As economist Paul Sheard noted in his book The Power of Money, money is created not only by the fiat of governments or central banks but also by commercial banks. Relatively few people are aware of this fact, but fewer still realise that stock markets also can create “money” in the form of purchasing power.

Thus, any collapse in stock prices of the kind which appears increasingly imminent now represents both the destruction of “paper wealth” and of real wealth that supports economic activity. This warrants serious thought at a time when the global economy is looking fragile.

Stock market crashes have come and gone over decades leaving in their wake financial distress before eventual recovery. The scale of the next one will exceed anything seen in the past when it happens.

As Reuters markets columnist Jamie McGeever noted this week, US and world stocks have touched new highs as artificial intelligence (AI) fever continues to outweigh the prolonged US-Iran impasse, but “the ceasefire is fragile and hopes of a lasting deal appear to be fading”. Stock market concentration, he added, “is near record levels in the US and across emerging markets. Should investors be worried? Not necessarily, although it could get messy once the drawdown finally gets under way.”

The cause for particular concern now is that the total value of exchange-listed stocks – those of AI and some tech companies especially – have been elevated to unprecedented heights of tens of trillions of dollars, creating new levels of imputed wealth.

What does this mean? Putting it simply, the value of shares is largely in the eye of the beholder, meaning that of the market or the individual investor. It depends on how much the investor believes the companies in which they invest are capable of earning in a given period.