Does Wealth Just Evaporate or is it Transferred?
May 11 2011
In this video blog of a recent Q&A session with audience members, Michael Maloney explains one of the most difficult concepts for investors to grasp—where does the wealth go following a market crash?
It is often said that wealth “evaporates” in the wake of a crash such as the real estate crisis of 2007.
“Wealth is never destroyed, it is transferred,” Mike explains. “When your house was worth a million bucks, say oil was $140 a barrel. Now the same house is worth half a million, but oil is worth 70 bucks a barrel. Your house is still worth the exact same amount measured in oil. So that’s the true wealth—if you sell your house, how much food, how much gasoline, how many shares of the Dow, how much stuff can you buy? The dollar amount doesn’t mean anything…. Even though the dollar price of them may have fallen, the real estate didn’t vanish.”
Likewise, Mike says, “most of the companies that the stock market represents didn’t vanish” with the Crash of 2008. “They fell in dollar terms. But if you look inside the company, where its stock fell to $10 from $100. Does the company produce one-tenth what it did yesterday? Does it have one-tenth of the employees? In 99.9% of cases, no; it’s the same company.”
Ebbs and flows of cycles occur as people rush from investment to investment seeking value, Mike says. Eventually all the currency now in other kinds of assets will rush toward gold and silver. The important thing is not the dollar price of gold and silver, he explains, it’s how many tangible things an ounce of gold or silver can buy.
Post taken from WealthCycles.com
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