In these, the golden years of congressional farce, we need periodically to be reminded of a few basic economic realities. Here is just one of them. I will try to offer up others from time to time, but I keep getting distracted by the glorious theatrics all arouund us. It is hard to keep my mind on economic truths when Christopher Dodd keeps appearing on the evening news with his backside covered in red ink that he personally sat in.
So here’s the deal. When bubbles burst, we have to remember that they were bubbles after all. There is a difference between losing wealth that you actually had and losing wealth that you just thought you had. Now the latter mistake can have real economic consequences, of course. For just one example, if you think you have money, you frequently undertake financial obligations on the strength of having it. And when the money goes poof, the obligations frequently don’t go poof. And there you are.
But keep this bubble bursting in perspective. I have seen numbers saying that the world has lost 40% of its wealth. Well, no, not exactly. Real wealth keeps the rain off, keeps you warm and dry, and so forth. Because we have not had an unusual number of natural disasters, all that wealth remains — and which a number of people are going to pick up at bargain prices.
Think of it this way. Suppose you and a buddy bet on the big game, and he bets you a zillion badillion dollars that his team is going to win. You take him up on it, but they lose. He promises to pay you next Tuesday, and you rush home all excited, eager to tell your wife about your good fortune. On the way home, because God has answered all your prayers, you go on a shopping spree involving SUVs, boats, motor homes, flat screen televisions, and so forth. When it turns out your friend doesn’t really have that kind of money — and if he did, he wouldn’t be giving you any — the global economy has not really lost a zillion badillion dollars. There will be some hard adjustments for you to the tune of whatever you bought and can’t take back, but the figure that dazzled you was not real wealth.
So stupid bets like this and, more to the point, ridiculously over-valued stock, companies, banks, etc. do not constitute genuine wealth. They were a measurement of lust, not a measurement of blessing. When a bubble bursts, the genuine wealth is transferred, but it is not lost.