More Unchaste Paper

OK -- it's been said again, for the thousandth time in the past two weeks. "The Crash of 2008, which now is wiping out trillions of dollars of individuals' wealth..." This is from Pat Buchanan. And I know what he means. On paper -- I repeat, _on paper_ -- trillions have been lost and trillions more stand to be lost. (And how recently it is that we've even begun talking in terms of "trillions". It used to be that "billions" was too big a word for the average person to ever use, but now that's gone the way of "pennies".) And sure enough, if Joe Stockholder gazes at his portfolio -- the way he would gaze at an X-ray showing a gigantic tumor in his abdomen -- he sees that the "value" it has today, according to the selling prices of its various contents, is less than the "value" it had yesterday, and perhaps -- though not necessarily -- less than the actual purchase price, i.e. what he paid for it in the first place. And the chances are that if he cashed out today, he would suffer a capital loss, which he could then declare as a tax deduction the next time the IRS comes around.

But for all this, there are some conceptual fallacies going on here. Number one is the notion that the stock you are holding is "worth" something -- a specific amount, in fact, based on the sale price of the moment. But this is not true! A stock is worth _nothing_ until it's sold, and only then is its worth determined by the amount someone else is willing to pay for it. Even the IRS knows this -- it doesn't tax gains until they are realized, i.e. until the item is sold. And it also doesn't credit losses until the item is sold. The vacillations of "value" on a piece of held stock are meaningless, and here's why. Yes, you could be the only holder of Acme Corp. stock to put it up for sale on a given day. And the person buying it could be the only person on earth who _wanted_ Acme Corp. stock that day. So your transaction would have little or no effect on the value of the stock -- in other words it would be a drop in the bucket compared to the overall market (or to the totality of Acme stock in the hands of stockholders). But what if _everyone_ who owned Acme stock put it up for sale on a given day? And what if there were very few, if any, takers? Well, the "value" of the stock would drop precipitously for no other reason than that, i.e. there is a lot for sale and no one's interested. It would have nothing _necessarily_ to do with the state of the firm's assets, accounts, inventory, productivity, management, marketing, growth prospects, or anything else. In other words, it would be a purely paper exercise. (This is why the Dow could, theoretically, drop all the way to zero, even if most of the firms represented on the market were still in business and, in fact, making money. Calling all "bargain hunters"!) On the other hand, let's say you put your shares up for sale and there are, for some reason, scores of interested buyers. Suddenly you're "rich"! But you're not really rich until the sale is finalized -- and then all you have is dollars, and... well, we'll get to that in a minute.

So what I'm trying to say is that all these trillions in "losses" are, after all, largely on paper, since most of the stockholders in question are not actually selling their own stock. The value of their stock is being "determined" by the transactions of people who are selling with people who are buying. You literally don't know how much your own stock is worth until the time of sale. This could be considered reassuring... but it's also deeply troubling. Because stockholders generally don't actually "own" anything except that piece of paper -- they don't have an actual share in the firm's capital property or other assets. If I own a share of General Mills it doesn't mean I own a few bricks in the wall of their factory, or part of a large flour sifter. All it means is that I have some claim -- although not even that solid a one, as evidenced by the fights that break out in stockholders' meetings -- to future earnings, i.e. profits. And those earnings -- or my share of them -- don't come in the form of cash, but in more stock -- or in increased "value" (here we go again) of the stock I already own. It really isn't the same as saying that Americans have just lost trillions in tangible goods or property -- we're not talking "casualty losses" here, like after a hurricane. It's all about paper. Now, the fact that people are willing to trade tangible property for paper is... well, it's their problem, I guess, or at least it should be. What makes it everyone else's problem is beyond me.

But -- and let me spread the doom and gloom a bit further here -- what is exchanged for the paper called "stocks" is seldom, if ever, tangible property -- at least not directly. I mean, when's the last time someone walked into a stock brokerage and offered a set of silverware for a few shares of stock? No, the deal is mediated by still another form of paper -- the one called "currency". And as I've pointed out, the American dollar is nothing more than a share of stock in... well, I'm not even sure what, since the U.S. is most definitely not a profit-making organization. I guess in a vague way it's a share in the aggregate growth potential of the economy, as well as of the ongoing standard of living and the health of the commercial sector. (I told you it was vague.) What it is is, basically, a measure of confidence -- not confidence in anything in particular, just "confidence" in general. In any case, it's not backed up by anything tangible -- when you have a dollar, you don't "own" anything, any more than you "own" anything when you have a stock certificate (or the electronic equivalent -- which is scary all by itself). So really, it's all a house of cards, but if enough people believe, even a house of cards can remain standing for years... decades... centuries! And this goes some way toward explaining what is euphemistically called "volatility" in both securities and currency markets -- because, in truth, no one knows what anything is really worth (hint: nothing) so it's all a matter of speculation, and emotion, and enthusiasm, and panic.

Wouldn't you really rather be Amish right now?