golfgal… I don’t mean to be overly critical (or maybe I do)… but for someone who’s in the financial services industry you have a woeful misunderstanding of how the world works. In your previous post you wrote:
“I think its interesting that so many people believe wealth is just simply lost. Where do you think the money goes? Is there a vacuum I’m unaware of that sucks dollars out of the world? All while someone is buying MSFT or CSCO, there is another person shorting it. So if the price of MSFT goes down, certainly the person betting long loses money, but the person who shorted it makes money.”
I’ve got news for you: LOTS and LOTS of times wealth “is just simply lost.” To use but one simple example, let’s say I’ve got a publicly-traded mortgage company that’s valued at $1 billion dollars and $100 million of that market capitalization is sold short. And let’s say the next day before trading the company announces it’s going BK and the market cap goes to zero (just to simplify things) on the first trade. Well, the shorts doubled their money, so the “shorts’ wealth” increased to $200 million. But the longs just lost $1 billion. So the NET LOSS to overall global wealth was $800 million. That $800 million… poof… disappeared. Considering that less than 5% of all the shares of S&P 500 companies are sold short at any given time, when stock prices increase, wealth increases (in the short term) and when stock prices decrease, wealth decreases (in the short term). The world is always long stocks by a HUGE margin. (This is why economists talk about “the wealth effect” in conjunction with rising and falling asset prices.)
To use an even clearer example, let’s say I own an apartment building worth $10 million. And to simplify things let’s say that I have no mortgage and self-insure the property. And let’s say that an earthquake reduces the building to rubble the next day. What happened to my $10 million? It’s gone; it disappeared. The economic utility and financial rents went *poof* into thin air. Indeed, you could think of it as disappearing into a vacuum if you like.
The bottom line: Wealth absolutely disappears and “is just simply lost.” It happens all the time. Conversely, wealth is also created via innovation, etc. Fortunately, over the long term, more wealth is created in aggregate than is destroyed due to increases in productivity. But with any given security or asset, wealth can absolutely be destroyed, and often permanently. To be quite frank, that you’re in the financial industry and don’t realize this is somewhat… well… disturbing.
