What Happens to Wealth During Market Crashes

There’s a misconception that tweeting can change the world or engender action. Unless you’re an established brand or well-known person the vast, vast majority of tweets are ignored. Tweeting at someone or tweeting within a conversation seldom elicits a reply. Tweeting is like yelling from your rooftop in a neighborhood where each house is spaced miles apart, to give you an idea of the lack of density of Twitter. There’s a lot of people and a lot of tweeting, but not much interaction between users. A person with 10k followers may only get 5 or so re-tweets/favorites – a very low interaction rate, much worse than Facebook.

With that said, there is a debate on Twitter about what happens to wealth during a crash. Obviously people lose money, but is there a counter-party who receives the lost wealth, akin to a conservation of wealth law? The answer to this wealth conundrum is obvious at first. Wealth that is tied up in unsold shares is called paper wealth, versus ‘hard cash’. So if you have a company with 1 million shares in the hands of investors, insiders, and institutions at a presently quoted price of $25/share, this represents $25 million of wealth. If the stocks falls in half, $12.5 million of wealth is gone. That is how trillions of dollars of wealth was lost between 2007-09.

But what about the conservation law? This is where it gets more complicated. As a stock is rising, in accordance to the chart to scalar theory, you have an ‘inflow’ scalar. When the stock falls there is an ‘outflow’ scalar. As a stock rises from $x to $x+n and falls back to $x, the two are equal: Inflow (to get from x to x+n)= Outflow (to go from x+n to x). The conservation law only holds for the rising/falling portion on the chart, but there may be millions of shares that are not subject to the inflow/outflow mechanism, so wealth is lost in that manner. The chart to scalar theory says that not everyone can redeem their shares during a crash; wealth of the many will be lost by the selling of a few. Profit can be made in a crash by short selling, but the maximum profit is limited by the inflow/outflow equilibrium equation. If there are tens of millions of shares outstanding and the price has risen from $25 to $40, selling maybe only 200,000 of them short (in accordance to the equilibrium equation) may be enough to get the price back to $25, indicating a limited profit potential. But the total losses from the millions of latent shares in the hand of shareholders is very large.