How is a global recession even possible? Where did all the money go?

Discussion in 'Economy' started by Dark Starscream, Feb 7, 2009.

  1. Dark Starscream
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    Dark Starscream Rookie

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    Many people, businesses, governments, and even banks have run out of money. If there is a finite amount of money in the world, where did it all go?



    Thank you for any assistance you can provide in answering this lingering question.
     
  2. rcajun90
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    rcajun90 Member

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    I would like to know the answer to that as well. I suspect it doesn't go anyplace it just loses its value. Any economists on here?
     
  3. gonegolfin
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    gonegolfin Member

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    It is not that the banks and the monetary system are running out of money. There has been a massive amount of deleveraging that has taken place. The payback of debt (loans) extinguishes money. This is deflationary. If this outstrips the lending/investing by banks (creation of new money), then a contraction of the money supply occurs. The supply of money and credit is ever changing. At present, we have seen a steep drop off in the money multiplier (money supply divided by monetary base). The velocity of money has dropped significantly. The banks have enormous reserves that have been created by the Fed (the only way bank reserves can be created) in an attempt to eventually counteract these deflationary forces (in addition to risky debt swaps conducted by the Fed, diminishing the quality of the Fed's balance sheet and therefore our currency). I also think this is a setup to float substantially more treasury debt (the Treasury will need buyers and the banks are good candidates). But these reserves have been encouraged to stay on deposit with the Fed for the most part and are not being lent or invested by the banks in such an amount that would cause significant increase in the money supply at this time (again, likely as a stash to help fund future treasury auctions). The banks are also fearful of their own balance sheets and the economy and have thus reduced their level of lending/investing.

    See my two most recent articles for some background ...
    http://www.usmessageboard.com/economy/66033-interpreting-fed-policy.html
    http://www.usmessageboard.com/econo...y-supply-money-velocity-and-monetization.html

    Brian
     
    Last edited: Feb 7, 2009
  4. gonegolfin
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    gonegolfin Member

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    Hello rcajun90. See my previous post and articles.

    Geaux Cajuns!
    Brian
     
  5. Amanda
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    Amanda Calm as a Hindu cow

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    It's slipping through a hole in the ozone. :tongue:
     
  6. Dark Starscream
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    Dark Starscream Rookie

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    Thank you very much for your help explaining this. So... a big part of the problem is that people have been paying down their debts? Hmm... I always thought that was a good thing, but I guess if everyone is doing it at once, it would hurt the economy. So basically, the only way to grow the economy is to continually increase the world's debt?
     
  7. Kevin_Kennedy
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    Kevin_Kennedy Defend Liberty

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    No, people need to save. It will cause a recession, as we're witnessing. However, the recession has to happen. It is the market's attempt to correct itself.
     
  8. wimpy77
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    wimpy77 Member

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    mr. kennedy is correct. this is what alot of economist are missing. also the banks and lenders gave people loans they couldn't afford.
     
  9. gonegolfin
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    gonegolfin Member

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    No. You are simply addressing the symptoms, not the cause. The problem is that the types of intervention that are being executed today are an even more drastic form of intervention that has been applied in previous cycles ... with the goal of extricating ourselves from recession (which really only punts the problem down the road ... until the problem can no longer be punted). The boom periods are increasingly shorter and less fruitful while it takes increasingly more inflation to emerge from the bust part of the cycle. Simply look at the extent to what the government is doing now and compare it to previous cycles (look at the down cycle in 2002-2003, early 90's, ...). Excessive debt is bad and saving is good. Saving is the proper foundation or economic base that is required to regain economic health.

    The deleveraging to which I was referring was mostly in the financial markets. For example, hedge fund investments overseas receiving margin calls on their dollar loans ... forcing them to sell their assets and repurchase dollars. A type of unwinding of a carry trade. Everything was being sold to raise dollars for loan repayment. This is one reason why Gold (in the futures market) took such a beating and is still at risk.

    But there is no doubt that the deflationary forces (that is a result of past abuses) are causing hardship. But the solution is not continued interference. When the government interferes (as stated above), a bigger problem emerges. It is deeply concerning when we have gotten to the point where we cannot sell all of the government debt we need to fund our spending ... and we need to rely on debt monetization by the Fed (Fed purchasing of Treasury securities in the open market to fill the gap in demand).

    Brian
     
    Last edited: Feb 8, 2009
  10. Dark Starscream
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    Dark Starscream Rookie

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    So... a trillion dollar stimulus package will only put off the recession that needs to happen in order for the economy to correct itself, right?

    Thank you again for your kind attention to my inquiries, by the way.
     

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