[mmasters]

Wealth isn't destroyed it's transferred.

The wealth of resources of our planet in conjunction with our expanding knowledge and various economic systems has served to generate the abstract wealth we have today.

The root problem is we have a private debt based money system based on a central bank model which encourages cartel formation. Furthermore, these cartels can manipulate booms and busts in order to transfer wealth and power from the general public to the cartel. Yet further, the excessive boom phases also serve to deplete our resource base at a high rate and influence unmanagable population growth.

[CrudeAwakening]

No actual money is lost (in aggregate) in a bear market. What is lost is the paper value of assets, or people's perception of wealth, which was based on a value which was mutually agreed by marginal market participants, and was always subject to renegotiation.

The money supply doesn't collapse when the stock market collapses, the only thing that changes is the ability to exchange claims on wealth (stocks) for a more liquid form of wealth (i.e. money) at values that were previously accepted.

No real wealth was lost when the Tulip mania subsided - instead, previously inflated perceptions of wealth were brought back to earth. But that's not to say that there aren't winners and losers during a bear market of course.

[BigTex]

But wait, one measure of wealth is certainly the value-added as a result of human expertise manipulating natural resources, right?

And the banksters have applied that reasoning to their development of financial instruments--i.e., the banksters have taken basic financial instruments (the natural resources) and performed some value-added voodoo to make the underlying securities more valuable by packaging, repackaging, bundling, unbundling and all sorts of leveraging shenanigans. The bear market is, in turn, taking back the "wealth" that these instruments created, sort of like dumping oil back into a well after pumping it to the surface...right?

If this reasoning sounds strained, it is, but this is how this crap was sold in the first place. The elaborate financial intruments were sold as value-added to basic instruments as a result of the expertise of the developers of the financial instruments.

The wealth was never there in the first place.

[phaster]

$this->bbcode_second_pass_quote('MrBill', 'I')f the stock market or housing declines 'wiping out trillions of dollars of wealth' was there any money actually lost? Why? Why would it matter?

[CrudeAwakening]

Does the action of people bidding against each other in an auction, thereby raising the price of whatever asset they are bidding for, create wealth? Of course not.

Bidding up exchange values and creating wealth are different things. Similarly, bidding down exchange values and destroying wealth are different things.

Real wealth is inherent in an objects utility value; exchange value is secondary. There is more real wealth in $100 worth of food than there is in a $100 bank deposit, although their exchange value is the same.

[cube]

A bull market is not representative of true wealth, instead it is only an illusion of wealth. A bear market is the collapse of a bull market which again is ONLY an illusion so no true wealth was actually destroyed.

A bull market is like selling all the furniture in your house to throw a party. You're guaranteed to have bang up party for the night but you're going to have a nasty hang over tomorrow morning or perhaps for the rest of the week. Furthermore you'll be recovering on the floor because remember you just sold off your furniture.

[MrBill]

Excellent points of view. Thanks! ; - )

[cube]

I think most people (not PO forum members but people in general) believe:
up == good
down == bad

I totally disagree. I think the most economically destructive actions are taken during the bull market phase. As what bankers like to joke: "Bad loans are made during good times."

Taking a no-doc 0% down payment adjustable rate home mortgage loan with negative amortization is a wealth destroyer not a creator. Lying about your income to buy a bigger house does NOT provide a stable foundation for future growth. See what I mean?

I think bull markets actually destroy wealth because that's when people act stupid and make bad investment decisions such as paying the financial equivalent of a house just for 1 tulip flower! (17th century tulip mania) However there is a delayed reaction from committing an action and actually feeling the consequences of action. Bull markets are when wealth is destroyed but the pain is not felt until in the bear market phase.

[mkwin]

$this->bbcode_second_pass_quote('', 'H')ow is it possible that 61% (so far) think stocks or real estate do not have a "monetary or exchange value."? Never mind if you think it is a bubble, or is un-sustainable, or is frothy, or is abstract, or does not spring directly from Gaia's bosom. If you can buy it or sell it, it is a form of wealth by definition.

[mkwin]

$this->bbcode_second_pass_quote('', 'I') think bull markets actually destroy wealth because that's when people act stupid and make bad investment decisions such as paying the financial equivalent of a house just for 1 tulip flower! (17th century tulip mania) However there is a delayed reaction from committing an action and actually feeling the consequences of action. Bull markets are when wealth is destroyed but the pain is not felt until in the bear market phase.

[cube]

$this->bbcode_second_pass_quote('mkwin', '')$this->bbcode_second_pass_quote('', 'I') think bull markets actually destroy wealth because that's when people act stupid and make bad investment decisions such as paying the financial equivalent of a house just for 1 tulip flower! (17th century tulip mania) However there is a delayed reaction from committing an action and actually feeling the consequences of action. Bull markets are when wealth is destroyed but the pain is not felt until in the bear market phase.

[mkwin]

$this->bbcode_second_pass_quote('', 'E')VERY bubble will eventually have "over-capacity".

[cube]

$this->bbcode_second_pass_quote('mkwin', '')$this->bbcode_second_pass_quote('', 'E')VERY bubble will eventually have "over-capacity".

[MrBill]

Bull markets are turned into bubbles when they become one way bets! ; - )

[Doly]

My two pennies:

According to the definition of wealth posted, wealth are the things that have a monetary value.

A bear market destroys money, obviously. The question is: does it also destroy the things that cost money?

Obviously, not immediately. If something is repriced, even if it's given away for free when it was expensive before, it isn't destroyed.

But as a secondary effect, if some stuff that you own is repriced to a lower value, you will feel less wealthy, and that will change your decisions about how to use your money. Specifically, you are likely to spend less money, and in particular, you may invest less to create things with a monetary value, or to maintain the stuff you already have. For example, if the value of your home drops catastrophically, you may feel less inclined to do those home improvements you were thinking of or you may stop doing maintenance repairs. Same thing applies to a company that chooses to lay off staff and trim operations.

So, as a secondary effect, bear markets destroy wealth.

[phaster]

$this->bbcode_second_pass_quote('mkwin', '
')I propose the following assets are a store of wealth:

Precious metals
Property
Cash
Commodities
Government bonds
Equities
Corporate bonds
Futures, options and other financial instruments

This talk of ‘paper’ wealth is just nonsense. I would prefer to have paper government bonds hidden away in times of an economic depression than a cartload of gold that is going to get stolen by the hungry masses. Yes different assets have different risk profiles but you can’t claim some are ‘real’ while others are ‘paper’ wealth’.

[yesplease]

$this->bbcode_second_pass_quote('Doly', 'B')ut as a secondary effect, if some stuff that you own is repriced to a lower value, you will feel less wealthy, and that will change your decisions about how to use your money. Specifically, you are likely to spend less money, and in particular, you may invest less to create things with a monetary value, or to maintain the stuff you already have. For example, if the value of your home drops catastrophically, you may feel less inclined to do those home improvements you were thinking of or you may stop doing maintenance repairs. Same thing applies to a company that chooses to lay off staff and trim operations.

So, as a secondary effect, bear markets destroy wealth.

[LoneSnark]

As I understand it, a brear market implies that, in general, society has been wreckless with its investment and instead of creating wealth by producing what people want it has destroyed it by producing what people do not want.

As such, a bear market itself is not destructive, but it is a sign that society as a whole has been destructive in the immediate past.

Now, it does not end there; a bear market curtails investments, sometimes to zero, so further wealth creation is being prevented, but it is not being destroyed.

Now, if your average recession becomes a monetary depression then real wealth is being destroyed in droves, as companies producing what people want and need go bankrupt due to their customers inability to find cash (see the early 1930s for a 'money drought').

[kmann]

Hurricanes, earthquakes, tornados, and wars destroy wealth. Bear markets do not. However, they may inhibit the ability to produce more wealth.

[MrBill]

Every transaction involves a buyer and a seller. The buyer benefits when they buy a share or a house and it goes up in price, but the seller does not.

Conversely, when the seller sells to the buyer and the price of the share or house falls the buyer is worse off, but the seller still has the proceeds from the sale price.

Therefore, bear markets by definition cannot destroy wealth. They help to re-distribute wealth from buyers to sellers.

However, as assets can be used as collateral for the purposes of borrowing money a fall in asset prices makes the underlying loan more risky. Less collateral value to cover the value of the loan. The borrower may still repay the loan as agreed, but it increases the likelihood of default.

It matters as the price of any asset is negotiable, but the value of the debt is absolute. If the asset price falls below the value of the debt then the debtor can default on that pledge, but real wealth is destroyed as the lender has to re-coup that loss from their own assets or accumulated wealth. Therefore, falling markets tend to increase the relative value of debt in real terms.

On the other hand it would be wrong for governments to artificially support asset prices - equity or houses for example - because this is just really discriminating against one class of asset holders for the benefit of another. Homeowners at the expense of renters and would be house buyers that have been priced out of the market for first time buyers. Stock buyers at the expense of sellers who correctly calculated - or guessed - that the stock's current price did not accurately reflect the present value of the company's future earnings. Speculators and borrowers at the expense of savers and value-investors.

kmann wrote:
$this->bbcode_second_pass_quote('', 'H')urricanes, earthquakes, tornados, and wars destroy wealth. Bear markets do not. However, they may inhibit the ability to produce more wealth.