Do Changes in Asset Prices Denote Changes in Wealth

When stock or bond prices drop sharply we are told that the nation''s wealth has fallen. Some commentators go beyond such a vague statement and calculate how many billions of dollars of wealth have been wiped out by multiplying the percentage change in stock prices or bond prices by the previous value of outstanding stocks or bonds. This appears sensible and indeed obvious, and if the figure looks huge, for example, $2.1 trillion (about one quarter of annual GDP) for one week in April 2000, so be it. Yet, when we look at the real economy it also seems obvious that the nation''s stock of capital is the same as it was the day before the market crashed. Our factories can turn out just as many shoes, ships and tons of sealing wax as before, and our fields are just as fruitful. To be sure, if bond prices fall the value of claims we have on each other is less, but except for our net claims on (or liabilities) to foreigners, the gains of debtors and the losses of creditors wash out when we look at the nation as a whole. Even the change in the value of government debt washes out because the debt is the liability of taxpayers.