Lately I’ve been wondering where all the money I used to have went. I used to have a bunch of money in stocks. Over the last few years it seems a lot of that money has gone away somewhere, so that now I only have a small part of the money I had a few years ago. Looking at the usual suspects: My friends certainly don’t have the money, the corporations certainly don’t have the money, and the government certainly doesn’t have the money. In fact, they all seem to have lost money just like me. Obviously its not as if there is less money than there was a few years ago - so where did all our money go? Somebody’s gotta be getting rich off all this, right?
It didn’t really go anywhere. You have an asset called X. Yesterday, you could have sold X for $100. Today you could only sell it for $50. The money didn’t disappear; buyer interest did. Or, more accurately, buyer interest got redirected elsewhere.
Remember – stocks are valueless until you sell them. Their value is nothing tangible until then.
So the money was never really there. Oh, sure, you could have received money by selling, or maybe by using them as collateral for a loan, but you never did. The stocks were just bookkeeping entries (unless you actually got certificates, which is unusual these days) and you didn’t make any money on them except on paper.
The value of the stocks has changed; people are willing to pay less for a share. But the only money involved was what you used to buy them.
There are two parts to your question. First, as has already been stated, you have not lost money because you weren’t holding money to begin with. You were holding assets which others assigned a certain price, and now those assets are priced at a lower level. You still own the same assets. Second, there is indeed less money than there was before. Or at least available money was starting to decline until the Federal Reserve began injecting money into the supply around September 2008. Money is not like energy; it can indeed be created and destroyed. Nobody necessarily has to be gaining from your paper losses.
In theory, I suppose you could say the seller who sold you stocks got rich off of you. But there’s no telling what that seller did with the proceeds of the sale, and said seller could very well be in the same boat you are.
You buy a car for $30,000. Five minutes later you sell it on Ebay for $15,000. Where did the money go in the five minutes?
It’s a good question that has many complicated attached threads. Clearly, we’ve all heard of “derivatives” and “products” that are so complex that almost no one understands them. My view of this is that, in general, the so-called contraction of the economy means that in essence, pretty much everything is becoming less valuable. There’s a re-callibration of sorts happening, where the tide is now receding, and everything is going down. My house may still be worth twice what yours is, but we’ve both lost what was once a higher selling price.
One other feature of this that strikes me is that a huge amount of the problem is that the products that were being bought and sold were essentially promises - IOU’s - not goods or services. A mortgage is a promise to pay. It’s debt. It’s not money. So that a large amount of the financial world is floating on trust and belief and not much more than that. Credit and debt are based on belief and trust - they’re two sides of a promise. So when it turned out that domestic and international trust in financial America began to erode, no doubt in some measure connected to the erosion of trust in political America, things began to get shaky and we began to lose. Not money, but value. Not money, but wealth.
Most money–i.e., checkable deposits–is a promise to pay.
When economists calculate the amount of money in circulation, it turns out that they use several different valuations at least one of which includes all the outstanding credit. One important thing that has happened is that the amount of outstanding credit has indeed gone down the tubes since hardly anyone is lending. Tried to get a mortgage lately?
True, of course, MandaJO. But I was trying to get to the notion that our economy, particularly the higher levels of finance, is apparently more and more detatched from the traditional “goods and services” type of economy.
Once again, basic accounting comes to the rescue.
Money is not the same thing as value.
Your Net Income can be described as the total amount of money you have coming in each month:
Net Income = Revenue - Expenses
Revenue = Money in
Expenses = Money out
The total value of all your stuff (including cash) is called your equity:
In accounting, the basic formula to calcuate equity on a balance sheet is:
Equity = Assets - Liabilities
Assets = Things that have value or generate Revenue
Liabilities = Value you owe others or generate Expenses
So for most people, their revenue is their salary and their expenses are their bills. If they have a positive net income, they now have a surpus if cash, which is an asset.
They can take that cash asset and convert it into stuff they need (which are assets) or other revenue generating assets like stocks.
Your total equity is the value of all your stuff (house, car, furniture) minus any liabilities you have (mortgage, car loan, credit card debt)
In a recession, prices may increase (inflation) faster than your raises at work, causing your net income to decrease. People don’t have as much money so they are less willing to pay for your assets so the value of your home or stocks might decrease.
There is the same amount of cash during a recession as before.
However around 97% of money now exists as numbers on a computer screen. i.e. Everyone’s current account balance and this digital money is deleted during a recession. To see how this happens consider the bank loan process to its final conclusion.
If you apply for a loan from a bank, the manager will check it meets certain criteria. Once approved the bank manager will increase your current account balance without decreasing any other account. This is where all of our digital money comes from.
As you repay a loan your current account balance reduces to zero as does your debt and the money no longer exists.
There is less digital money during a recession because loan repayments are greater than new bank loans.
I hope this helps,
Paul Ferguson
Are you serious with these statements?
They are false.
eg, “without decreasing any other account”. Well ok, not false, but a ledger entry is made into the liabilities account (WRT the Bank) appropriate for that type of loan. Likewise an offsetting liability account is set up for the debtor. Also, additional net revenue is generated from the interest paid by the debtor to the bank. Likewise reserves must be transferred to the the governing body’s reserve account to compensate for the additional liability. Also, if the CDO is sold to a third party, the bank receives their [previously loaned] funds from the third party and a ledger entry is made to offset the previous liability entry and the liability account for the debtor is also offset. The BANK can now loan that same money [actually a little more due to the interest they received] to someone else.
IOW; YDKWTFYTA
The problem in this recession is that the sales of CDO’s stopped, thereby breaking the cycle.
Yes I’m serious.
When banks make loans they directly create money by typing a new balance into the borrower’s account. No-one else’s account is lowered.
The Central Bank may well look at increasing that bank’s reserve account as you point out the fact still remains that the bank creates digital money through the loan process.
Equally, after a loan repayment is received by a bank the total of all current accounts is lower and the money used to repay the loan no longer exists.
Looking at this from the bank’s balance sheet demonstrates the same thing. When banks approve a loan they creates additional demand deposits for the borrower. These become new liabilities of the bank. The debtor becomes a new asset.
When the debt is settled both entries return to zero and the demand deposits can no longer facilitate a transaction. And so money is deleted through loan repayments.
The money is always there. Only the pockets change.
the issue is really that you’re thinking of money as a physical object sitting in pile somewhere whereas these days money usually equates to a figure on a piece of paper attributed to someone or something.
Just like if a bank collapses - it’s not like the bank can just dip into the vault and give everyone their money back because they never really had the money in hard cash. Even a bank note itself is nothing more than a promise that your bit of paper is worth something. On notes in England it says “I promise to pay the bearer on demand the sum of…”
It’s insane to think that I get be paid by my employer, put that money into the bank, then buy something online and throughout that whole process nobody even sees anything more than a figure on a screen somewhere to let us know that the money has been exchanged.
These things you’re saying are not even close to accurate, at least for the US.
Yes, that’s fine as long as the borrower just leaves the money he borrowed on deposit with the bank. Hey, I have taken out 0% promotional credit card loans and just left them on deposit to earn interest. But that’s not typical.
The typical borrower is going to want to withdraw his funds and buy something with them. If the borrower wants his money in the form of greenbacks, the bank is going to have to debit their reserve account at the Fed to get some greenbacks (or replenish their supply). If the borrower wants a check, the bank where the check is deposited is going to want Fed funds when they present the check to the bank on which it is drawn. Fed funds come out of the lending bank’s reserve account.
This graphic from this Wikipedia article is required reading for this discussion.
Most money in our economy does not exist as actual currency anywhere: it is created by being multiplied through the banks (fractional reserve banking). Money is loaned by the central bank to commercial banks who hold a fraction and then loan out to other banks who keep a fraction and loan out more to others … multiplying the values, creating money in the economy, through the iterations (see money multiplier). Suddenly though the loans go bad and the money isn’t really in the bank, it [It’s a Wonderful Life]“It’s in your house, and your store, don’t you see?”[/IAWL], the real cash gets pulled out, the banks initially cannot and then just do not put out as much in loans, multiply by much much less, and the created money goes poof.
It was not just that the pockets changed. The process of creating it became dysfunctional and it went gone as a result of that lack of oversight.
I agree he has gotten too much of his financial information from youtube Zionist conspiracy videos, but this isn’t quite the way it works, either.
The loan is an ASSET, not a liability to the bank. The deposit account is a liability to the bank.
When the bank issues a loan, the loan is added to the ASSET side of the ledger. The money credited to the borrower’s account is added to the liability side of the ledger. If the bank sells the loan note to a third-party, the note is deducted from the bank’s assets, but the cash received from the third-party is added to its assets. The borrower’s account is not affected.
If the borrower writes a check on his account, the bank’s liabilities are decreased by the amount of the check. But the bank where the check was deposited will demand assets from the bank that issued the check. The only acceptable assets (in the United States) are Fed funds. Hence, assets will flow out of the bank’s reserve account, decreasing its ability to make any more loans until it either receives some deposits or loan payments or it sells some more assets.
Thanks Alley Dweller.
My point was that that the Ferguson approach ignores the “multiplication factor” that is present in the banking system, or rails against it as some vast conspiracy.