11 Trillion Lost In Household Wealth So Far

“We’ve lost almost $11 trillion of household wealth in the last 17 or 18 months,” lamented Senator Christopher J. Dodd, the Connecticut Democrat, on last Sunday’s “Meet the Press,” urging Congress to proceed with speedy deliberations on a finance reform bill.

Eleven trillion dollars! That’s over three-quarters of our current gross domestic product.

Where did all this wealth go? Did other folks get it? Or did it just go up in smoke?

For that matter, what precisely is “wealth”? Is it something tangible we can see, or is it something intangible – something merely imagined?

In an illuminating paper on asset values and wealth, the economist Michael Reiter defined wealth in a way that makes sense to economists:

“Wealth” is the present value of the expected stream of future utility [human happiness] that an “infinitely lived individual or a dynasty” [or a nation] could hope to extract from the real resources available now and in the indefinite future, assuming these real resources are allocated and managed now, and over time, so as to maximize that present value of future utils (at the “proper” discount rate).

Two practical points can be extracted from this abstract definition.

First, economists think of wealth not just in monetary terms — as cash, stocks, bonds and real estate — but in terms of human well-being.

Second, and most importantly, the wealth a nation believes itself to possess is based strictly on the citizenry’s expectations about the future. It is in good part a figment of the citizens’ imagination.

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