Wealth Destruction in Times of Crisis: What It Is and What It Means

Investing Pioneer –  1/30/2023 – 1:28 PM EST

As we enter the approaching economic storm, discussing the following concept I think is timely.

The concept is wealth destruction. Take FTX. It went from the market valuing the assets at billions of dollars to a dissolution much faster than it was created. When value is destroyed, there may be a relative wealth transfer. This is mostly of concern to the economy when artificial assets and wealth are used to purchase other assets and goods. If that suddenly disappears, it can have a deflationary effect on the system, meaning those who have other assets, and did not hold the artificially inflated one, are technically wealthier, because wealth is relative.

This idea may be significant going forward, in the context of a debt crisis, inflicting something worse than the 2008 financial crisis.  

To further elucidate this concept of relative wealth, let’s travel back to the great depression. In Ron Chernow’s book, the House of Morgan, he states, “Astute investors who bought their bonds became the future owners of Wall Street”. Certainly, in such a deflationary collapse, those who bought bonds fared very well. In an inflationary collapse, it is usually gold and silver that allows the investor to take advantage of the concept of wealth being relative. How to take advantage? Purchasing undervalued assets with your “bonds” or “gold”, which allowed bond holders to become the “future owners of Wall Street”.

It is said that the Union League club, following the crash of 1929 and the continued deterioration in the market until its deepest trough in 1932, had a room wallpapered with stock certificates (Chernow, House of Morgan). Those who managed to retain their assets from beforehand were inherently much wealthier. Indeed, the price of many of those stock certificates plastered to the walls eventually rose again, leading eager hands to pry off the certificates from the walls, a message to future investors that if you manage to escape a crash mostly unscathed, use the opportunity to buy before the economy and financial system normalizes.