Friday, May 6, 2011

Where did all the money go?

It's been a moment or 3 since I've written. My bad.   Anyway, I was listening to a podcast and someone asked a question, where did all the "value" go that disappeared in the stock market crash of 2008?  The truth is, it wasn't real in the first place. Let me give you an example, if you have a car you want to sell, a rare, vintage 1937 whatever. There are only 4 known in existence. It might be worth a tidy sum, say $100,000. It's worth that because that's what someone is willing to pay you for it.  You haven't sold it, that's just the going rate. That money doesn't exist in your pocket until you actually sell the car. (it's kinda like saying Mark Zuckerberg is worth x billion dollars because someone says that Facebook, a privately held company, is worth y billion dollars.)

Say one day someone finds a stash of 14 more of the exact same 1937 vintage vehicles, in a warehouse in East Bubblebutt, NJ.  Suddenly yours isn't so rare anymore. Suddenly the market of people willing to give you $100,000 for yours starts to shrink, as does the "value" of yours. Within 2-3 months, the "going price" for yours is only $60,000, because the original value was based on the rarity of it.  You lost $40,000. Or did you?  Did you physically have $40,000 4 months ago that you don't have now? No. So how did you lose it? That's what happened in the stock market. And happens everyday. The value of a stock is based on what you can get someone to give you to own it. All the daily market fluctuations are the changes in what people are willing to pay to own stock X. When they decide they don't want to own it that bad, the value decreases. It's like being the only girl at an all-boy school. Then 300 new girls enroll. Yeah, exactly.

So, where did all the money go?  Poof....

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