OT: Re: US IT jobs going overseas creating 'IT Rust Belt'.

[Charles Steinkuehler]

Dave Hull wrote:
> On Mon, 12 May 2003 numa at thenuma.com wrote:
> 
>> Remember TRILLIONS of dollars were just vaporized almost overnight.  That 
>> trillions, in large part, were savings.  It takes time to recover from such 
>> a situation.
> 
> I'm not an economist, though I did take several econ. classes in college, but 
> whenever I see or hear that x amount of money was lost/disappeared/vaporized 
> or what have you, when the stock market went down, I think about all the 
> investors who prompted that fall. They sold their shares and many of them 
> "took profits" or made money on the sale of those shares.
> 
> The money wasn't really lost, someone got paid for the shares that were sold. 
> I'll grant that there may have been a transfer of wealth and if someone can 
> explain it to me like I'm in kindergarten then I might buy that money 
> vaporized, but my gut tells me that's not right.

It really did "vaporize", but you first have to realize that it also 
materialzied overnight, too.

Not quite kindergarten scenerio, but hopefully not too hard to follow:

- Seatle Joe forms WigiCorp, a trend-of-the-minute high-tech startup.

- With a couple ideas scribbled on the back of a coctail napkin, Joe 
gets enough money from venture firms to put up a website and hire 
lawyers to structure an IPO.

- WigiCorp "goes public", selling 10% of the company for 10 million 
dollers (or $10 a share at the IPO offering price).  This puts the 
public value of WigiCorp at $100 mil.

- You were "lucky" enough to get in on the ground floor, and have 100 
shares at the IPO offering price of $10 (for a $1000 total investment, 
and a whopping 0.001% ownership stake in WigiCorp).

- At this point, you go on a vacation to the bahamas or something, and 
stop reading the financial reports :-)

- 6 months later, you return from your trip(s) abroad, and find WigiCorp 
stock is now worth $100 a share (total company valuation of $1 Bil, and 
your $1000 investment is now worth $10,000).

NOTE:  The share price reflects the price a buyer and seller agree on 
for a specific sale.  While in the normal world this should reflect the 
true market value of a company, in thinly traded stocks, or in 
situations where investors are acting irrationally (ie everyone's trying 
to jump on board the hotest/latest trend), prices can get disconnected 
from reality.  If one moron...er investor is willing to pay $1000 a 
share for one share of WigiCorp stock (instead of the "going" rate of 
$100), the *ENTIRE* WigiCorp company (and all it's existing 
shareholders) get a 10X "virtual" gain.

Let's be clear about that...someone else paid more money than you did 
for something you bought, which makes it more valuable.  You do not gain 
(or loose) any money until you actually sell the stock you bought. 
Although it's possible in today's world to borrow against unrealized 
gains, invest on margin, live off your credit card and purchase stock 
with your paycheck, and other complex transactions, we're ignoring these 
for the sake of this discussion.  Generally, however, if your $1000 
investment turns into something valued by the market at $10,000 or 
$100,000, you're going to be feeling pretty good, and probably eyeing 
that new car/house/girlfriend/whatever.

- Encouraged by the performance of your portfolio, you leave on another 
extended trip abroad...

- When you return, WigiCorp stock has crashed.  It is now worth only 
$0.10, and is about to be delisted.  You have not "lost" any money (that 
only happens when you sell the stock), but WigiCorp has gone from a 
market valuation of $100 Mil (when you bought at the IPO) to $1 Bil (at 
$100/share) to a valuation of $1 Mil (likely the auction value of their 
Aeron chairs, pool-table, and video games), and your initial investment 
of $1000 has see a high "potential" value of $10,000, and is now worth a 
"potential" $1.  Of course you won't know the *ACTUAL* value of your 
investment until you actually sell it and see what someone is willing to 
pay.

It's pretty easy to become a "paper millionare"...just create a company 
structure, declare a few million shares stock (let's say 5 million), and 
sell a share or two to your parents / wife / girlfriend / 
high-schoool-buddy for $1 each.  Presto, you're the 99+% owner of a 
company valued at 5 million dollers, putting your personal net worth at 
$4,999,996 minus however much you're upside-down on your car loan 
(assuming you sold one share each to the above groups...just don't let 
your wife or girlfriend get ahold of the shareholder list!).  Of course, 
if you try to sell a million shares for a million dollers, you might 
have a much harder time of it!

The engineering types I know familiar with statups call these 
"j-dollers" or "i-dollers" (depending on whether you're preference is i 
or j for the square root of -1), signifying their imaginary nature. 
Only when you sell something for cold-hard cash do you get "real" money.

So...it's actually pretty easy to wave the "magic wealth creation wand", 
and even easier to see the whole mess disappear into the thin air from 
whence it came.

-- 
Charles Steinkuehler
charles at steinkuehler.net