Matt K writes:
I hear about losses and write-downs a lot and I am wondering where does the money go? If someone is losing money does that mean that someone is gaining money? If so then who? If not then where does the money go? Did it ever exist at all?
Here's the deal:
First, let me just say that I still struggle with this one. The answer has to do with what we mean when we say "money." I tend to think of money as currency — as dollars in my wallet, usually, or as dollars I can take out of my bank account.
But money is also what we use to measure value, just as we use degrees to measure temperature.
In the case of a write-down, businesses are forced to reconsider the value of things they own. Imagine a chicken farmer who owns a truck that he thinks is worth $10,000. He records that $10,000 on his list of assets.
That doesn't mean he's got $10,000. What he's got is a truck. And if the value of that truck suddenly declines — because it breaks down or the world runs out of gasoline or whatever — the farmer needs to figure out the new value of the truck. He "writes down" the old value of $10,000 to whatever the new value should be.
Let's say the best estimate shows the new value is $1,000, for scrap metal. The farmer now looks to be $9,000 poorer. And maybe he will be, in hard dollars, because he'll have to pay for a means of carting his chickens around. But it's not as if somebody piled up the $9,000 and burned it.
Personally, I find it helpful to think in terms of value — what's gone missing in a write-down is value. We just so happen to count value in dollars.