Where does all money and wealth go in the recession?
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The value of something is only worth as much as the next person is willing to pay for it. If that’s stock then a share price could go from $100 to $1 in a single share transaction. That would reduce to market cap of the company 99% with a single $99 trade. I know that’s extreme but it shows that reported “losses” are only superficial. What is the actual value that the share of that company? Is it $1 or $100, or something in-between? So when market value drops it’s the market buyers that are saying “we don’t want to pay the same risk premium to own those shares”. So the market buyers push the stock lower since that’s where all the liquidity goes.
Housing will face a liquidity wall again with a rise in interest rates. Buyers don’t want to take on the debt burden at higher rates and therefore don’t take out big loans. So the value of everything starts to come down to where the liquidity is.
Liquidity is the point where buyers and sellers agree on the price for a transaction.
So it’s not that wealth disappears, it’s more that higher risk premiums have been lowered to match liquidity.
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