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Where did the money go?
All the money lost in the stock market and the housing crash never really existed, economist says
Trillions in stock market value – gone. Trillions in retirement savings – gone. A chunk of the money you paid for your house, the money you're saving for college, the money your boss needs to make payroll – gone, gone, gone.
Whether you're a stock broker or Joe Six-pack, if you have a mutual fund or a college savings plan, tumbling stock markets and sagging home prices mean you've lost a whole lot of the money that was right there on your account statements just a few months ago.
But if you no longer have that money, who does? The fat cats on Wall Street or Bay Street? Some oil baron in Saudi Arabia? Or China?
Or is it just – gone?
If you're looking to track down your missing money – figure out who has it now, maybe ask to have it back – you might be disappointed to learn that is was never really money in the first place.
Robert Shiller, an economist at Yale, puts it bluntly: The notion that you lose a pile of money whenever the stock market tanks is a "fallacy."
He says the price of a stock has never been the same thing as money – it's simply the "best guess" of what the stock is worth.
Shiller uses the example of an appraiser who values a house at $350,000 (U.S.), a week after saying it was worth $400,000.
"In a sense, $50,000 just disappeared when he said that," he said. "But it's all in the mind."
Though something, of course, is disappearing as markets and real estate values tumble. Even if a share of stock you own isn't a wad of bills in your wallet, even if the value of your home isn't something you can redeem at will, surely you can lose potential money – that is, the money that would be yours to spend if you sold your house or emptied out your mutual funds right now.
And if you're a few months away from retirement, or hoping to sell your house and buy a smaller one to help pay for your kid's college tuition, this "potential money" is something you're counting on to get by. For people who need cash and need it now, this is as real as money gets, whether or not it meets the technical definition of the word.
Still, you run into trouble when you think of that potential money as being the same thing as the cash in your purse or your chequing account.
"That's a big mistake," says Dale Jorgenson, an economics professor at Harvard.
There's a key distinction here: While the money in your pocket is unlikely to just vanish into thin air, the money you could have had, if only you'd sold your house or drained your stock-heavy mutual funds a year ago, most certainly can.
"You can't enjoy the benefits of your (pension) if it's disappeared," Jorgenson explains.
"If you had it all in financial stocks and they've all gone down by 80 per cent – sorry! That is a permanent loss because those folks aren't coming back. We're going to have a huge shrinkage in the financial sector."
If you choose, you can pour most of your money into stocks and track their value in real time on a computer screen with other investors, confident that you'll get good money for them when you decide to sell.
But that collective confidence, Jorgenson says, is gone. And when confidence is drained out of a financial system, a lot of investors will decide to sell at any price and a big chunk of that money you thought your investments were worth simply goes away.
And don't blame speculators, Jorgenson says.
"Those folks in general have been losing their shirts at a prodigious rate," he said. "They took a big risk and now they're suffering from the consequences."
October 13, 2008 in World View [of real estate] | Permalink
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Comments
Its ahrd to imagine that we are going thru another dramactic turn for the worse in the rreal estate market here in the US. Fortuately, Austin Texas hasnt been hiot as hard as most of the country.
Posted by: Austin Texas Real Estate | Jun 16, 2011 4:45:34 PM
The money may be gone, but saying it didn't exist is completly off the wall. Please ask yourself a question if you had sold all of those holdings and moved to treasury fund where would that money be?
The money was created in your account, therefore it existed at one point in time. To whom it went its irrelevant.
Posted by: Investor | Oct 15, 2008 9:33:34 AM
This article is so full of generalizations and stereotypes that I wonder if it ever existed.
Posted by: davidm | Oct 14, 2008 9:38:18 AM
It kind of reminds me of Bill Clinton's "surplus".
Of course it never existed, except in someone's words.
Posted by: Charles Nickalopoulos | Oct 14, 2008 8:51:33 AM
So, everyone is upset about something that does not exist?
In other words, people are worrying about nothing?
Posted by: Charles Nickalopoulos | Oct 14, 2008 8:49:06 AM
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