Destruction of Wealth ~ market folly

Wednesday, October 15, 2008

Destruction of Wealth

Simply put, the destruction of wealth/income will have greater implications for this economy than many are anticipating. It is a ripple effect of this crisis that is barely even being accounted for.

Yes, we all already were paying attention to the fact that the unemployment rate is rising and that tons of jobs have been lost on Wall Street. But, what about those retail investors who invested in those financials and saw their shareholder equity wiped out? What about 401k investors who have seen their retirement savings and net worth decrease significantly?

This is a ripple effect of the pain coming to roost on Main Street. I'm not trying to be a harbinger of doom, but I don't think enough people are talking about it. The consumer is going to be in a much much deeper hole than many anticipate. Everyone has already factored in the job loss and tough economic times. But, in addition to the tough times stripping people of their jobs, you're now seeing Wall Street's woes put substantial pressure on people's savings (what little they may have). After all, we know that the savings rate in America is pitiful. The thin get stretched even thinner.

This Wall Street Journal article is the perfect example of that. Although this article deals with a woman who is already retired, the same principles apply. (The woman relies on dividends as a source of income). And, she is just one of millions who have been undoubtedly affected by the destruction of income and wealth.

People have lost their jobs; there goes their streaming income. 401k investors have lost 20% or more of their retirement savings; their retirement is now pushed back. Congress' budget analyst has estimated that as much as $2 trillion in retirement plans has been wiped out in the past 15 months. Retail investors with separate accounts have most likely also suffered notable losses; there goes some of their savings. So, where will they turn now? Certainly not to the home equity loans that were once so popular. The house ATM is all out of cash due to depreciating home prices. Need a loan? Oh I'm sorry you're already heavily in debt and we're tightening credit standards. Any and all of these situations in whatever degree of severity lead to a pinched consumer. And, a consumer recession is much stronger than any recession already being forecast.

People don't like to lose money. Period. Not only does this destruction of wealth put people in a bind, but it affects them psychologically as well. Consumer sentiment is already low, and it's about to get even lower.

But don't worry, we here at Market Folly believe eeeeeeverything will be just hunky-dory!!!

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