I think one of the most common misconceptions about the money supply is that there are a fixed amount of dollars at any time, so if there were $6 trillion yesterday, you can expect there to be $6 trillion today. But this isn’t true; the US money supply is specifically designed so that money comes into existence and vanishes out of existence all the time during the day. When you take out a mortgage, the money you get loaned didn’t exist before it was loaned to you, in the same way the $1.8 trillion that was lost in the stock market yesterday simply no longer exists.
The mortgage example is a little bit different. True, that money “didn’t exist” before you signed the loan (loans do increase the money supply), but it’s still “real money” inasmuch as it’s secured by the asset that is your home, and backed by the other assets that the bank holds (i.e. other people’s secured mortgages), and pays out real, actual, spendable cash, since the builders still need money to buy two-by-fours, for instance. The person who pays the mortgage probably never actually touches any of that money, but it still has at least some basis in reality. Fractional reserve banking feels kind of stupid, but it’s been around for long enough to be a plot point in It’s A Wonderful Life, more or less with no major issues (aside from the obvious one).
With the stock market (and pretty much all speculative markets), it’s different. That money exists even less than it exists for a mortgage transaction; speculative markets don’t increase the money supply the same way that bank loans do, because the money isn’t based on anything in the real world at all.
To illustrate: a stock can lose value without anything changing hands at all. If you buy a stock for a hundred real dollars on Monday and that company does something stupid on Tuesday, your share could lose half of its value even though nothing changed hands that day. If you sold that stock on Wednesday, you might get only $50 of real money back. “Where did the money go?” Nowhere. I mean, functionally, the person (or bank or whatever) from whom you bought the stock on Monday still has the other $50, but they didn’t steal it; it’s just that now, there’s nobody who wants to spend $100 to buy it from you anymore. That money isn’t secured by anything or backed by any objective source of value. It’s entirely subject to whims and vibes, which economists call “market forces” to feel better about themselves.
When people talk about “market value,” it’s those whims and vibes they’re talking about: how much people are willing to pay for shares. There are X-million shares out there which people are willing to buy for $Y each; multiply those two numbers and you get the total market value. So when a market “loses value,” it doesn’t mean that any actual money has gone anywhere, it means that nobody wants to spend that much to buy into the market anymore; Y has just gotten smaller. If every bank account in the world was suddenly frozen and no money could move anywhere, the market could (and almost certainly would) still lose value.
Now, in all likelihood a good chunk of money has actually gone somewhere in addition; the people who shorted the stock and who sold early while it was still worth a lot are the ones who have it now. But that’s not where it was lost, because that’s not what “market value” actually measures.
This is generally good analysis, but I think you overestimate how different legally a claim on the ongoing usage of a piece of real estate is to an ongoing share of corporate ownership and by extension profits, and underestimating how much speculation distorts real estate markets relative to the stock market.
Yeah, all ownership and money is made up, and the value of everything is more-or-less arbitrary. But for the sake of this question, the value of one is more real than the other.
For one thing, the transactions representing “market value” are not all going to happen today. The combined value of every company’s shares on US exchanges is something like $75T, and on a really really good day maybe like $1T is going to actually change hands. If all of it ever did, the market value would probably fluctuate, but it would stay about the same because all of those shares are still out there and they all have a selling price.
But for your house, well, you may well actually sell it today. If you do, you will actually (yes, insert all the asterisks here) get all of that money out of your asset, and after that the asset is worth nothing to you because you don’t own it anymore. Its value is real and attainable.
That value fluctuates with speculation, sure; but if the economy were to collapse, having a house to live in is still of use. A piece of paper saying you own a hundred-millionth of a corporation which no longer exists isn’t, save as tinder. That gives real estate some floor of value that a stock could never have; it’s very unlikely that they would ever stop tracking the fact that you own a home just because the value went to zero, but they regularly delist companies from the NYSE and NASDAQ.
And the other thing is, I’ve done a pretty poor job of pointing out that we’re talking about two different types of valuations here: one is the valuation of an entire market, while the other is the valuation of a specific asset owned by an individual. When talking about the $75T valuation of the stock market (and its $1.8T loss), we’re talking about the former; its analogy in real estate isn’t a single house, it’s the housing market as a whole. But when talking about a single mortgage, the analogy is to a single stock share.
When the market lost $1.8T in value, the only individuals who lost any money were the ones who had the misfortune to sell when the price was lower than they paid for it; but their losses didn’t contribute to that valuation loss (other than indirectly), they were an effect of it. It’s entirely possible for an individual to lose money in a bull market or make money in a bear market.
On the other hand, if your individual home loses value, it has…well, um, lost value. If you sell it when its value is lower than what you paid for it, regardless of how great the market as a whole is, there’s no way for you to make money in that transaction (yes, asterisk, I’m sure there are ways in which that might still be a financially beneficial choice, yada yada). Its value directly means something to you in a way that the market value doesn’t.
Anyway, I’ve used a lot of words but not been super clear, so I guess I should stop for now.
I think one of the most common misconceptions about the money supply is that there are a fixed amount of dollars at any time, so if there were $6 trillion yesterday, you can expect there to be $6 trillion today. But this isn’t true; the US money supply is specifically designed so that money comes into existence and vanishes out of existence all the time during the day. When you take out a mortgage, the money you get loaned didn’t exist before it was loaned to you, in the same way the $1.8 trillion that was lost in the stock market yesterday simply no longer exists.
The mortgage example is a little bit different. True, that money “didn’t exist” before you signed the loan (loans do increase the money supply), but it’s still “real money” inasmuch as it’s secured by the asset that is your home, and backed by the other assets that the bank holds (i.e. other people’s secured mortgages), and pays out real, actual, spendable cash, since the builders still need money to buy two-by-fours, for instance. The person who pays the mortgage probably never actually touches any of that money, but it still has at least some basis in reality. Fractional reserve banking feels kind of stupid, but it’s been around for long enough to be a plot point in It’s A Wonderful Life, more or less with no major issues (aside from the obvious one).
With the stock market (and pretty much all speculative markets), it’s different. That money exists even less than it exists for a mortgage transaction; speculative markets don’t increase the money supply the same way that bank loans do, because the money isn’t based on anything in the real world at all.
To illustrate: a stock can lose value without anything changing hands at all. If you buy a stock for a hundred real dollars on Monday and that company does something stupid on Tuesday, your share could lose half of its value even though nothing changed hands that day. If you sold that stock on Wednesday, you might get only $50 of real money back. “Where did the money go?” Nowhere. I mean, functionally, the person (or bank or whatever) from whom you bought the stock on Monday still has the other $50, but they didn’t steal it; it’s just that now, there’s nobody who wants to spend $100 to buy it from you anymore. That money isn’t secured by anything or backed by any objective source of value. It’s entirely subject to whims and vibes, which economists call “market forces” to feel better about themselves.
When people talk about “market value,” it’s those whims and vibes they’re talking about: how much people are willing to pay for shares. There are
X-million shares out there which people are willing to buy for $Yeach; multiply those two numbers and you get the total market value. So when a market “loses value,” it doesn’t mean that any actual money has gone anywhere, it means that nobody wants to spend that much to buy into the market anymore;Yhas just gotten smaller. If every bank account in the world was suddenly frozen and no money could move anywhere, the market could (and almost certainly would) still lose value.Now, in all likelihood a good chunk of money has actually gone somewhere in addition; the people who shorted the stock and who sold early while it was still worth a lot are the ones who have it now. But that’s not where it was lost, because that’s not what “market value” actually measures.
This is generally good analysis, but I think you overestimate how different legally a claim on the ongoing usage of a piece of real estate is to an ongoing share of corporate ownership and by extension profits, and underestimating how much speculation distorts real estate markets relative to the stock market.
Yeah, all ownership and money is made up, and the value of everything is more-or-less arbitrary. But for the sake of this question, the value of one is more real than the other.
For one thing, the transactions representing “market value” are not all going to happen today. The combined value of every company’s shares on US exchanges is something like $75T, and on a really really good day maybe like $1T is going to actually change hands. If all of it ever did, the market value would probably fluctuate, but it would stay about the same because all of those shares are still out there and they all have a selling price.
But for your house, well, you may well actually sell it today. If you do, you will actually (yes, insert all the asterisks here) get all of that money out of your asset, and after that the asset is worth nothing to you because you don’t own it anymore. Its value is real and attainable.
That value fluctuates with speculation, sure; but if the economy were to collapse, having a house to live in is still of use. A piece of paper saying you own a hundred-millionth of a corporation which no longer exists isn’t, save as tinder. That gives real estate some floor of value that a stock could never have; it’s very unlikely that they would ever stop tracking the fact that you own a home just because the value went to zero, but they regularly delist companies from the NYSE and NASDAQ.
And the other thing is, I’ve done a pretty poor job of pointing out that we’re talking about two different types of valuations here: one is the valuation of an entire market, while the other is the valuation of a specific asset owned by an individual. When talking about the $75T valuation of the stock market (and its $1.8T loss), we’re talking about the former; its analogy in real estate isn’t a single house, it’s the housing market as a whole. But when talking about a single mortgage, the analogy is to a single stock share.
When the market lost $1.8T in value, the only individuals who lost any money were the ones who had the misfortune to sell when the price was lower than they paid for it; but their losses didn’t contribute to that valuation loss (other than indirectly), they were an effect of it. It’s entirely possible for an individual to lose money in a bull market or make money in a bear market.
On the other hand, if your individual home loses value, it has…well, um, lost value. If you sell it when its value is lower than what you paid for it, regardless of how great the market as a whole is, there’s no way for you to make money in that transaction (yes, asterisk, I’m sure there are ways in which that might still be a financially beneficial choice, yada yada). Its value directly means something to you in a way that the market value doesn’t.
Anyway, I’ve used a lot of words but not been super clear, so I guess I should stop for now.
They’re good words, and I think helpful for readers. I’m glad you wrote them.
You’re very kind, thank you.