Paper Wealth

An angel's smile is what you sell
You promise me heaven
Then put me through hell
--Bon Jovi

As the SPX marks new highs, many people are breathing a sigh of relief. Not only have they recovered losses associated with the credit market meltdown, but in many cases their account statements indicate that they are wealthier than ever.

However, the numbers on those statements reflect wealth only to the extent that financial securities can be converted into liquid assets that can buy real resources.

People tend to assume that such a conversion is straightforward. Simply sell stocks, bonds, et al to get liquid.

Maybe so. But if lots of people simultaneously decide to seek liquidity, then today's account statement numbers do not reflect wealth levels.

They reflect ignorance and overconfidence.