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One of the common fallacies in economics is the fallacy of composition. What's true for you and what's true for me may not be true for all of us together….
This is from my latest blog article in the New York Times. To see more visit here.
One Response to “The Loss of Stock Market Wealth: The Individual versus the Nation”
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October 23rd, 2008 at 11:15 am
You left out the time component, perhaps on purpose for simplification in order to attain better readership understanding, but unfortunately, that changes the conclusions.
Since the price of a share of stock should in theory be more or less the Net Present Value of all future returns, considering only current productive GDP and current value of the economy is incorrect. The drop in prices could well be due to the fact that future earning potential for these companies has been seriously damaged. In fact, that earning potential could easily be damaged to the tune of 40%. Why not?