[p2p-research] Fwd: Where does the "lost" money go ? can we find it and get it back ?

[Stan Rhodes]

Kevin, added you in case something I said needs to be slapped around a bit.

There are three concepts here.  One is "asset value," one is the
creation of money via "credit" (aka the "monetization of debt"), and
the last one is "inflation."

The "money" doesn't go anywhere if there is something valued (an
asset) that drops in value.  You've probably heard the term "toxic
asset."  A "toxic asset" is just something that's not worth the price
tag people have put on it.

Consider a gemstone you think is a diamond, and you think is worth
1000 USD.  You go to sell it, and the prospective buyer has it
appraised.  The appraiser tells you both it's just glass.  The
asset--the glass you thought was diamond--is essentially worthless,
and has negligable value.  No one "wins" that "lost" value.

Stocks and various financial instruments--assets--that are held for
their monetary value can lose their value too, but no one "gets" that
drop in value as money.  It's a question of who holds the hot
potato(es) when the value plummets, and in this case it was a
significant portion of the financial sector.  In a bubble, those
making a lot of money from the bubble also stand to lose their ass in
it as well, and often do.  Most simply have no idea when the bubble
will pop, and they're getting GREAT returns in the meantime...

The estimated value of the mortgages came from the estimated value of
the homes, and that value had been increasing constantly, beyond
anything reasonable, creating a bubble.  A bubble is when assets are
valued much more than they're actually worth.  Not many people care
that the overvalued assets are overvalued during the bubble, because
everyone's buying and selling and the value is growing.  Eventually
this inflated sense of value "pops" when people realize the assets are
not worth as much as they are priced.  That's the asset portion of the
mess, in simple terms.

In case Thomas' reply about credit and monetization wasn't understood,
I'll explain that briefly too. "Monetizing debt" means the government
borrows money from the Fed and spends it as money.  Essentially, the
government is credited Federal Reserve Notes (USDs), with the promise
to repay that debt to the Fed Reserve in the future.  The government
then puts this money into circulation by spending it.

The concept of money created from credit is simple enough in concept.
Think of 3 people on an island that use IOUs with each other.  One
harvests coconuts, another fishes, and another makes sandals.  Let's
assume they value fishes and coconuts the same, but sandals are worth
about 10 fishes or coconuts.  We can see how credit (IOUs which are
money) flows:
1. The coconut gal needs sandals, so she "buys" a pair from the sandal
guy by writing him a 10-coconut IOU.
2. The sandal guy needs some fish, so he gives the fish dude the IOU
for 10 coconuts in exchange for 10 fish.
3. Later that day, the fish dude brings the IOU to the coconut gal and
gets 10 coconuts.  The gal destroys the IOU.
The cycle of credit has come full-circle.

Our government essentially tells the Fed Reserve "IOU 10 USDs," the
Fed Reserve says "ok, I'll put those in your account, but you owe me"
and the government then spends those USDs on programs or bailouts or
whatever.  At some point, those USDs are supposed to be paid back to
the Fed Reserve.  That's why those USDs are also called Federal
Reserve Notes--they're IOUs to the Fed Reserve.

In theory this is useful, because our government, like the coconut
gal, could get the sandals when she needed them and then pay back
later.  In other words, the government could get a wad of cash when it
needed it and pay that wad of cash back later (via collected taxes,
for example).  This is what banks do when they give someone (person,
business, another bank) credit.

You may be asking "why do we need the Fed Reserve to create money and
lend it to us?"  Good question, but that's another very long
discussion, one that I think begins with "In theory, we really don't
need them to, because we could do it ourselves..."

Lastly, INFLATION.  Monetary inflation, as Thomas said, is pumping
more money into the economy, diluting the money supply.  It's
"dilution" because the same "value" in the economy is spread over more
money, meaning each money unit is worth less value than it was--it's
diluted.  Gum was a penny, now 50 pennies.  The gum, itself, is still
just gum, but a penny is worth less than it was.

Take the islanders again.  There is no need to destroy the IOUs when
they come back to the issuer, since they'd just need to write one
again.  They become "monetized debt."  These dollars go into
circulation and occasionally one of them writes additional dollars
when they wear out.  There are only 3 people, so it's pretty easy for
the islanders to keep an eye on one another, and each knows the other
is good for it.

Let's say they make an "official" unit: the former IOU 10 becomes 10
"island dollars."  The IOUs are no longer connected to a particular
person, they are just an exchangeable note. They also make these
dollars legal tender: all 3 agree it MUST be accepted for all debts,
public and private, just like our Federal Reserve Notes.  Although a
dollar was originally valued as roughly one coconut or one fish or .1
of a pair of sandals, supply and demand causes fluctuations in price.
That's fine, and expected.

Over time, more people wash ashore and begin exchanging their goods
and services, until there are 10 islanders, all using the established
money system.  One of them--we'll call her the rancher--wants to clear
a section of land and build a ranch for the island's native flightless
birds, so she can produce and sell more eggs.  To finance this, she
creates 10000 dollars, and figures that, once she's built her ranch,
she'll just destroy 100 dollars that come to her per week.
Essentially, she is acting as a bank, and loaning to herself by
monetizing debt.

The island hasn't run into this situation before, but it's "legal,"
and the rancher has good intentions.  She wants to create something of
value to her, and likely the community.  This new development seems
reasonable enough to everyone.

The rancher spends this 10000 dollars on supplies and labor.  The
others are just a little uncertain that she'll be able to provide
enough goods and services to "repay" in "good time."  They're not sure
she sees how much those 10000 dollars are worth to everyone.  As she
spends more money, and it enters into circulation, the islanders see
more money in everyone's hands.  Those working on her land ask for
higher wages than they earn on their own, both because they know she
needs the help, and because they feel they should be compensated more
for spending their leisure time working.  Other islanders see this
increase in the money supply, and realize they could ask a little more
for their good and services, and get it.  These factors combine to
nudge the islanders to increase their prices.

Thus, the islanders see the value of their dollars decrease as prices
increase, and marvel at inflation.  Sandals now sell for 20 dollars,
coconuts for 3 dollars (they cleared coconut trees for the ranch, so
coconuts are more scarce), and fish for 2 dollars.  "Why, back in the
old days," the original 3 islanders complain, "a fish only cost a
dollar!"


I hope these explanations begin to reveal some of the mechanics behind
the issues discussed.  I don't know how far the email goes back.
However, I think anyone discussing money and economics should also go
through the effort of reading some of the material online, including
some of the material, like E.C. Riegel's work (Thomas makes this
available online because he's awesome), and some basic Austrian,
Chicago, etc school perspectives (use wikipedia at least), and so on.
Just because many people are confused about what things are and why
they happen doesn't mean that no one knows, or that the whole thing is
a weird scheme (well, ok, the Federal Reserve is a weird scheme).

Also, Michel, think about it backwards, or maybe inside-out.  Credit
is (in theory) a measure of your "worth" in demanded value.  This is
why Chris Cook talks about guarantee societies and credit as a
relationship.  If the rancher took the loan from an actual bank, but
couldn't pay it back, the bank would lower the measure of her "worth"
in public-demanded value (goods and services the public wants).  In
other words, if you take more than you can pay back, you will be
allowed less credit, or perhaps none at all.  The "loss" is then
written off, and you can think of it as the "cost" of the system
learning and revising your credit worth within the "flow" of money.
In a fair system, the overall burden of the lesson is borne by
everyone, and perhaps a little more by those responsible for
monitoring credit ratings.  In an unfair system, well... take a look
around!

Essentially, the current problem is, not only is the monetary system
out of the public's control, it failed to judge actual value worth a
damn.  The solution presented is to monetize a bunch of debt--print
money.  Yes, that will lead to monetary inflation, but that might not
actually be such a big deal IF the socioeconomic system were also
revised/reformed/evolved to be more equitable.  Right now, that AIN'T
going to happen.

Many battles I've seen between Austrian (take your pick on Mises.org)
and Keynesian (people might recognize the name Paul Krugman) seems to
often be fought over, around, in, or through, inflation.  The debates
touch on the rest of the system, but so often come back to one side or
the other's perspective on inflation.  In actuality, inflation just
is, it's socioeconomic equity that really matters.

-- Stan

On Mon, Jan 5, 2009 at 1:34 AM, Michel Bauwens <michelsub2004 at gmail.com> wrote:
> Hi Thomas,
>
> but your answer then leaves the question: where is the money gone that has
> been wiped out as value from the stock market and housing prices?
>
> since in your account it is not lost, where is it and who has it?
>
> I find your answer to be very counter-intuitive and the opposite of what I
> would assume.
>
> If you cannot repay it, it's lost, but if you repay it, it is again
> available for further loans and as basis for fractional reserve, and
> therefore, in my view, not destroyed.
>
> Michel
>
> On Mon, Jan 5, 2009 at 10:21 AM, Thomas Greco -- thg <thg at mindspring.com>
> wrote:
>>
>> Money is created when banks make a loan; it is destroyed when the loan is
>> repaid.
>>
>> The bailout will be inflationary because the debts that are being shifted
>> from the private sector to the public sector are debts that cannot be paid
>> by the original debtors. Government will take the loss, not by using tax
>> revenues to repay them but by monetizing more government debt. That will
>> dilute the value of all the money already in circulation.
>>
>> Tom
>>
>> ----- Original Message -----
>> From: Michel Bauwens
>> To: Nicholas Roberts
>> Cc: Thomas Greco -- thg ; Peer-To-Peer Research List
>> Sent: Sunday, January 04, 2009 10:55 AM
>> Subject: Re: [p2p-research] Fwd: Where does the "lost" money go ? can we
>> find it and get it back ?
>> Hi Nicholas,
>>
>> Does the money have to 'go' anywhere ...
>>
>> Since it is created 'out of nothing' through fractional reserve banking,
>> why can't it be destroyed just as easily, in the equivalent of a virtual
>> fire?
>>
>> I understand from some remarks, 'the bailout won't create inflation
>> because it's merely trying to replace lost money', that this money was
>> effectively destroyed.
>>
>> Perhaps monetary transformation expert Thomas Greco has some insight to
>> your question?
>>
>> see also http://p2pfoundation.net/Category:Money
>>
>> Michel
>>
>> On Sun, Jan 4, 2009 at 12:05 AM, Nicholas Roberts
>> <nicholas at themediasociety.org> wrote:
>>>
>>> --
>>> Nicholas Roberts
>>> [im] skype:niccolor
>>>
>>>
>>>
>>> ---------- Forwarded message ----------
>>> From: <nicholas at themediasociety.org>
>>> Date: Sat, Jan 3, 2009 at 5:16 PM
>>> Subject: Re: Where does the "lost" money go ? can we find it and get it
>>> back ?
>>> To: Dean Baker <dean.baker1 at verizon.net>
>>> Cc: Noam Chomsky <chomsky at mit.edu>
>>>
>>>
>>> happy new year Dean
>>>
>>> who takes it out of circulation ? how ?
>>>
>>> is it destroyed ? made null ?
>>>
>>> how much of the wealth from a bubble gets accumulated by the rich
>>> promoting the bubble ?
>>>
>>> how much gets taken out of circulation ?
>>>
>>> is there a good reference to this ? a website or book ? I am
>>> interested in the formal process and also the reality...
>>>
>>> thanks in advance
>>>
>>> -N
>>>
>>> On 1/3/09, Dean Baker <dean.baker1 at verizon.net> wrote:
>>> > Hi Nicholas,
>>> >
>>> > It's just like counterfeit money that has been seized by police. It is
>>> > wealth that is taken out of circulation. It means in principle that the
>>> > people who did not own stock and did not lose wealth can be better off,
>>> > assuming that the demand generated by this stock wealth (people spend
>>> > in
>>> > part based on the wealth they hold in stocks) is replaced by other
>>> > sources.
>>> >
>>> > regards,
>>> >
>>> > dean
>>> >
>>> > Nicholas Roberts wrote:
>>> >> hi Dean
>>> >>
>>> >> this is a really obvious question, but I have yet to find a good
>>> >> answer;
>>> >>
>>> >> where does the money "lost" in the stock and housing bubbles go ?
>>> >>
>>> >>
>>> >> is it destroyed ? how and where ?
>>> >>
>>> >> is it transferred ? how and where ?
>>> >>
>>> >> is it accumulated ? by whom, how, where  ?
>>> >>
>>> >> can we get it back ?
>>> >>
>>> >>
>>> >> are there any good flow diagrams that explain this in plain terms for
>>> >> regular folks...
>>> >>