When the markets earn trillions and people do not realize... How does the financial economy work? When the markets make trillions and people don't even notice.
Ahmed Azzam, head of research and market analysis at Equity Company, explained in an interview with Al Jazeera Net that a company's loss of $100 billion in market value does not mean the disappearance of assets of the same size from the economy, as factories, equipment, or products do not disappear, but rather investors' evaluation of the company in the market decreases.
Details
The same idea applies to the huge numbers of global markets, as the financial assets monitored by the Financial Stability Board amounted to 503.7 trillion dollars by the end of 2024, compared to a global gross domestic product of 111.67 trillion dollars during the same year, meaning that the value of the assets is equivalent to about 4.5 times the world’s annual production, according to Al Jazeera Net calculations.
The real economy means factories, farms, stores, transportation, software, health care, and other activities that produce goods and services and provide jobs and incomes, while GDP measures the final added value produced within the economy during a specific period, avoiding counting the intermediate good and the final product twice.
Also, the figure of $503.7 trillion is not net global wealth, but rather the total assets on the balance sheets of financial institutions covered by the Financial Stability Board’s monitoring.
Rockets, spacecraft, satellites, Internet services, factories, and employees represent their activity in the real economy, while stocks and market value represent the financial aspect that reflects investors’ expectations of their profits, future projects, and the risks surrounding them.
But this difference does not mean the existence of a financial economy that produces 4.5 times the real economy, as the first number compares an accumulated balance existing at a specific moment in time, with a flow of goods and services achieved over the course of an entire year.
A distinction must also be made between the real economy and the financial economy. The real economy is an expression of production, work, and income activities, while the financial economy, according to the International Monetary Fund, includes instruments that grant their owner a financial right or a share in an asset or future flows.
He points out that the name “paper economy” or “book economy” came from recording these wealth in the form of shares, contracts, and financial accounts, and not in the form of factories or tangible products, but that does not mean that the profits and losses resulting from them are not real, especially when the investor sells his assets or the effects of the decline are transferred to financing and spending.
Financial institutions contribute to directing savings and distributing risks, but each new layer of intermediation, securitization and financing adds assets and liabilities to budgets, while only the amount of service and added value produced enters the output, according to the Financial Stability Board and the World Bank.
Context
Azzam defines the real economy as activities that produce a good or provide a service, such as agriculture, industry, trade, transportation, and technology, explaining that these activities create jobs, wages, and profits and are included in the calculation of the gross domestic product.
Taking into account the difference in calculation methodology, the growth rates reveal that the value of financial assets increased by an annual average of 6.1% between 2018 and 2023, then increased by 6.3% in 2024, while global output in current dollar terms grew by an average of 4.2% annually during the first period and by about 4% in 2024.
The assets of pension funds amounted to $44.1 trillion and the assets of insurance companies reached $38.9 trillion by the end of 2024, within the detailed sample of the Financial Stability Board.
Therefore, the addition of more than $23 trillion to the value of stocks in 2025 was mostly a repricing of existing stocks, and not money that flowed into corporate coffers or was automatically transformed into factories and jobs, according to the US Securities Commission.
Azzam SpaceX provides an example of the meeting of the real and financial economies within one company.
$256.8 trillion with non-bank financial institutions.
$21.5 trillion in public financial institutions,
