“Those that hold at $10 when it plunges to $5 lose, but the money in in ‘the system’ by PRIOR participants and current/future ones.”
By Daniel at 8 November, 2008, 10:49 am
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Not really. You can imagine a reverse of the scenario, where XYZ starts at $5 and then goes to $10 overnight. Suppose it IPO’d at $1 and then went to $10 on very small volume. The real cash that exchanged hands at the IPO was $1 million. But now that XYZ is at $10, suddenly there’s effectively $11 million in the overall economy (the cash the company raised in the IPO, plus the total float.) Where did the extra $10 million come from? Nowhere. And similarly, if XYZ then drops from $10 to $5, in the process $5 million disappears back into the void.
It’s conceptually similar to the funny money that’s been sloshing about in the derivatives market. All those hyper-leveraged “assets” that were supposed to be worth a global total of $150 Trillion — suddenly they’re worthless, practically overnight. And all the economic knock-on effects from that fictitous former wealth are now evaporating as well. From whence it all came, there it now returns.
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