Thursday, March 5, 2009

Where's The Money?

A reader asks a great question: "What happened to the money?"

What does he mean? Well, we're immersed in a global economic downturn. And because of that, most of us have lost money. The money that we thought we had - in home equity, saved for retirement, etc. - has dried up.

But where did it go? Overseas? To outsourcers? The big oil companies? Big pharma? Seems like a mystery, doesn't it?

Actually, it's not mysterious at all. Not if you're following Planet Money, the NPR blog and podcast that's doing a bang-up job of explanatory journalism during this economic freefall.

I subscribe to the Planet Money podcast and occasionally catch the reports the team does on This American Life. I highly recommend that you do the same. Think that all the macro-economic jargon is hopelessly over your head? So did I, but they're explaining this stuff in terms that even an English major (c'est moi) can follow.

So what's the answer to the question? Well, says Planet Money, you're asking the wrong question.

Let's turn it around: When you buy a home and it goes up in value (ah, the good old days!) you have more money than you used to. But you don't generally ask, "Where'd this money come from?" You simply understand that your net worth has increased because your asset (the house) has appreciated.

So in a nutshell, it's not "money" that's been lost, it's value. Our homes, our pension accounts, our stocks or mutual funds have all declined in value. Of course, that loss in value doesn't translate into actual dollars lost unless we sell during this market downturn. (Which is why your financial adviser is probably telling your to 'stay the course' with your retirement funds.)

Does that make sense? If not, listen to Planet Money for a while and it will. I promise.

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