Wealth is transferred, not destroyed. Money supply is not affected by gyrations in the market; it simply shifts capital from one party to another. Think about it, every transaction has a buyer and a seller. The buyer transfers capital to the seller. When someone sells a stock, the money does not travel into a black hole and disappear. It goes into someone's bank account. Let's use futures as an example. I buy an sp 500 futures contract at 1700. You are short this contract. No matter which way the market goes, up or down, and by whatever magnitude, the net effect of our wealth as an aggregate stays the same. Say the sp drops 5 pts. My account is marked at 1695. I am down 250 dollars. You account is marked at 1695, you are up 250 dollars. The sum of our wealth will always equal zero (250-250=0). My loss is your gain. If the sp dropped 500 pts. My account is marked down 500, yours is marked up 500. The change is always zero.
Now let's use GOOG as an example. GOOG goes public at $50 a share. Ten million shares are sold to the public at $50 a share. Let's say the public is one guy named John Smith. John Smith is the proud owner of 500 million dollars worth of GOOG stock. Where does that money go? Well, some of that money goes to the underwriters in fees. Some of that money goes to the brokers in the form of commissions. The rest of that money goes to GOOG. That's right, GOOG get's 500 million minus the fees. So now let's say GOOG stock goes to zero.
What happens? Well, John Smith is out 500 million dollars. But GOOG has that money now. The money never disappeared. It went to GOOG. What did GOOG do with it? They invested the money into technology. Say they put all the money into an algorithm company to develop some technology. Now what did they do with that money? They used that money to pay their employees. Where does that money go now? They used it to buy their wives a new car. Now the car company uses that money to pay their employees. And on and on we go. The money never disappears; it simply gets transferred to another party. Now if the stock goes from 50 dollars to 100 dollars does John Smith gain anything? No. Someone has to buy the stock. Let's say the next day you come in to buy some GOOG and the current offer is $100. Now, the gain John Smith has on paper comes at your expense. You paid $100 for the stock. The only way John Smith can realize his gain is if you transfer your wealth to him. Say he sells you all his stock. The money he is walking away with came out of your pocket! It didn't just appear out of the blue. Now if GOOG goes to zero now, the net effect of all the aggregate dollars is still 0. You are out 1 billion dollars. John Smith made 500 million and GOOG made 500 million. The net effect is ZERO! It's the same thing with homeowners. If your house has doubled in value, the gains are all on paper until you sell the house. Think about it. If the stock gaps to 100 and no trades take place, how can you say what you are worth? It's all a paper gain.
Bill Gates and many others net worth are tied to their assets. All their assets. These assets fluctuate in value every day. Gates’ net worth fluctuates every day with the price of MSFT stock. In 2000, there were many young geeks worth millions on paper. Many of them never realized those gains. Their stocks went to zero and were no longer worth millions. The problem becomes exasperated when people start to borrow against their inflated assets be it stocks or their homes. Again, money is transferred here in the form of debt. Rest assured, the money is very real and someone is on the hook for that. Again, this is not mathematically possible. The only way it could happen is if the Federal Government was actually creating currency to buy stock from you. In that example, money is being created. But when stock prices go higher, someone is buying that stock. Your net worth is increasing at the expense of the buyer who is relieving you of your stock. Yes, you are getting wealthier, but at the expense of the new buyer who now owns your stock! Wealth effect is worthless. Your wealth on paper will fluctuate daily. Your actual wealth is only realized when a transaction has occurred. Again, what people really think they are worth is irrelevant. It doesn't matter where the exits are and who can get what price. When they sell, someone else's wealth is being transferred to them. It's as simple as that.
Now let's use GOOG as an example. GOOG goes public at $50 a share. Ten million shares are sold to the public at $50 a share. Let's say the public is one guy named John Smith. John Smith is the proud owner of 500 million dollars worth of GOOG stock. Where does that money go? Well, some of that money goes to the underwriters in fees. Some of that money goes to the brokers in the form of commissions. The rest of that money goes to GOOG. That's right, GOOG get's 500 million minus the fees. So now let's say GOOG stock goes to zero.
What happens? Well, John Smith is out 500 million dollars. But GOOG has that money now. The money never disappeared. It went to GOOG. What did GOOG do with it? They invested the money into technology. Say they put all the money into an algorithm company to develop some technology. Now what did they do with that money? They used that money to pay their employees. Where does that money go now? They used it to buy their wives a new car. Now the car company uses that money to pay their employees. And on and on we go. The money never disappears; it simply gets transferred to another party. Now if the stock goes from 50 dollars to 100 dollars does John Smith gain anything? No. Someone has to buy the stock. Let's say the next day you come in to buy some GOOG and the current offer is $100. Now, the gain John Smith has on paper comes at your expense. You paid $100 for the stock. The only way John Smith can realize his gain is if you transfer your wealth to him. Say he sells you all his stock. The money he is walking away with came out of your pocket! It didn't just appear out of the blue. Now if GOOG goes to zero now, the net effect of all the aggregate dollars is still 0. You are out 1 billion dollars. John Smith made 500 million and GOOG made 500 million. The net effect is ZERO! It's the same thing with homeowners. If your house has doubled in value, the gains are all on paper until you sell the house. Think about it. If the stock gaps to 100 and no trades take place, how can you say what you are worth? It's all a paper gain.
Bill Gates and many others net worth are tied to their assets. All their assets. These assets fluctuate in value every day. Gates’ net worth fluctuates every day with the price of MSFT stock. In 2000, there were many young geeks worth millions on paper. Many of them never realized those gains. Their stocks went to zero and were no longer worth millions. The problem becomes exasperated when people start to borrow against their inflated assets be it stocks or their homes. Again, money is transferred here in the form of debt. Rest assured, the money is very real and someone is on the hook for that. Again, this is not mathematically possible. The only way it could happen is if the Federal Government was actually creating currency to buy stock from you. In that example, money is being created. But when stock prices go higher, someone is buying that stock. Your net worth is increasing at the expense of the buyer who is relieving you of your stock. Yes, you are getting wealthier, but at the expense of the new buyer who now owns your stock! Wealth effect is worthless. Your wealth on paper will fluctuate daily. Your actual wealth is only realized when a transaction has occurred. Again, what people really think they are worth is irrelevant. It doesn't matter where the exits are and who can get what price. When they sell, someone else's wealth is being transferred to them. It's as simple as that.