Where does destroyed wealth go?

Quote from BVM88:

To summarise what others have said here, there can't be "an equal number of winners" because prices are set at the margin. It only takes one seller at a lower price to reduce everyone's wealth.
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No, it only reduces the wealth of those that hold the same asset class.

RE doesn't affect gold, etc.
 
Quote from jprad:

No, it only reduces the wealth of those that hold the same asset class.

RE doesn't affect gold, etc.
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I was looking at it from one asset class to make it simple. If the OP understands that prices are set at the margin he will have his answer.
 
Quote from joeski:

Thanks in large part to the handful of ET posters who are actually knowledgeable and helpful, I think I understand money creation through lending, but I do not understand how wealth disappears. It's pretty obvious how a decline in an asset's value affects the owner of that asset during the decline in price, and particularly how banks can be quickly rendered insolvent by defaults or foreclosure of severely devalued assets, since they are conjuring most of the money they lend out of thin air (in other words, if they don't get most of it back, they're screwed).

However, the money from the loan went to purchase something, no matter how dubious its valuation at the time of the transaction. Even though the buyer (and ultimately the lender, if it comes to that) realizes a loss, the seller received the money and presumably retains it, or passes it to someone else in another transaction. In any case, it seems there should be some kind of law of conservation of "money".

Now, it also seems obvious that there is a distinction between "wealth" (or "value") and "money", and I can see how inflation could wipe out wealth while preserving the amount of money. But if we are experiencing deflation at the moment, not inflation, why do people constantly mention the $11 trillion (or 16 or whatever) of wealth that has evaporated? All that money that people spent on ill-fated CDOs or CDSs, or McMansions in Stockton for that matter, where did it "go"? If there are so many losers, why aren't there an equal number of winners so that spending remains the same.

It is self-evident that spending is decreasing, but I would like to understand how and why. Thanks!
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I see what you are saying so lets try to look at it. Say you buy a house for 100k before the bubble and sell it for 200k during the bubble and you profit 100k. Sure we all know the guy that bought your house is going to default and the bank will be on the hook for it, but what did YOU do with that extra 100k? maybe you bought a brand new 30k car and paid cash! That 30k went to pay the car salesman, the factory workers that made the car, the chinese people that make the parts for the car, the OTHER chinese people that dug the iron out of the ground to make the parts that were sold to the factory to make the car that you bought and so on. So basically you could say that your money went to china.
 
Quote from bbqbbq:

the money didn't disappear. there are hidden winners in the US, who sold houses and stocks at the top. but who's gonna say they won, when everybody else is losing their jobs?
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Good balanced comments bb.:cool:

Even the winners lost some;
Asian cans of pineapples went from $0.69 to $0.99,[US dollars] tomatoes did much the same.......past 12 month or so.

Of course , if your pineapple exspenses are smaller than stock/RE gains, or you have a few homegrown tomatoes to sell or eat,
I say you are still a winner.
:D

And even those who did not sell @ the top, some made money, because thier cost basis was low.Wealth wasnt necessarly destroyed there .Could sell [to open a position] that a fund sold to close, could be win/win there......

And even though Dave Ramsey admitted {FOX} he lost money buying buying stocks early;
since its in his retirement fund, maybe, maybe not a loss, long term.
:cool:
 
Hmmm, it seems to me that a lot of people here have missed the REAL enemy and the missing phantom!!! The better question is...what happened to the missing INTEREST and INTEREST PAYMENTS. Much of the "wealth" generated throughout this "boom" was from "interest." The real problem lies in the fact that a $100K loan will generally purchase $100K's worth of real materials in the REAL world. The problem for our economy now is what the banks were "banking on" - the interest payments...which contributed a HUGE amount to the "missing money" - the "wealth creation" from thin air...now promised into 401Ks, mutual funds, REITs, etc.
-gastropod
 
LOL.

It goes where the goblins go.

Below. Below Below Below.

Ding Dong the Wicked Debt is dead. :D

Quote from RussellDaytrade:

Where does destroyed wealth go?


Gone where the woodbine twineth.
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Let me help you out.

Margin = Leverage = Debt

All better now?


Quote from jprad:

No, it's debt-based money.

You "create" the money via a journal entry. There's a very real debit that's created when the loan is made and the principle and interest has to be repaid to remove that entry.

That's also why the money "disappears" after the debt has been paid.

The rub is the interest, which requires additional money to have been created elsewhere.



No, your broker is on the hook (liability) if you can't pay off the debit created as a result of the margin loan.

That's why they'll close out your position once you get close to wiping out the real value of your account.



Not all banks bought into the scheme. There are plenty of small banks that continued to use the same means tests for making loans.
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The "conjured up part" was the "interest" - the interest was NOT part of the real economy - monetary base. The "interest" is the thing that has to be created from nowhere! A $100K loan over 30 year may cost $300K when payed off - where did the "other $200K" go? With the "time value of money" many of the banks got rich selling off that "future interest" for real money!!! What did the banks do with the "future interest"? That is the bigger question being avoided here on this board.
-gastropod
 
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