We’re clawing our way back out of it (or not, dependign on who you listen to), but we’ve just experienced a pretty bad economic downturn. 401Ks are down, companies gone bankrupt, the govenrment out of money and (presumably) mortgaging our future… and so on.
So, where did all the American wealth go?
I’m no economist, so go easy on me.
It was paper wealth. The paper just got devalued - like in stock prices falling through the floor.
Where did all of the money come from? I rolled $90K from a 401K into an IRA about five years ago. That account has had a value over $130K and as low as $70K and is now about $100k.
For a rough analogy think about a baseball card. If you hear about someone selling/buying the same card for $100, you might think you hold an asset worth $100. If someone pays more, you now have a higher net worth. If someone pays less, you’ve lost value. The reality is that until you try to turn that assets (baseball card, mutual fund or stock) back into cash, your net worth is just an estimate. The money didn’t come from somewhere or go anywhere, your estimate was just adjusted.
Generally that has been a concern with a lot of baby boomers all wanting to cash out their retirement accounts. The increased supply might push the value down.
The money didn’t go anywhere. The value of the investments fell.
All things, even money, are commodities that have a market value. The market value of money and other things went down, thus there is less wealth. It doesnt have to go anywhere, it wasnt concrete to begin with. The same way an ounce of gold loses or gains value as the market fluctuates.
So lets look at my neighborhood. A lot of the 2 bedroom condos were being sold for around 300k in late 2007 or early 2008. They are now selling for 200k. So lets say there are ten new condos on my block and they just sold for 200k. Compared to 2007 the value of my block, from those sales alone, went down 1 million dollars.
I don’t know where yours went, but mine went AWAY
Are you telling us that the Beanie Baby I bought for $5 isn’t really worth $3500 because someone asked that much for the same one on Ebay? (They had no takers.)
Oh, and BTW, in that same sense, the house you bought for $400K and want to sell for $750K because you listed it at that asking price is really only worth $200K because that’s all anyone will pay for it at a foreclosure sale. Did you lose 200K, $350K or $550K? How much money disappeared?
Worth has little to do with what you THINK stuff is worth. It’s what someone will pay for it. However, in a financial system, at some point, a book value has to be assigned. You can’t always wait for stuff to sell before booking a value. In a global market when a big enough disparity between book value and what someone will pay happens you have created a bubble that is bound to burst. It happens over and over and over. Then a write-down is forced which is what we are going through. It is something that will continue to happen over and over again. Its always just a new player in a different arena at a different time. (Tech stocks, mortgages, oil, commodities, franchises, etc.) Meantime, someone (or some/many entities) has skimmed off enough profit by playing on the disparity that a lot of people get screwed.