Wealth destruction 1 | Finance & Capital Markets | Khan Academy

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How bubbles destroy wealth. Created by Sal Khan.
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Finance and capital markets on Khan Academy: When are you using capital to create more things (investment) vs. for consumption (we all need to consume a bit to be happy). When you do invest, how do you compare risk to return? Can capital include human abilities? This tutorial hodge-podge covers it all.
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[@karvinfernando3782]

This video was posted 2 days before the stock market crashed. That is absolutely unbelievable.

[@adbasdbasdkasdja7246]

Karvin Fernando the real talent is posted this way before like 1 year, crash. Posting this before 2 days is actually like just saying there is an elephant in room and it is tryng to hide.

[@h4bbqpenger]

@@adbasdbasdkasdja7246 ummm，he makes lots of videos but you seem to be assuming that he only called this out 2 days before the crash? He's been forecasting a housing crash in multiple videos before March 2008. So you're just clearly very misinformed. I'm just simply pointing the elephant out in da room as you said yourself

[@123chargeit]

My dad once said something that has stuck with me for decades "Something is worth what someone is willing to pay for it". I was in classes in SC to become an appraiser (didn't become one but I did take the classes) in 2005 right in the peak and thats exactly how it functions. A house is appraised by looking at 3 or more comps (comparable properties in the area) that have sold recently. Really thats all that can be done once again because a house is worth what someone is willing to pay.

[@PunmasterSTP]

My dad said that to me too! Sage advice...

[@fergonzaleza1]

i have investments in Costa Rica. A mere million wont get to live like a king, trust me. Maybe at ease. As of 2018 is one, if not the most, expensive country in Latin America. But terrific video!!

[@mark7996]

basically money is just an idea. the market value of a house at any particular point in time is a sentiment for that particular asset. sentiments vary as people look to other outside indicators ie: stock market, geopolitical issues, environmental issues even, etc...yes there is no 'wealth' now, but time was the main factor. the wealth was not 'illusionary', rather, that's not the best word for it....since if you sold at the right time, wealth would be present.

[@ramrants8392]

@Mechness yes, implementing a centralized economy does require a change in human nature. This is why centralized economies are implemented through force. The USSR, China, Cuba are just a few examples of how wonderful that system is. Everyone is poor or dead.

[@kunalkumar3591]

I got to know that this vidoe was poste d 2 days before 2008 housing crisis, Here I am In India watching this tutorial 11 years later

[@UmTheMuse]

Thanks for teaching us all how to destroy the world, lol. 1. Become an investment bank 2. Pour all risk into your minion corporation, as per your Mortgage-backed securities series 3. Buy a house for 2-3x asking price 4. (Optional) Broker home equity loans from all the neighbors. You can get a buddy to do it for you 5. Laugh at the ruined homes EC: buy these "distressed" properties with consumer upgrades for a discount and take over the neighborhood instead

[@happycakes1946]

Cheers for the 20,000 created out of thin air. You can't sell a house for a million, pay back 80,000 and pocked 940,000. That don't add up. He paid 100,000 for house originally so he only made 900,000. Plus the original 20,000.

[@kunalkumar3591]

I had the same doubt thanks

[@arogyalohani]

He sold house for a million and twenty thousand dollars.

[@MatteNoob]

Sal, this is so funny! When you tell me these things some of my old collegues' stories comes to mind. - How they kept getting richer and richer, took out new loans and improved their houses etc. Hahaha, if I knew what you say now, I'd sure be preaching, haha. Thank you for your insights, this is extremely interesting.

[@Ksblue]

@knowledgeaboveall Actually printing money just redistributes wealth. The new money does have true value as the new money becomes a vehicle for redistributing wealth.

[@exemsexis]

Brilliant video ! Love all your videos on finance and the Credit Crisis. Thank you Sal

[@degauze]

best cliff hanger ending

[@taihungau8696]

Misleading title: The interior designers and tourism industry in the destination of vacation would have benefited from the 500k the home owner borrowed from the bank, so wealth is transferred but not destroyed. The home owners have squandered their own wealth but wealth is not destroyed. Wealth is only destroyed during war when tangible assets are destroyed such as the Kuwaiti oil fires (burning oil fields). That is why money becomes 'paper' and is worthless as hyperinflation sets in. You should do an illustrated video on DJs getting paid extravagant amounts (like 300k usd per night) just to pretend to press buttons on stage. I think that's more like 'wealth destruction'. I guess the private jet and champagne companies like gulfstream and dom perignon would benefit from such extravagant spending. I have another theory: what if wealth is not destroyed but merely 'illiquidated' or frozen by 'hoarders'. This usually happens during deflation when cash is appreciating with respect to most other assets. The opportunity cost of this wealth freezing would be enormous since it could be used building factories or on research & development and would slow down the economy, hence calling for fiscal stimuli from the government.

[@FranciscoIgnisci]

Someone know about a book of this topic?

[@dsws2]

Home improvement is real investment. It creates an asset (the pretty rec room and kitchen) that is expected to provide value for someone in the future. The problem is that it's even more grossly overvalued than the house. So they overpay for it. They might expend $200k of factors of production to produce improvements that are really only worth $20k as a stream of imputed revenue.

[@Mechness]

@AUSM92 If you ever had a point to make, I missed it.

[@blahduh]

Very good video, thanks!

[@PeterSodhi]

... or simplified debt = disaster. The modern English translation of the latin "Mort-gage" is a handshake with death.

[@LECityLECLEC]

Wow that’s deep!

[@LECityLECLEC]

Thank you for sharing this!

[@DaveJLin]

Regarding the first house selling for $1M ... He originally paid $100K for it, paid $20K up front, and owes the bank $80K. So, after all the dust settles, he should profit overall only $900K at most ($1M gained, $100K spent), if we disregard interest, fees, taxes, etc. So, after paying back the bank the $80K loan, he keeps $920K from the sale, where $20K of that was his original down payment. So, he is net $900K richer than before, and he goes to Costa Rica with $920K, not $940K.

[@beamboy14526]

this

[@leiflife]

Just another way to "create value" I guess... On the other hand, he talks about a NINE fold increase from $100k to $1M. Maybe he nets everything out in the end 😁

[@kunalkumar3591]

he put his money 20k into the house 8k loan, nad then sell at 1M, then at the end he should have made 900K not 940K

[@gloobark]

5:29 is there a separate term for equity based on speculated appreciation? as opposed to the equity based on the amount already paid off

[@manoman0]

thanks for your vids. get me keeping up with some important and useful theory. cheers

[@pongman]

Thanks Sal! Now it's time to watch the vice-presidential comedy show. Where's my popcorn?!

[@vittoriobenedet2221]

khan i think you miss out a foundamental problem here - many factories do make tiles.countertops.roof etc increasing the total economic pie creating jobs etc.

[@ramrants8392]

@Mechness are you aware that this country did not have a personal income tax until the 20th century. And when personal income tax was passed, it was the top 1% who paid 10% of their income. It wasn't until the 30's (thanks FDR and your big government programs) did all Americans have to start paying a personal income tax. How did this country make it to the 1930's with no income tax?

[@YusefAsabiyah]

I think the problems with this analysis would be cured if you spoke in terms of wealth TRANSFER rather than wealth destruction.

[@Mechness]

@AUSM92 Your post is moot as you didn't understand the point I was making. Of course rich people and large organisations can make money from providing products and services to the government, just like anyone else can. The fact is though, that that is a small fraction of the economy. Therefore most people who get rich must predominantly make their money from people below them on the income scale. Where else do you think rents and the interest in mortgage repayments goes for example?

[@5959512]

Is there stilll money to be made in this type of situation ex. buying wholesale at 250K or is this still a bad market to invest in.

[@brandonreed09]

I disagree about his investment opinion..You are paying someone for those housing improvements. That money does increase the economy as that person then uses the money to buy other products, pay employees or invests it in their business. Your housing value as well will likely go up.

[@wabio]

"....this wasn't real investment...." This is exactly what Peter Schiff said when he won his penny bet vs. Art Laffer. Unfortunately, hindsight is 20-20.

[@rbmaserang]

@PeterSodhi i think that one is closer tied to marr- iage

[@Mimimounir]

Hi there Firstly thanks for the video. Just 2 questions: 1) which prog are you using for the screen recording and 2) does it work on the Mac Thanks

[@lifelonglearner1863]

this comment omg 10 years old. are you still there?

[@Mechness]

Some dodgy arithmetic here. So we're ignoring the interest payments, but the seller of the house on the left ends up buying a $100K house for $60K. He should be moving to Costa Rica with only $900K. You've knocked his $20K equity off the cost of the house at the start - that makes sense. Then you've taken $20K off the mortgage before settling it AND then given him the 20$ back as well. He's $40K up on the deal.

[@onion77478]

@knowledgeaboveall i really wonder who's behind it all . there's definitely some person(s) pulling strings.

[@TallFastLoud]

@ramrants wait...so you are against the New Deal but for a /more/ progressive tax structure? how do you reconcile those two things? oh, and how they made it? slave labor, for one thing...

[@patrickjacobsen7805]

Consider me woke. This is just wow.

[@MrTobybuddy]

back up .

[@GraysonDean1990]

@ 9:37 more appealing to a greater fool.....lol

[@kovidhrammanikonda9133]

Shiv R which is you??

[@rzhao01]

The worth of fiat (unbacked) money is not determined by some central bank. It is determined by its supply and demand like everything else, and this is determined by things like the federal reserve's interest rate, amount of money printed, and the strength of exports. By changing the aforementioned values governments can curtail inflation during periods of rapid growth and kick start the economy in recessions. "False" currency actually provides enormous benefits to a nation, used properly

[@PunmasterSTP]

Wealth destruction? More like "Wow, great videos, and what an introduction"...to finance and capital markets!

[@AdamSmith102938]

Capitalism is about each person wanting to keep his own money. Let's call that greed, to concede your point. Socialism is about wanting to take someone else's money. That too is greed, but it has another element: theft. We all are greedy, certainly you are. You want more money, and if I ask you for $5, you will say no because it's yours (your capitalist greed at work). Under socialist greed, I could take your money by force. Now which is better?

[@Mechness]

@AUSM92 Tax isn't theft. Every civilised country has it and it's generally avoidable: stop earning money. Welfare is a small part of public expenditure. If the welfare state in your country were dismantled entirely, you'd be barely aware of a drop in tax, but you'd notice your society descend into squalor and crime. That's what you pay for. I don't know how you work out that the rich earn all their money via government. Maybe look at where public expenditure goes before making assumptions?

[@ramrants8392]

@Mechness this is wrong on so, so, so many levels. First, those with capital increase their wealth as well as those providing the labor. Those providing the labor don't work for free - they are paid with capital. Socialism does guarantee a standard of living - it guarantee's everyone is poor. Wealth does not pass up, it passes down. Those at the "base of the pyramid' have the least amount of wealth, with little disposable income. There is little/nothing to pass up. Get a clue.

[@Mechness]

@ramrants I think you need to study your history more closely.

[@claudiocampanella2429]

You said if we don't count the equity for the 10 years payments, so it stay at 80k, ... well then if he does make to Costa Rica he can only take 920k and not 940k. haha poor guy, about 4500% profit in 10 years.

[@TallFastLoud]

@knowledgeaboveall this is a fallacy. gold has no intrinsic true value either -- the only reason it's rising right now is psychological -- people /perceive/ it to be intrinsically valuable. but really, it's a mostly worthless, if attractive, metal. money is a social construct; it's an accounting tool, not a commodity. and what's all this about the world bank? the Fed determines our money supply, dude

[@UmTheMuse]

In terms of pure money, a managed bankruptcy looks like a good idea: it looks like you're getting a "heads I win, tails you lose" deal. The problem is that if you're a douchebag like that, nobody will trust you with their money. You're a legal conman, after all. Businesses depend on their good names, so they can't use this. Individuals would have to get a really good deal to sell their souls like that.

[@mike11022]

Just one small error, the seller of the first house gets 920K after paying off his 80K loan after selling the house for 1M. He does NOT get his initial 20K down payment back. That would be absurd.

[@Mechness]

@AUSM92 Welfare isn't theft. It's blatantly the opposite. Rhetoric is all very well, but you need a better system to compare to before criticising. Laissez-faire capitalism and small government isn't it - you just get a taller pyramid with a tendency toward periodic collapse. Socialism sees that capitalism is flawed and attempts to address the imbalance. It's never perfectly implemented, but it's better than the alternatives. To improve on it you'd have to fundamentally change human nature.

[@5688312]

haha 11.11.18

[@zacharycat]

This guy makes no sense. of course investing in your house creates value. It increases the value of your property and creates jobs for carpenters, plumbers, painters, etc. i suppose he would blow it all at the track instead.

[@mr.taxpayer5289]

actually there is a basic law of common sense, or diminished returns. if one continues to pile money into their middle class home there comes a point where it is useless. If I build a $250k home in a neighborhood of $250k homes and then decide to put $100k into landscaping, such as a fountain/waterfall, boulders, exotic trees, etc. I would never get this $100 k back when I sell the home.