Destruction of Wealth?

[Joseph Brooks]

People are saying that declining home, stock, 401(k), etc values is a destruction of wealth. But I don't believe it and have been arguing that wealth is not destroyed until there is material destruction (i.e. a house burns or a car is totaled). I have searched Google for an economic theory that covers this, but haven't found anything specifically. But I have found economists talking about how a rise in asset prices (without a material change in assets) is essentially redistribution of wealth from those without assets to those with assets.

Example:

Person 1: Has $100k in cash.
Person 2: Has 1 house.

House drops 50% in "value".

Person 1: Has $100k in cash.
Person 2: Has 1 house.

Where is the "destruction of wealth"? The same amount of wealth exists before and after ... 1 house and $100k in cash. If the house is valued at $75k, that doesn't mean $175k exists in the economy ... because there is only $100k of actual cash in the economy. What really exists is $100k of cash and 1 house. What has really happened is a redistribution of wealth. Watch this time:

Person 1: Has $100k in cash.
Person 2: Has 1 house.

Person 1 buys house from Person 2. Houses are currently selling for $100k each.

Person 1: Has 1 house.
Person 2: Has $100k in cash.

House drops 50% in "value".

Person 1: Has 1 house.
Person 2: Has $100k in cash.

Person 2 buys house from Person 1. Houses are currently selling for $50k each.

Person 1: Has $50k in cash.
Person 2: Has $50k in cash and 1 house.

The same amount of cash and houses exist at all steps in the process ... $100k in cash and 1 house. With the drop in housing prices, wealth has essentially been redistributed from those with houses to those without houses. The only way we can prove this is to have those with houses exchange them for cash after the drop in values and see where the cash sits.

We have 100 million owner occupied households in the USA, and the average house is valued around $250k, for a total value of $25 Trillion. Yet, $25 Trillion in cash (physical or electronic) doesn't exist. So if house values drop 50%, does that mean $12.5 Trillion has been lost? How can it be lost if it never existed in the first place?

What has really happened is a change in demand. Less houses are being demanded, so demand has shifted to other assets (hint hint, treasury bonds). So while the 30 year T bond is currently fetching 4% interest ... someone with a 30 year T bond from 1985 that is fetching 12% could easily sell their bond for 105% of its face value. Instead of a 2009 bond fetching 4% interest that could only be sold for 100% of its face value.

Wealth has been redistributed from house owners to 30 year T bond owners. Wealth is not destroyed until resources are used or there is a material loss.

Does anyone else understand this? Or am I alone here?