Now that the so-called ‘credit crunch’ is becoming recession (because people are waking up to the fact that value isn’t there if no-one can repay their debts) we’ve heard some enormous estimates of how much money we’ve lost. Trillions lost from the stock market and the UK’s houses: we’re supposedly all poorer because of this. I’m going to show why this isn’t the case.
One question that can be asked, if all this money is lost, is ‘where has it gone?’ A good answer was provided here, in comments in response to a Guardian piece.
If you buy a used bicycle from me for £100 and then, in order to get some spare cash, are forced to sell it the nexy day for £10 then 90% has been wiped off the value.
The money tou lost didn’t evaporate out of the bicycle – you lost it when you paid me that initial over-priced sum. I still have you £90 if I’m smart…
Who was selling shares at their peak??? That’s where the “lost” money is.
Now this is, to some extent, true. However, in a ‘market’ like a stock exchange or the theoretical ‘housing market’, the price used in one or more buy-sell transactions is taken to be indicative of a ‘market price’. Analysts then multiply this figure by the number of objects in the market (shares, houses etc.) to give a total value of the stock. Hence, if the price of a share falls from 50p to 25p, and there are a billion shares, then £250,000,000 has been lost in value.
If we take the example of the second-hand bike we can envisage a situation where, upon hearing that thrawnpop sold his bike for £100, we all ‘write up’ our assets as though the bike was worth £100. So the value of the nation’s broken bikes in garages is £100 million. And then when we realise that £100 was an overvaluation, or a mini-bubble, we ‘discover’ that each of our bikes is only worth a tenner, and the nation’s broken bikes are worth £10million. So we’ve ‘lost’ £90million in a ‘write-down’. But the £90million never existed, it was a paper asset. The only money that was lost, the only money that went anywhere was £90.
This is why all the talk of Britain’s companies being worth X, or Britain’s real estate being worth Y is just hype. Imagine how much Britain’s houses would be worth if every homeowner decided to sell up and move to Australia…