Set forth below is the text of an e-mail that I sent last week to my friend Brian. Brian and I became friends during my days as a Capitol Hill reporter. We have stayed in touch in the years since. Brian asked: “If everyone (or the vast majority) has lost money, are we really any poorer?”
You’re asking a penetrating question. I wish that everyone would take some time and think this one through. If they did, that would help a lot.
The full reality is that there has been no loss. The money that was “lost” was pretend money. It was cotton candy that has now been blown away in the wind. It never existed in the first place. So of course it was not possible to “lose” it. One cannot lose something that does not exist in the first place.
However, we ARE poorer as a result of our decision to entertain the illusion of being richer for a time:
1) People who believed that the illusory wealth was real started businesses because of that belief and now have seen those businesses fail when the illusory wealth was taken away. The years of effort devoted to building those businesses is lost. That’s a loss for the entire society because those years could have been put to more constructive use;
2) People who believed that the illusory wealth was real spent far larger sums on houses and cars and vacations than they would have had they known that most of the stock market gains of the 1990s were comprised of funny money;
3) People have failed to properly plan for their retirements because they believed that the numbers they saw on the bottom line of their portfolio statements were reasonably accurate;
4) Businesses that would have done better in an environment in which people didn’t think they were as rich as we had come for a time to believe we were failed in earlier years because they were trying to compete with businesses that gained an unfair advantage because of the belief in the funny money. For example, companies selling luxury homes moved ahead of companies selling modest homes because luxury homes seemed to make more sense for a time than they would have had we known the real numbers;
5) Lawmakers have directed huge amounts of money to stimulus projects that would not have been devoted to those projects had we been talking straight with each other about the true level of wealth in our society.
The money that came from the overvaluation of stocks was pretend money. We’ve lost nothing in returning to fair-value prices. But we have caused millions of unfortunate economic choices to take place by telling people for 13 years (1995 through 2008) that they possessed far more in the way of accumulated wealth than they in fact possessed. It’s a tragedy.
The good news is that we could turn it around by making a decision as a society to begin talking straight about how stocks work. If we did that, the economic growth that would result in the following years would be huge. All of the negatives would be turned into positives. My hope is that this crisis is going to cause so much pain that it will cause people to ask the fundamental questions that need to be asked to get things on a much better track.
It’s a gut check for our society. Do we like what comes from telling lies to ourselves about what our stock portfolios are worth? Or can we reach down deep and transform an unfortunate set of circumstances into something that ends up generating lots of wonderful, wonderful advances in years to come?
Learning how stock investing works is like learning how to cure cancer or how to fly or how to build a computer. There are thousands of implications that affect every aspect of human life that follow from it.