I agree with you in general, but I'm not so sure when we look at something like Madoff where money literally vanishes. That money, as you say, represents an actual value that did not actually vanish. It's rather hard to say where it went, but it's unclear that there's a net drop in value for humanity.
This could in a certain sense be a case where the broken window fallacy actually holds up to scrutiny. Since the money is merely symbolic, no value is actually lost, merely shifted. People are adversely affected, but if they are spurred to create more value, it's plausible that the net benefit is positive to society.
There is, if nothing else, the opportunity cost of where that money could have been productively invested instead of wasted to no effect.
Money and wealth aren't directly connected (IMHO a critical and underrated aspect of understanding real-world economics), and it is true that money rarely justs evaporates. Wealth can, though, and even merely inefficiently applying money can build up to an opportunity cost. There were better things to do with that money than to spend effort making it, then piss it away.
You're right. It was a consumption transfer away from Madoff's victims and to Madoff and his beneficiaries (with some blow-off to the rest of the economy when Madoff lost money in bad investments). Although there is some value lost whenever anyone invests in unproductive activities, because investment is an encouragement to those inefficient activities.
Theoretically, that would mean that none of the victims were defrauded of any money, or the ones that received money fraudulently could conceivably be forced to return it. But that's not my understanding of what has happened.
Actually, the earlier "victims" tend to make out pretty well, especially in the beginning. Later victims purely lost out. And Madoff certainly "skimmed" enough to live pretty well on.
Most of the Madoff money didn't "vanish", it never existed in the first place. He just made up numbers and sent them out on account statements. That money didn't go anywhere since it wasn't actually money to begin with.
This could in a certain sense be a case where the broken window fallacy actually holds up to scrutiny. Since the money is merely symbolic, no value is actually lost, merely shifted. People are adversely affected, but if they are spurred to create more value, it's plausible that the net benefit is positive to society.