Wealth destruction 2 | Finance & Capital Markets | Khan Academy
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- Опубліковано 27 вер 2024
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How bubbles destroy wealth. Created by Sal Khan.
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Finance and capital markets on Khan Academy: When are you using capital to create more things (investment) vs. for consumption (we all need to consume a bit to be happy). When you do invest, how do you compare risk to return? Can capital include human abilities? This tutorial hodge-podge covers it all.
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2:24 when his voice changed super deep has convinced me this guy is an alien with his vast knowledge and changing voice, and I was playing in 1.5x, creepy! 😂
woah his voice gets extra scary at 2:30
+William Leung
yeah, pretty much scared the shit out of me. watching this at 1am lol
Thought I was having a stroke. Glad you said something.
he became an angry demon real quick
What probably happened is there was that audio glitch you heard right before then, and in the original video it was longer and more annoying, so he pretty much cut it out. But in order for his voice to stay in sync with his drawings, he had to make that section of his audio "last longer", which is why it sounds deeper.
did no one notice him going through puberty between 2.20 - 2.30
There are two brilliant concepts in this video:
1) Extravagant unsustainable consumption equals wealth destruction (disinvestment).
2) Basic sustainable consumption equals wealth creation (investment).
Is there any formal economic theory along these two lines that we could study further?
Many of the of the MBSs probably do look cheap based on current performing cash flows (I don't know, I'm not directly involved in this market). These cash flows, however, are deteriorating every day and the underlying assets (houses) are also going down in value quickly. Your point is well taken, however, one could probably find some good deals here.
Nothing wrong with consumption when you know its consumption (and an argument could be made that it makes you happier which is the best return).
Finance and capital markets? More like "Sal's teaching this? Wow, then let's learn it!" Thanks for all of these amazing videos. Over the past five years I must have seen at least several hundred of them, if not a thousand. Keep 'em coming!
I am a stay at home mom. I need to learn about wealth and the terms related to it on a beginning learning level. These two classes are great. The instructors voice is pleasant and clear. Thanks for these two great classes!
I know it's been over a decade, but I just came across this video and your comment and I was curious how things have gone over that time. I hope that you and your family are doing well.
your kids got their own mortgages now ajjaa. It has been a while
I bet the person who disliked this video was a banker
Exactly
I'd also add that there is no shortage of sophisticated investors with 6-10 year time horizons with cash so there is probably good reason for them to be taking a pass on this stuff. Its also hard to know what the underlying assets look like/are worth.
legislating against reality ... I like that!
I don't agree that the 500k which was spent on improving the house was destroyed. It got paid to shops, logistics companies, warehouses, contractors, factories and probably helped all the people who are involved with the products purchased (such as the granite top, hardwood floor etc.) to earn a living for their family. I understand these are luxury goods we're talking about and they do not benefit society but the redistribution of that 500k doesn't end there. These luxury goods are just the first link. Anyway, a very very good video.
I totally agree with you.
I disagree. Wealth is created when real capital is used to create additional capital or goods/services, and it's consumed when goods/services are consumed into utility (e.g. happiness). Transferring that 500k to the workers is wealth-neutral, but the work they do is neutral or "destroying" wealth because they're spending time (and potentially invested resource) that otherwise could've been used to create wealth.
To prove this, suppose that I'm ALSO someone who builds hardwood floors. I raised the 500k by doing so, and give it to someone else to build hardwood floors for myself. Actually suppose everyone in the world is doing this to "create wealth". Since nobody is actually producing anything of value (e.g. food, shelter, safety), everyone dies because all of that money is worth 0 utility.
This is my problem with people talking about "creating jobs". If you "create jobs" by printing money to give to people who you assigned meaningless tasks, you're neutral or destroying wealth.
The $500K were put in the house in a speculative bet. Since the house price did not increase the wealth was destroyed. The problem is when destruction is perceived, not when the money is spent. No one will put $500K in their house thinking they are destroying wealth, it is when things become volatile enough and you loose that your perception is that your wealth its being destroyed. If for example you did not spent money nor took lines of credits etc, by the end of this scenario you home would be worth $250K, not bad and from your view point no wealth was destroyed. The lessons is do not speculate and you are likely to be safe.
This is called broken window economics
Sorry to burst your (very tiny) thought bubble, but you're not smarter than Khan. Not even close. I like that you use critical thinking in trying to refute what is said in the video, but you are wrong.
Price is an illusion
Mind blowing.
There was no wipe out, the money didn't disappear from economy. Wealth is a subjective abstract term. When you pay money to watch a movie, is this money "disappearing"? Also, a house is a house, if the person bought a house for 100k, and 5 years later that house is "worth" 500k, you can suppose the person had a "gain" in their wealth, as if there came 400k out of nowhere into the house (like a ghost spirit that's worth 400k). But this notion of wealth is abstract, the house is still worth "one house". The example at 7:25 of the 420k that "disappeared" from economy, only disappeared because it never existed in that sense from the start. The house is still "one house" and the 420k was money held by the bank, which may now be in the bank accounts of drug dealers, strippers, bar owners, car rentals, restaurant owners, hotel owners, etc.
On should interpret the term wealth destruction more metaphorically. Also i wouldn't say wealth is a subjective term but an intersubjective one, since your economic decisions depend on the economic decisions of others. In this case there was the continous wrong notion that the society sees houses as sth with high demand which was caused by wrong risk calculations. Therefore, people allocate their wealth to assets or consumption which they wouldn't if they knew the actual demand. The opportunity costs of this distorted allocation could be defined as wealth destruction.
People lost the home and the capital they put as a down payment because they couldn't pay mortgage. And when some other guy bought that home for inflated price but it's actual value is way low and he got a bank to issue a mortgage for that amount and suddenly when he defaults on his mortgage and bank has to sell the home for less than the money they gave him to begin with. So, now bank lost the money. There is a value and money lost. And some banks/ financial institutions have issued bankruptcy and they people who bought stocks in them lost their hard-earned money.
You are talking philosophy not economics.
I think the video is about microeconomy . The house owner and the bank they both lost their wealth .
He didn't say money was wiped out. He said wealth was wiped out. What is wealth? It's the possession of stuff that is valuable. When things lose value, your wealth decreases.
Never seen any notification for any of these replies. Anyway, Philosophy comes before Economics. "Money" and "Finance" are abstract concepts, they psychologically simbolize material things that are useful for life. There´s real wealth loss when you lose material things or the capability of acquiring things. So the "wealth loss" will be relative to a person or group of people. But when money is created based on future credit it is as abstract and even fictional as the notion of a deadset consolidated future.
This dude hates granite countertops.
Well it's even scarier than that. The bank never had the money lend to homeowner No 3 in the first place. Only a fraction of the principal amount, that money just came out of thin air though a process called fractional reserve banking. Actually this is how money is generated in the economy today, through credit, loans, mortgages, etc. not the printing press at the federal reserve.
And now one could argue "but the individuals and companies that gained from the bubble put the money in the bank that gets fueled back into the economy". But who is asking loans from the bank? Individuals for consumption and companies for investment. Again, individuals won't borrow because they have no collateral, and firms won't reinvest because they have not enough demand to justify it. Moreover banks won't lend because they are afraid of further losses so they themselves will sit on money.
Thank you.. Really well explained!!
I assume your talking about real estate? If that is the case, you should wait until inventories stabilize (stop growing) for a few months. If you're talking about the stock market, we could see some rallies but stocks tend to over-correct relative to fair value implying that we could see some significant downside over the next 1-3 years (punctuated by sharp rallies).
Opportunity cost or sunk cost shouldn't be considered as destroyed wealth. They just simply redistributed. One's consumption becomes someone else's income even in this case.
Awesome assessment and good points re: government. You must be a Ron Paul fan!
this whole idea of valuing a belief is causing robbery without guns but pens. like this video
The part I dont agree with, having gone through an actual foreclosure, is the part about the house rising in value from the original price of 100k to 250k. In my case, I bought the house in 2000 for 290k, with 20% down, and I could not sell it for 240k, or 230k in 2010. I had to drop the price to 205k to get a short sale offer, and that was rejected by the bank. The bank foreclosed and is trying to get 270k and no buyers are showing up..
I argee with the comments saying it is just a transfer of wealth, but that does not take away that it is a destruction of one's own wealth :p
well if you put wooden floors in a house you sell to me and i remove them and throw them to rote out i think thats destruction of wealth
The problem is that the consumables are sunk into inefficient allocations and can't (easily) be reallocated. People bought consumer goods with the idea that they were *investing*.
Yes, the construction workers et al made money, but it's only transferred money, not an actual increase in people's well-being. An equal amount of money got thrown out the window when the house was foreclosed, btw.
Wow.
I feel like the whole "productive assets vs non-productive" bit here is a distraction. You could just as easily have wealth destruction in a factory as well, and consumer spending can be economically stimulative. Basically Wealth Destruction is just the flip side of Wealth Creation via lending and asset valuation.
Why don't we just make people liable for their poor decisions, let them pay back what they're underwater by. No bailouts, no moral hazard, and people will wake up overnight and stop taking ungodly risks.
Yes...Dick Cheney DID step in on the video around 2:28 for a few seconds.
At the point where you leave off, it's not clear that wealth has been destroyed. The houses still exist. They haven't been foreclosed, put up for an auction with no buyers, boarded up, and allowed to fall into ruin.
Ill-advised consumption has taken place. Instead of investing for their retirement, people have counted on their house value to sustain them and thus have considered themselves free to spend all their income on current consumption. But that's not the same as wealth destruction.
Very good explanation although there is one concept that I don't really agree with. The wealth didn't disappear, it transferred. One mans debit is another mans credit (accounting principle), or if you want to look at it one mans income will end up being another mans income (once it is spent). If the economy starts slowing down the FED decrease interest rates on loans so people can take out more loans and start spending more and generating incomes for other. Once the credit portfolio becomes too big and starts overthrowing the income then interest rates increase causing people to think twice about borrowing money. This basic economic concept leads me to believe that wealth does not and cannot vanish, similar to energy it just transforms, moving from one person to the next.
i thought the wealth disappeared because of market forces? prices change due to demand supply changes so the wealth is lost primarily from that? sure the consumed vacations do help in destroying wealth but can someone clarify if its mainly due to price change?
I don't think the wealth disappears completely from the economy as you assert. You seem to ignore the benefit of the low prices to the homebuyers in the transactions. You also seem to ignore the profits to the entire supply chain of goods and services behind those granite countertops, bathrooms, wood floors and, yes, even the vacations.
@MrBipBipp It goes to the service economy. It does not go towards production of anything, rather it goes to a contractor who is probably getting rich in these boom cycles. That's fine, that's capitalism, but Sal is saying that 500k loan would have been better utilized by a new medical startup company that would employ people for example. I'm pretty sure that new countertops do not boost GDP numbers.
Is my understanding of this correct? Wealth is destroyed as a combination of two things.
1. People allocate their wealth on things that they don't value intrinsically but anticipate will create more wealth for themselves because of rising demand.
2. Demand for the things drops and people are left with stuff they can't trade and don't value intrinsically.
Elämäm koulu this video is about a house/home. Four walls, in door plumbing. hot and cold running water and electricity. Not something you can nor should discarded hap hazardly.
Thanks man for this
Well, in my opinion the pricing of many of the houses were grossly overinflated anyway, sometimes by as much as 25%-50%. I noticed in the early part of the 2000's lets say around 2001 on that the prices rose dramatically on many of the houses. New houses that had been selling for around $250,000 jumped up to 400,000, then 500,000 than up to 650,000, than as high as 850,000. Now looking at the location the materials put in the house and the average income of most people i knew it was overinflated
Khan Academy Chopped & Screwed @ 2:30
Spending from the 500k loan helped the businesses where this money was spent so its not a total destruction of wealth... It gets destructive though when the money gets spent on things we dont need like Humvees or Private Jets that pollute and destruct what nature gives us.
How is wealth destroyed by purchasing consumer goods? The money goes from the bank to the loanee then to the person selling the consumer good. The money has just transferred.
In order words, there there was no productive investment or advancement in the real economy. Some got richer and won't spend all the money they won, and many got poorer and can't spend anymore. That's why spending plunges after a bubble. Moreover the manufacturers won't invest that money if no one is willing to consume their goods anymore. They will sit on their new money, because there is no demand for their products, because the "consumer portion" lost all its money.
I had a question.. Maybe im wrong.. thats what im trying to understand.. u wud count the 500k in the exaample as wealth destruction.. but doesn't that money go to the vendors whom we bought the granite for or the carpenters, plumbers who build the extra bathrooms.. it goes back into circulation.
granted it doesn't "create" wealth like factories, institutions but doesn't seem to destroy.. the bubble itself i wud agree destroys wealth, but the reason i see is defaulting.. where the money vanishes.
It does distribute somewhere, but the important point to note here is that the liquidity (500k) that was purchased and spent against the asset (houses here) was leveraged from loans which were based on inflated prices. So this money was not worthy of what it bought for the owner (granite). Thus, the money the granite seller received was basically a fraud as it was inflated with the factor of housing market increasing bubble and this "hidden" inflation was bound to create problems somewhere. This normally wouldn't show up in normal cases but the housing market was playing riskier and riskier games with CDOs and Credit Default Swaps. Finally, this obscurity surfaced up with the banks (sources of money for granite sellers) default and now the granite seller no longer has access to his savings in these banks.
why did last video was removed? it sounds like the most important part of playlist. Mr. Khan, were you threatened for the content with solution out of this mess?
Hilarious. I’m and from Stockton California
If consumption is considered the ‘destruction of wealth’, what is the point of wealth anyway?
Hello 2008 my old friend.
(visiting from 2022)
Shouldn't the consumption( c+i+g) also be included in the GDP? If it is, then the value was not lost, the price only "depreciated" due to the false assumption that all houses are equal. In the long run, the housing price will only go up due to inflation if hold depreciation and surrounding environment constant.
Audit the FED and you will understand that people stopped paying thier mortgage because there was not enough money in the system to pay both principle and interest on all the loans. Cut off the supply of money: Destroy the economy.
Yoooo... did the devil enter you at minute 2.28? What was that voice change?
What is the next video called? His friend's solution.
What do you call it when American Hedge Fund managers do the same thing ?
@gillian2301
yeah we know we just watched the video
this isnt a review box
also what is "asset"?
Marianna Tsemekhman something you own that stores value. Say you own a pen, it's technically an asset because you own it and could sell it to someone for $1.
Usually, an asset refers to big ticket items tho- such as a house or a business because these store LOTS of value.
When was this made?
Consider yourself subbed thanks for opening my eyes
Legislating against reality also involves the Unites State Government buying bad loan homes in order to protect home values for property tax. If the government would have not stepped in, every home owner, on the average, would probably be paying 25% -50% less taxes!
scottab140 you hit the nail right on the head.
He suddenly turned into Thor I think
appraisal is a scam. if theres no unaccountability for the valuation, it is worthless.
Re: destruction of wealth If the government takes over worthless, toxic assets and offsets the destruction of wealth by printing more money, has theat wealth been destroyed?
+b8bpattson yeah, because your money now is becoming more worthless
See scotttab140's reply above.even though the homes lost value the neighborhoods where still generating more money in taxes. There by providing more police, firemen, and water reclamation and sewer maintenance
What my mom thinks when I buy some games.
Bro 2nd house took 500k real money from the bank and enjoyed or invested somewhere how did he lost 170k then ?
Sal, i think you forgot to add 80K on total loss borne by the bank (the loan house #3 on 1995).
So the lesson is don't take home equity loans?
8:55 the phone rings
What is "equity"? I don't know about economics
Ownership % Stake
Misleading title: The interior designers and tourism industry in the destination of vacation would have benefited from the 500k the home owner borrowed from the bank, so wealth is transferred but not destroyed. The home owners have squandered their own wealth but wealth is not destroyed. Wealth is only destroyed during war when tangible assets are destroyed such as the Kuwaiti oil fires (burning oil fields). That is why money becomes 'paper' and is worthless as hyperinflation sets in.
You should do an illustrated video on DJs getting paid extravagant amounts (like 300k usd per night) just to pretend to press buttons on stage. I think that's more like 'wealth destruction'. I guess the private jet and champagne companies like gulfstream and dom perignon would benefit from such extravagant spending.
I have another theory: what if wealth is not destroyed but merely 'illiquidated' or frozen by 'hoarders'. This usually happens during deflation when cash is appreciating with respect to most other assets. The opportunity cost of this wealth freezing would be enormous since it could be used building factories or on research & development and would slow down the economy, hence calling for fiscal stimuli from the government.
+tai hung Au You're mixing "money" with "wealth". If the government doubled the quantity of money today, we would not say we are twice as wealthy. Twice as much paper money does not mean twice as much productive power (more farms, more factories, more education, etc). The only result would be prices twice as high. Here, the money moved and facilitated the transaction, but the physical good (the wealth represented by the granite counter tops) is worth less than before.
+tai hung Au Also, the home owners may not have spent the entire 500k. In f act they may have been using part of it to pay their mortgage.
+Yakushii You need not lecture me on such a basic concept that asserts fiat money is just a numeral measure of wealth and that the actual value of wealth is ever changing. Did you know paper 'notes' and coins only constitute 3% of the monetary supply and that 97% of it is virtually digital (no pun intended).
+Yakushii I am just stating my view that liquidity coming from speculation makes up a lot of the volatility we see in the markets today, especially so with highly geared derivative financial products.
It's all subjective. If I say I'll give you 200 bucks a day to carry stones to build a house, then you do it and I don't pay you, you feel like you were robbed, that you "worked for nothing". If instead I ask you to help me carry stones to build a house for a poor family that survived a tsunami, as charity work, you'll have performed the same work, spent the same amount of time, have the same amount of money you had before, but will not feel robbed, will not feel like you're "less wealthy", like you worked for nothing. The concept of money creates a parallel abstract notion of value.
How did the home owner gets a 500K$ loan when he is already having a 80K$ loan? How did the bank even sanctioned 500k$ to the guy who is already having a debt of 80k$ on the same property?
watch the video before this one " wealth destruction 1".
Basically, the home owner got a mortgage to pay for the $100k house-- he gave 20k as down payment and owed 80k to the bank as a mortage.
10 years later in 2005, when the mortage has been payed, the homeowner desides to get an equity loan from the bank for 500k.
Vinoth Raja K piggie back loan. Google it.
Everyting was good and fair until you started talking about the government actions. It was like all of sudden you got high up in the clouds.
@SinticFire Consumption is not presented as bad, it's presented as not being an investment. When you're buying wooden floor, you're not creating wealth, you're merely transferring $X to a company. Surely everything is intertwined, without consumption there can't be investment. But we have to draw the line somewhere, otherwise I might justify my frequent visits to strip clubs; a lap dance could be considered an investment since the strip club might afford sexier strippers.
may be you are too young to understand
Only people with a big IQ would get this i think. I don't
What if the U.S government provided incentives for wealthy foreigners to buy up all these richly furnished houses at bargain prices? That way foreign funds can be injected into the U.S economy and these funds can be used to invest into productive investments? That way the funds used to furnish all these houses to raise their value wont be a completely wasted.
@noxure I thought a lot of people dream about living in the U.S.A even rich people who can afford to immigrate for a "better" life. For example lots of wealthy Russians are being prevented to immigrate because of ultra stringent immigration rules. If these rules were relaxed a lot of wealthy people who just want to live in America nevermind a job can buy these houses? Im sure the legals issues is something of a contingency that in most of their minds may never be needed?
2:35 when puberty hits
Wealth isnt destroyed because the savings on the discounted price of the house are passed on to the buyer. The money for the granite worktops are sent out to mining industry and trades people. Its a rebalancing in my opinion.
Whoa there hoss.
You said _"the bank had given $500,000 of real capital, real money that could have been used to build a factory, plant crops, work on research and development, ...that was real $500,000 of capital... and now they got a house and they auctioned off that house and they got $250,000. So they lost $250,000. Right?"_
Wrong. Totally wrong.
Under fractional reserve lending the bank never really put out $500,000 in the first place. 90% of the 'loan' was created out of thin air, or rather created out of debt. The bank only lost potential profit from the affair, not actual capital, not actual reserves. They may have claimed those planned earnings as part of their assets so that it looks like they lost money. But you can't lose what never really existed beforehand. Don't cry for the poor bank. They didn't lose anything. They just didn't make as much as they thought they would. Maybe someone lost a bonus, but then that's what bailouts are for.
Economics seems pretty weak here. Consumption is presented as bad, but every consumption is some enterprise's income. Khan says money could have been invested in a factory. Well, it was - the factory that built the flooring, or whatever other household improvement.
Dead wrong video. The 500k of the loan turned into something else and they did not vanish and also most definitely they went into the economy . Its a horrible way to see economics and i would like to know where do you base that the owner lost ? He was given 500k in warm money while he only paid 20 k plus his mortgage for 10 years . Its his responsibility if he threw them in the trash or made something from it
Hey all of a sudden your voice became heavier in the middle of the vdo
I often argue that the worst form of wealth destruction is when people knowingly harm their own health, for example eating junk foods, excessively watching TV, if not outright doing drugs. I'm surprised you didn't make this example.
To the people that are asking if the countertop manufacturers profit from the sales during the boom, why was wealth destroyed: You are confounding wealth with money. The people that initially were prepared to invest money to become richer, did it in depreciating assets. The manufacturers won the same money as the consumers lost. But now a huge amount of consumers can't keep spending because they don't have the money anymore, and the manufacturers won't offset that cut in spending.
No the banks didn't lose but the depositors did and so did all the 401ks and pension funds that bought the toxic debts.
Thanks Khan.But,I really wonder will the economy tank as bad as u try to paint?Its b'coz government can push to zero interest and thereby the rich are compelled to spend.Of course,government can once again lower the loan interest rate to make everyone back to the game unless some unpleasent events happen.
The examples u gave,e.g,Miami arebasically places that properties price soars due to mere speculation without real economy there.If there are real economy going on,like Washington,Paris,prices will not plummet like that..Btw,this is my opinion.
There is real economy in Miami. A lot of money from other countries end up in Miami. Not only legally, but also indirectly, illegally at first, but then transformed into legal. Even if a tourist spends a lot of (untaxed) money with drugs and prostitutes, much of this money will be spent by the prostitutes and drug dealers in car dealerships, apartment rents, jewelry, restaurants, clothing, etc. In terms of property prices, a lot of this "wealth", or the extra money going as profit to the property seller, is coming from other countries economies. A person may make a lot of money owning a business in Brazil or Argentina, and use this money to pay twice the price on a Miami house. These economy things are very complex.
Sal, I've only seen a few of your videos and I am totally psiched. I am excited to learn more from them. Expect a doation from me soon. Can I get your feedback on this point? It is a different way of looking at money. Money is wealth because we know we can somone else will give me something of value for it. Here it is: If all the money in the world was destroyed the total amount of wealth would remain unchanged. Money is an idea, concieved in the mind of man. Continued...
Stockton, CA still has not recovered. The government is cosigning mortgages now through the H.O.M.E. program!
Also using a piggyback loan with the low cost to qualify and the rest is through the County signing off.
He learned this from Peter Schiff
Wow this is eye opening.