Was the Wall Street Money Real or Imagined?

Wall Street investor; AP photo

Question/Comment: Could you explain where all the money went that supposedly vanished during the Wall Street meltdown? Who has it? Was it imaginary or did it really exist?

Paul Solman: All Wall Street values are imaginary. All money is imaginary. All VALUE is imaginary. It’s an act of collective belief, of faith – matters of the mind.

What’s a diamond worth? Gold? They’re worth what we all somehow AGREE they’re worth. Push comes to shove (in a nomadic subsistence economy, say) they might be WAY more trouble to even carry with us than they’d be worth in trade. Their “exchange value” is an act of the imagination.

“Unfair,” you might say. “Diamonds and gold are obvious cases of imaginary value.” Okay, then what about LAND? It can keep you alive, so it must REALLY be worth something, you’re thinking. It has a “use value.” But suppose you are a nomad? Or determined to live on a boat, like the survivalist fascinatingly featured in the January 26, New Yorker, “dystopian” Dmitry Orlov? (My friend Nassim Nicholas Taleb, who has often appeared on this page, is also in the story.)

But look, for the sake of no argument (because argue is the last thing I want to do with you folks, flattered as I am that you read this), let’s say diamonds and gold and land and forks and squab ARE somehow intrinsically valuable. That still wouldn’t be true of MONEY, money which, like ours, isn’t even backed by anything. Its value is a collective act of imagination.

It’s worth what it is because someone SAYS so, and we choose to believe them. And right now, BTW, we (the citizens of the world) are saying U.S. money is worth LESS, a more tangible asset like gold, which you simply can’t make more of, having risen in dollar price the past few years, months, weeks and days.

Wall Street? The values there too are an act of the imagination. A share is a theoretical ownership slice of a company. But what’s the COMPANY worth? At the very least (if it were forced to shut down and liquidate), whatever it could get for its “assets.” But WHAT assets? Factories that make cars no one wants? Land that may well be unfit for human habitation without considerable and expensive clean-up efforts?

And that’s just for companies that actually MAKE things. As you’ve heard, ad nauseam, we’re mainly a SERVICE economy. What are the saleable assets of SERVICE companies? Aeron chairs? Computers soon to be out-of-date? And don’t forget: the company’s got to pay its debts before stockholders get a dime.

In theory, a stock’s value is supposedly grounded in something more than the company’s net asset value (what it owns minus what it owes). That something is a SHARE of its future profits. But what are they, pray tell? What might they be in a steep recession or worse?

Where did the money go?

Thirty years ago, our first house cost $60,000. We sold in 1984, but today it’s appraised for $776,200. I know because I just this second looked it up online.

Now $60,000 in 1979 was an inflation-adjusted $171,000 in 2007, the last year for which this useful website has data. There sure hasn’t been a lot of inflation since then. So then where did the extra $600,000 or so come from? From our collective evaluation of that house – the world’s SUBJECTIVE judgment of what it’s worth; which, when you think about it, boils down to our IMAGINATION.

The value was CREATED by us all, even if the house never changed hands. And if the value subsides back to $171,000, why then that created value would have vanished in the same way it materialized – by a collective act of imagination.