The Dim-Post

February 27, 2009

Destruction of Wealth

Filed under: general idiocy — danylmc @ 3:04 pm

Via DPF, Alan Bollard has described the credit crisis as the greatest destruction of wealth in world history. That doesn’t sound right to me. Sure, vast amounts HAVE been lost in the equities markets. But if a nation’s houses are valued at 1 trillion dollars one year, increase in value to 2 trillon over five years and then decrease back to 1 trillion have we really lost a trillon dollars? Likewise, what if a bank claims that their complicated, opaque financial products are worth 1 trillion dollars but they’re really totally worthless? There has been some loss of wealth due to the fact that the economy was operating under false assumptions of value but we haven’t lost a trillion dollars.

Compare this to the crash of 1929 in which many governments (notably the US) let the banks go under; 90% of savings and investments are notional (they don’t physically exist) but they represent real economic wealth and when the bank gets wiped out that notional wealth is instantly destroyed (which is why governments go to extraordinary lengths to keep banks solvent). Just about everyone in the world lost their life savings in the late 20’s and early 30’s. Things today are rough but we haven’t seen anything like that.

Nor have we seen destruction of wealth comparable to that of the mid 1940s in which many of the worlds cities and industrial regions were destroyed by a combination of conventional and nuclear weapons. The current crisis is bad but not THAT bad.

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17 Comments »

  1. According to Marilyn Waring, physical disasters are good for GDP. Destroying many of the world’s cities could be very positive, as the work of cleaning up and rebuilding all counts towards GDP.

    Comment by Deborah — February 27, 2009 @ 3:17 pm

  2. Totally agree – and slightly concerned if our Reserve Bank governor really thinks true value was represented in that $30trillion facevalue of stocks. It would be interesting to see where that takes us back to in terms of global stockmarkets (and on could assume that current face values have fallen below true long-term value as well).

    Comment by Gareth — February 27, 2009 @ 3:23 pm

  3. Deborah, thats just one of the reasons why GDP is not a good measure of wealth, google “broken window fallacy”

    Comment by Owen — February 27, 2009 @ 5:07 pm

  4. Ah, I think Bollard said ‘possibly’.

    Also the destruction doesn’t happen when you assume you assume one year your asset – lets say a house – is worth $1 million and the next year its value drops to, say $750 million.

    The destruction happens if you borrow on the assumption it is worth $1 million. Which is what a lot of people have done.

    Comment by Rob Hosking — February 27, 2009 @ 5:26 pm

  5. Danyl: That doesn’t sound right to me

    I’m amazed Danyl. You’re starting to make economic sense! I would suggest that you continue to ask that question: what makes real money? What makes savings? What is economic growth?

    Because the latter is a bit absent: is there such thing as economic growth or is it just a pie we carve up?

    And Deborah: when can I come and smash up your house?

    Comment by Berend de Boer — February 27, 2009 @ 6:39 pm

  6. Oh – I agree with the point that Owen made i.e that GDP is not a good measure of wealth. I believe that was part of the point that Marilyn Waring was making in the first place.

    So leave my house alone, thank you very much!

    Comment by Deborah — February 27, 2009 @ 9:19 pm

  7. Danyl, the short answer is yes.

    If you had $20 and found $10 and then lost $20, have you lost any money? Damn rihgt you have.

    And ‘The current crisis is bad but not THAT bad.’ – no, not in WGN, yet.

    Comment by jesuswept — February 27, 2009 @ 9:50 pm

  8. If you had $20 and found $10 and then lost $20, have you lost any money? Damn rihgt you have.

    That’s not what happened though is it? US homeowners didn’t find gold bars hidden in the basements of their homes that made them double in value, only to mysteriously lose them. House prices increased in value during a speculative bubble and then fell again. As Rob points out, people borrowed money based on bad assumptions about the house prices (and lost money that way) but the actual loss of real wealth is much smaller than the change in dollar value of US real estate from the height of the peak to now, which is what Bollard is quoting.

    Comment by danylmc — February 27, 2009 @ 10:09 pm

  9. danyl – your argument is redundant. The value of something is defined by what the market values it at. Thus “wealth” is exactly defined by the measures Bollard describes. Or do you think there is some essential “valueofhouseness”? Perhaps a platonic form? Or is there an inherent utility to houseness? If so how should we describe it? In terms of kilograms of carrots? Or perhaps as an emotion or a colour? I can see the real estate advertisement now – “three bedroom, low maintenance family home for tender – all offers over magenta considered.”

    Like so many of your arguments this one is superficially attractive but upon closer inspection has the value of a brunist common sense committee decree…

    Comment by robinsod — February 28, 2009 @ 12:02 am

  10. Danyl said “That’s not what happened though is it? US homeowners didn’t find gold bars hidden in the basements of their homes that made them double in value, only to mysteriously lose them. ”

    Yes Danyl, this is exactly what happened.

    I hate to say it but robinsod is correct (gag gag cough retch-washes hands compulsively for 20 minutes with bleach)

    Comment by jesuswept — February 28, 2009 @ 3:38 am

  11. Or do you think there is some essential “valueofhouseness”? Perhaps a platonic form? Or is there an inherent utility to houseness? If so how should we describe it? In terms of kilograms of carrots? Or perhaps as an emotion or a colour?

    Your clumsy sarcasm aside, it’s obvious to anyone thinking about this for more than a second that houses do have utility. And if there is no inherent value of houses then why are large, comfortable houses in nice areas always more expensive than small uncomfortable houses in bad neighbourhoods?

    Comment by danylmc — February 28, 2009 @ 6:51 am

  12. He means that if someone is willing to pay $300,000 for your house in 2005 and someone else is willing to pay $500,000 for it in 2007, its value and therefore your wealth has increased by $200,000.

    Personally, I don’t think that alters the fact that if the only reason someone is willing to front up half a mil for your house is that some shyster who doesn’t actually have half a mil is willing to pretend to lend it to him, the real value of your house is definitely not $500,000.

    Comment by Psycho Milt — February 28, 2009 @ 8:38 am

  13. The destruction happens if you borrow on the assumption it is worth $1 million. Which is what a lot of people have done.

    Especially those investing in or living off pension funds. That is very real money that they are not getting right now or not going to get when they retire.

    BUT, I agree the situation is not a war like or even 1929 like calamity.

    Comment by Don — February 28, 2009 @ 2:27 pm

  14. PM, sod, jw
    wealth does not equal money (or notional forms of it inside computers)
    money is basically toilet paper

    Actual wealth is not theoretical.. it is based in material resources & the ability to obtain them

    having said that i don’t think acquiring loads of stuff = happiness :)

    Comment by ropata — February 28, 2009 @ 8:12 pm

  15. “having said that i don’t think acquiring loads of stuff = happiness”

    Tell that to the staving when the “loads of stuff” is food….

    Comment by James — March 1, 2009 @ 2:55 am

  16. james i agree with you, do try and comprehend before attempting to be clever

    Comment by ropata — March 1, 2009 @ 3:48 am

  17. PC defines wealth here: wealth is not riches

    Comment by ropata — March 1, 2009 @ 10:20 am


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