"It was never there to begin with" is my answer. When we say "$X is worth $Y billion dollars" it's an expression of hope, not a quantization of an actual potential. The financial industry's tolerance of such baseless metrics is one of the reasons to avoid the whole area of endeavor: they're willing to lie to themselves and everyone else about what they do.
Let's say you own a magic box that produces 15 potatoes a day, automatically. You use these to help feed your family, and sometimes you sell the extra potatoes you don't want to eat, or give them away to friends.
One day the box starts working a little bit less- it only produces 12 potatoes a day.
You keep assuming the box is worth the same and then suddenly one day you try to eat 15 potatoes and suddenly realize that the wealth you thought was there actually wasn't.
I get where you're trying to go, but it falls flat on its face as soon as you say it produces 15 potatoes a day. You're conflating creation of assets with a ballpark estimation of what someone might pay for a thing.
It's like they say with collectibles. That 15000 dollar comic book is worth squat til you find the buyer willing to pay $15000 for it.
Not conflating, it's a good example. The asset is the magic box, not the potatoes. The magic box is worth less when it's producing less.
It's not like collectibles. Productive assets have value no matter what someone wants to pay for it. That's why gold and crypto are so stupid - it's greater fool theory.
Wealth went down, but you've only given one example.
Asset prices can change in response to asset values changing(like your example), estimates of asset values changing, liquidity problems, and risk preference changes. And it can feed on itself.
In some of those cases real wealth is lost, in others, it's just people throwing around different bids and offers.
Price is a signalling protocol for resource allocation.
Perhaps the underlying resource has been degraded or is no longer useful in some sense, in which case real wealth has been lost. Otherwise it might just mean the signalling has changed (e.g. control of resources has shifted).
The Author misunderstands as badly as the people he is trying to explain to, conflating wealth and market value. If you own an asset, that is your wealth, no matter what dollar price you can sell it for, just the asset itself. You can trade it, but in aggregate, the amount of money and assets in the world stay the same. That's why the only real wealth increases are in GDP, someone creating some new wealth which never existed before. Price is just an estimate about the future, how large the money stream your assets might entitle you to capture over its lifetime, and one that has constantly to be revised. Value is subjective.
A house is an asset, building more houses drops the value of existing houses but it doesn't destroy your house. The money supply also stays the same. It only goes up when you borrow money to buy or build a house and goes down as you pay off the mortgage.
Let's say there's a new company that develops technology to grow apples efficiently.
This company will be eventually able to sell its technology. But why would apple growing companies buy it? They can grow cheaper apples and thereby make more profits. So it follows that our apple tech company will be able to make profits.
Central to this example is that apples are valued by people. People WANT apples. And if they can eventually buy it for cheaper they are better off.
Now from the shares point of view, why will I buy shares of apple tech? Because I believe that this company will actually develop the technology, go on to make actual tangible profits by selling to companies. And I believe this because I believe apples are actually valued by people.
Now what will happen to the society if this company goes down under? The society on the whole lost the opportunity for cheaper apples (again valuable). And obviously the few investors who had put the money lost part of their wealth. (Similar to burning one's money)
So to answer the question, where did the wealth go? I think it's equivalent to a situation where if all my wealth were in eggs but they all rotted away.
Now to ascertain whether wealth vanishing is a good or a bad thing, i think that is directly dependent on your subjective opinion of the value the wealth was attached to. In the case of apples, it would clearly be a net loss to society.
But if we take shares of a porn company going down, there was no net loss to society because my subjective opinion on the value of porn is 0 or negative.
Where does the wealth come from when asset prices go up?
The numbers are irrelevant, because they are based on units that go up and down too.
My house was worth (say) 100,00 units 10 years ago. Now it's worth 200,00 units. The house hasn't changed, but the units have declined in value. So you need more of those worse units to pay the same amount.
A better way of looking at it is with an inert asset like gold. In the 1930s an ounce of gold was about $35, today that same ounce of gold costs about $1800. The gold itself hasn't varied. (It can't, it's a metallic element.) But the buying-power of the USD has declined tremendously; so much so that one dollar today has the roughly the same buying power that two cents did way back in 1935.
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[ 3.3 ms ] story [ 35.3 ms ] threadOne day the box starts working a little bit less- it only produces 12 potatoes a day.
What happened to your wealth?
I get where you're trying to go, but it falls flat on its face as soon as you say it produces 15 potatoes a day. You're conflating creation of assets with a ballpark estimation of what someone might pay for a thing.
It's like they say with collectibles. That 15000 dollar comic book is worth squat til you find the buyer willing to pay $15000 for it.
It's not like collectibles. Productive assets have value no matter what someone wants to pay for it. That's why gold and crypto are so stupid - it's greater fool theory.
Old Warren Buffett covers this well here: https://hollandadvisors.co.uk/wp-content/uploads/2021/03/buf...
Asset prices can change in response to asset values changing(like your example), estimates of asset values changing, liquidity problems, and risk preference changes. And it can feed on itself.
In some of those cases real wealth is lost, in others, it's just people throwing around different bids and offers.
Perhaps the underlying resource has been degraded or is no longer useful in some sense, in which case real wealth has been lost. Otherwise it might just mean the signalling has changed (e.g. control of resources has shifted).
Let's say there's a new company that develops technology to grow apples efficiently.
This company will be eventually able to sell its technology. But why would apple growing companies buy it? They can grow cheaper apples and thereby make more profits. So it follows that our apple tech company will be able to make profits.
Central to this example is that apples are valued by people. People WANT apples. And if they can eventually buy it for cheaper they are better off.
Now from the shares point of view, why will I buy shares of apple tech? Because I believe that this company will actually develop the technology, go on to make actual tangible profits by selling to companies. And I believe this because I believe apples are actually valued by people.
Now what will happen to the society if this company goes down under? The society on the whole lost the opportunity for cheaper apples (again valuable). And obviously the few investors who had put the money lost part of their wealth. (Similar to burning one's money)
So to answer the question, where did the wealth go? I think it's equivalent to a situation where if all my wealth were in eggs but they all rotted away.
Now to ascertain whether wealth vanishing is a good or a bad thing, i think that is directly dependent on your subjective opinion of the value the wealth was attached to. In the case of apples, it would clearly be a net loss to society.
But if we take shares of a porn company going down, there was no net loss to society because my subjective opinion on the value of porn is 0 or negative.
The numbers are irrelevant, because they are based on units that go up and down too.
My house was worth (say) 100,00 units 10 years ago. Now it's worth 200,00 units. The house hasn't changed, but the units have declined in value. So you need more of those worse units to pay the same amount.
A better way of looking at it is with an inert asset like gold. In the 1930s an ounce of gold was about $35, today that same ounce of gold costs about $1800. The gold itself hasn't varied. (It can't, it's a metallic element.) But the buying-power of the USD has declined tremendously; so much so that one dollar today has the roughly the same buying power that two cents did way back in 1935.