Interesting post up at New Economic Perspectives:
Sometimes, something interesting and seemingly contradictory can happen in the economy. And when it does, it has important implications for the economy’s financial stability. That interesting thing is this:
Private sector net worth can increase even if private sector net financial assets were negative, as they were from 1997 to 2008 (except for a brief period in 2003/2004).
The reason this was possible is that net worth is dependent upon valuations, whereas accounting flows are not dependent upon valuations. One important financial asset class that enters into private sector net worth calculations are stocks.
If the market price for a stock is $90 and then I buy one share of the stock from you for $100, all that changes in the transaction itself is that I have $100 less than I had previously and you have $100 more than you had previously, and I have one more share of stock and you have one less share of stock. But what also happens is that the stock’s quoted market price increases from $90 to $100.
That means that everyone else who owns a share of the same stock thinks that they are now $10 wealthier per share of stock. The same thing happens any time the stock market goes up, writ large.