Evaporation of paper wealth[edit]
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 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'?"[1] 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."[1]
Accounting[edit]
Paper wealth is fundamentally an accounting matter – one's net worth 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 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 and not reflect the potential value in a more orderly sale.
Related distinctions[edit]
Assets can be distinguished as real (physical) assets, notably property, plant, and equipment (PP&E – real estate, buildings, durable equipment) and inventory (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 such as the U.S. Federal Deposit Insurance Corporation). 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, as debated in the Cambridge capital controversy – 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 assets and intangible assets are distinguished. In wealth management, liquid financial assets (roughly corresponding to common understanding of paper wealth, ignoring value of housing) is a key metric.
Other forms of wealth[edit]
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". At the individual level these are referred to as human capital, including education and social connections, while at the social level these are referred to as social capital, and include communities, social norms, and institutions; more traditionally these were referred to as "civilization", but this usage is now considered pejorative. There is also what Pierre Bourdieu calls cultural capital, the asset of knowledge and connections that university-educated people have.