of Wealth on a Vast Scale
Wave International Articles
How $1-million can disappear!
The bursting of the "debt bubble" which started in 2008 is far from
It's the financial story of our age and it's happening before our eyes.
The full scope is hard to keep up with because it's unfolding at
The top level is the sovereign debt crisis:
- National governments: Several in
Europe and even the U.S.
- State and local governments:
services slashed; vendors waiting to get paid.
- Corporations: financial
institutions at home and abroad remain in questionable health. PIMCO
Chief tells Bloomberg(9/13)
"We're getting close to a full-blown banking crisis in Europe." And
CNBC reports (9/14) "Moody's Investors Service said...it downgraded the
credit ratings of Societe Generale and Credit Agricole."
- Individual Households:
"under-water" mortgages; "new conservatism" toward spending.
As the credit bubble
continues to deflate, the evaporation
of vast wealth may
follow on a historic scale. Please read this excerpt from the second
edition of Conquer
the Crash (pp.
"...a lender starts with a
million dollars and the borrower starts with zero. Upon extending the
loan, the borrower possesses the million dollars, yet the lender feels
that he still owns the million dollars that he lent out. If anyone asks
the lender what he is worth, he says, 'a million dollars,' and shows
the note to prove it. Because of this conviction, there is, in the
minds of the debtor and the creditor combined, two million dollars
worth of value where before there was only one. When the lender calls
in the debt and the borrower pays it, he gets back his million dollars.
If the borrower can’t pay it, the value of the note goes to zero.
Either way, the extra value disappears...
"The dynamics of value expansion and contraction explain why a bear
market can bankrupt millions of people. At the peak of a credit
expansion or a bull market, assets have been valued upward, and all
participants are wealthy -- both the people who sold the assets and the
people who hold the assets. The latter group is far larger than the
former, because the total supply of money has been relatively stable
while the total value of financial assets has ballooned. When the
market turns down, the dynamic goes into reverse. Only a very few
owners of a collapsing financial asset trade it for money at 90 percent
of peak value. Some others may get out at 80 percent, 50 percent or 30
percent of peak value. In each case, sellers are simply transforming
the remaining future value losses to someone else. In a bear market,
the vast, vast majority does nothing and gets stuck holding assets with
low or non-existent valuations. The 'million dollars' that a wealthy
investor might have thought he had in his bond portfolio or at a
stock’s peak value can quite rapidly become $50,000 or $5000 or $50.
The rest of it just disappears. You see, he never really had a million
dollars; all he had was IOUs or stock certificates. The idea that it
had a certain financial value was in his head and the heads of others
who agreed. When the point of agreement changed, so did the value.
Poof! Gone in a flash of aggregated neurons. This is exactly what
happens to most investment assets in a period of deflation."
Now is the time to prepare for a deflationary
depression by reading the 90-page Free
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article was syndicated by Elliott Wave International and was originally
published under the headline Evaporation
of Wealth on a Vast Scale. EWI is the world's
largest market forecasting firm. Its staff of full-time analysts led by
Chartered Market Technician Robert Prechter provides 24-hour-a-day
market analysis to institutional and private investors around the world.