Never having been all that good on money, other kindly souls (bankers,
accountants & people like them) have explained the crash to me, and it
makes sense. I’d be happier if the bankers & accountants were all
crooks, like nice Mr Madoff - I find it more than a little worrying
that the people running the system took their huge bonuses and
knowingly invested them in sub-prime mortgages and bank stock.
So I know why banks have no money.
Now the US Treasury, The European Central Bank, several dozen institutions in the UK who have the right to print money (slight exaggeration, but no joke!) have printed TRILLIONS!
Nobody, however, has been able to tell me where the money actually
went. It has to go somewhere, even if that it was a particularly
impressive bonfire. But I don’t think it was. Where exactly is the
“missing” Trillion U$Dollars, and the equally “missing” Trillion
€uros and so on.
And telling me “it’s in that second property you bought in Florida”
isn’t the answer - I may have the condominium, but someone has a few
million dollars I paid for it - and that was real money, and must be
somewhere now.
So I but a house for 3,000,000. And I buy 2,000,000 worth of Bank shares.
I know they’re worth doodle squat in 2009, but where’s the 5 big M’s. The banks say “we don’t have it - we’re broke & we need a bailout”. So where is it???
I am not an economist, but it seems to me that if you had hypothetically purchased a house for three million (dollars or euros or pounds sterling or whatever) all in cash, you would have three million in equity, against which you could borrow. Or you could sell the house and recover the three million. But if the market drops, you can no longer sell the house for three million, but instead might get only one million for it. So you’ve lost two million. If you can afford to remain living in the house until the economy improves and the market rises, this may not matter to you. But if you need to move, then this is going to hurt.
And even if you’re still living in a house whose value has dropped and have no plans to move, there is a psychological factor that you feel poorer. So you may spend less and that also affects the economy.
You ask an important question. (So important that it’s been asked and answered many, many times in the dozens of previous threads about the crisis dating back to 2007.)
Probably the simplest, non-technical way to answer the question is to distinguish between money and value.
Money is what is printed or coined by the government. There’s really not at that much of it. We did a thread on that too recently. How much total cash is there in the world?. The answer came to less than a trillion US dollars and less than a trillion Euros and maybe 4-5 trillion equivalent total.
That’s obviously a drop in the bucket. The US GDP is around 13-14 trillion alone. How is this possible?
For one thing, money circulates. I buy a good and that money pays manufacturing costs and shipping costs and wages and those payments pay other payments and so on.
The rest is all value. When you buy a book at a bookstore you pay twice as much for that book as the bookstore paid its wholesaler. Where did that extra cost from? It’s created value. Value is perceived worth. You can set value at any level. You can pay a penny for that same book used. You can pay $100,000 for the same book if it’s a signed collectible. Value is created - or lost - out of the nothingness that is worth.
Take stocks. We just did this too. Why is the stock market valued the way it is? The stock’s price is whatever the last person was willing to pay for it. That price is based on perceived value. It can go wildly up or wildly down. That value is just as “real” as a dollar bill (because the value of a dollar bill also changes minute by minute based on what goods or currencies you can exchange it for). If you have stock worth on paper $100,000 you can use it in exchange for $100,000 worth of other value. It if goes down to $1,000 you can only get $1,000 in exchange. If it goes up to $1,000,000 same deal.
This all works because everybody except for nutcase goldbugs understands that no such thing as intrinsic worth exists. The value of everything, including money, is what the market is willing to pay for it. Value goes up or down based on the totality of these calculations. Therefore value is created or destroyed. It’s not imaginary. It’s as real as the air we breath.
That lost trillion? It’s gone because nobody will give you that extra trillion in exchange anymore. One day it will come back. From where? Out of more perceived value. That’s the basis of all capitalism.
There’s an assumption that the stock market is a zero-sum game – for every dollar one person makes, another person loses a dollar – but this is not really the case.
Consider a company with a million shares priced at $1 per share. The company’s “value” as express by market capitalization is $1 million.
A small percentage of shares trade each day. Some buys 10 shares at $2 per share, and suddenly the company is worth $2 million. Then someone else sells some shares for $1 and the company’s value is back to $1 million. The company’s assets and liabilities didn’t change, its revenues didn’t change, and nobody said they would pay $2 million for it.
You are leaving out the way fractional reserve banking works, which the OP may not know about.
Say I put $1000 in currency into my local bank. I don’t have the currency anymore, I have a promise that I can get it back whenever I want. In my head, though, I would still say I have a thousand dollars. Then, they bank takes $900 of that thousand dollars and loans it to my friend Bob. Bob now ALSO has $900, and if Bob and I sit down and talk about how much money we have, we will agree that he has $900 (in his pocket) and I have $1000 (in the bank) and we can both spend our money whenever we want. More money has been created. If Bob puts his money into the bank and they loan some of it out to Suzie, then Suzie and Bob and I all have our money.
When banks won’t lend to each other because of fear they won’t be paid back, or because people haven’t been paying them back or making new deposits with money they borrowed elsewhere, money disappears.
Thank you all - I now know what my question should have been. It’s a double entry book-keeping question.
An Irish bank (since bough by the taxpayer) apparently gave 15 individuals loans of more than half a Billion Euro each. That’s 8 Billion Euro, or 10 Billion Dollars.
I know it wasn’t cash - I know it was M1 Money. Why M1? Because they could (and did) draw on it. These people spent it - all of it. And those who got it, spent it in turn. And so on.
My question is - where is the 8 Billion Euro today ? It must be somewhere. It’s going to be in the form Cash (M0), Current (Checking in the US?) Accounts (M1) or long term savings (M2).
One of those individuals took a thousand Euro and bought a large home appliance with it. That store paid their electricity bill with it. The power company paid their employees with it. Some of the employees spent it at the grocery, others brought it back to the Large Home Appliance Store.
Does that help?
In other words, the money isn’t in any particular place. It got mixed in with all the other money.
They’ve got lots of money to lend. They just don’t want to lend it. Money isn’t disappearing from banks, it’s disappearing from the double entry bookkeeping system, as you (quite aptly) put it.