American households lost $1.33 trillion of their wealth in the first three months of the year as the recession took a bite out of stock portfolios and dragged down home prices.As noted in my title for this entry, this is nonsense. Yes, it feels like we lost $1.33 trillion but much of that was bubble-inflated, unreal "value."
When our stocks and our homes go up in price, it is psychologically easy to believe that we have earned those increases. "Earned," when in fact we have done no such thing. Those inflated prices simply reflect the fact that temporarily the market values those shares or that property at a higher price. Then the bubble bursts and the market values the same shares or property at a lower price.
How is it that we "earn" the increase in price but "lose" the decrease in price? It is one of the persistent irrationalities of the human species. You earn what you work for: your salary or perhaps the rent you receive on property or money you let others use temporarily. Increases in property or stock value are just winning bets you made on the directionality of the markets. Losses are losing bets.
Betting on stock or property values more closely resembles betting on horse races than casino gambling - that is, knowing something about the way horses have run in the past is helpful. "Helpful" but you can still lose betting on the favorite, the horse that should win.
Similarly, knowing something about the management of firms whose stock you buy, or about the demand for their products, is useful. Knowing something about the evolution of a neighborhood and about population migrations is helpful in buying property. And in both cases you can have the knowledge and still lose.
It is also true that when the entire economy hits a soft spot, most stock prices and most property prices go down in the short to medium run. When the entire economy is booming, most stock and property prices rise, also in the short to medium run.
Ups and downs are in the nature of capitalism. Get over it.
