Skip to comments.WEF 2009: Global crisis 'has destroyed 40pc of world wealth'
Posted on 01/31/2009 4:04:24 AM PST by TigerLikesRooster
WEF 2009: Global crisis 'has destroyed 40pc of world wealth'
The past five quarters have seen 40pc of the world's wealth destroyed and business leaders expect the global economic crisis can only get worse.
By Edmund Conway in Davos
Last Updated: 5:42AM GMT 29 Jan 2009
Steve Schwarzman, chairman of private equity giant Blackstone, said an "almost incomprehensible" amount of cash had evaporated since the financial crisis took hold.
"Business will be very different," he added.
His comments came on a day of the World Economic Forum characterised by the gloom of its participants and warnings that the crisis will endure for some time. News Corp chief executive Rupert Murdoch kicked off the meetings by warning that the atmosphere was worsening despite global economic confidence plumbing the lowest depths on record.
(Excerpt) Read more at telegraph.co.uk ...
Has it destroyed wealth, or was the wealth never really there to begin with?
It did not destroy wealth. It just forced us to lower our valuation of it.
[Lots of fat is destroyed last year along with some meat. Much more fat still remain. It would be to be destroyed along with huge chunk of meat in coming days and months.]
It could go on for a very long time. Nothing Bush did, and especially everything Obama is doing, is meant to correct the underlying problems. Gonvernments can’t print their way to wealth. Ponzi on top of Ponzi.
Accountants can’t destroy wealth. There is more stuff now than last year and stuff is what wealth is. The amount someone is willing to pay for my stock has changed, but the stuff that is the company has not. Was the stock ever ‘worth’ $40? Is it really worth $12 now? I don’t know, but I still like the company and still own a lot of stock. We got a PS3 and a 50” plasma this year — THAT is wealth ;-)
One hopes the US will return to the days of basing wealth on tangible items.
But I don't hold out high hopes.
Those post-nationalist traitors mean to subvert national sovereignty -- if they couldn't do it by "well, we're all interdependent by trade, so why have borders at all" then they will try it by "these financial crises demonstrate the need for a trans-national, supra-national economic governing body...like US." (How conveeeeeeeenient.)
Anti Davos Sarcasm Torpedo ARMED. FIRE!!
A real president would rescind executive orders on assassinations and launch a strike on Davos.
...unfortunately, that president is Ahmadinejad.
So, Euroweenies, how's that "negotiation for non-proliferation" working out for you...?
NO cheers, unfortunately.
No it hasn’t. Real wealth can’t be destroyed. It can only be TRANSFERRED.
Which is equivalent to the exchange value of money increasing, and to long term interest rates increasing.
Some portion of the reduction in long dated claims reflects actually lower future cash flows now expected, than expected previously. But the largest portion of it, by far, simply reflects a lower value being put on any future anything, compared to ready money, available this instant.
The first portion - actual reduction in nominal future cash flows - is in turn composed of two elements. A big part of it is simply lower future inflation expectations. The same real values earned and paid 5 or 10 years from now, let alone 20 or more, are expected to cost fewer nominal dollars.
Only a residual left after both of those adjustments, reflects a *true* reduction in the real value of actual future cash flows.
And only that residual is any actual reduction in anything that should meaningfully be called "wealth".
A mere rise in interest rates that adjusts the "terms of trade" between present and future goods is not a reduction in real wealth. The same present goods exist as before, and the same future goods, and their utility. And mere decline in inflation expectations likewise is not a reduction in real wealth. It may involve a net transfer from holders of equity to holders of debt forms of financing, but it isn't a change in the future real value being divided between them.
The residual of real losses basically just reflects the pause in economic growth. If a world economy normally growing 2.5% a year in real terms, instead declines 2.5% a year in real terms for one year, and then instantly gets back on its normal 2.5% a year growth track, there are two ways of looking at the cost or damage. One is that two years of effort leave the world as wealth as before and then normalcy returns. The other is to see the permanent track of income growth as 5% lower than one imagines it might have been. For good. To the extent that asset values capitalize expectations of the latter sort, that can and will be the permanent effect on real capital-wealth.
But the world is not remotely 40% poorer. Income has fallen about 2%, and with lost growth maybe that rises to 4%. 4 isn't 40. Most of the rest is changes in interest rates and inflation expectations, and maybe a portion is also overshoot in capital markets. (Certainly the corporate bond market, for instance, it seriously undervalued at present levels).
yeah ok, but not by changing a few numbers on some computer screens - which is the thrust of the article
real wealth is lost when people sit on their backsides or break stuff sure, and there has been a bit of that, but 40% is just lies
How does 'cash' evaporate? This is sounding like voodoo magic.
Wealth isn’t destroyed; it’s all paper money, folks. That home you bought is still there; it’s just not worth what you though it was.
Things are only worth what the next person is willing to pay for them.
They have been revalued, not destroyed.
>> If it is worth less relative to other goods and services, part of its value destroyed and that much of your wealth is gone. <<
But that’s just it; the article describes the entire system, and it is a closed system. If it said, “Global crisis has destroyed 40pc of the UNITED STATES’ wealth,” we could discuss how our wealth changed relative to, say, China. But China’s been just as badly hurt.
If the value of your house drops in half, or $200,000, you’re out $200,000... but I can now purchase your home for $200,000 less, so I gain.
The loss in the world’s wealth is that the economic output of the world did shrink considerably in the fourth quarter. I think I read S. Korea’s shrank by 22 percent! ( at an annual rate, so even that’s only 5.5%) That loss is real; we produced less than we had been producing, and we kept on consuming. And the disruption to our fiscal systems may certainly mean a drag on our future production for years to come... but we did not lose much of our current wealth.
When the Russian mafia is selling apples on the street corners, we’ll know we reached bottom.
I am reminded of antique cars. I was told years ago that an antique car was worth exactly what someone was willing to pay for it. Notice this is not the value that I put on it, but the value someone else did.
This can lead to an interesting situation where I think it is worth $25,000 but a buyer thinks it is worth $6.000. What is its true value? What someone else is willing to pay. So it is with stocks.IMHO
The concept of wealth is highly psychological. If you have something (like a house) that people will pay a premium for, you have wealth. If they won’t pay what you think its worth, you’ve lost wealth. You can argue if its a real loss or not (as you still have the house), but perception is often reality.
Every time I see that picture, I think: We are soooo screwed.
Your Congress, with Dodd and Frank and others, fomented and abetted a financial crisis, which has had the effect of stripping $ 7.5 TRILLION from the value of American homes and $ 7.5 TRILLION from the value of Americans stock holdings in their 401K’s and IRA’s.
They also spent a total of $ 2 TRILLION last year between stimulus, TARP,pork, and Federal Reserve pumping money into the banking system.
Now they want to spend $ 819 BILLION. And that isn’t all!
Mr.Geithner now is pushing for a national bank to take over “toxic assets” to the tune of $ 2-3 TRILLION.
Not only have you been personally looted by your own Government, but so have your grandchildren and great grandchildren.
And with this proposed spending, there will be massive inflation by the end of 2009 into 2010, that will further erode your savings. Looted again!
Just remember, this money represents hours of your life that you spent working to build your future, and Congress squandered it.
Angry yet? Pick up the phone on Monday and let the grifters in DC know how you feel. After all, you’re paying for this fiasco.
The number comes from things like Z.1 flow of funds accounts, and mostly reflects stock market declines and real estate declines. Which is just rising rates plus lower inflation expectations. Which are a pay me later instead of pay me now thing, but not a real wealth reduction.
We have a $14.3 trillion a year income, and we can readily afford all of this. Anything that gets the economy growing again is well worth it. The Fed and Bush treasury were doing the right things, and Geithner will as well. Populists left and right throwing bombs are doing their best to wreck everything and make it all worse, but they will not be allowed to run anything.
JasonC, it’s a free country and you can spew your baloney anytime.
However, it’s not only me who has experienced a 40% drop in their 401K.
But you say, nah, that’s not real money. Guess you didn’t plan to retire soon.
Put your head back in the sand.
When inflation wipes out what is left of even pre-peak pricing, we’ll see who’s crying then.
And no, a $ 14.3 TRILLION dollar economy cannot absorb $ 5 TRILLION in deficit spending in the span of 12 months.
Unfortunately our glorious goobermint has just instituted a huge off-budget debt increase to this nation...that in of itself will create less wealth and less value in the private sector, i.e., debt is not wealth, agree?
My point being, the opportunity for the average consumer to acquire more wealth has been diminished for the future.
We can see very little has been done since The 0 took office, or for that matter sin Nov. 2006, to invest in this country's infrastructure as a point. Not increasing the efficiency of the infrastructure slows the time frame to allow users to conduct business, therefore slowing the growth of wealth of the private sector. The consistent increasing of the national debt removes wealth from the consumer as well as increasing the total tax burden at this same time (percentages). If one takes your statement to be truse of a real 4% shrinkage of the GDP with and increase in near term and long term debt, then the wealth has shrunk too. Without increasing the nation's wealth, credit cannot soundly be issued to grow wealth as a whole.
The government invests very little w/ respect to sound investments versus the average consumer.
Without income, the private citizen cannot increase his wealth. For the most part, government is just a huge overhead item on the entire balance sheet.
Arguments can be made as to the function (variable) government affects the national wealth model with it's physical purchases, but other than a few buildings, military hardware, and land, government is not allowed to possess much wealth...just redistribute it through taxation a legislation. With the total of a bailout package and a pork socialist program package equal to $1.5 trillion (off budget) we have to add in that interest too for the lending. So, what is the percentage of the GDP is the $1.5 trillion dollar scam plus the $2.7 trillion fed budget?
......Lots of fat is destroyed last year along with some meat......
You are correct. In the modern world, wealth is merely electron blips in a system hard drive. Banks are movers of electrons posted in ever increasing numbers to ledgers representing nothing of substance.
The current crisis is pretty much a hard drive failure. The real wealth is still there in the form of solid companies, real estate, gold and other hard assets.
Secondly, you make no mention of the hundreds of trillions of Credit Default Swaps and CDOs that are still leveraged against God knows what. Does this burden ultimately rest anywhere? While we are on the subject of what our GDP will and will not bear it seems to me trivial arguing whether it will bear several trillions when we don't have any measure of certainty about this issue. It is sort of like The Lord said about the Pharisees, they argue about swallowing a gnat but take a camel whole.
I have yet to read anyone who claims to know what the hell they are talking about deal with either of these issues.
Looking forward to some knowledgeable response.
Reposted, please forgive me, Mozilla stripped my paragraphs.
.....its all paper money, folks......
A paper $$ is but a tangible representation of an electronic ledger entry. It is really all electronic money now days
Vert true see bail-out plan.
.......US real estate is worth about what it was in 2005....
To take it on a national basis misses the point. In many areas, the value has not diminished substantially. The collapse of the wildly inflated values is a coastal phenomenon
.....its not only me who has experienced a 40% drop in their 401K.....
Did you sell out? If so you lost wealth.
If you still hold the assets, you did not. The wealth true value will not be known till you actually sell.
If you are depending on the interest these assets were yielding, you have been made poorer, as a 40% reduction in principal yields less return.
The security millions depended on is no longer there. And why? Because a few Congresscritters screwed the pooch.
On paper or not, the losses are real. If a house is valued at $ 200,000 less than you paid for it, your mortgage doesn’t decrease nor do your property taxes and assessment decrease.
And if you have to move, you’re going to experience REAL loss over this “correction”.
And the average American family, carrying even a modest amount of debt, is being shafted. Add to the mix being unemployed and your world is going to fall apart real quickly.
This is the environment the looters have created. And despite the dispassionate and erudite discussion on this thread, this will affect all of us negatively soon.
A real president would rescind executive orders on assassinations and launch a strike on Davos. ........
That would put a serious dent in the world supply of smart alecs & wise guys...Financial wise guys that is. The con artist biz would also be severely impacted. Is it to much to hope that Jim (China) Rodgers would be there
It’s all promises.
And I'm not going to be crying about any of it, whatever the sequel. My house will continue to provide me shelter. My job will continue to provide me income. My habit of saving a solid portion of my income will get a better than average price for all the assets I ever by, and I'll accumulate more of them, not less, if the path getting there is rockier or lower. Not to mention the fact that natural beauty around me, friendship, intellectual interests, etc have more to do with my happiness than any of the above.
Sound principle trump fear mongering panic every day of the week and twice on Sundays. Sell your doom to some depressed liberal deadbeat who cares.
As readily as you can address unicorns and their mating habits.
The Fed held the narrow money supply, M1, which is the measure it directly controls, completely flat from the spring of 2005 to the spring of 2008. It is normal for that measure to increase about 4.5% per year, long term average. (The economy grows continually; if no money were added it would form an ever shrinking portion of our total wealth etc). That is what broke the real estate bubble and the commodity price bubbles. Too many people were betting on a grand inflation (and against the United States), and turned out to be completely wrong.
Next for the overseas comment, foreign holdings of US located assets are something like $20 trillion, while US holdings of foreign assets are something like $15 trillion. And the income from the two has been nearly the same, through the end of 2007 at least, because the foreign claims on the US are mostly low yield government debt, and the US claims abroad have a lot more direct investment in corporate subsidiaries and the like, which earn more per dollar invested.
Net foreign claims against the US are around 7% of our assets. In normal times, that is about as much as the asset value line grows in one year. (That averages good years with bad e.g. it was true for the decade spanning the 2000 stock market crash by 5 years on either side).
The Fed is currently allowing faster narrow money creation, yes. It is doing so because private debts are running off and demand for safe, short term investments are effectively unlimited. Otherwise put, the velocity of each dollar is in the toilet. It is parking in money funds and sitting there doing nothing whatsoever. That is why prices are falling - for houses, commodities, stocks, gasoline, etc. It is a deflation in other words, and not an inflation.
The error most quantity theory types make in this matter is they assume the demand for money is a constant. So, if there is more money in existence, they expect its value to be less, in direct proportion. But this is not remotely the case. The demand for money changes just like the demand for Chevy Suburbans or cabbage patch dolls. And when demand for dollars soars, if the quantity doesn't move then the price does, instead. Soaring price of a dollar is the same thing as collapsing price of everything else.
Which is exactly what happened last year. The US economy bottomed in March when measured in Euros. Then the dollar flew higher, and we imported asset deflation. Not inflation. Oil prices collapsed by a factor of 4. So did most other industrial commodities, ags, etc. These are not signs of inflation, but of a panic demand for money as a safe investment, and an equally panicked repudiation of everything else.
The Fed is doing the right thing. The inflation panic mongers are just trying to get their epic bets against it over the last 4 years to "come right" in the end by sheer repetition, but it isn't happening.
It will take time for what the Fed is doing to work, but it has already restored the money market (short term loans) to tolerably normal conditions. The next segment that will heal is the longer term loan market, corporate and muni bonds and the like. Rates on that stuff peaked in November and have been improving since. All the financials will show it in their first quarter results - those just won't be announced until April, so we have another quarter of panic and pain ahead of us.
As for CDSs and CDOs, they aren't remotely the same animals, and it is a measure of the amount of ignorant panic mongering abroad in the land that they are all lumped together into the same stew.
CDSs are a zero sum bet among bankers. If all of them went poof tomorrow, there would be no net gain or loss. They are not like debts, where something already changed hands and has to be repaid in full or real value has disappeared or been destroyed. We should still have exchange clearing of them, because they can cause problems indirectly. Some firm thinks it isn't taking much risk because it thinks another will back it up, but then the backup fails. But that's it. The scaremongers tote up transactions amounts in them and try to get the man on the street to believe they are debts. This is approximately like adding up every line on your checking account statement without asking whether any of them off set each other, and confusing the total transaction amount with the balance.
CDOs on the other hand were just another kind of mortgage. A small portion of them were unsound frauds, and when those exploded, everyone assumed it was true of the entire set up. It wasn't. The result has been a giant write down on the books of banks, as the same performing mortgages are valued lower to yield some higher return, because nobody wants the stuff. There were serious losses only in "subprimes", which were junk loans to begin with and never should have been made. The theory behind them was always that the collateral would be worth enough, not that the borrowers were sound. Needless to say, when house prices drop 40-50% that isn't enough.
Everyone speaks of loan losses on all the bigger market segments after that - prime mortgages, credit cards, home equity, auto and student, etc. But for all of those, the charge offs for unpaid debts are all well under the interest rates charged. You can make less money than you hoped that way, but you aren't going to lose heavily.
The banks have a problem because they lost half their capital and their capital wasn't optional. It performs a necessary social function and if it isn't fully replaced, nobody else is going to be in good shape either. Populists and blame-mongering pols can't seem to wrap their minds around the point, but it is economically impossible for everyone else to do well, if bankers are ruined. Bankers, even ruined ones, have much better credit than everyone else, they will bid higher for everything and get it, and nobody else is going to see a dime until they recover.
So, we should simply see to it that our bankers get filthy rich again and stop worrying about whether anybody "deserves" any of it. Probably everyone involved deserves about six feet of earth, but who cares? The way forward is to help bankers recover, and they can then help everyone else recover, not out of the goodness of their hearts but with greedy little dollar signs in their eyes. That's called capitalism. It works, though it needs an occasional kick in the pants, and this is one of those times.
The economy is going to recover, in relatively short order as politics goes, and when it happens the Dems - who will have had nothing to do with it, really, any more than they can cause the sun to come up tomorrow by oohing and aahing in unison - will claim they saved the day. It all conservatives manage to do in the meantime is predict endless doom, and be completely wrong, then the Dems are going to look right and conservatives are going to look like skinflint fools.
What conservatives need to do is be prepared for the economy to recover, and point out to people what actions actually help that and who does the actual heavy lifting, and it isn't Washington. OK, some of it is the Fed, and we should forthrightly say so. And the banks do need public support - opposing that out of populist idiocy is, well, idiocy. Conservatives have to remember that they are the natural party of people who have smelled money once or twice, is a free capitalist society, and stop trying to out class-war the Democrats. You never, ever will. If the people want class war, they will always elect a Dem, not a populist Republican.
The conservative economic appeal used to be, vote for us, we know how to run an economy so everyone gets rich, starting with us. Now, instead, they seem to think the way to appeal to people is to crucified financiers and stand on the street corner naked in a washboard screaming that the end is nigh. That has approximately 3 votes for dogcatcher and will never get anywhere.
Do you see this as not impacting our economy for some reason? Does this have any impact on our sovereignty might be a separate issue. Secondly, you make no mention of the hundreds of trillions of Credit Default Swaps and CDOs that are still leveraged against God knows what. Does this burden ultimately rest anywhere?
When you hold a highly leveraged piece of paper and its value drops, your broker comes and takes away any cash you had in a margin call. Your so-called wealth just evaporated in the night like voodoo magic.
I am no economics brain, but isn't this just a global gambling operation? How could so many have the ability to in concert, deflate the economic balloon? Because the whole world appears to be sifting through their ashes trying to find any scrap of paper with what could be claimed to have value.
What is next? I have not read anywhere or seen evidence yet that anyone knows what to do to put the balloon back together. All I keep reading and hearing is more money, 'highly leveraged pieces of paper' keeps getting dumped down the same drain pipes.
Cash did not evaporate. Wealth evaporated. Cash is physical peices of paper. Money is cash plus entries in accounting systems. Wealth is money plus a bunch of other stuff people generally agree is valuable.
Wealth “evaporated” in the sense that what we once thought was worth $10 we now find out is really worth only $6. Money “evaporated” in that all those book-keeping entries (including loans and mortgages) that were based on that wealth has been likely devalued.
You know how fractional reserve systems essentially create money when banks lend? They also create money when non-banks lend (the “shadow banking system”). The reverse is also true. Collapse in lending leads to falling money supply.
That's democrat-talk. Wealth is created. Wealth is destroyed. See the internal combustion engine as an example of wealth creation, and WW2 as an example of destruction.
In a couple of ways. The basic fact is that economics is a behavioral study - meaning that it is a study of the way people (individually or in groups) behave under certain conditions - the condition economics cares about is scarcity (which to you and me means a limited number of things - money, oil, water even air). After my time in the field, behavioral economics and other specialized fields emerged that shattered the silliness of previous schools. These guys recognized that most of the tools we've historically used (aggreagates, equilibrium, etc) are often misleading, and that only individual actors matter, that there is not equilibrium but constant dynamic change, that all value is subjective, and most importantly that an economy is a dynamic adaptive complex system. In other words they recognized that modern economic models are pitiful representations of economic reality - they are sometimes useful but in very complex situations (like today) can be misleading. They are trying to create more complex models now that computing power permits, but it's a gargantuan task.
The other thing is that like I said above, economics is an adaptive complex system - emphasis on adaptive. Because it's conscious. It's living, breathing, always observing its own environment (like government and regulators) and trying to leverage that for its own gain. The Lucas Critique is a theory that states that once the general public realizes that a certain measure (say M1 or CPI) is used as a policy tool, that measure starts to lose is effectiveness for that policy. Indeed, we've known since the mid-90s that M1, M2 and CPI were starting to lose their value. Re-read GReenspan's "irrational exuberance" speech from 1996 and you will see a wonderful summation of what my 5 years at the Bureau of Labor Statistics revealed about the consumer Price Index.
The economy is not a passive subject, it is like a wild animal, constantly in an active struggle to evade its would-be tamers. So yes, we are in the early stages of undertanding the economy, and no we will never be able to catch up as much as we can with the physical sciences.
“Wealth is created. Wealth is destroyed. See the internal combustion engine as an example of wealth creation, and WW2 as an example of destruction.”
Yes, we’d already been over that if you’d read replies. Breaking stuff/inventing stuff is different of course. What’s democrat talk is saying wealth can be destroyed simply by numbers going down on a screen.