Ah, the markets. What does it mean really, to say that trillions in stock market value has gone up in smoke? All the money gone? For those who relied on the markets as a safe haven, clearly the words "caveat emptor" meant little or nothing. If you don't have the money any longer, just who does? An article by Eric Carvin, AP, may help shed a bit of light on this great financial mystery, revealing it for the gossamer fuzz it is.
Eric Carvin' article
Follow below the fold.
Carvin quotes Robert Shiller, Yale economist:
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.
"It's in people's minds," Shiller explains. "We're just recording a measure of what people think the stock market is worth. What the people who are willing to trade today — who are very, very few people — are actually trading at. So we're just extrapolating that and thinking, well, maybe that's what everyone thinks it's worth."
Shiller uses the example of an appraiser who values a house at $350,000, 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."
So, in essence, what is disappearing is potential money, "the money that would be yours to spend if you sold your house or emptied out your mutual funds right now".
When does potential energy become kinetic? When 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. However, potential money is not the same thing as the cash in your purse or your checking account. While money in hand is unlikely to vanish, the money you have as "potential" which would have become real if you had drained your mutuals or sold your house, certainly can go up in smoke. In a heartbeat. Its the markets, stupid.
Carvin continues, quoting Jorgenson:
"You can't enjoy the benefits of your 401(k) if it's disappeared," Jorgenson explains. "If you had it all in financial stocks and they've all gone down by 80 percent — sorry! That is a permanent loss because those folks aren't coming back. We're gonna have a huge shrinkage in the financial sector."
There was a time when nobody had to wonder what happened to the money they used to have. Until paper money was developed in China around the ninth century, money was something solid that had actual value — like a gold coin that was worth whatever that amount of gold was worth, according to Douglas Mudd, curator of the American Numismatic Association's Money Museum in Denver.
Back then, if the money you once had was suddenly gone, there was a simple reason — you spent it, someone stole it, you dropped it in a field somewhere, or maybe a tornado or some other disaster struck wherever you last put it down.
But these days, a lot of things that have monetary value can't be held in your hand.
If you choose, you can pour most of your money into stocks and track their value in real time on a computer screen, confident that you'll get good money for them when you decide to sell. And you won't be alone — staring at millions of computer screens are other investors who share your confidence that the value of their portfolios will hold up.
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.
If you once thought your investment portfolio was as good as a suitcase full of twenties, you might suddenly suspect that it's not.
In the process, of course, you're losing wealth. But does that mean someone else must be gaining it? Does the world have some fixed amount of wealth that shifts between people, nations and institutions with the ebb and flow of the economy?
Jorgenson says no — the amount of wealth in the world "simply decreases in a situation like this." And he cautions against assuming that your investment losses mean a gain for someone else — like wealthy stock speculators who try to make money by betting that the market will drop.
"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."
"Of course, they had a great life, as long as it lasted."]
So, world wealth will simply decrease and we fade once again back into the strange world of shadows. And if this isn't freaky enough for you, there are reports of cybersecurity problems at the World Bank Group.
From slashdot.org in brief. Keep in mind FOX has reported on it, but I have no reason to doubt it:
"The World Bank Group's computer network — one of the largest repositories of sensitive data about the economies of every nation — has been raided repeatedly by outsiders for more than a year, FOX News has learned. It is still not known how much information was stolen. But sources inside the bank confirm that servers in the institution's highly-restricted treasury unit were deeply penetrated with spy software last April. Invaders also had full access to the rest of the bank's network for nearly a month in June and July. In total, at least six major intrusions — two of them using the same group of IP addresses originating from China — have been detected at the World Bank since the summer of 2007, with the most recent breach occurring just last month. In a frantic midnight e-mail to colleagues, the bank's senior technology manager referred to the situation as an 'unprecedented crisis.' In fact, it may be the worst security breach ever at a global financial institution. And it has left bank officials scrambling to try to understand the nature of the year-long cyber-assault, while also trying to keep the news from leaking to the public."
Like I said, it's been Money for Nuthin', and the Chicks for Free.
X1 Update: Just how much is missing? Enough to swallow the earth 10X over into the biggest financial hole you can ever imagine.
This video gives a very good description of the situation.
video