Saturday, November 29, 2008


Even after the historic stock market rally, global markets have lost $50 trillion in wealth over one year. I think people still haven’t come to terms or grasp the magnitude of wealth destruction we have just lived through. Sure, we can flip out about the $200 billion the U.S. Treasury injected into consumer debt markets so people can go out and jump on the consumption treadmill on Black Friday but that is a drop in the bucket compared to the wealth destruction we just went through. And future indicators point to further market distress.
What are the 3 major areas where this wealth was destroyed? We have global equity markets, real estate, and commodities.

First, let us take a look at the financial damage done in the global financial markets:

In this area alone, more than $32 trillion in global wealth has evaporated. The global stock markets provided the quickest and most up to date information on the perceived market value of actual assets in countries around the world. The fact that we are $32 trillion poorer on paper this year than in 2007 should make you think what exactly happened to that money? If you need a helping hand you should read the article describing deflation and exactly what wealth destruction will do to a society.

Much of this destruction is based of course on the credit crisis. So far, institutions have taken credit losses on bad loan write-downs to the tune of $910 billion. Of course this is only the tip of the iceberg when we consider all the commercial real estate that will be busting in 2009.
So that is one area where the money has evaporated. Let us now look at how much wealth has been destroyed in U.S. real estate markets. During the peak, residential real estate in the United States had a value of $24 trillion. Since that peak, as measured by the Case-Shiller Index U.S. residential real estate is now down by 22%.

So only in residential real estate in the U.S. $5.28 trillion in housing wealth is now gone:
$24 trillion x 22% = $5.28 trillion

Keep in mind that this doesn’t factor in the collapse of the commercial real estate market as well. In addition, there were global housing bubbles in the U.K., Spain, Ireland, Australia, and China that are facing similar price declines to the United States.

The other wealth destruction comes from the utter collapse of the commodities markets.

The most visible and probably most highly followed is the collapse of the oil markets:
The oil markets have collapsed by 67% since the peak of $147 a barrel was reached. This is a stunning reversal of the fortune of many countries dependent on oil. For example the Russian Trading System Index was holding up a bit stronger due to exports in oil but with the collapse, the index is now down a jaw dropping 74% and the market had to be closed a few times during the turmoil.

What this global collapse should prove is that anyone that thought that there was going to be decoupling was simply wrong. We are completely tied together. No economy is isolated and what this shows is that there was really hardly any place for money to hide.

$50 trillion is now gone from the system. Will there be more losses to come?

1 comment:

PKS said...

Yep, and not only are we into the deflation, but we haven't even begun to see the effects of the 'systemic risk' of credit-default swaps/obligations.

Do a little reading on those, what Warren Buffett described as "economic weapons of mass destruction".

We ain't seen nothing yet.