Friday, December 26, 2008

Asset Price Declines, Wealth Destruction, and Federal Borrowing / Bailouts

The Federal Government's Flow of Accounts (hat tip Mish) shows a ton of detail related to just how much wealth has been lost in the past 12 months (through the third quarter). Per Mish:

$7.08 Trillion in wealth has vaporized in the past year. Figure 2008 Q4 to be as bad as Q3. If so, roughly $10 Trillion in household wealth will be vaporized in little over a year. And looking ahead, there is no reason to believe the stock market, the housing market, or the economy will show signs of recovery anytime soon.
Detailed below, we see that more has been lost ($7.7 Trillion), looking at just the holding gains / losses on assets over the past 12 months (R.100 Page 113).

Going back to 2004, we can see just how large a drop off this was (note that YTD 2008 we have seen losses across all the asset classes tracked).

Without cheap financing to prop up asset prices above sustainable levels... asset prices fall. Just think about it... home prices have fallen as individuals find it much harder to get a mortgage (if they even want one). A home buyer found it much easier to pay $500,000 for a home with no money down, than with the traditional 20% down.

This is exactly what has happened as corporations, investors, and banks are no longer able to lever their businesses, investments, or balance sheets due to a lack of available financing or losses they were forced to write down. Credit has all, but ceased with the HUGE exception being that for the Federal Government (data from F.1 page 17).


  1. Wealth isn't really "destroyed." Individuals lose, but what happens when global equities, housing, bonds, commodities, and so on all go down? Deflation. Which means things are cheaper. All that wealth lost, if it didn't go into someone else's pocket, went towards global deflation. If everything is cheaper, the remaining wealth you have is increased, effectively. By just the amount of the loss. Of course, deflation brings its own issues...

  2. There may be some truth to this. But the corollary is that all that wealth we thought we were creating in the last few years..... did not actually happen.

  3. Definitely a "house of cards" that has toppled.

    The wealth (real or not) was tapped into through home equity loans, selling of stock, etc... and that drove a lot of the economic growth. Either way, most of that ability is gone.

  4. I love this idea, circulated elsewhere as well, that 'wealth isn't destroyed'. Over on Mish's site it's 'money never leaves the stock market'.

    Well, okay, then wealth is never created either, and we are all really... what? millionaires? Cavemen?

    Did you think 'wealth' only goes up? Good little Capitalist. Just don't try paying for your yacht with all that wealth that never gets destroyed. And since you've got a perpetual wealth machine, maybe you'd like to bail out all the homeowners? No? Why not? Insufficient 'wealth'?