So America has no money. Things are tight in the UK too. I hear Iceland is not faring so well either.
Am I right in thinking, though, that money is one of those things that doesn’t just “disappear” - it just changes hands?
What countries are doing particularly well right now, financially? I assume China is the big answer. But are there others?
And, other than the USA, UK and Iceland, what other usually-stable countries aren’t doing so well right now? How’s Japan?
No, money can and does disappear.
Value is notional. If the stock market goes down collectively by a trillion dollars, that trillion dollars is taken out of the global economy. If the price of real estate goes down by a trillion dollars, that value is gone. Etc.
That’s exactly what has happened, except that the actual number is much higher. That’s why the global economy is in recession. And no, China is no longer doing well. It is in a world of hurt, because orders for its products have declined dramatically. Less value, less money, less spending.
Yes. Even if the notional value of the stocks and loans you had was illusory, people still acted as if they had that money, as did their creditors. And since the value of a dollar is entirely dependent on that same effect, it is as if they indeed had that money.
Well, there are lots of issues here. The main point is the way you’ve set things up is not really how they work–it’s not like there’s a big pool of money that got shifted from the US to another country.
The US is having economic issues for several reasons unrelated to the amount of money anyone has. For one, several assets (such as real estate and stock) have lost value. When that happens, no money changes hands, the assets just become less vuable because buyers are only willing to pay less than they used to pay. For another, the economy is slowing for several reasons unrelated to the amount of money anywhere, such as banks’ unwillingness to lend and different opinions of value among buyers and sellers.
Another issue lurking in your question is what money is really. US money means something different to a US resident than it does to a chinese resident, for example.
To put it in a more detailed way, a lot of what people consider to be the value of their assets is just an estimate of what those assets would sell for if they were to be sold. That is thought of as money, but unlike the cash in one’s wallet, it’s not real until you go and get it, i.e. sell the asset. If the market for that type of asset collapses before you can sell it, the value is gone – but it was really never more than an expectation anyway.
This is something I just don’t get. If I have a house that I buy for $150k, sell it at 200K, then I’ve got the extra $50k. If the house price goes back down to $175k, he’s the one out money, I’ve still got mine. I can see money that I’ve never had, like the $150k house that went up in value to $200k, but I didn’t sell, then the price drops back to $150k, I haven’t lost anything except for imaginary value. That’s what I don’t get, if I buy something someone has the money somewhere.
Interesting points, all. Thank you. I had a feeling that a lot of this crisis was “on paper” as it were.
Was The Great Depression also on paper? Did Joe Q. Public really have all that much in credit and stocks at the time, or does that not matter?
Also, any word on what other countries are not doing so well right now? (countries that usually have very stable economies, that is)
Suppose you buy a house for $150k, and it increases in value to $200k. You use that $50k of extra equity as collateral to take out a line of credit with your bank, which you use to finance a fun-filled cruise to Tahiti.
Then the real estate market takes a dump and the value of your house goes back down to $150k. You no longer have any extra equity in your house, and the bank’s collateral is worthless. They might as well have given you an unsecured loan. If you sell your house, there’s no way you’d be able to pay off the line of credit, unless you have $50k lying around, but you probably don’t, because you are fiscally irresponsible and took out a second mortgage to go on vacation.
And this is why “paper losses” matter. As soon as the imaginary money goes poof, people can no longer use it to finance new spending. So they don’t spend as much, commerce declines, jobs are cut, and the creation of actual goods and services slows down. In that way, a sudden disappearance of imaginary money can quickly lead to a scarcity of real wealth.
I’m not sure what you mean by this. Usually when people say “on paper” they mean it isn’t quite real. That’s dead wrong in this instance. As others have explained, notional value is all there is. Some economic nutcases, like the goldbugs, try to insist that there is such a thing as intrinsic value, but nobody with a lick of economic sense has paid any attention to them in years.
The economic system runs on value, and on the credit that value will bring. The banking system has used this for centuries. They routinely lend out several times the value of the money they have on deposit, knowing that unless there is a run on the bank they can use the interest paid on those loans to smooth out daily transactions. (This is different from a Ponzi scheme because banks demand collateral, or a lien on an asset worth the amount of the loan, before handing over the money.) The rule of thumb is to lend out five times as much. That creates four times as much money as existed previously.
All other financial transactions work in similar ways. And people use the loans to build houses, start factories, create industries, all of which bring new value into the world. Stocks represent this value and create an additional level of new value. This value is used exactly like money because in a modern economy it is money. You might say that money is always physically there, but the value - the buying power - of a $100 bill varies with the economy and so reflects changing values just as a stock price does.
The Great Depression had the same roots. Stocks were important, but just like today the hits were taken by the greater economy, loss of credit, reduced demand for manufacturing, lowered housing prices, etc. Everything is interrelated.
Yes. All of them. It’s a global recession. Everybody’s hurting. Every major economy is in desperate condition.
I may not have the money any more, and the bank doesn’t have the money any more, but the airline I took to get to Tahiti have some of it, the restaurants, hotels, taxis, and lots of other people have the money. I understand that if that’s the case then I have lost money because I can’t pay off my house and the bank takes a loss, but someone does have the $50k. So basically someone has to be making out even if lots of other people are not.
My rudimentary understanding of it:
Say you (person A) deposit a dollar into a bank. The bank loans out that dollar to person B, who pays Person C for goods and services. Person C puts that dollar in the bank who loans it to Person D, who pays Person E, who puts it back in the bank.
So now we have 3 people (A, C, E) who have a claim to that same physical dollar bill. Money does not merely change hands, it grows and multiplies. It can also contract back down to that original dollar. When it does so, wealth just disappears.
Let’s try a different scenario, a much less complicated one. Suppose you bought the house for $150k, and now it is worth only $120k. Have you lost any money, or is it only “imaginary value”?
Right, but let’s say that now because you’re “upside down” on your house you can’t take stupidly frivolous loans out to go on vacations anymore. Those industries are now hurting too.
And instead of being a nice guy and paying the bank back the money that you owe them you decide to take a walk and just abandon making those payments anymore because you’ll never be able to pay them that money out of pocket. Then the house goes into forclosure and sells at auction for between 90% and 60% of it’s highest valuation point. Now the recent sales in your neighborhood are adjusted down, forcing appraisal values even lower meaning more and more of your neighbors might become “upside down” on their loans and decide to walk away.
Within a few months, thousands and thousands of dollars that were lent against just disappear.
YamatoTwinkie has it. The issue is that when credit is extended and leverage is utilized, available money grows. When people default on debts, available money shrinks. To extend the example:
A depositor has $60k and puts in a bank. The bank loans out $50k and keeps $10k as reserves. The original $60k has now effectively grown to $120K ($60k in the depositor’s account, $10k in the bank’s reserve, and $50k in your hands). You trade your $50k away to the Tahitian businesses in exchange for goods and services (Depositor: $60k, Bank: $10k, You:$0, Tahitian Businesses: $50k). But then you can’t pay back the loan. Meanwhile, the depositor decides he wants his money back, but the bank can only honor $10k of the $60k. So the total money supply has shrunk back to $60k (Depositor: $10k, Bank: $0k, You: $0k, Tahitian Businesses: $50k).
And of course, in a real pinch even “the money” is a rather artificial notion, not tied to anything in an immutable ratio. What your $50k is worth in some sort of absolute evaluation–say, the value of a day-laborer’s work–can (and does) expand and contract. You may recall the 100 quintillion pengő, if you wander back in history.
Or the new Zimbabwean $50 billion note.