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Paper wealth means
wealth Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...
as measured by monetary value, as reflected in price of
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
s – how much
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money ar ...
one's assets could be sold for. Paper wealth is contrasted with real wealth, which refers to one's actual physical assets. For example, if one owns a house and its assessed value increases (relative to the general price level, i.e., assuming no
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
) then one's paper wealth has increased – the asset has increased in value, meaning it could in principle be sold in exchange for a larger quantity of money, but one's real wealth is unchanged – the real asset is still the same house. It is said that one has "gotten richer ''on paper''," meaning "as an
accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
matter": numbers on a
balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
have changed, but the physical world has not. The term "paper wealth" is frequently used in popular discussions of wealth, and in some critiques of
capitalism Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private ...
,
finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...
, and certain economic theories, but is little-used in mainstream economics, which instead generally identifies wealth with paper wealth. The term "paper wealth" has some pejorative connotations, suggesting "only on paper (but not in reality)", but can also be used neutrally to mean "(simply) as an accounting matter". Related distinctions are sometimes drawn between real assets and
financial asset A financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank deposits, bonds, and participations in companies' share capital. Financial assets are usually more liquid than other tangible assets, such ...
s, or between
tangible asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
s and intangible assets, the latter particularly in accounting, as detailed below.


Evaporation of paper wealth

A confusing aspect of paper wealth is that it can increase or decrease across an entire economy, without any changes to the real economy; this is known as "asset price
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
or deflation" (a change in the aggregate (nominal) level of prices without corresponding real change). Thus, paper wealth does not "come from" or "go to" anywhere – the prices just go up or down. "It's a common misunderstanding to ask, 'where did the money go'?"
Björgólfur Thor Björgólfsson Björgólfur Thor Björgólfsson (born 19 March 1967), known internationally as Thor Bjorgolfsson, and colloquially in Iceland as Bjöggi, is an Icelandic businessman and entrepreneur. He is also chairman and founder of Novator Partners. Björ ...
, discussing 2008–2012 Icelandic financial crisis, quoted in
Iceland's vote gives UK little comfort
, by Rowena Mason, ''
The Daily Telegraph ''The Daily Telegraph'', known online and elsewhere as ''The Telegraph'', is a national British daily broadsheet newspaper published in London by Telegraph Media Group and distributed across the United Kingdom and internationally. It was f ...
,'' 06 Mar 2010
which is particularly asked in the case of a stock market crash or in the bursting of a price bubble. This has more colorfully been described as "A lot of money goes to money-heaven."


Accounting

Paper wealth is fundamentally an
accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
matter – one's
net worth Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net ...
is the accounting value of one's assets minus the accounting value of one's liabilities. There are various accounting methods for different assets and liabilities, and they yield different notions of net worth; some methods are more or less volatile than others. For example, one may value ("hold", "mark") assets at book value, meaning the price for which they were purchased; in this case paper wealth does not change when the potential sale price of an asset changes, but does change if the asset is sold, as the asset is replaced by the sale proceeds. Conversely, one may mark assets at market value (
mark to market Mark-to-market (MTM or M2M) or fair value accounting is accounting for the " fair value" of an asset or liability based on the current market price, or the price for similar assets and liabilities, or based on another objectively assessed "fai ...
accounting), in which case paper wealth changes as the market varies. In some cases different measures may differ significantly – for example, one may purchase a stock for $1, and the market value may increase to $100, so the book value is $1 and the market value is $100. Conversely, one may purchase a house for $100,000, and then the housing market may fall, with the identical house next door selling for $80,000. In both these cases, book value and market value (to the extent that there is a market) differ, and which is more accurate may be debatable – one may argue that liquidation value (price obtained if sold immediately) would be a
distressed sale Distress may refer to: * Distress (medicine), an aversive state in which a person shows maladaptive behaviors * Mental distress (or psychological distress) * Distress, or distraint, the act of seizing goods to compel payment * ''Distress'' (novel ...
and not reflect the potential value in a more orderly sale.


Economic effects

Paper wealth is attributed as being a factor in economic cycles; in mainstream economics this is interpreted as the wealth effect, while in some heterodox schools it is interpreted as price bubbles.


Wealth effect

The most commonly discussed effect of paper wealth is the wealth effect: as people (households) increase in wealth, they are likely to spend more, while if their wealth decreases, they are likely to spend less. This is termed "the wealth effect" (compare income effect), and is generally attributed to psychological feelings of confidence – one feels rich, so one spends. The significance of the wealth effect is debated; it is generally
procyclical Procyclical and countercyclical variables are variables that fluctuate in a way that is positively or negatively correlated with business cycle fluctuations in gross domestic product (GDP). The scope of the concept may differ between the context ...
, meaning that when the economy is doing well, asset prices increase, causing consumers to spend more, which provides further stimulus to the economy and risks causing overheating. Conversely, if the economy is doing poorly, asset prices fall and consumers spend less, leading to a vicious cycle and potentially a depression.


Price bubbles

Less commonly, increases in overall paper wealth are seen as signs of price bubbles – unsustainable increases in the level of prices. These are generally attributed to credit bubbles (prices are bid up using borrowed money), and seen as a significant warning sign of a pending economic crisis; they form the central mechanism of Austrian business cycle theory and debt deflation. These concerns are not widely shared by mainstream economics – elevated asset price levels are considered a concern, but a minor one, while private credit levels are not considered macroeconomically significant, as they are simply a question of distribution. Austrian economics ascribes price bubbles as due to excess printing of money by central banks, and ultimately inflationary; the resulting bursting of the price bubble and following depression being necessary purging of the previous excesses. In debt deflation (most associated with Post-Keynesian economics, but with some mainstream interest), price bubbles are particularly associated with excess ''private'' credit growth, especially extension of credit by commercial banks. While the price bubble itself is neutral, people then borrow against these inflated asset prices (as via a home equity line of credit), which increases the credit bubble, and it is the elevated level of ''debt'' that is the underlying cause of the ensuing depression.


Related distinctions

Assets can be distinguished as real (physical) assets, notably property, plant, and equipment (PP&E – real estate, buildings, durable equipment) and
inventory Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Inventory management is a discipline primarily about specifying the sha ...
(consumables), and financial assets (equity and debt in other companies). At the level of a household, real assets are most commonly a home (both the land and the building), personal belongings (notably cars or other vehicles), and some commodities (such as gold) or collectibles (art). Financial assets most commonly include stocks and bonds (both corporate and government). The status of cash is more debatable – fiat money is formally a financial asset backed by a government, while a bank deposit is a financial asset backed by a commercial bank, which today is generally backed by a government (via
deposit insurance Deposit insurance or deposit protection is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance systems are one component of ...
such as the U.S.
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...
). As such, the value of cash may inflate away – it is a form of paper wealth – but it is generally distinguished from stocks and bonds. A related technical issue in economics is the
aggregation problem An ''aggregate'' in economics is a summary measure. It replaces a vector that is composed of many real numbers by a single real number, or a scalar. Consequently there occur various problems that are inherent in the formulations that use aggregat ...
, as debated in the
Cambridge capital controversy The Cambridge capital controversy, sometimes called "the capital controversy"Brems (1975) pp. 369-384 or "the two Cambridges debate", was a dispute between proponents of two differing theoretical and mathematical positions in economics that starte ...
– to what extent is it permissible and useful to aggregate different measures? Aggregating different physical and financial assets is, in some views, illegitimate or misleading, though the ''market value'' of assets can simply be aggregated by adding. This aggregation is generally accepted practice in economic theory, with disaggregation reserved for accounting or detailed analysis. In accounting,
tangible asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
s and intangible assets are distinguished. In
wealth management Wealth management (WM) or wealth management advisory (WMA) is an investment advisory service that provides financial management and wealth advisory services to a wide array of clients ranging from affluent to high-net-worth (HNW) and ultra-high ...
, liquid financial assets (roughly corresponding to common understanding of paper wealth, ignoring value of housing) is a key metric.


Other forms of wealth

Beyond real assets and financial assets, other valuable intangible assets, which are popularly referred to as "wealth", are formally referred to as forms of "
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used fo ...
". At the individual level these are referred to as human capital, including
education Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty ...
and social connections, while at the social level these are referred to as
social capital Social capital is "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively". It involves the effective functioning of social groups through interpersonal relationships ...
, and include communities, social norms, and institutions; more traditionally these were referred to as "
civilization A civilization (or civilisation) is any complex society characterized by the development of a state, social stratification, urbanization, and symbolic systems of communication beyond natural spoken language (namely, a writing system). ...
", but this usage is now considered pejorative. There is also what
Pierre Bourdieu Pierre Bourdieu (; 1 August 1930 – 23 January 2002) was a French sociologist and public intellectual. Bourdieu's contributions to the sociology of education, the theory of sociology, and sociology of aesthetics have achieved wide influence ...
calls cultural capital, the asset of knowledge and connections that university-educated people have.


See also

* Fictitious capital * Real prices and ideal prices


References

{{Wealth Wealth