Where Does The Money Go?
I thought I’d written on this one before, but I don’t see it so I’ll write about it now. I’ve heard people ask this question over and over; where did all the money go that was lost in the stock market and in real estate?
The answer is nowhere. The truth is that most of that money never existed. It’s all about speculation and belief. People invest in a company like Microsoft because they believe the company is one that will make a lot of money from selling their products. As more people buy into Microsoft, their stock price goes up, and people who want to buy afterwards have to pay a higher price to get a piece of the pie.
However, the true wealth of a company is what they report as their profit and sales every quarter. When they report good news, people want to buy and the stock price goes up. When they report bad news, people want to sell and the price goes down.
Over the last 18 months, as news kept getting worse and worse, more people were selling than buying. Suddenly, many people were finding that they were having problems getting their money because it just didn’t exist. As much as the media really worked hard to find scapegoats like Bernard Madoff, Sam Israel, and Robert Allen Stanford, the truth is that they just found the loopholes in the system and made themselves rich because of it.
Investing has always been a game to most people. In reality, companies issue stocks because they need continuing capital to help sustain themselves without spending their own money. If they make profits, investors are happy, the board of directors are happy, and money keeps flowing in. But the only real money is what you pay up front.
Real estate is the same thing. Many people buy up real estate with this expectation of its gaining equity the longer they have it. The truth about real estate is that it’s only worth what someone else decides to pay for it. In a buyer’s market, you will get more money for your property than in a seller’s market. That’s why so many homeowners in southern and western states have found themselves in so much difficulty. They paid for homes in areas where the prices were inflated, signed bad deals, and when banks started taking homes in foreclosures and property values fell, folks found themselves paying more than their homes were worth because there were no buyers around to bring the prices back up.
I know someone locally who many years ago was able to sell this little tiny property with this little house to a company for around $150,000 because they wanted to put a strip mall in. The house is still there because one person refused to sell, and the company hadn’t made contingencies if one homeowner decided not to sell. She made out like a bandit; they,… well, that home and all the others are still there, still small, some look rundown, but all are occupied. None of those homes are worth what she, and some others, got paid, and someone lost a lot of money speculating.
Anyway, that’s how it is; all that excess money doesn’t exist. By the way, this big deficit our country owes,… the real money doesn’t exist. Governments are the only entities that can make money when they need it, but the more money they make, the less it’s worth elsewhere. Another lesson for another day.