Where Has All the Money Gone???

[bflbob]

I've always thought of myself as a pretty smart guy. But I'm at a total loss on the current economy. I've never studied money or economics (other than one course in college), so I've always used a model that I made up myself to explain it. Unfortunately, it does nothing to explain the current situation.

In my mind, 'money' is just a paper representation of a formulaic mix of time, smarts, and raw materials. If I had to describe it (as a whole), I'd say it is 10% time, 85% smarts, and 5% raw materials.

If you come to work for me, you are trading your time (8 hours) and smarts (varies greatly) for a piece of paper that you can use to go to the store and buy eggs with. The eggs get to you because a farmer used his chickens (raw material) and time to ship them to you cheaply (smarts).

If I have chocolate, and you have peanut butter, and we are the only two people on earth, and we are sitting next to each other, I don't think we'd need money. We could just "agree". I'll give you some chocolate, if you give me some peanut butter.

But if I'm in New York, and you are in Brazil, we need money in order to get your peanut butter and my chocolate together. The basics are the same -- I'm trading some of my raw materials for some of yours -- but it takes the time and smarts and raw materials of many other people in order for the trade to occur. And that is handled fairly with the use of money.

In "Bob World", this always made sense to me. It explains supply and demand, profits, inflation, and many other economic events to me. It explains why third world countries are unable to dig out of poverty easily (they have plenty of time, but very little smarts or raw materials). But it doesn't explain the economic changes we are seeing now.

Obviously, due to their situations, everyone values their time differently. In the USA, most people would quit rather than work 10 hours for a loaf of bread. But in Etheopia, they would look at that differently. In the USA, we are mainly trading smarts and raw materials. In Etheopia, they are mainly trading time.

So, back to my question. Where has all the money gone?

If I was eager to give you some chocolate yesterday in trade for some peanut butter, why won't that deal work today? Is it because you no longer trust me to get the chocolate to you? Or I, you?

Why are so many people who were willing to trade their paper version of time, smarts and raw materials for a big-screen television yesterday, unwilling to do it today?

In my mind, nothing has changed. I still have chocolate. You still have peanut butter. Why aren't we trading any more?

Sears still has refridgerators. You still have time, smarts and raw materials. Why aren't you willing to trade?

Where has all the money gone?

(Discuss amongst yourselves...)

 

Dislike ads? Become a Fastlane member: Subscribe today and surround yourself with winners and millionaire mentors, not those broke friends who only want to drink beer and play video games. :-)

[kidgas]

Bob,
You are indeed correct in that money is simply an agreed upon representation of "resources" be it time, talent, or physical assets which make bartering easier. I trade my time and talent professionally for little pieces of paper with which I buy food, gas, shelter, etc so I don't have to grow any food myself.

To answer your question, the money hasn't really gone anywhere. The problem was that we have been using fiat currency that is created out of thin air. It used to be that people would barter directly...your eggs for my bacon. People also were mining precious metals namely gold and silver which served a similar purpose. If I wanted eggs but you didn't want bacon, I could give you some gold and you could go to the blacksmith for wagon wheels. Well, it wasn't safe to keep a bunch of gold lying around so the blacksmith would deposit it at the local bank and be given a receipt for the gold. Rather than go and get the gold back when the blacksmith wanted a haircut, he would just trade that receipt to the barber as payment. Lo and behold, the first paper currency.

Of course, given human nature, the banker saw that these receipts could be traded for goods and services so maybe if he just created a few extra now and again, he could live a higher lifestyle (sorry just saw a Miller commercial during halftime) than otherwise would be possible. Lo and behold, the first inflation. Now there were more of these receipts floating around than there was gold in the vault. Once the townspeople start to figure this out, they start going to the bank to demand their gold and a bank run has begun. The bank run started with a loss in confidence in the integrity of the paper floating around town. Eventually, the gold gets redistributed, some people lose some or all of their gold, the old banker gets run out on a rail, and the process repeats. Lo and behold, the first deleveraging.

Prices return to where they should have been without all the extra money around, but commerce still occurs. People still eat and drink and put shoes on their horses. But because they don't feel as wealthy as before, they may do a little more bartering, they may pay with gold and silver directly. It takes several years before confidence returns but eventually the process does repeat. The bottom line is that you can't get something for nothing. You don't accumulate "real wealth" without hard work. You must ultimately trade your time, talent, or treasure for money.

SO, to answer your question: The money hasn't really gone anywhere. There is simply a readjustment of pricing because of the deleveraging of a fiat currency. House prices are down, stock prices are down, gas prices are down, and ultimately prices for electronics, clothing, etc will come down as companies deal with excess capacity. The question to ask yourself is despite your net worth changing, how has your purchasing power changed? That is the definition of monetary wealth. Yes, you might have lost some dollar value of wealth, but can you still trade for energy, property, food, etc at the same rate? If that is the case, then the "money" is just an abstract idea and nothing has truly changed.

 

[kimberland]

From what I hear,
it is stuffed under mattresses,
waiting for bottoms
and for safety to return to the lending process.

The majority of wealth is controlled by very few people.
If they take their marbles and go home,
the game is over.

At least, that's this simple gal's take on things.
I leave it to others to get all technical and stuff.

 

[hatterasguy]

China. We now only sell burgers to eachother. Manufacturing is the base thats needed to create wealth, we decided to let it go. Now were in trouble.

China owns us.

 

[ocean]

The explanations about money are correct, but there is an extra part missing at the end.

It's shocking how little the average person knows about our country's monetary system, I'm glad you are asking. I had similar light bulbs go on, which spurred me into research, and only then did I start to realize what is going on.

All real money is currency, but not all currency is real money. Our currency is not real money, AND is debt-based. If everyone paid off all their debts (or stopped paying and went delinquent), there would eventually be no more dollars in circulation. Here's why:

As kidgas explained,
In our country, gold, silver, tobacco, or other real goods were used as money. Then paper representing these goods were used as money. Then the paper was used in place of the good, and printed at a greater than 1:1 ratio. This is called fractional reserve lending. We don't even have that today. This is where the explanations of money taps out, but that's ok. I didn't know either.

In 1913, the banking system was nationalized, and the Federal Reserve, a private bank with power of law, was formed. Over time, fractional reserve standards based on real money were eroded away, and in 1971, the last standard was removed. Since then, the dollar has become a completely different creature.

Today, it is a promise to pay. It starts with the Federal government requesting a loan from the national bank, and promising to repay it plus interest. That loan is divided into dollars which the government spends, and is eventually deposited into the banking system. These paper or digital deposits are then loaned out to businesses and consumers in a fractional reserve ratio. This is not the same fractional reserve as above, because there is no value being held. Essentially, for every $10,000 created out of thin air and deposited, those dollars (after being loaned out and redeposited several times) can create an additional $90,000 in currency. The kicker is that the new dollars can eventually do the same, and money is created at an exponential rate, as long as there are borrowers to lend them to.

There are two problems with this system.
First, interest on the money has to be repaid. But with what? Only the dollars for the principle where created, where does the repayment from the interest come from?

Second, the endless cycle of borrowing can't stop. And because there is no standard to base our money off of, like gold or silver, there is no limit to how much can be lent. So, money just goes further down the tank in value. If you save a dollar today, it will be worth much less when you need it most in retirement. Especially at the rate the Fed and the government are printing/borrowing it.

That is why we constantly hear folks stress the importance of buying and holding onto assets. The assets won't loose value like paper currency will. If one currency fails, you simply charge a different type of money for the asset.

Hope that wasn't too much!


Now, to answer your question,

Our money is created by a promise to repay. In very general terms, many loans have gone delinquent in this overflow of credit we had, where a monkey could obtain a loan. Good borrowers are hard to find. Since a loan is made on the promise to repay, there are not many who can promise to do so. The "global pool of money" is waiting for more borrowers. The dollars haven't disappeared, they're just waiting. On the higher levels, the money is being created and doled out left and right to bail out financial institutions who have their debt collapsing, but this is a top-down intervention, and by the time it inflates the value of the dollar, we are unlikely to see any benefit from it.

Hope that helps!

 

[bflbob]

Some good discussion is going on here guys and gals!

I've read enough of Kiyosaki's stuff to understand the concept of fiat money, and the demise of the gold standard. And I sort of really fear the change in China. I mean, they have loads of time and increasing smarts and plenty of raw materials.

What I'm still confused about is the sudden "brakes" that seem to have been applied to the world's economies. What triggered this at such an accelerated rate?

It seems like one morning, everyone in the world (my world anyway) decided to quit buying stuff. Part was due to increased fuel prices. More cost at the gas pump means less for the luxury items. But what tipped it past the "I'll buy smaller" to the "I'm not buying" stage?

I start having my wife cut my hair, so the barber has to close. The barber can't afford to go out to dinner, so the restaurant closes. The servers can't afford to buy cars, so the dealer closes. And so it goes.

But at some point, there is going to be a barber sitting around with his scissors, a restaurateur sitting around with his silverwear, and a car dealer sitting around with his cars, and one of them is going to have to trade with the others in order to eat.

If everyone stops 'doing', we all die.

As I understand it, the biggest problem with fiat money is inflation. Because there is more is circulation all the time, what was there yesterday gets...well...watered down. That would explain pricing increases, etc., and it would fit the model I have in my head quite well. One pound of my chocolate is equal to two pounds of your peanut butter. It doesn't matter if it takes twice as much money, half as much money, or no money. The exchange rate is still the same.

But what is it that has made it so that no one wants to do the trade anymore???

Citibank doesn't want to trade for the time and smarts of 53,000 employees anymore. Or, if they do, a whole bunch of people don't want to trade for what Citibank has to offer. What made them change? What made 53,000 people "untradable" overnight?

And, on a slightly different track, what made gold the standard, and why is it so bad to be off it? Shells were used to buy Manhattan. Why aren't they the standard? Unlimited supply? Then why isn't square footage of property the standard?

Sometimes, I worry that this whole situation is strictly based on vengence. If I'm not doing better, then I'm not going to let you do better either!!! One hand washes the other, and mine's not looking too clean! But that just destroys my faith in humanity, so I have to ignore it.

Let's keep on discussing. And in the meantime...please pass the peanut butter.

 

Dislike ads? Become a Fastlane member: Subscribe today and surround yourself with winners and millionaire mentors, not those broke friends who only want to drink beer and play video games. :-)

[kidgas]

Bob,
I can't speak for others, but I can tell you why I'm not willing to trade. First of all, I have enough stuff and really don't need any more. My standard of living is fully adequate. Right now there is a lot of uncertainty and lack of confidence about the future. Many are concerned that they will no longer have jobs in the next several months. So, they are hunkering down and downsizing purchases. I would like to replace my Suburban since I have the need to transport 8 family members around from time to time. However, when gas prices were so high, I decided that I might be able to tough it out for a while, keep the thing running and replace with something smaller when the eldest left for college (uncertainty about future gas prices and inflation). Now, I am afraid that my taxes might go up (again uncertainty) so even though gas prices are down, I will not make any large purchases and potentially burden myself with higher expenses.

As you know, with fiat currency, there is uncertainty regarding the future value of that currency. This uncertainty prevents individuals, businesses, and governments from effectively planning for the future. So, everyone just becomes paralyzed and trade stops. When the fiat is based on trust and that trust disappears, guess what? We are living with the consequences.

Humans furthermore have bias in that they think that the recent events will project consistently into the future. That is what causes bubbles...thinking prices will always go up...and busts. It is just the way it is...like fear and greed.

You might as well ask what causes an avalanche. The pressure builds until something gives and the snow just goes and goes. What was the initiating event? Probably not one thing but you can point to all sorts of contributing factors. Eventually, someone decided that they wouldn't pay anymore for a particular asset. It is just that the bubble burst. Now, it is every man for himself and people are going into survival mode.

Hate to disappoint you, but I will still watch out for my expenses for awhile. Eventually, lower prices/deflation will cause houses, stocks, companies to be so cheap that people won't be able to resist. That point will come. It just will be impossible to call the exact bottom.

 

[kidgas]

You are right that people will continue to do or we would all die. Systems with the flexibility to adapt will thrive. Those that can't, won't. I would like to think that America's is an adaptable system.

About gold: There must be something inherent about the desirability of gold since it has been treasured for thousands of years. This gets passed on from human to human and generation to generation. Ask your young female relatives if they would rather have a wedding ring made of gold and diamonds or seashells. Then you will have an answer about the gold standard.

 

[Andrew]

What I'm still confused about is the sudden "brakes" that seem to have been applied to the world's economies. What triggered this at such an accelerated rate?

Good explanations so far in this thread.

The problem was that the driving force in the global economy for the past involved debt growth on a level with no historical comparison. The brakes really haven't been "slammed"; its all been playing out of the past couple of years -- take a look at when the Miami real estate market peaked.

The big cracks started appearing back in the summer of 2007, well before either the stock market or the price of oil peaked (this involved some of the first defaults on subprime CDOs; hitting some Florida school funds if I remember correctly.)

An additional piece to the problem is that the business models of highly leveraged companies require credit growth to fuel sales. Money is borrowed on the expectation of future sales growth. When that future growth stagnates and turns into a contraction it can immediately turn a healthy "asset" into a worthless liability.

 

[ocean]

Your example of Citibank and the hair dresser is a good one.

1. It starts at the top, as do all systems based on "central economic planning". The Fed held the fund rate at 1%, which meant that investors could not safely invest in them to hedge against inflation (also caused by the Fed). This caused the "global pool of money" to search for other investments. Many schemes within the credit system stepped in to fill the void.

2. Citibank, as a part of the bigger credit system filled with currency, created credit and made, or purchased bad loans. This happens all the time, but during this credit hike, they believed the frenzy and made a TON of bad loans all at once.

3. The credit system made loans available in mass to unworthy borrowers who could not, or would not be able to repay. These borrowers, like the hair stylist or restaurant owner you mentioned, were able to max out credit cards and other loans to keep what they had purchased with debt, but once they became too highly leveraged, they couldn't get more loans and became delinquent. People go insolvent all the time, but not usually so many all at the same time.

4. This wave of default hit the shore and caused a huge percentage of assets to become insolvent literally while we slept. As you know, the reserve requirements don't allow banks to lend if they don't have a certain amount of reserves, or if they have too much bad debt. So, they stopped lending. Or, were very picky. Rumors and fear spread, and pretty soon everyone was afraid to do anything, even if they were solvent.

5. The Fed, in order to halt this, is buying up the bad assets, or giving banks more reserves, and is basically doing anything and everything to get a smoldering bonfire back. Even if it has to dilute the currency to do it, which is killing people's savings. They know this, but won't admit it.

6. But there are no more borrowers for the fire to consume, and that is why things are slow and shaky.


To your question about gold standards:

The reason why the framers of the constitution said that gold or silver could only be legal tender is for the exact reasons we are facing today. They saw how the wealthy in Europe used banking systems to gain control of a country and eventually drive it to economic ruin while they benefited.

Credit is like a steroid, and the lender like the doctor. Steroids actually have positive uses to treat emergency illnesses, and bolster a persons strength before a confrontation. But, as we all know, prolonged use of steroids is toxic for the body and while massive growth is an obvious side effect, the body cannot handle the rapid pace and its internal mechanisms become stretched and fail.

The doctor can be a life saver, and give you a dosage to help you heal or face a challenge. Or he can become a drug dealer, who gets you hooked and benefits from your strength until you collapse internally.

The same can be said for nations. Credit can help a nation pull itself out of a tough spot as it gets back on its feet. For example, if a disaster were to strike, wiping out the revenue from an area of trade. A loan can help the nation get by and rebuild. A loan could also help a country pay for war to defend itself and gain spoils. As long as they act like good investors and pay it back, they're using it responsibly. BUT:

A nation can get hooked on credit as a stimulant for unnatural growth. And there are plenty of credit "dealers" out there willing to facilitate them. Especially when legal tender is added to the mix. I won't go too deeply into that, but you can imagine how dangerous that is.

Why is a standard so important?

Excess credit is basically lending on what is not really there. What happens when I have one bushel of wheat, and give an "I owe you" (which is what all dollars or bank notes or bonds are) to 3 different people, payable on demand? I just invented 2 bushels of wheat that didn't really exist. I'm lending what I don't have. And if all three people need their wheat at the same time, 2 of them will go hungry, unless I can come up with the other 2 before they need it. That is called Fraud where I come from. It's called "fractional reserve lending" on Wall Street.

At the time, a gold standard is what was used to keep the lender in line, so they couldn't lend more than a certain reserve ratio. But the ratios get played with, and eventually that goes away too. The founders didn't want any lender to have the unlimited ability to lend fake money. Not only to safeguard the people who saved gold in the bank, but to keep a bank from buying out the government with an overwhelmingly large amount of credit, as has been done throughout history.

 

[bflbob]

Great discussions! Rep+ to many of you!

 

Dislike ads? Become a Fastlane member: Subscribe today and surround yourself with winners and millionaire mentors, not those broke friends who only want to drink beer and play video games. :-)

[Charmed Angel]

Ocean, Good stuff! Rep +++

Bob Rep+ for getting this discussion going!

I think it would be good advise to tell all the small businesses that borrow money to provide a service or product to their client and than Later send the client a bill, to ask for the money up front or at the time of service.
People may have all the best intentions to pay, but at the end of the month, if they can't afford it, they simply won't or can't pay the bill.

 

[Runum]

I know ya'll are thinking a lot higher level than I am but I think that high end electronics(plasma, LCD TV's) have had a little to contribute to this stall.

Like Kidgas said, he's got enough stuff for right now. Or, if he still wanted more stuff how many $5000+, massively depreciating, TV's can the average family absorb? What is the lifespan of the dodad and how long to pay for it? My gosh what a black hole for most families, including my tenants. They have better TV's than I do. Is it possible to saturate the markets and the market says, I have enough? Or is marketing and sales able to convince people it's time to buy?

 

[Jonleehacker]

What I see missing from the discussion is that money is related to emotion and supply and demand.

For example if all of a sudden there was a second person who liked peanut butter but didn't like chocolate, then the value of peanut butter goes up and the value of chocolate goes down.

If all of sudden a there is report on the news that peanut butter may have a health risk, then the perceived value and cost of peanut butter goes down.

If you put it in terms of money, then money is being created or destroyed when the relative value of the goods that it is measured against goes up or down.

Sears still has refridgerators. You still have time, smarts and raw materials. Why aren't you willing to trade?

So to get back to your original question, we aren't willing to trade anymore because the perceived value of a new fridge has dropped dramatically. When life is good and we believe there is an easy supply of money (or credit) then a new fridge, which may only be a slight upgrade from our existing one, makes complete sense.

But if we believe that we may not have a good flow of money coming in or if the equity in our home is shrinking therefore closing down our personal ATM machine, then a slight upgrade in refrigerator becomes much more expensive relative to more core needs like stocking that fridge with food.

So where all the money went, is that it contracted into a belief that more core needs can no longer be taken for granted. Peanut butter and chocolate are now irrelevant, since the cost of water is so high there is nothing left for snack foods, therefor the price of peanut butter and chocolate plummet.

Okay, time for a trip to the corner store for some junk food

 

[fanocks2003]

It's a big time trust issue. It always is, when deals never happen.

Banks that do not trust each other, family members or friends who do not trust you to make them money in a startup. Customers who do not trust you can give them quality stuff in exchange for their paper dollars. Or maybe they mistrust your good intent totally.

Always a trust issue involved.

 

[bflbob]

I think I'm ready to throw some more confusion into this discussion...

Money...the actual printed and coined stuff...normally doesn't disappear much. Sure, you could lose a pocket full of change in the couch, or a fire could burn some folding money, but basically, it just gets circulated around. Correct?

Where has all that money gone? The banks don't have it, since they're requiring bailouts to get by. The general public doesn't seem to have it, unless they are just storing it in matresses. If they put it in the bank, then the bank wouldn't need a bailout, so it must be elsewhere.

The car manufacturers don't have it, since they also need bailouts.

Just because someone loses money...a bank for instance...doesn't mean the money ceases to exist. I mean, the seller of the property got the money that the bank funded. Where did it go?

See where I'm coming from?

 

Dislike ads? Become a Fastlane member: Subscribe today and surround yourself with winners and millionaire mentors, not those broke friends who only want to drink beer and play video games. :-)

[ocean]

What I see missing from the discussion is that money is related to emotion and supply and demand.

For example if all of a sudden there was a second person who liked peanut butter but didn't like chocolate, then the value of peanut butter goes up and the value of chocolate goes down.

If all of sudden a there is report on the news that peanut butter may have a health risk, then the perceived value and cost of peanut butter goes down.

If you put it in terms of money, then money is being created or destroyed when the relative value of the goods that it is measured against goes up or down.



So to get back to your original question, we aren't willing to trade anymore because the perceived value of a new fridge has dropped dramatically. When life is good and we believe there is an easy supply of money (or credit) then a new fridge, which may only be a slight upgrade from our existing one, makes complete sense.

But if we believe that we may not have a good flow of money coming in or if the equity in our home is shrinking therefore closing down our personal ATM machine, then a slight upgrade in refrigerator becomes much more expensive relative to more core needs like stocking that fridge with food.

So where all the money went, is that it contracted into a belief that more core needs can no longer be taken for granted. Peanut butter and chocolate are now irrelevant, since the cost of water is so high there is nothing left for snack foods, therefor the price of peanut butter and chocolate plummet.

Okay, time for a trip to the corner store for some junk food

Supply and demand plays a big part in all this. But it is the supply of credit which I am concerned about the most. You can't accurately measure other factors in the market because excess credit distorts it. It artificially meddles with the market. It's like heroin, it will screw you up! There will always be a demand for more money, but this is one thing which should not be issued lightly. Just like peanut butter, the excess supply of dollars will drive the perceived value down. It already has, think about prices 30 years ago. How different it was then. The loss in value is in direct proportion to the supply of money, which is directly proportionate to the debt of the central government.

And why is congress borrowing money at interest from a private institution in the first place? When they could issue it themselves with no interest. Remember: "of the people, by the people, for the people". They represent us. We are borrowing this money. They are placing us in debt to the central bank when they issue bonds and spend. Our taxes are what service the loans. That's another thing the founders limited and forbid, taxes. But that's a whole other can of worms.

I agree that perceived value plays a big part in the market. However, people didn't wake up one day and decide not to spend. They ran out of credit. That credit came from somewhere, and was retracted. Retracted mainly by the huge wave of delinquency which triggered limits on lending regulations, not by the Fed or its bank's unwillingness to continue lending, as they have shown. Bernanke even joked about dropping currency out of helicopters if it came to that.

On another forum, someone tried to convince me that the Fed was a good thing by limiting the bank runs which many centuries were plagued with. I responded that those banks were lending too much and eroding the reserves of their depositors, and essentially fleecing the people by pretending that value was there when it wasn't. They shouldn't have been allowed to lend fraudulently in the first place.

He also made the statement that trusting the market completely was like shooting a gun and causing the cattle to go off a cliff. I responded: "It's interesting that you use the word "cattle". Under the rule of one bank, it is as if one group of cowboys has all the cattle in all the cities in all the world gathered together. And when that shot is fired, we ALL go over a cliff. At the same time."

Study history. Watch "John Adams" and "Rob Roy". That's why this country separated from Europe, to get away from fraudulent lenders and their monopolies and meddling and taxing.

So, the lesson we can learn is, never borrow unless it will advance your financial position. And hold assets which will hold their value against an inflating currency.

 

[ocean]

I think I'm ready to throw some more confusion into this discussion...

Money...the actual printed and coined stuff...normally doesn't disappear much. Sure, you could lose a pocket full of change in the couch, or a fire could burn some folding money, but basically, it just gets circulated around. Correct?

Where has all that money gone? The banks don't have it, since they're requiring bailouts to get by. The general public doesn't seem to have it, unless they are just storing it in matresses. If they put it in the bank, then the bank wouldn't need a bailout, so it must be elsewhere.

The car manufacturers don't have it, since they also need bailouts.

Just because someone loses money...a bank for instance...doesn't mean the money ceases to exist. I mean, the seller of the property got the money that the bank funded. Where did it go?

See where I'm coming from?

oh boy... LOL.

First you have to understand how it comes into existence. And that most of it is digital, not cash or coins. Only a very small fraction of currency is what you see in cash and coins. Remember that this "money" is credit, which is like an economic steroid. Our economy relies on a continual flow of this credit to grow. What you are seeing is a blockage in the flow of extra currency being pumped into the system. Why?

Because lenders cannot lend if they hit their reserve limits. Lending too much, or the delinquency of debt they already created hits these limits. So, the people we rely on to create money are not able to create it. That's why the Fed, as a last resort is there to issue more lending power to the banks, and why they are pushing so hard to buy up bad debt. To unlock the banks from their lending limits by removing the bad debt from the books and giving them more reserves to lend off of.

Also, you mentioned auto manufacturers... Many have their own banking company, like Ford Motor Credit. They do the same financial hat trick, and suffer the same effects when their loans go delinquent. In fact, many companies have their own financing company, that's whats so pervasive about this credit disease, it infects nearly the entire system.

You are thinking in 1:1 terms, so it's hard to picture it. Imagine if you had a checkbook linked to your savings account. And if you have $1,000 in your savings, you can write checks for an additional $9,000 in newly created money to lend. That's what a bank in this country can legally do. And the head bank can do even worse. They can just write checks, no reserves necessary.

When those loans go delinquent, you cant lend anymore, and actually, it is as if that new $9,000 loan just disappeared. I hope that explains how money can seem to just "disappear". It was never real to begin with, and when a person stopped agreeing to pay it, it vanished.

I hope there comes a day when we realize this and stop using funny money.

 

[Charmed Angel]

I think I'm ready to throw some more confusion into this discussion...

Money...the actual printed and coined stuff...normally doesn't disappear much. Sure, you could lose a pocket full of change in the couch, or a fire could burn some folding money, but basically, it just gets circulated around. Correct?

Where has all that money gone? The banks don't have it, since they're requiring bailouts to get by. The general public doesn't seem to have it, unless they are just storing it in matresses. If they put it in the bank, then the bank wouldn't need a bailout, so it must be elsewhere.

The car manufacturers don't have it, since they also need bailouts.

Just because someone loses money...a bank for instance...doesn't mean the money ceases to exist. I mean, the seller of the property got the money that the bank funded. Where did it go?

See where I'm coming from?

The way I see it (they way I play it out in my head so it all makes sense to me). The banks made a lot of notes, ie. make believe money. When a seller sold his house, the only money he saw was his equity, the rest went to the bank that was holding the note for the seller. They just exchange it all electronically, so that money never really gets seen or touched, This is the "make believe money".

The ones that were smart with their money and didn't abuse the subprime mortgage industry, managed their finances well and came out ahead of the game. They are the ones sitting with a little extra cash in thier pockets.

While the ones that were lent the money, using subprime loans, that they really shouldn't have been lent in the first place (because they couln't afford the loan), they are the ones that buy all the big screen tv's and other junk that they use credit cards for. They are the ones that got all the "make believe money". Well now there is no more "make believe money". Thier credit is shot because they defulted on the motgage, and now are forced to pay cash for everything. Well, they didn't have cash to support the lifestyles they were living for the last decade, and now that they don't have any credit, they are forced to down grade thier once luxourious lifestyle.

So as I see it, It all went Poof! and literally disapeared.

 

[MJ DeMarco]

Bob,

As ocean point out, most of the money you are referring to is unrealized, digitized money. For example, if I went to my brokerage account branch and asked to withdraw $1,000,000 they'd look at me and laugh. They don't have the physical money. It's a digital imprint in my account. Now, if I want to transfer that money to a different account, all they do is transfer the amount - digitally -- money is not physically moved.

Also, when the market cap of a company declines by $1 BILLION, where does that money go? It doesn't go anywhere because it was, again, a mirage much like America's overinflated home prices. People refinanced their homes and took cash-out because they wanted the mirage to be real -- real spendable cash and it worked, for awhile.

The system is collapsing because now, everyone is trying covert those digital mirages into real, spendable dollars. Since most of it was phony money to begin with, the banks are struggling to meet the demand as those assets are now worthless.

This is what I find very scary about all of this -- all of us who check-in to our brokerage accounts / savings / funds and see a dollar amount on the screen -- it isn't real. It is just a number and not backed by anything physical -- not real dollars you can cart away in a suitcase and not real gold.

Scary scary scary.

 

[ocean]

The way I see it (they way I play it out in my head so it all makes sense to me). The banks made a lot of notes, ie. make believe money. When a seller sold his house, the only money he saw was his equity, the rest went to the bank that was holding the note for the seller. They just exchange it all electronically, so that money never really gets seen or touched, This is the "make believe money".

The ones that were smart with their money and didn't abuse the subprime mortgage industry, managed their finances well and came out ahead of the game. They are the ones sitting with a little extra cash in thier pockets.

While the ones that were lent the money, using subprime loans, that they really shouldn't have been lent in the first place (because they couln't afford the loan), they are the ones that buy all the big screen tv's and other junk that they use credit cards for. They are the ones that got all the "make believe money". Well now there is no more "make believe money". Thier credit is shot because they defulted on the motgage, and now are forced to pay cash for everything. Well, they didn't have cash to support the lifestyles they were living for the last decade, and now that they don't have any credit, they are forced to down grade thier once luxourious lifestyle.

So as I see it, It all went Poof! and literally disapeared.

Essentially, yes.

1. Excess of credit caused loans to be made that were not sound in a vicious cycle of loaning, depositing, and multiplying, then more loaning and on and on.

2. Existing loans for everything, not just houses, started going bad. This not only stopped new loans, it destroyed existing assets the banks had on their books. This hit lenders hard, because they couldn't loan any more money, and their assets vanished.

3. Due to lending limits, lenders stopped issuing more loans, which caused the next wave of people dependent on credit to go delinquent. And on and on.

4. Lending limits became tightened, and a "good" borrowers being few already, became even fewer.

So, its a combination of bad debt destroying assets, causing lending limits to be hit, and a lack of good borrowers.

 

Dislike ads? Become a Fastlane member: Subscribe today and surround yourself with winners and millionaire mentors, not those broke friends who only want to drink beer and play video games. :-)

[bflbob]

You are thinking in 1:1 terms, so it's hard to picture it. Imagine if you had a checkbook linked to your savings account. And if you have $1,000 in your savings, you can write checks for an additional $9,000 in newly created money to lend. That's what a bank in this country can legally do. And the head bank can do even worse. They can just write checks, no reserves necessary.

When those loans go delinquent, you cant lend anymore, and actually, it is as if that new $9,000 loan just disappeared. I hope that explains how money can seem to just "disappear". It was never real to begin with, and when a person stopped agreeing to pay it, it vanished.

This is a good example of what I'm trying to point out. The bank turned $1,000 into $10,000 and loaned it to someone.

That someone used the $10,000 for something...to pay another debt, buy a used car, go on vacation, or whatever. They took the $10,000 and (by default) either spent it or saved it. It didn't disappear. It went somewhere.

If the guy invested it in stocks, and those stocks droppped in value, then he lost 'value', but not cash. His cash had already passed along to the guy who he bought the stock from.

Whether it is digital or paper, the cash has moved on.

If the banks can multiply it by ten, then there should be a big increase in the total money supply in the country. I can see where this would create inflation, or a devaluation of the dollar, but not a cash shortage.

(Please understand that I'm not trying to argue in this thread, but open ideas for discussion.)

 

[andviv]

bob, I think I get your point, and I agree with you 1005. where did it go?

I asked the same in this other thread:
http://www.thefastlanetomillions.co...post62907.html?highlight=money+sold#post62907

The person who sold the house to Joe got those $150,000 (or at least part of it, if they sold for a profit).
what did that person do with that money?
Not all of them spent it.
Some (many) invest it wisely or have it available in some bank account.

The money is there.

Joe lost.
The bank (or whoever bought the paper) lost.
the one who sold to Joe in the first place made some. That is the money I'm looking for.

I keep reading here people answering about "value".
But I am not looking for value, I'm looking for the actual cash (or its equivalent).

Somebody has it.

It can't disappear.

Or I'm stupid and just don't get it. But the math still does not add up. I keep thinking the money is out there, somewhere (any similarity with agent Mulder is pure coincidence)

 

[bflbob]

bob, I think I get your point, and I agree with you 1005. where did it go?

I asked the same in this other thread:
http://www.thefastlanetomillions.co...post62907.html?highlight=money+sold#post62907



I keep reading here people answering about "value".
But I am not looking for value, I'm looking for the actual cash (or its equivalent).

Somebody has it.

It can't disappear.

Or I'm stupid and just don't get it. But the math still does not add up. I keep thinking the money is out there, somewhere (any similarity with agent Mulder is pure coincidence)

:iamwithstupid:Bingo! I'm a math guy, and I'm totally lost with this concept.

I can imagine that a lot of the cash has gone off-shore.

OPEC, China and a slew of other countries who we are net importers with.

Since the cash doesn't seem to be in any of the normal places -- banks, mainly -- where is it hidden?

Maybe Russ is sleeping on a big lump???:smxB:

 

[Charmed Angel]

This is a good example of what I'm trying to point out. The bank turned $1,000 into $10,000 and loaned it to someone.

That someone used the $10,000 for something...to pay another debt, buy a used car, go on vacation, or whatever. They took the $10,000 and (by default) either spent it or saved it. It didn't disappear. It went somewhere.

If the guy invested it in stocks, and those stocks droppped in value, then he lost 'value', but not cash. His cash had already passed along to the guy who he bought the stock from.

Whether it is digital or paper, the cash has moved on.

If the banks can multiply it by ten, then there should be a big increase in the total money supply in the country. I can see where this would create inflation, or a devaluation of the dollar, but not a cash shortage.

(Please understand that I'm not trying to argue in this thread, but open ideas for discussion.)

See, Nobody actually saw the Cash that was used to pay off existing mortgages on properties that were sold. In most cases over 50% of the purchase price was just transferred, on paper or electronically, to another bank.

Because the values of real estate were inflated, Joe Homeowner walked away with more money in his pocket from the sale of the property. That money in most cases went into another investment.

Now on the flip side of that transaction, Jane Buyer mortgaged the home for 100% of the purchase price. Let's say she bought it for 400k. And now, 2 years later, the property is only worth 275k. She can't afford to make the mortgage payments, can't sell it for what is owed on it, and the property goes to foreclosure and the bank takes it back.

When Joe sold the house to Jane, he owed 150k. From the sale of his house he pocketed the difference, 250k. The bank gave him 250k, and sent the phony money to the other bank to pay off the 150k.

In my eyes, they money that was passed from bank to bank to pay off existing mortgages never really existed. It was the excess 9k that the bank created from the 1k.

So the bank now has a property that is only work 275k, but they already paid 250k cash for it, and 150k phony money. They just lost all the phony money they had into the deal. Poof! gone

And since the bank payed all the "real" money to the sellers of the real estate, they didn't have any "real" money left. They were banking on the new homeowners to give them "real" money through their interest payments. Well, nobody payed their payments. So these banks never got the "real" money back.

They quickly learned that phony money doesn't pay the payroll.

Just a theory...

 

[ocean]

Bob, no no, absolutely not! You are raising excellent points and questions.


It's not so much that the supply of money is shrinking, or a cash shortage as you put it, it's that its not being increased at a high enough rate. Our economy, like a crack-fiend requires higher and higher doses, otherwise it goes into detox.

The detox being the clearing of bad debt, and revaluation of assets to realistic levels. In fact, that is part of why the depression was bad, reality flooded back into the market. But, those who were smart bought up assets, and those who thought that credit would always be plentiful, and their money was safe in the bank, became poor almost overnight.


The logic you guys are using is normal, real world accounting. The banks use optomistic accounting. They lend money that was never there. It's based off of a promise to repay, and when that person doesn't repay, the asset disappears. Or gets down-graded and sold for pennies.

In it's very basic form: Remember the bushel of wheat? and the three IOU's I gave out on that bushel? I am promising to pay people 2 fictitious bushels of wheat. It is an "asset" on their books. I anticipate having a good harvest, but when I can no longer deliver, those bushels that people are expecting are written off and vanish. Now they have to go to a court and try to collect what they can from me, if they can.

But in our complex system, it's paper based on paper based on paper, and on and on. When the person at the front can't deliver, all those "securities" people think of as having value become worthless.


It doesn't make sense to you and me. Why? Because we learn how to create VALUE, not debt. I wouldn't buy a mortgage unless I verified the asset which backed it. And I wouldn't buy or carry 900,000 in notes secured by 100,000 in property. Senseless, right? If those borrowers don't repay, I've spent 900k and can only get back 100k. Banks use this "logic".

 

Dislike ads? Become a Fastlane member: Subscribe today and surround yourself with winners and millionaire mentors, not those broke friends who only want to drink beer and play video games. :-)

[CMCarlin]

I can imagine that a lot of the cash has gone off-shore.

OPEC, China and a slew of other countries who we are net importers with.

Since the cash doesn't seem to be in any of the normal places -- banks, mainly -- where is it hidden?

Though I'm not as experienced or as knowledgeable as most of you here (there's my disclaimer), this is exactly what I think.

When I think of our money system, I think in terms of it's circulation. Much of that money is being recycled back into the lower end of the 'funnel' which is into the hands of the average consumer through their pay checks, bonuses and salaries. However, it is being filtered up through the funnel through this large system and the excess is being skimmed off (for lack of a better phrase), in my opinion, to foreigners.

IMHO, the stimulus package is all a joke because the system is not changing. The money will still be filtered 'upwards' towards the few that control the system and putting money in the hands of the consumer is doing nothing to change the system. Our economy needs a restructuring. We need more exporting. Right now we are passing our wealth off to other nations because we are constantly consuming from them. I guess a highly simplified version of what I'm saying would be to say for every dollar I spend, china ends up with 20 cents of that and we don't ever get that back. Do this over a trillion times and we have a lot of money leaving our economy and ending up in china.

Obviously there is more to this and I would never even begin to be able to put all the separate pieces of the puzzle together here. This thread is an obvious indication as to how complicated our economy is and how all the cogs fit together. It is a very large machine, especially when you start to think in terms of global economics.

Gee, I hope I explained my limited perspective properly. I know that I have already learned a lot from just the few posts residing in this thread and I couldn't even begin to start gluing it all together.

 

[andviv]

Again...

Joe sold a house in 2005 and pocketed $10,000.

He did NOT invested that money. Nor spent it. He kept it. Let's say, he "saved" it. It probably is in his savings account.

He has $10,000.

But he is not buying anything with those $10,000. Bob is asking the question "why not?" Right Bob?

 

[ocean]

To put it another way, when a consumer sees a dollar, they think: "I can use this dollar to buy one candy bar".

When and entrepreneur sees a dollar, they think: "I can take this dollar, borrow 3 dollars, buy 10 candy bars at $.40 each, and make a $2 profit."

When a banker sees someone else's dollar, they think: "They can deposit it in my bank, I can lend out 9 dollars, collect 6% interest on 9 dollars, and pay them 2% on 1 dollar, and make 5.4 dollars in interest on money I never earned or owned."

And it is too difficult to think about what a member of the Federal Reserve thinks when they see a dollar.

 

[bflbob]

Good thought process there Webjunky!

That's where the deficit comes from...we're buying more from other countries than we are selling to them. And I think that's where a lot of the money has gone lately.

This brings up another question though.

If the US is 'losing' it's cash to other countries, how come so many other countries are also having to do bailouts??? Is Botswana taking all the cash?