So as we all know there’s a huge economic crisis all over the world.
Many factories from a wide range of different sectors are closing and this is happening in USA;Europe,Asia…everywhere.
My question is : where is the money going ? Shouldn’t the money just MOVE from some place to another instead of disappearing ? How is it possible at simultaneously all countries are in recession ?
Shouldnt’ some countries get richer while others get poorer instead ?
Imagine what happens when a few million people take out a loan and then cannot pay it back for whatever reason.
The real crisis is that. It has a snowball effect, as one can imagine, in that if we cannot pay back our loans then we sure as heck are going to be spending on luxuries, etc. This will cause unemployment in the long run.
The people who provided the capital for these loans are the big losers but the money did not disappear; it got spent on consumables and those people made money in the short run. In the long run they will be hurting because credit is seizing up. And by the way, these bailouts will not work because we cannot force people to take out loans, especially under these circumstances.
The way to fix this it just to allow the bad debt to be liquidated (i.e, no more bailouts) so that prices can find the correct market rate and productive assets can be bought up and put to use. Instead of consuming on borrowed money we need to produce an income of our own so that we can continue to consume those goods that contribute to our quality of life.
Unpaid credit, which isn’t money, to sum up lift’s post.
You borrow money and you don’t pay it back. The buck stops with you and somebody is out. Multiplied by 1 million.
[quote]Horazio wrote:
So as we all know there’s a huge economic crisis all over the world.
Many factories from a wide range of different sectors are closing and this is happening in USA;Europe,Asia…everywhere.
My question is : where is the money going ? Shouldn’t the money just MOVE from some place to another instead of disappearing ? How is it possible at simultaneously all countries are in recession ?
Shouldnt’ some countries get richer while others get poorer instead ?
[/quote]
It’s not a zero sum game. One does not get more when the other has less. A rising and lowering tide raises and lowers all ships. People accrued debt they couldn’t pay for. The lenders hedged bets on money they didn’t actually have and more or less we pushed the debt around until it was time to pay up. That’s when the gig was up. Eventually debt has to be paid. If it is not then lenders stop lending and people stop buying. When that happens, money pools and a good economy is when it flows.
[quote]FormerlyTexasGuy wrote:
Unpaid credit, which isn’t money, to sum up lift’s post.
You borrow money and you don’t pay it back. The buck stops with you and somebody is out. Multiplied by 1 million. [/quote]
Many millions actually.
[quote]Horazio wrote:
So as we all know there’s a huge economic crisis all over the world.
Many factories from a wide range of different sectors are closing and this is happening in USA;Europe,Asia…everywhere.
My question is : where is the money going ? Shouldn’t the money just MOVE from some place to another instead of disappearing ? How is it possible at simultaneously all countries are in recession ?
Shouldnt’ some countries get richer while others get poorer instead ?
[/quote]
It is the Anti-Industrial Revolution. I’m surprised you’ve never heard of it.
“I guess you might call this the ANTI-industrial revolution.” — Atlas Shrugged
Successful companies are now those who produce the least and get the most bailout money. Welcome to the new era!!
[quote]pat wrote:
Eventually debt has to be paid. If it is not then lenders stop lending and people stop buying.
[/quote]
Pat, you more or less got it but allow me to make a few additions, if you will:
Consumers do not need credit to consume. In fact, credit can only come about because of savings in the first place. Just because a bank extends someone a loan of $100,000 does not mean it will buy anything.
For example, we cannot purchase a yacht that has not been built. The yacht cannot be built until the other factors of production have been first produced, and so on. To produce all the factors of production to build a yacht required a number of people to save and invest over a finite duration of time. This is how real* credit is created.
So yes, people will stop buying but only because there is nothing to buy – and no amount of fiat credit will correct that.
*as apposed to fiat
"The shocking facts revealed in the banks’ own balance sheets and in the OCC’s Quarterly Report demonstrate the enormity of problem:
Massive Risks at America’s Megabanks
(bill. of dollars)
B of A Citi B of A + Citi JPM
9/30/2008
Total assets 1,831 2,050 3,881 2,251
All derivatives 38,186 39,979 78,165 91,339
Credit default swaps 3,291 2,467 5,758 9,250
Exposure to defaults by trading partners 177.6% 259.5% 400.2%
Fact #1. Too big to save. Bank of America Corp. and Citigroup, Inc. have combined assets of $3.9 trillion, or 43 times the size of the Treasury bailout funds they’ve received to date.
Fact #2. Bigger losses ahead. Even before any further declines in the economy, an unusually large portion of their assets are already in grave jeopardy ? commercial real estate loans going sour, credit cards loans tanking, auto loans sinking, and residential mortgages turning to dust. Now, as the economy continues to tumble, avoiding much larger losses will be almost impossible.
Fact #3. Big derivatives players. Bank of America and Citigroup are the nation’s second and third largest high-rollers in the derivatives market, with a combined total of $78 trillion in these bets outstanding. That’s over ten times the derivatives that Lehman Brothers had on its books when it failed last year.
Fact #4. They’ve bet far too much on each other’s failure. Bank of America and Citigroup are also the second and third largest participants in the most dangerous derivatives of all ? credit default swaps. These are the big bets that financial institutions make on the failure of other major companies.
But participants in this market are like shipwrecked sailors in a sinking lifeboat betting fortunes on who will live and who will survive: If a company bets too heavily on failures and too many companies actually fail, who’s going to make good on those bets?"
— Martin Weiss
of Weiss Research
We’re going to have a depression in this country, with something like National Socialism to follow. We’ll welcome it after all the food riots and bloody rampaging gangs.
[quote]Headhunter wrote:
Fact #4. They’ve bet far too much on each other’s failure. Bank of America and Citigroup are also the second and third largest participants in the most dangerous derivatives of all ? credit default swaps. These are the big bets that financial institutions make on the failure of other major companies.
[/quote]
A little clarification for you:
In most cases a credit default swap is not a bet that a company will fail. Rather they are usually owned by a party that has a far more substantial interest in that company actually surviving. Between the banks it makes sense that they would have these in place. For instance, if I am Goliath National Bank and I have financed a $5B credit facility for ABC Corp, I have a large financial interest not only in ABC Corp surviving but also the bank that is providing it’s financing and it’s suppliers financing and it’s client’s financing. I would not bet a nickel on the banks owning CDS’s as a bet on each other’s failure. It makes absolutely no economic sense as one failure would assuredly lead to the impairment of the others’ stability.
It certainly should be that way, but it seems like this is less the rule, and more the exception. I think a lot of producers bring production on line with loans, in the West anyways.But I don’t have any figure on this. Isn’t total US debt something like 40 trillion. That’s got to be waaaay too much, compared to the US savings level.
[quote]Mr. Chen wrote:
I think a lot of producers bring production on line with loans…[/quote]
Sure, but every producer relies on the fact that someone else has already produced their factors of production first. That is the rule.
What happens when producers consume all of those factors of production and they are not replaced? Credit disappears and we must look to new producers – enter the Chinese. Credit is not the waving of a magic wand to create paper checks for consumers. It only looks that way because you are not first considering all the production that goes on behind the scenes.
Even if you go all the way down to the very first raw materials needed in production there first had to be someone to save and invest in order to bring that production about.
[quote]LIFTICVSMAXIMVS wrote:
Mr. Chen wrote:
I think a lot of producers bring production on line with loans…
Sure, but every producer relies on the fact that someone else has already produced their factors of production first. That is the rule.
What happens when producers consume all of those factors of production and they are not replaced? Credit disappears and we must look to new producers – enter the Chinese. Credit is not the waving of a magic wand to create paper checks for consumers. It only looks that way because you are not first considering all the production that goes on behind the scenes.
Even if you go all the way down to the very first raw materials needed in production there first had to be someone to save and invest in order to bring that production about.[/quote]
I understand that loans have real assets behind them, even the plasma TV I buy with my visa, if not an asset of real value at a bankruptcy auction, was at least produced by an assembly line.
So if the total of US debt money it 40 trillion, how much of that should be able to be located as real, valued assets?
Divide 40 trillion by 300 million and that will be your answer, the populous will be sold off into slavery as collateral haha.
Simple answer: The money Barons and the World Banks. Those that control the money itself at the highest level.
Maybe we can use cows to explain:
Feudalism: You have two cows. The lord of the manor takes some of the milk. And all the cream.
Pure Socialism: You have two cows. The government takes them and puts them in a barn with everyone else’s cows. You have to take care of all the cows. The government gives you as much milk as you need.
Socialism: You have two cows. The government takes one of your cows and gives it to your neighbor. You’re both forced to join a cooperative where you have to teach your neighbor how to take care of his cow.
Bureaucratic Socialism: You have two cows. The government takes them and puts them in a barn with everyone else’s cows. They are cared for by ex-chicken farmers. You have to take care of the chickens the government took from the chicken farmers. The government gives you as much milk and as many eggs as its regulations say you should need.
Fascism: You have two cows. The government takes both, hires you to take care of them, and sells you the milk.
Pure Communism: You have two cows. Your neighbors help you take care of them, and you all share the milk.
Russian Communism: You have two cows. You have to take care of them, but the government takes all the milk.
Communism: You have two cows. The government seizes both and provides you with milk. You wait in line for you share of the milk, but it’s so long that the milk is sour by the time you get it.
Dictatorship: You have two cows. The government takes both and shoots you.
Militarism: You have two cows. The government takes both and drafts you.
Pure Democracy: You have two cows. Your neighbors decide who gets the milk.
Representative Democracy: You have two cows. Your neighbors pick someone to tell you who gets the milk.
American Democracy: The government promises to give you two cows if you vote for it. After the election, the president is impeached for speculating in cow futures. The press dubs the affair “Cowgate.” The cows are set free.
Democracy, Democrat-style: You have two cows. Your neighbor has none. You feel guilty for being so successful. You vote politicians into office who tax your cows, which forces you to sell one to pay the tax. The politicians use the tax money to buy a cow for your neighbor. You feel good. Barbra Streisand sings for you.
Democracy, Republican-style: You have two cows. Your neighbor has none. You move to a better neighborhood.
Indian Democracy: You have two cows. You worship them.
British Democracy: You have two cows. You feed them sheep brains and they go mad. The government gives you compensation for your diseased cows, compensation for your lost income, and a grant not to use your fields for anything else. And tells the public not to worry.
Bureaucracy: You have two cows. At first the government regulates what you can feed them and when you can milk them. Then it pays you not to milk them. After that it takes both, shoots one, milks the other, and pours the milk down the drain. Then it requires you to fill out forms accounting for the missing cows.
Anarchy: You have two cows. Either you sell the milk at a fair price or your neighbors try to kill you and take the cows.
Capitalism: You have two cows. You lay one off, and force the other to produce the milk of four cows. You are surprised when she drops dead.
Singaporean Democracy: You have two cows. The government fines you for keeping two unlicensed farm animals in an apartment.
Hong Kong Capitalism (alias Enron Capitalism):
You have two cows.
You sell three of them to your publicly-listed company, using letters of credit opened by your brother-in-law at the bank, then execute an debt/equity swap with associated general offer so that you get all four cows back, with a tax deduction for keeping five cows.
The milk rights of six cows are transferred via a Panamanian intermediary to a Cayman Isands company secretly owned by the majority shareholder, who sells the rights to all seven cows’ milk back to the listed company.
The annual report says that the company owns eight cows, with an option on one more.
Meanwhile, you kill the two cows because the Feng Shui is bad.
Environmentalism: You have two cows. The government bans you from milking or killing them.
Totalitarianism: You have two cows. The government takes them and denies they ever existed. Milk is banned.
Foreign Policy, American-Style: You have two cows. The government taxes them and uses the money to buy a cow for a poor farmer a country ruled by a dictator. The farmer has no hay to feed the cow and his religion forbids him from eating it. The cow dies. The man dies. The dictator confiscates the dead man’s farm and sells it, using the money to purchase US military equipment. The President declares the program a success and announces closer ties with our new ally.
Bureaucracy, American-Style: You have two cows but you have to kill one of them because the government will only give you a license for one of them. The license requires you to sell all your milk to the government, which uses it to make cheese. The government pays lots of money to store the cheese in refrigerated warehouses. When the cheese spoils, the government distributes it to the poor. The poor get sick from the cheese, go to the emergency room, and are turned away because they have no health insurance. The President declares the program a success and reminds us that we have the finest health care system in the world.
American Corporation: You have two cows. You sell one to a subsidiary company and lease it back to yourself so you can declare it as a tax loss. Your bosses give you a huge bonus. You inject the cows with drugs and they produce four times the normal amount of milk. Your bosses give you a huge bonus. When the drugs cause one of the cows to drop dead you announce to the press that you have down-sized, reducing expenses by 50 percent. The company stock goes up and your bosses give you a huge bonus. You lay off all your workers and move your production facilities to Mexico. You get a huge bonus. You contribute some of your profit to the President’s re-election campaign. The President announces tax cuts for corporations in order to stimulate the economy.
Japanese Corporation: You have two cows. You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You teach the cows to travel on unbelievably crowded trains. Your cows always get higher test scores than cows in the U.S. or Europe, but they drink a lot of sake.
German Corporation: You have two cows. You engineer them so they are all blond, drink lots of beer, give excellent milk, and run a hundred miles an hour. Unfortunately they also demand 13 weeks of vacation per year and are very expensive to repair.
Russian Corporation: You have two cows. You have some vodka. You count your cows and discover you really have five cows! You have more vodka. You count them again and discover you have 42 cows! You stop counting cows and have some more vodka. The Russian Mafia arrives and takes over all your cows. You have more vodka.
Italian Corporation: You have two cows but you can’t find them. While searching for them you meet a beautiful woman, take her out to lunch and then make love to her. Life is good.
French Corporation: You have two cows. You go on strike because you want another cow, more vacation and shorter work weeks. The French government announces that it will never agree to your demands. You go to lunch and eat fabulous food and drink wonderful wine. While you are at lunch, the airline pilots and flight controllers join your strike, shutting down all air traffic. The truckers block all the roads and the dock workers block all the ports. By dinner time the French government announces it agrees with all your demands. Life is good.
Political Correctness: You are associated with (the concept of “ownership” is an outdated symbol of your decadent, warmongering, intolerant past) two differently-aged (but no less valuable to society) bovines of non-specified gender. They get married and adopt a calf.
Counterculturalism: Wow, dude, there’s like . . . these two cows, man. You have got to have some of this milk.
Surrealism: You have two giraffes. The government requires you to take harmonica lessons.
^Correction
Capitalism: You have two cows and a growing surplus of milk so you consider trading the extra milk for a handful more cows. You’re neighbor see the abundance of dairy and beef coming from your farm and decides to start his own business too and now contracts with you so he can produce fresh dairy products. Subsequently, now because of the abundance of dairy products and beef an other neighbor decides to open a malt-shop.
Your village now has an abundance of cheap dairy and beef, and cheeseburgers – all because you were free to contract through the miracles of capitalism.
[quote]Mr. Chen wrote:
So if the total of US debt money it 40 trillion, how much of that should be able to be located as real, valued assets?
[/quote]
It doesn’t work that way. Once an asset is bought it doesn’t necessarily retain its “value”. Everyone values goods and services subjectively which is why prices ceaselessly change.
Let’s not forget that some of that debt was incurred for intangible goods which can have no resale value – a massage for example, cannot be resold.
I highly doubt that if all owned assets in the US were sold they would sum to $40 trillion. In stead of trying to value assets more highly they need to come down where the most buyers will be willing to enter the market. That is the only way to get the pump moving again.
[quote]LIFTICVSMAXIMVS wrote:
^Correction
Capitalism: You have two cows and a growing surplus of milk so you consider trading the extra milk for a handful more cows. You’re neighbor see the abundance of dairy and beef coming from your farm and decides to start his own business too and now contracts with you so he can produce fresh dairy products.
Subsequently, now because of the abundance of dairy products and beef an other neighbor decides to open a malt-shop.
Your village now has an abundance of cheap dairy and beef, and cheeseburgers – all because you were free to contract through the miracles of capitalism.[/quote]
LOL
Well, it’s not a pure zero sum game, but in a world of limited recources and lawyervodoo, some (billion people)get fucked and some can get away with so much.
Also @horazio, Money CAN simply vanish, as work can simply be wasted and put largely out of the economic circle. Governments are usually most effective here but with cheap fiat money, private banks seem to be even more able.
Correction #2
Anarchism: The same as capitalism except your milk is unpasteurized and you keep the heads’ of PETA members stuck on spikes at your property line as a reminder to those who would disrespect your property.
…and everything tastes better.