Wednesday, March 11, 2009

Wall Street still doesn't understand what wealth is.

The head of Blackstone Private Equity Group said that he is shocked, SHOCKED, to discover that 45% of the world's wealth has been destroyed in the past year or so. This strikes me as a pretty stupid thing to say.

Compared to last year, the world has about the same amount of productive capacity, about the same quantity of goods, about the same amount of every kind of resources. When I look around, I see the same buildings and factories and people and everything else that I saw last year. The only difference is that all of that stuff was vastly over-valued last year, driven up in value by Wall Street wizards like Blackstone, and the rest of us who were caught up in speculative bubbles. This year everything is probably a bit under-valued. What all the money managers and financial experts don't seem to realize--still!--is that nothing that they created is real. It all meant nothing more than the price of tulips. If they understood that, they would not be surprised to find that most of the phony values they helped create have disappeared.

The real losses of wealth happen when real people actually lose their jobs due to the financial collapse, and our farms and factories actually produce fewer goods. But the "wealth" represented by our previous valuations of our homes and our stock portfolios has not disappeared. Most of us still own the same homes and hold the same portfolios. Only our inflated view of the value of those assets have come down to earth. Once we adjust to that reality, values will start creeping back up again.

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