It bums me out that a single press release can cause so much of the world's wealth to evaporate. Worldwide capital was something like $80T iirc, 2% of that would have solved every budget crisis in the world.
The downgrade didn't cause this. At least, you need a rather complicated model to explain how it did. Interest rates fell on US Treasury bonds; this means investors think they're the safest instrument to invest in. Today we saw equities crumble, not bonds.
I would guess it's mostly the evolving European situation that's throwing us headlong into the abyss, with a hefty serving of realizing the USA is run by clowns who are utterly incapable of addressing any important problems. Note that this is beyond simple "politicians are teh stupid," which applies in any country, but in the USA particularly. Europe's facing serious problems, but that's because they're burdened with very tough choices as a result of badly thought out institutions from the 1990s. The USA faces very easy choices, but we're facing serious problems because... well, we want to? Because we have a dysfunctional government? Who knows. Regardless, it's an unforced error.
Its worth noting that some investors are thinking this is a liquidity event because someone got a margin call rather than concern about euro economic concerns. I'd think its both. But yeah, u.s. bonds are doing fine despite the downgrade.
Evaporate? When you buy a stock for $10, that is the moment when your $10 are gone -- not the minute it plummets. If you can sell it later for $15, congrats, that is the moment where you can realize a profitable "exit". But in the meantime -- every second of it -- don't ever count on that stock, bond or other 'vehicle' to "hold your $10 through the winds of change" or protect it against changes in the perceptions and opinions of all the other gamblers, investors, savers, market participants around the globe. Any given day, its "ticker value" merely reflects the value judgments of the relatively small number of co-owners that happen to buy or sell the same asset that day -- it never reflects "your net wealth". Your net wealth is your cash, house, car, brain, any other physical asset -- minus any money you spent on counter-party future obligations, promises, thoughts, hopes -- speculation. That stock you bought? It can be $1 or $100 tomorrow or in 10 years, and you only ever know it when it's time to sell.
Was money lost? Sure -- but not last week or today -- rather, on the day the individual investor bought into these markets.
Anecdotically, I made a few nice profits with Bitcoins back in May/June when they were all the rage -- but I never ever confused them with physical wealth, I knew the nature of my gamble and I timed my exit -- not perfectly, but good enough to convert this "digital profit" or "paper profit" back into "physical goods". I'm not a full-time trader or gambler and I believe in investing my time more productively, but at the same time, sometimes it's fun to play money games. Too bad so many people on a world-wide scale believe it's a smart idea for their retirement estate to "take on debt to 'invest' in others' debts". This has been going on for a long time but it's not especially sustainable or otherwise inspiring -- especially since the debts are now backed by the children of your children. Think I'm off-topic by now? Think again!
You do realize that cash is not a true physical asset, right? You can hold it in your hand, but it has no intrinsic value. The only value it holds that that which others assign to it, not unlike a share of stock.
Good thoughts -- I did and do realize it, in fact! Some price stocks in currency, some value currency in stocks. Some price oil in currency, some "currency" in "oil". Some price gold in currency, others value currency in how much gold it buys (oil producers, for example!)
That said, by "physical wealth" indeed I didn't really mean paper currency or receipts for commerce and I mentioned this mistakenly to "soften my message" for those purely and fully entangled in the paper world of yesteryear.
My point is that you're talking about investments as if they are instantly gone and that this is some special case. "Was money lost? Sure -- but not last week or today -- rather, on the day the individual investor bought into these markets." This is incorrect, or at least it's not very meaningful. There's nothing special about stocks that make wealth disappear instantly. If your wealth is gone the second you invest in stocks, then it's also gone the instant you purchase oil futures, buy dollars/euros/your-favorite-currency, purchase gold, put it in the bank, or pretty much anything else. Any asset you obtain today really has only the value that someone else will assign to it when you wish to unload the asset at some point in the future.
"If your wealth is gone the second you invest in stocks, then it's also gone the instant you purchase oil futures, buy dollars/euros/your-favorite-currency, put it in the bank, or pretty much anything else."
Agreed!
"purchase gold, " -- disagree:
You're right on all counts but you're simply expressing my point more "extremely" than even I did myself... certainly, every trade of physical or digital goods is a subjective value judgment of both parties involved. In fact, stocks are a lot more "solid" as an "investment" in my book than pure debt and bonds and "financial vehicles" etc. But then, another question is how many of "working peoples' savings" should be entrusted to the ever-swinging daily judgments of full-time traders and speculators, 'wealth advisors', 'funds and trusts' that always chase yesterday's bubble and collect their commissions one way or the other. If capital goes into real estate, surely enough new condos spring up in Florida and Bangkok. If capital chases dot.coms, new dot.coms get created left and right. Tulips can be grown at will, too! Certainly, paper wealth can be multiplied indefinitely in nominal terms, but not in "real terms". The question then is, what are "real" terms? Well what happens when capital, tired of all the bubbles, runs into Bitcoins? They cannot be duplicated easily but boy can they be hacked. Bonds? Safe to bondage the tax-payers of 2030, today, is it? Ultimately, savings and holdings that are not "for-play money" will have to return to seeking protection in stuff that cannot be hacked by smart script kids or replicated and duplicated at will or by 'economic emergency laws' -- savings will at some point no longer be entrusted to better-dressed Madoffs -- they will have to seek assets with a long history book of storing wealth generated by productive past work well into the future for reference. That could be Mona Lisas but there's only one of them. Or that could be any other tangible, non-hackable, fungible, liquid physical good that has no competing industrial use, most importantly cannot be produced or increased in quantity at will and has been valued consistently by the kings and millions of "normal people" around the world for millenia well into the present. Sure, the "currency prices" of such assets may well fluctuate but the mere storage of savings function might well out-perform today's vehicles and instruments over the long term. Plus, as you already noted, currency does not reflect "intrinsic" value either so these nominal fluctuations are a laughing matter at best :)
But wait, couldn't this be said of stocks either? Exactly! Long-term savers will know this and not panic much. But those who talk about "wealth that evaporated" -- they were likely trading and speculating for a paper profit next week or month, not for "value-investing" or "storing savings". So both you and me shrug at them and say, "look again, no real wealth did evaporate! No factory collapsed, no car or house mysteriously disappeared..."
Do you believe that gold has tripled its intrinsic value over the past 5 years? Or that virtually all other assets have lost 2/3 of their intrinsic value during that same time frame? Gold has very little intrinsic value (to my mind, at least), especially before the electronics revolution, and it is as subject to the whims of investors as any other asset. If you buy gold at $1700 today and it drops back to $500 in five years, you'll see the same loss as if you bought $1700 of Google and it dropped to $500. While I agree that gold cannot be multiplied indefinitely, the same applies to many (indeed most) other assets. The price of homes has no fixed limit, but neither does the price of gold. This is especially true when the market sells gold futures and such that are not necessarily backed by physical gold.
> But wait, couldn't this be said of stocks either? Exactly! Long-term savers will know this and not panic much. But those who talk about "wealth that evaporated" -- they were likely trading and speculating for a paper profit next week or month, not for "value-investing" or "storing savings". So both you and me shrug at them and say, "look again, no real wealth did evaporate! No factory collapsed, no car or house mysteriously disappeared..."
On this part, I agree. True wealth doesn't evaporate when the market drops. (That's not to say that a drop in the market can't hurt long-term wealth production; i.e. economic growth vs recession.) As you said, houses didn't fall down. Nothing changed except some paper values.
But then, anyone who understands how markets work should understand that wealth is not truly created or destroyed by trading in the markets. It's just exchanges of wealth. If you've got a share of stock and sell it to me for $100, the same wealth exists after the trade. If I turn around and sell that stock to someone else for $50, the same wealth still exists. The paper value of that stock might change, but no actual dollars disappeared as a result of the transactions. I lost money, but the economy did not. (I do believe that stock and commodities exchanges can themselves be real wealth, though, in the same way a village market is wealth.)
> you're thinking of golds meager utility as a "commodity" and you're right -- but almost non-existent commodity utility is its greatest strength as a reserve and savings asset -- there is no competing usage so it can fully absorb value without disrupting anyone else's business or livelihood. Just ask the central banks of the world, the kings of the past, the Chinese, Indians, Russians, Brazilians... or our grandparents! This stuff is not only virtually undestructable over centuries; neither can it be diluted or produced at will -- the physical kind, that is:
Gold has historically been used as a reserve of wealth because it's malleable (so can be formed and/or split for convenience), abundant enough to be feasible for currency use, relatively simple to purify, and because people wanted it. The only things that are compelling about gold in modern times is that people want it and that it has a limited supply. Unfortunately, gold is also very limited as an investment. As far as assets go, it's historically not done as well as other asset types. Gold has some "intrinsic" value, but it's value doesn't really increase (nor generally does its price over the long term). In comparison, a dollar in a bank account draws interest (though lately that's negligible) and a share in a company may grow in real value as that company's profits increase.
> That's its strength, it can absorb unlimited nominal "value" -- if houses couldn't be built from the ground up, they'd be almost as "good as gold" -- just not as durable, fungible, divisible, portable and compact. Plus "housing" implies a competing "social" use. "Do not speculate in houses, people need to live in them", some will moan -- "do not speculate in pork bellies, people need to eat", some will moan. Who will complain about physical gold being "overpriced"?
No one will complain about physical gold being "overpriced". They'll complain about the drop afterward. This is what happened with housing as well. Very few were complaining about the price on the way up as they indebted themselves to buy 2x what they could afford and 3x what they needed. But they sure complained when home prices started dropping. If everyone were putting their money into gold, you could be sure they'd start screaming about their "retirement funds" when gold started dropping.
> This is the best part... physical gold is a steal as its current price is still being 'discovered' exclusively on the paper commodity exchanges, where new demand is still largely met with freshly printed certificates. Paper gold, I agree, is highly overvalued. That means, physical gold today is tremendously undervalued! Even gold in the ground, not yet mined, is already being traded in paper by speculators! It will be a spectacle one fine day when they try to collect in specie -- if ever. They're in it for the paper profit and sure enough they will be paid off in nominal terms.
I don't agree with this assessment. Physical gold is by and large priced to match the paper variety. When prices fall on the market, they'll fall for physical gold as well.
It wasn't a single press release, but an "official" recognition that the U.S. is hurtling along on an unsustainable budgetary path. We're borrowing more money each year than we spent as the ENTIRE federal budget each year in the 1990s.
Also, in many ways, Europe and Japan are in even worse shape, and the recent sell-off is probably more driven by European events.
If you read S&P's actual paper, it focuses on political dysfunction, not economic. For instance, they said that if the Bush tax cuts for people making 250k/year were allowed to expire, then they would have allowed the USA to retain its AAA rating, but the American political system seems incapable of making the necessary revenue adjustments to attain fiscal consolidation.
Of course, S&P is really just a bunch of corrupt idiots, so either way you shouldn't pay much attention to them.
The political dysfunction is only interesting to them inasmuch as it produces economic dysfunction. If Congress was deadlocked for months on end on, say, Don't Ask Don't Tell legislation, the thought of downgrading the US's debt rating would never have crossed their mind.
It's not a revenue problem, it's a spending-more-than-we-have-revenue problem. And I don't mean that it must be fixed with cuts only, but the idea that we can tax our way out of this problem is basically purely theoretical. With the real politicians we have, it won't work, unless after we fix the root spending problem.
Take everything Stephen Moore says with a giant grain of salt. He has some, er, very hackish tendencies, especially when veering away from research and trying to give a pretty finish to right wing policies on the WSJ op-ed page.
it's a spending-more-than-we-have-revenue problem
Which can be fixed either by increasing revenue or decreasing spending.
Raising taxes increases revenue. Pair Clinton-era tax rates with some very modest reforms to Social Security and some much more significant ones to Medicare, and we'd honestly be sitting pretty well.
And even if we did nothing, even now the biggest economic issue by far is jobs, not projected deficits in 2040.
Edited: upvoted you, because I can't conceive of why others should have downvoted you...
"Which can be fixed either by increasing revenue or decreasing spending."
That's actually not quite true. A truer statement would be that for a given constant level of spending deficit, it can be closed by either increasing revenue or decreasing spending. But you can't assume a constant level of deficit, because time progresses and politicians adjust based on their income and outflows. (Not necessarily in a good way, but they are looking.)
Try to put yourself more in a physics frame of mind than a political one. It's the difference between statics and dynamics. Solving the budget problem with a static snapshot of a dynamic process isn't going to work. With the track record that our politicians have, just handing them more money isn't going to solve the problem if they're just going to spend even more of it. A static-forces model of the political appropriations process fails to predict reality, the model where politicians dynamically increase their spending even more than revenue does historically fares better.
(... yes, I know it is odd to approach politics from the point of view of building models to predict reality and seeing which ones successfully, no sarcasm at all, I see hardly anyone take this approach. But there are in fact enough hard facts out there to have some success with this approach, if you can learn to take your science-trained sensibilities and look at the political world. Political science need not be an oxymoron, though I suspect an actual study of political science wouldn't look much like what is currently called that.)
Your model itself is a significant assumption, though. Consider the Clinton tax hikes combined with some moderate restrictions on growth in spending as a counterexample: they ultimately led to the closest thing to a budget surplus we've had in our lifetimes, ignoring details like whether we technically were in surplus or not.
It is fair to ask whether that's sustainable, as in the 2000s we saw our politicians take those projected surpluses and spend them on tax subsidies for the well-off. Which, indeed, is just what that model predicts. But that just speaks to the need to elect better politicians and create better institutions to act as an endogenous curb on unjustified spending.
Your tone suggests you think you're contradicting me, but your last sentence is simply a restatement of my point. (I'm still trying to work out a clean way of stating it, so I take responsibility for that.) The solution needs to solve the dynamics of the problem. It may visibly manifest as tax hikes and/or spending cuts, but those will be effects, not cause.
what they meant was in addition to the $4 trillion saved by current budget compromises over 10 years that getting rid of the Bush tax cuts would add $4 trillion in ten years thus placing $8 trillion of that $14 trillion deficit as no longer being an impact in ten years due to the surpluses we would have each budget year.
It seems to me that reducing the deficit by 50% is damn good idea.
It's unlikely that much of today's market action relates to the downgrades. Bonds rallied, and equities extended losses that started in July, not friday night. Don't get caught in the trap of connecting events because they happen about the same time, this is a global event: Germany is down 5% on the day, London 2.5%, japan 2%.
Indeed, no real wealth was destroyed. Well, a few cars were set on fire in London, but that was unrelated.
Part of the secret to my happiness is this: I permit myself to feel happy on days when my stock portfolio goes up, but not to feel sad on days when my stock portfolio goes down. In this particular case I'd much rather be happy than consistent.
Your definition of wealth is broken. A car is wealth. It may be a depreciating asset, but it is still wealth. It has value in its materials. It has value in its construction. It has value in its utility. A car most certainly can make money.
Wealth consists of all things that have value. Shares in a company are wealth. Dollars in your pocket are wealth. A house is wealth. A coal mine is wealth.
No, that's an asset. A car is wealth, and could be either an asset or a liability, depending on the car and what you do with it, but it's still wealth.
A guy named Silver Storm knows better. A magnifying glass and a bar of bullion is worth a magnifying glass and a bar of bullion.
A magnifying glass and a $1B Bond is worth more than a $1B Bond, depending on the perceived stability of the economy's other banking institutions. When things get a bit less stable reserve ratios tighten up.
Some percentage of the worlds "wealth" has been standing on a foundation of bad debt which is, as it always eventually does, working its way out of the system. Sad that it's going to be painful, but it has to happen, and really the sooner the better.
