Destruction of Wealth?

Simply put, the destruction of wealth/income will have greater implications for this economy than many are anticipating. It is a ripple effect of this crisis that is barely even being accounted for.

Yes, we all already were paying attention to the fact that the unemployment rate is rising and that tons of jobs have been lost on Wall Street. But, what about those retail investors who invested in those financials and saw their shareholder equity wiped out? And, what about 401k investors who have seen their retirement savings and net worth decrease significantly?

This is a ripple effect of the pain coming to roost on Main Street. I'm not trying to be a harbinger of doom, but I don't think enough people are talking about it. The consumer is going to be in a much deeper hole than many anticipate. Everyone has already factored in the job loss and tough economic times. But, in addition to the tough times stripping people of their jobs, you're now seeing Wall Street's woes put substantial pressure on people's savings (what little they may have). After all, we know that the savings rate in America is pitiful. The thin are stretched even thinner.

This Wall Street Journal article is the perfect example of that. Although this article deals with a woman who is already retired, the same principles apply. (The woman relies on dividends as a source of income). And, she is just one of millions who have been undoubtedly affected by the destruction of income and wealth.

People have lost their jobs; there goes their streaming income. 401k investors have lost 20% or more of their retirement savings; their retirement is now pushed back. Congress' budget analyst has estimated that as much as $2 trillion in retirement plans has been wiped out in the past 15 months. Retail investors with separate accounts have most likely also suffered notable losses; there goes some of their savings. So, where will they turn now? Certainly not to the home equity loans that were once so popular. The house ATM is all out of cash due to depreciating home prices. Need a loan? Oh, I'm sorry you're already heavily in debt and we're tightening credit standards. Any and all of these situations in whatever degree of severity lead to a pinched consumer. And, a consumer recession is much stronger than any recession already being forecast.

People don't like to lose money. – Period. Not only does this destruction of wealth put people in a bind, but it affects them psychologically as well. Consumer sentiment is already low, and it's about to get even lower.

But don't worry, we here at Market Folly believe everything will be just hunky-dory (note the sarcasm)!

 

Comments

[investor88:]

Destruction of wealth [stocks, houses] is a serious drag on the economy. Then there is deleveraging which is another burden. Tough times ahead before sunshine again.

2008 Oct 16 08:40 AM

[Smarty_Pants:]

As the post-Chernobyl Russian newscaster's reported:

"Everything is FINE! Especially at the nuclear power plant."

(Ditto the sarcasm)

2008 Oct 16 11:48 AM

[moonbat1775:]

"After all, we know that the savings rate in America is pitiful. "

Well either Americans are 1) dumb or 2) there are some perverse incentives at work here. Americans are dumb in some ways but they are pretty crafty about money so I vote for number 2).

And the culprit is: The Fed and fractional reserve banking lowering interest rates below free market rates. Is the victim supposed to cooperate in his rape?

2008 Oct 16 12:02 PM

[carey_jim:]

It's interesting to look at the percentage of farmers in the United States for each decade from 1880 to 1980, when thinking about the consequences of a Great Depression.

In 1880 49% of all American workers were farmers
In 1900 38%
In 1920 27%
In 1930 21%
In 1940 18%
In 1950 12%
In 1960 8%
In 1970 4.6%
In 1980 3.4%

www.agclassroom.org/ga.../

If we have another Great Depression, it will be an urban depression and will look much different from the last one where most adults had memories of being raised on small farms and knew how to feed themselves.

I think another Great Depression would bring a different kind of social upheaval.

2008 Oct 16 12:19 PM

[Smarty_Pants:]

I've got a broker, her name is Fay,
15% down on the Nasdaq today
She's a good old worker when a rally's underway,
15% down on the Nasdaq today

We've made some profits in our day
buying upgrades all the way
And we know every tick of the way from
breaking even to making the dough.

Chorus:
Low sales, everything is down
Low earnings for the economy's slowin' down
And you'll always know your broker will be thinkin' your way
If you've ever traded stocks in the bourses today

2008 Oct 16 12:30 PM

[axelrod608:]

Once upon a time, when economic times got bad, one could "downsize" - sell the family home and get a cheaper one. Bow even that option is moot. We are witnessing the end of "retirement" for all but the very rich. Literally ALL the sources of income other than Soc Sec are being gutted.

And Cary is right - it will be an urban motif depression this time. Heck, even the "farmers" left are really agribusinesses. I'll bet small family farms are only a fraction of 1% these days.

How much food can YOU grow in your yard ?

2008 Oct 16 12:34 PM

[ResourceWise:]

The US economy has become a giant casino, where, for example a car manufacturer made more profit from selling car loans than selling cars! Something had to give – and it has with a vengeance. We can now watch with horror as the 6 trillion dollar Credit Default Swap market unravels - 1000 dollars for each man, woman and child on this earth – yes even the 2 billion that who live on less than one dollar a day!

2008 Oct 16 01:04 PM

[rogerk2:]

The stock market is not causing destruction of wealth. The market is a zero-sum mechanism: it simply transfers wealth from one party to another. Every loss is offset by a comparable gain to somebody else somewhere in the system.

What we are actually seeing is destruction of unrealized or paper wealth, the writedown of imputed values of stuff that aren't tangible assets. We're getting killed by failed insurance policies, not failed companies...and by the bankers and rating agencies and insurance companies that pitched this stuff like it was real.

2008 Oct 16 03:20 PM

[joes:]

It is interesting to see the theme of the "Great Depression" woven into so many postings. There are two parts of that story, what was lost that is the current focus (correctly and understandably) and what is so hard to feel in these times, what will be gained by the transformation of our economy and as a result our society.

So many posts and articles also talk about how the "wealth bubble" was built on an unsustainable model, where the selling of "packaged" money was worth more than "unpackaged" money, with the truth being that it is until someone has to open the package.

Understanding this so quickly after the fall should help us to attack the root causes of the systems problems and redesign something that works better, not perfectly because that is impossible, but something that is measurably (by our current almost certain to be flawed but better than guessing methods).

On thing to consider is that the last recovery, the New Deal, was built on a set of firm principals that spread the opportunity, which spread the wealth through a more palatable manner than welfare payments. Jobs, training and yes, even loans were used to allow businesses to thrive.

Now that model would be hard to replicate, but not impossible, because new businesses that can support people need to look for new ways to create value to present to the market. Whereas corner stores and restaurants used to work at local ownerships level that is no longer true.

Regulations and restrictions could work but that would be the wrong application of Government, innovation into other things that people can do, maybe some based on the cheap communications and data portability enabled by the Internet.

What ever the case it will require an entire country (and world) of people that care enough about the future and other people else to think about the long view, if we get that right the old New Deal will pale in comparison to the New New Deal.

2008 Oct 16 03:27 PM

[DanTanner:]

Americans have lost huge chunks of money in terms of net worth. Lack of values in real estate and sharp drops in stocks have wiped off the best asset base there is. Than came the obliteration of 401Ks, pension plans, IRAs and money market funds. To top this all off people are using savings to pay expenses since incomes have plummeted. This is a downward spiral very negative very disturbing. I have never seen it this bad.

2008 Oct 17 02:21 PM

[robert.b.fe...:]

I haven ever seen things any better! Bargains abound on the market while wages remain stable and in some cases are rising. Just goes to show that this is not a single crises but a conglomeration of regional ones. People keep posting that this is the worst crises since the great depression. Not true this is the worst crises since the carter administration and this will pass as well. People that have a long time horizon to retirement are buying at discounted rates. Even with the paper losses sustained recently in 401K and IRA accounts dollar cost averaging will more than offset them. Real estate is becoming very affordable and interest rates are still low. If the credit crunch really exists I haven't seen it as I am constantly being bombarded by credit offers for everything.

2008 Oct 19 02:01 PM