The world's largest economy, US , could well be poorer by a staggering $20 trillion on paper, thanks to the sliding prices of stocks, housing and commercial real estate for the massive value erosion, a latest report says.
"If in real terms we assume write-downs of 50 per cent in US equities, 35 per cent in US housing, and 35 per cent to 40 per cent in commercial real estate, we will have had a total loss of about 20 trillion dollar of perceived wealth from a peak total of about $50 trillion," the latest report by investment firm Grantham, Mayo, Van Otterloo Company (GMO) said.
Wealth on paper is an illusion and the erosion in value is a notional loss, however, this illusion has given rise to over-stimulated consumption and higher imports.
"We have not lost wealth, but just the illusion of wealth. Illusions tend not to have very long-lasting effects, but they obviously can and do have very powerful short- and even intermediate-term effects," GMO chairman and co-founder Jeremy Grantham said.
This illusion, which applied to stocks, real estate, art, and almost everything else, was indeed grand in nature and it directly over-stimulated consumption and indirectly over-stimulated imports. However, these losses meant that US has suddenly become shockingly poorer, and a dramatic increase in real debt ratios.'
Grantham further said that this is a good time to learn from the Japanese crisis of 1989, when Japanese had a bigger problem in write downs.
"This is a good time to look at the Japanese crisis of 1989 to present since, along with the Great Depression, it is probably one of the two most relevant examples for today's problems. They had to write down perceived wealth by an amount equal to a stunning three times GDP," Grantham added.
There is, however, a significant difference between the then Japan and today's United States as the Japanese corporate sector went into the 1989 crunch with much higher leverage than the US had ever seen.
"The Japanese stock market was over three times our market's recent highs and their land prices was at several multiples of that of United States, the report said adding that "in 1989, Tokyo's land per square foot was around ten times the value of Manhattan's!".
Meanwhile, regarding equities, the report said even if the the total value of a certain portfolio is down, but an investor owns the same number of shares and hence the same fraction of long-term wealth that the said investor had before.
However, the basic fact is that the investor had 'simply overestimated his wealth before, believing that the companies that they owned had quickly become twice as valuable,' the report added.
