Where’d all the wealth go? The market drops. DNDN falls off a cliff. My house’s assessed value shrinks? The nation doesn’t appear to be worth as much. My net worth is a lot less than it was before. How did the wealth evaporate?
Wealth appears to be evaporating all around us, except for those lucky enough to be holding gold, or those who are enjoying the perks of executive compensation, or lucky enough to be in the right place at the right time with the right skills. When the price of something drops, the wealth associated with that asset drops at the same time and speed and to the same extent. A vacant lot in my neighborhood was listed at over $300,000 a few years ago. Now it is listed at about $175,000. The owner’s asset has dropped almost 50%. Where’d the wealth go?
In my opinion, wealth is an illusion. It is a powerful illusion, and partly forms the basis of our economy, but it is an abstraction that we impose upon the world. Abstractions and illusions can vanish with a thought, and if we decide to think that way, wealth can vanish just as quickly.
Pop that bubble though and find that it’s not a balloon. Deflate the concept of wealth and it stops shrinking when it reduces to an inner kernel of value. Value, at least one way I use the word, is more tangible, and less likely to change because of opinion.
We could decided that the price of the vacant lot was zero. The price is merely what the market will bear. If no one wants to buy it, it’s price would necessarily be very low. But its value wouldn’t be zero. The land can hold a house and grow a crop. If someone set the price at zero, and someone bought it, they’d get value for the smallest trade in wealth.
Some things can have zero value. Investments with Bernie Madoff, shares of bankrupt companies, the charred remains of a dollar bill burnt to light a cigar, are all worthless, except as stories. Writers can find value in anything.
Much of our society is based on the illusion of wealth and the common agreement of what a currency can be traded for. Those are both abstractions, but they are necessary abstractions, at least for a little while as we evolve our society and civilization into something more sustainable and equitable. Without those illusions it is harder to trade services for cash which can be traded for the goods and services we need in our modern lives.
Watching wealth can be demoralizing and exhilarating. Most people invested for less than a decade have had too little experience with exhilaration. It is the counter swing of the financial pendulum. Human history shows that the pendulum rarely gets stuck on either end of its swing for long. The swings may show up in dollar signs but they also show up in emotions. Optimism and pessimism swing with wealth, though usually slightly out of synch; otherwise, bubbles wouldn’t catch people by surprise.
Watching value is harder than watching wealth just like seeing what the magician is really doing is harder than being taken in by the sleight of hand. Value is fundamental and more closely tied to quantitative analysis. It can be boring. Value can also be encouraging.
Recently a friend took me aside. She literally suggested we walk away from the traffic on Main Street and sit on the beach. She’d been worried about how I felt amidst the recent financial difficulties; but instead of handing out advice or wagging a finger at a risky style of investing, she wanted me to know that she’d looked at the companies I was invested in and agreed with me. I was invested in good companies. I knew and know that, which is why my emotional swings have been far less than many people expect. She’s a business owner and successful because she’s aware of the illusion and power of wealth and the fundamental nature of value. It was heartening and endearing to find that she’d spent that much effort understanding that part of my life rather than simply making assumptions.
Value is rarely the topic at parties, unless bragging rights are involved. There’s less drama involved and drama is theater and theater is storytelling. Value may not produce story, but it can sustain a life.
Frugality had a stigma of cheapness because frugal folk aren’t conspicuous consumers. They aren’t after the shiniest version or the trendiest tastes. They understand their needs and and wants and resources, and act accordingly. So, if a truck looks dirty and dented but runs and isn’t rusted, then its value is high. It is also less likely to be stolen.
Our country is looking dirty and dented. Even the hitch-hikers may avoid us. But under the hood there is a lot of solid value. I think a couple of extra wars and some failed experiments in deregulation syphoned out too much fuel. But the people I know are hard workers and smart. We have one of the best models for government, partly because it was designed to be repaired and improved. We also are a culture that is more likely to welcome new ideas. It is tough right now, looking at the negative swings in our nation’s and personal wealth, but in part, that’s our collective emotional response. Recognize the underlying value and the wealth we evaporated could return as a welcome rain.