If wealth is held or invested in negotiable instruments, that wealth may increase or decrease, without action of the holder/investor. If the worth of those instruments decreases to zero, so does the purchasing power of that wealth. Unlike energy, which may change forms but still remain energy, or H2O, which may be steam, water or ice but still H2O, trading the markets is an art, not a science, and wealth held or invested in negotiable instruments is subject to what other people think and do. Therefore, wealth is relative, but we all knew that.
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Where does destroyed wealth go?
- Thread starter joeski
- Start date
It's interesting that no Zero-Summers stepped forward ..
When the reactor at Chernobyl metled down what happened to its value? Unless there was an opportunity to short Chernobyl, it did indeed evaporate. Man is not particularly skilled at valuation ... these days everything is an exercise in arbitrage.
When the reactor at Chernobyl metled down what happened to its value? Unless there was an opportunity to short Chernobyl, it did indeed evaporate. Man is not particularly skilled at valuation ... these days everything is an exercise in arbitrage.
... stock market is no "zero-sum" game ... options areQuote from FeenixRizin:
It's interesting that no Zero-Summers stepped forward ..
When the reactor at Chernobyl metled down what happened to its value? Unless there was an opportunity to short Chernobyl, it did indeed evaporate. Man is not particularly skilled at valuation ... these days everything is an exercise in arbitrage.
... when you drive a car off the dealer's lot ... some of its value is already gone
Wealth is often a mirage!
On 11/07/07 GOOG closed at $741 on about 8 mil shares traded. GOOG's float is 241 mil shares. Today GOOG is at $310 per share.
An obvious statement that many journalists make is that GOOG has destroyed wealth equal to ($741 - $310)*241000000 total shares outstanding = $103 BILLION. This sort of calculation may be popular but it's wrong. On 11/07/07 only about 3% of the float traded at the $740 price. If the remaining 97% of GOOG owners tried to liquidate that day, the price of GOOG would have collapsed to a much lower level.
And so the wealth didn't go anywhere, it never really existed in the first place.
On 11/07/07 GOOG closed at $741 on about 8 mil shares traded. GOOG's float is 241 mil shares. Today GOOG is at $310 per share.
An obvious statement that many journalists make is that GOOG has destroyed wealth equal to ($741 - $310)*241000000 total shares outstanding = $103 BILLION. This sort of calculation may be popular but it's wrong. On 11/07/07 only about 3% of the float traded at the $740 price. If the remaining 97% of GOOG owners tried to liquidate that day, the price of GOOG would have collapsed to a much lower level.
And so the wealth didn't go anywhere, it never really existed in the first place.
you buy my stock, I get your money, stock goes down in value, I still have your money
Quote from gastropod:
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.
How is interest, by itself the enemy?
What other methods are there to motivate the people who have money to lend it to those who don't?
Sorry to drag this up again, but I still need help understanding this issue. Thanks to everyone who has contributed to the thread.
I started this thread by stating that I understood how money is created by the banks, but maybe I don't. In the explanation above, it appears that banks can only lend money they have on deposit. Even though a deposit is in a sense a liability, it's still money that came onto the balance sheet from outside, it wasn't created. It's no different from money given to a venture capital fund, for example, to be invested, except that a deposit might be called back at any time. It isn't money "created out of thin air", which is what I assume is happening. But maybe that's my problem?
Here is a thought experiment to illustrate. Suppose a bank has $1M in assets. If they are really restricted to the 10% fractional reserve, then they can loan $900K. If, as stated in the quote above, those loans get written down to half that, the bank is screwed, because they owe the depositors money that is now gone.
But I thought I understood that banks could push it even further, but considering the loan to be an asset, and lending against its presumed repayment. In this scenario, the bank with $1M in actual cash in the beginning could lend $10M. But then (and here is the thought experiment), if they foreclose on all $10M worth of loans and liquidate for 20% of the loan amount, they have the $1M with which to repay depositors and they have $1M in profit.
Obviously something is wrong here, because when loans are written down that severely, the banks become insolvent. So is it simply my exaggeration of the multiplier effect that is wrong, and banks really are restricted to lending an amount that is less than their actual deposits? Or do I have that right, but am missing another piece?
Thanks again.
Quote from scriabinop23:
3) fractional reserve banking multiplier. This is the key to the above argument. If the reserve ratio is 10%, then $1B of money created by the fed turns into a total $9B money created by the banking system (ponzi scheme).
....
So when in #3 the banks are forced to writedown bad loans (which are assets on their books) by 50%, they still are obligated to maintain their reserve ratios. They must raise more money so the assets balance out their liabilities (deposits). ie, bank has 90B in assets that are written down to 40B, and a reserve of 10B. Total bank deposits are 100B. So they have 50B of worth against deposits of 100B. They are entirely insolvent if people want their money. As a result, they stop lending until they recapitalize (and because new regulations come in) sufficiently. This results in the multiplier number going down, thus less money created.
Remember multiplier number is inverse to the reserve ratio. 10% reserve ratio = 10 multiplier. 25% reserve ratio = 4 multiplier.
[/B]
I started this thread by stating that I understood how money is created by the banks, but maybe I don't. In the explanation above, it appears that banks can only lend money they have on deposit. Even though a deposit is in a sense a liability, it's still money that came onto the balance sheet from outside, it wasn't created. It's no different from money given to a venture capital fund, for example, to be invested, except that a deposit might be called back at any time. It isn't money "created out of thin air", which is what I assume is happening. But maybe that's my problem?
Here is a thought experiment to illustrate. Suppose a bank has $1M in assets. If they are really restricted to the 10% fractional reserve, then they can loan $900K. If, as stated in the quote above, those loans get written down to half that, the bank is screwed, because they owe the depositors money that is now gone.
But I thought I understood that banks could push it even further, but considering the loan to be an asset, and lending against its presumed repayment. In this scenario, the bank with $1M in actual cash in the beginning could lend $10M. But then (and here is the thought experiment), if they foreclose on all $10M worth of loans and liquidate for 20% of the loan amount, they have the $1M with which to repay depositors and they have $1M in profit.
Obviously something is wrong here, because when loans are written down that severely, the banks become insolvent. So is it simply my exaggeration of the multiplier effect that is wrong, and banks really are restricted to lending an amount that is less than their actual deposits? Or do I have that right, but am missing another piece?
Thanks again.