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

[Dark Starscream]

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.

 

[rcajun90]

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.

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?

 

[gonegolfin]

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.

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

 

[gonegolfin]

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.

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?

Hello rcajun90. See my previous post and articles.

Geaux Cajuns!
Brian

 

[Amanda]

It's slipping through a hole in the ozone.

 

[Dark Starscream]

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.

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.


Brian

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?

 

[Kevin_Kennedy]

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.

 

[wimpy77]

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

 

[gonegolfin]

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.

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.


Brian

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?

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

 

[Dark Starscream]

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.

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.

 

[gonegolfin]

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.

Precisely. And if it does not happen and the misallocations of capital in previous cycles are not allowed to be resolved by the free market, we will either plunge into a deeper depression once the reflation proves inadequate ... or reflation will be temporarily successful (but yield a much less fruitful recovery than the last cycle), setting up a more massive collapse in the not too distant future.

Brian

 

[Munin]

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

When some banks go bankrupt, a lot of money that is on it vaporizes. In the case of Lehman Brothers (which was one of the biggest banks of the world) this was a true disaster, people around the world lost money that just seemed to have vanished from one moment to another.

Well yeah you can ask where did all that money from those banks go:

the first bank that existed was a man/organization that stored gold from other people, after a while he saw that he had a permanent amount of gold that nobody used that was stored at his bank. He started loaning that gold to other people and asked a to compensate him for those loans, this way he could compensate the people who stored money on his bank. But this way there is an illusion that there is more gold then there actually is, you see 2 people can own the same amount of gold because the bank loaned the gold of one man to another because the bank expects that not everyone will take there gold of the bank. So if one day there is some kind of panic and everyone wants to have their gold back from the bank, you will see that the bank can only give its gold to one of the 2 people that own the same amount of gold. this way gold vanishes, which is actually an illusion because the amount of gold has always been the same.


Normally in this modern time, there are enough banks around so if people get money from one bank this bank just gets a loan from another bank. But you see what happens if every bank is on its own, the same scenario I just described.

The whole banking system is based upon this, everybody needs to thrust that other people will thrust the bank enough so they leave their money on the banks. This way they are sure they can take their money of the bank anytime they want.

 

[RodISHI]

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

When some banks go bankrupt, a lot of money that is on it vaporizes. In the case of Lehman Brothers (which was one of the biggest banks of the world) this was a true disaster, people around the world lost money that just seemed to have vanished from one moment to another.

Well yeah you can ask where did all that money from those banks go:

the first bank that existed was a man/organization that stored gold from other people, after a while he saw that he had a permanent amount of gold that nobody used that was stored at his bank. He started loaning that gold to other people and asked a to compensate him for those loans, this way he could compensate the people who stored money on his bank. But this way there is an illusion that there is more gold then there actually is, you see 2 people can own the same amount of gold because the bank loaned the gold of one man to another because the bank expects that not everyone will take there gold of the bank. So if one day there is some kind of panic and everyone wants to have their money back from the bank, you will see that the bank can only give his money to one of the 2 people that own the same amount of gold. this way money vanishes, which is actually an illusion because the amount of gold has always been the same.


Normally in this modern time, there are enough banks around so if people get money from one bank this bank just gets a loan from another bank. But you see what happens if every bank is on its own, the same scenario I just described.

The whole banking system is based upon this, everybody needs to thrust that other people will thrust the bank enough so they leave their money on the banks. This way they are sure they can take their money of the bank anytime they want.

So if I have a one hundred dollars/gold in the bank how much can the bank loan out on that one hundred dollars/gold?

Then if the money/gold is secured by assets on the books can the bank used the money again?

If so how many times can the bank do this?

 

[auditor0007]

I may not be 100% correct on this, but this is my take. Feel free to correct me if you disagree. Much of what we consider money is actually paperless. In other words it doesn't exist to begin with. When we talk about money, we are talking about the value of assets. Money is just the tool we use to trade those assets, but in most cases we don't actually use the money to do that, we just trade the value of that money.

If you look at stocks or real estate, all have a given value at any time. They are worth so much money based on how much someone will pay for them. If you own your home, and a buyer is willing to give you $300,000 for the home, then your assests are worth $300,000. Now, when the market dries up because no one can afford to buy a home, then the value of your home decreases to the amount that you can actually sell it for. So if you could have found a buyer for your home three years ago who would be willing to pay $300,000, but now you can only find a buyer willing to pay $150,000, then you lost $150,000. But it wasn't in actual money; it was in the value of your asset which is only based on the going currency.

 

[Munin]

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

When some banks go bankrupt, a lot of money that is on it vaporizes. In the case of Lehman Brothers (which was one of the biggest banks of the world) this was a true disaster, people around the world lost money that just seemed to have vanished from one moment to another.

Well yeah you can ask where did all that money from those banks go:

the first bank that existed was a man/organization that stored gold from other people, after a while he saw that he had a permanent amount of gold that nobody used that was stored at his bank. He started loaning that gold to other people and asked a to compensate him for those loans, this way he could compensate the people who stored money on his bank. But this way there is an illusion that there is more gold then there actually is, you see 2 people can own the same amount of gold because the bank loaned the gold of one man to another because the bank expects that not everyone will take there gold of the bank. So if one day there is some kind of panic and everyone wants to have their money back from the bank, you will see that the bank can only give his money to one of the 2 people that own the same amount of gold. this way money vanishes, which is actually an illusion because the amount of gold has always been the same.


Normally in this modern time, there are enough banks around so if people get money from one bank this bank just gets a loan from another bank. But you see what happens if every bank is on its own, the same scenario I just described.

The whole banking system is based upon this, everybody needs to thrust that other people will thrust the bank enough so they leave their money on the banks. This way they are sure they can take their money of the bank anytime they want.

So if I have a one hundred dollars/gold in the bank how much can the bank loan out on that one hundred dollars/gold?

Then if the money/gold is secured by assets on the books can the bank used the money again?

If so how many times can the bank do this?

This depends on each bank, it s called the money multiplier: The percentage of money that can be loaned. The more money a bank loans, the more money the bank get as compensation (interests).

A bank can say that it will loan 30% of its money on the bank to other individuals, corporations, ...

Normally laws of the government say that each bank has to have a certain amount of money available (not loaned out). But each time when the economy booms, certain members of the government want to lower the restrictions (more money loaned out). And that is when it becomes dangerous, the more money you loan out the more risk you take (because more money can "vanish" if all goes horribly wrong).

 

[RodISHI]

I never figured it that away Auditor yet I am not a bank.

I have heard that they can loan up to ten times the amount of actual cash they have on the books. I am sure there are variables in hoiw that exactly works.

If they loaned on a house and foreclosed they can't add that back into the books until it is sold.

Perhaps someone here can give the accurate reflection on how that works.

 

[RodISHI]

When some banks go bankrupt, a lot of money that is on it vaporizes. In the case of Lehman Brothers (which was one of the biggest banks of the world) this was a true disaster, people around the world lost money that just seemed to have vanished from one moment to another.

Well yeah you can ask where did all that money from those banks go:

the first bank that existed was a man/organization that stored gold from other people, after a while he saw that he had a permanent amount of gold that nobody used that was stored at his bank. He started loaning that gold to other people and asked a to compensate him for those loans, this way he could compensate the people who stored money on his bank. But this way there is an illusion that there is more gold then there actually is, you see 2 people can own the same amount of gold because the bank loaned the gold of one man to another because the bank expects that not everyone will take there gold of the bank. So if one day there is some kind of panic and everyone wants to have their money back from the bank, you will see that the bank can only give his money to one of the 2 people that own the same amount of gold. this way money vanishes, which is actually an illusion because the amount of gold has always been the same.


Normally in this modern time, there are enough banks around so if people get money from one bank this bank just gets a loan from another bank. But you see what happens if every bank is on its own, the same scenario I just described.

The whole banking system is based upon this, everybody needs to thrust that other people will thrust the bank enough so they leave their money on the banks. This way they are sure they can take their money of the bank anytime they want.

So if I have a one hundred dollars/gold in the bank how much can the bank loan out on that one hundred dollars/gold?

Then if the money/gold is secured by assets on the books can the bank used the money again?

If so how many times can the bank do this?

This depends on each bank, it s called the money multiplier: The percentage of money that can be loaned.

A bank can say that it will loan 30% of its money on the bank to other individuals, corporations, ...

Normally laws of the government say that each bank has to have a certain amount of money available (not loaned out). But each times when the economy booms, certain members of the government want to lower that bar (more money loaned out). And that is when it becomes dangerous, the more money you loan out the more risk you take (because more money can "vanish" if all goes horribly wrong).

Yet the actual cash money did not really vanish did it?

 

[Munin]

So if I have a one hundred dollars/gold in the bank how much can the bank loan out on that one hundred dollars/gold?

Then if the money/gold is secured by assets on the books can the bank used the money again?

If so how many times can the bank do this?

This depends on each bank, it s called the money multiplier: The percentage of money that can be loaned.

A bank can say that it will loan 30% of its money on the bank to other individuals, corporations, ...

Normally laws of the government say that each bank has to have a certain amount of money available (not loaned out). But each times when the economy booms, certain members of the government want to lower that bar (more money loaned out). And that is when it becomes dangerous, the more money you loan out the more risk you take (because more money can "vanish" if all goes horribly wrong).

Yet the actual cash money did not really vanish did it?

No, it is like I said in the example of the first banker. 2 people own the same amount of cash. Imagine that the one who loaned the money uses it to buy a house that he will pay back to the bank, the money from the 2 people is used on the house and if the bank goes bankrupt then 1 guy owns a house (hasn't pay of the loan because the bank doesn't exist anymore) and the other guy is broke (or has the money that the other guy already payed for the house) because the bank gave his money to the guy that bought the house.

 

[Munin]

I never figured it that away Auditor yet I am not a bank.

I have heard that they can loan up to ten times the amount of actual cash they have on the books. I am sure there are variables in hoiw that exactly works.

If they loaned on a house and foreclosed they can't add that back into the books until it is sold.

Perhaps someone here can give the accurate reflection on how that works.

Yeah, that is because a bank loans money to one guy and he puts the money he loaned back on the bank. This means 2 times the same amount of money on the bank.

Now, the bank can use the combined money of these 2 guys (loaned and stored money) to loan again.

Now we have this scenario: with a third guy that loans money, so 3 guys (loaned, loaned and stored money).

And you can do this again and again and again and ... . So if everybody pays, then there is no problem. (Well that is a big IF actually)

 

[Skull Pilot]

another monkey wrench in the mix is the mark to market accounting practice.

basically it means that a lender is compelled to value assets and collateral for loans as if they would have to be dumped on the market today resulting in huge write downs of assets on paper.

It is a silly rule considering that even real estate holdings where the mortgage is being serviced on time and are in no danger of foreclosing have to be written down and thought of as a liability rather than the mortgage being thought of as an account receivable to be paid over 30 years