There’s another good quarterly letter from GMO’s Jeremy Grantham. Here’s a choice quote about the illusions of wealth that our society just experienced.

During the market?s rise, I wrote about the fallacy of paper wealth, particularly as it applied to houses. At three times the price, they were obviously still the very same houses. How could we kid ourselves that we were suddenly rich and didn?t need to save for our pensions when we were sitting in the very same buildings we bought in 1974? With ?wealth? built on such false premises, it is not surprising that we come to grief from time to time. But the good news is that, as we move back down to earlier prices, they are still the same houses. We have not lost wealth, but just the illusion of wealth. Illusions tend not to have very long-lasting effects, but they obviously can and do have very powerful short- and even intermediate- term effects. This particular illusion, which applied to stocks, real estate, art, and almost everything else, was grand indeed, and it directly over-stimulated consumption and indirectly over-stimulated imports. In the process, it suppressed both savings and investments of our own locally generated income.

…it is worth remembering that real wealth lies not in debt but in educated people, laws, and work ethic, as well as in the quality and quantity of ?xed assets and the effectiveness of corporate organization.

He also argues that, as a ratio of debt-to-assets, we need to lower the total debt in the US economy by $10 to $15 trillion dollars. Some will happy by write-downs (about $1 trillion so far), some by allowing time to decrease the debt, and some by inflating away the value of the dollar.