you just want a modest, comfortable lifestyle like Warren Buffett’s, you don’t need anywhere near the net worth of Warren Buffett to achieve it. By contrast, if you want the glamorous life of Buffett’s fellow billionaire Donald Trump, you’d better have a Trump-sized fortune to back it up. This means that a person with a very extravagant lifestyle – a huge house, several fancy cars,designer clothes, and lavish parties – isn’t necessarily rich in terms of net worth. If the house and the cars were all paid for with hefty loans, the person’s actual equity – the amount that belongs to the so-called owner – could be quite low.
It could even be negative if the house or cars have fallen in value, leaving the buyer with an upside-down loan. The closet full of designer clothes, no matter how much they cost to buy, probably isn’t a significant asset, and a big party – even a really great one – isn’t an asset at all. This goes a long way toward explaining why you see many arguments regarding how much income it takes to be really rich. When Americans talk about being wealthy, they often focus on having a high income.
It was understood that the certificate could be redeemed for gold at any time. Also, the certificate was easier and safer to carry than the actual gold. Over time people grew to trust the paper certificates as much as the gold.
That’s nearly 30 times as much as the average income of the remaining 99% of Americans, so branding this group as outrageously rich doesn’t seem, at first, like much of a stretch. One person, perhaps, would say that a million dollars is enough to make you rich, while another would say that it takes 10 million. Still others would give answers that weren’t expressed in dollar terms at all. They’d say that wealth means having a big house, a boat, and a private jet – or maybe just a comfortable home and good health insurance.