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(I'm not an economics student or anything of the sort)

Let's say the total valuation of a country's stocks rises from 1000 to 2000 during year 1, and then "crashes" from 2000 to 1000 in year 2. This prompts everyone to say this was a devastating event because many people lost a lot of money.

But ignoring economic growth etc., weren't those two years in the stock market just a zero sum exchange of wealth from people who sold high to people who bought high? I see why people who bought high lost money, but didn't the people who sold high gain an equivalent amount of money?

My question is essentially, in the short term is the reason why stock market crashes are so bad (I'm not saying that crashes aren't bad) that it causes great wealth inequality, rather than actually "decreasing the wealth" of an economy?

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  • $\begingroup$ I am not commenting about the zero sum game but declining stock markets are almost surely causing greater wealth equality rather than inequality. In the US for example many people cannot even afford healthcare. They definitely cannot afford to buy (own) stocks. What is bad about stock market declines is that they are caused by decreasing confidence, which usually results in less consumption and investment, which is further intensified by reduced wealth of the wealthy. $\endgroup$
    – Alex
    Commented May 26, 2022 at 6:31
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    $\begingroup$ @Alex "people can not afford healthcare, so they cannot afford stocks" is a non sequitur. If you have some savings, you can put your money in e.g. an etf. Treatment for cancer is more expensive than than a stock. Other than that your comment is bang-on and is essentially the right answer $\endgroup$
    – user18214
    Commented May 26, 2022 at 12:36
  • $\begingroup$ @user18214, I admit, it's a bit sloppy but the top 10 percent own 84 percent of all of Wall Street portfolios’ value source. Thirty years ago, the top 5 percent of Americans controlled just over half of the nation’s wealth. By last year, that figure was approaching two-thirds of wealth. Moreover, it's the wealthy white population who own most stock source. $\endgroup$
    – Alex
    Commented May 26, 2022 at 13:29
  • $\begingroup$ Wealth is not just money, it's also expectations of future money. If I hold a share that's estimated to bring me \$200 of dividends over the next 5 years, it's worth let's say \$150 or so. But if that estimate changes, oops, it's actually only worth \$75 or so. I don't have less wealth, really, just a more accurate estimation. But! the estimation is reified on the stock market so that I can use the estimation to buy stuff today. Yesterday everyone else thought the share was worth \$150 and I could have exchanged it for 30 cups of coffee yesterday. Today, only 15 cups. $\endgroup$ Commented May 27, 2022 at 16:21
  • $\begingroup$ this phenomenon is commonly explained about loans: issuing a loan creates money/wealth and paying it back deletes money/wealth $\endgroup$ Commented May 27, 2022 at 16:25

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The transactions on the exchange are zero sum.

But when people say that some event wiped out 1 trillion in market value", they're referring to market cap. The problem here is that people use past share transactions to value an entire company. In your example, $2000 was the peak. People refer to peaks, as people like looking at peaks.

You don't know how many shares traded at that price of $2000, perhaps just a few. But the money at the peak was never actually there, as it was a so-called inflated valuation.

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