Once assets start sliding in value, the reverse wealth effect quickly dries up demand for all asset classes with narrow ownership. Since these assets are illiquid — that is, the market for them is thin, with buyers few and far between–the prices are set by a very shallow pool of buyers and desperate sellers.
Consider a pleasure craft that retails new for $120,000. In the boom era of rising stocks and housing, a used boat might fetch $65,000. But as the wealth of the small pool of households able to buy and maintain a costly craft evaporates, the number of qualified buyers evaporates, too.
The seller might be aghast by an offer of $35,000 and reject it angrily. Six months later, he’s praying someone will take it off his hands for $15,000, and in another six months, he’ll accept $500 just to get out from underneath the insurance, slip-rental and licencing fees.
This is how it happens that boats that were once worth tens of thousands of dollars are set adrift by owners who can no longer afford to pay slip fees, and vacation homes are abandoned and auctioned off for overdue property taxes: the market for these luxuries dries up and blows away, i.e. goes bidless — there are no buyers at any price.
Once housing and real estate valuations fall, that will trigger a decline in the value of all other costly, narrowly owned assets, which will reinforce the reverse wealth effect.
This is the systemic payback for concentrating ownership of assets in the hands of the few: when their bubble-era priced assets plummet in value, the bottom falls out of all assets with narrow ownership.
The price of superfluous assets such as boats, vintage cars, collectibles, art and vacation homes can quickly fall to a fraction of bubble-era valuations, destroying much of what was always fictional capital.
The Federal Reserve reckons it can “save” the bubble-era valuations of junk bonds by being the “buyer of last resort,” but it will end up being the “only buyer,” effectively making the system even more fragile and prone to collapse.
The public will eventually have to decide if the nation’s central bank should be bailing out assets owned by the financial elite while the upper-middle class watches its assets collapse in value.
