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

[Michel Bauwens]

thanks a lot Stan, I can see that you really studied hard and that you do
have a skill to explain complex problems to the non-initiated ..

I understand now that estimated value of assets does not equate really spend
money ...

how would you advise people to study the economy, starting from scratch? how
did you do it?

Michel

On Sun, Jan 11, 2009 at 1:53 PM, Stan Rhodes <stanleyrhodes at gmail.com>wrote:

> Michel,
>
> Thanks, I'll try to answer your questions, but I think in some cases
> they carry incorrect assumptions that must be teased out.
>
> 1. The value of assets is not in the market as actual money.  The
> assumption that "at one point, somebody did buy it at such value" is
> incorrect if you mean the current valuation.  As with the diamond
> example, if I pay $75, and then it increases to perceived value on up
> to $200, but then I have it appraised and it's not worth anything, how
> much did I lose?  I lost $75 (plus interest, or some sort of
> opportunity cost).  Not $200.  Being valued at $200 doesn't mean I
> bought it for $200, nor that anyone else did.   People may have been
> willing to buy it for $200 before it was appraised, but once they find
> out it's glass, they'll offer me only a penny.  The price of the asset
> is always an estimation of its value by others in the market.
>
> The speed/ease with which assets can be converted to cash is known as
> their liquidity or marketability.  Since assets are not money, but
> stores of perceived value, some are far easier to sell for cash than
> others.
>
> A quick and simplified example of an asset relevant to the crisis: a
> mortgage, which is a promise to pay some amount every month.  If I'm
> an investor and I have a slice of that mortgage, I get paid every
> month, and I get more back from my investment in that mortgage than I
> might have if I had deposited the money in a savings account.
> However, the mortgage has more risk: the borrower might default.  To
> communicate this risk to investors and the market in general,
> borrowers and mortgages themselves are rated.  The rating system
> failed.  Between conflicts of interest and improper checks and
> balances, it failed to properly assess risk.  Of course, there was
> more than a single mortgage: there were pools of mortgages that were
> sliced and diced, repackaged, and swapped about.
>
>
> 2. I can't tell if you see a problem with assets, or a problem with
> the fractional-reserve system, or are somehow sort of combining the
> two.  I will separate the two.
>
> First, I'll use mortgages to clarify.  Sure, in some cases people took
> out a loan and used it for a vacation, but many also used one for home
> improvement, thus--in theory--increasing the value of their home.
>
> Assets and credit/loans are two different things.  The diamond analogy
> only goes so far; instead, maybe I should have used a laying hen that
> produces eggs regularly... does a foreclosed chicken = dinner? The
> trick is that in a mortgage, a person's promise to pay is used as an
> asset by the bank, as mentioned above.  On the borrower's side is a
> line of credit or loan in exchange for his promise to pay, with his
> house as collateral.
>
> If the borrower does not pay back as promised, the bank forecloses on
> the property.  The bank then attempts to sell the collateral (the
> property), and apply that money toward the debt.  Remember, the
> mortgage--as an asset--has value because of the income stream created
> by the borrower paying back his loan.  If the borrower defaults, that
> income stream doesn't exist, and the value of the mortgage drops.
>
> Second, concerning loans: the bank can always lend money.  The riddle
> is this: If the bank "lends again," is it lending the same money it
> "destroyed," or different money?  The answer: It's irrelevant.  The
> bank's books just have to balance.  This is hard to grasp because most
> of us earn money and treat it as a tangible, real unit that is
> exchanged for goods and services.  You have to forget what you think
> you know about money, and look at the actual flow.
>
> In theory, what Thomas said about the loan is correct, but in
> practice, it's not visible or particularly relevant.  That may seem
> extreme, but what actually matters to a bank is how much it can lend.
> How much the bank can lend is determined by the regulations of our
> fractional-reserve system:
> http://en.wikipedia.org/wiki/Fractional-reserve_banking
>
> The original questions concerned the drop in value in financial
> markets, and where that perceived value--which was confused with
> money--went.  The super-brief response to the original questions is
> this:
>
> The (US) stock market is valued using a dollar amount, but that amount
> is actually _perceived value_.  The dollar value is only a measure of
> estimated worth of assets; it does not exist as money.
>
> -- Stan
>
> On Fri, Jan 9, 2009 at 5:04 AM, Michel Bauwens <michelsub2004 at gmail.com>
> wrote:
> > Dear Stan,
> >
> > Thanks for taking all that time to explain things,
> >
> > however, I still don't see the logic of the 2 things that thomas claimed,
> so
> > perhaps you, or someone, could answer those very specifically
> >
> > PROBLEM 1:
> >
> > - the stock market is worth say $3Tr, and because of a crash, it's
> suddenly
> > only worth $1Tr. I'm assuming that money has disappeared from
> circulation,
> > because at one point, somebody did buy it at such value, yet is not
> getting
> > it back ... (or is it not really destroyed, because somebody actually got
> > paid that overvalued amount at some point?). In the first case, if the
> $2Tr
> > is destroyed, and the govt only creates $1Tr, then there is still less in
> > circulation than before, and therefore, there is no inflation. Would a
> case
> > in point not be japan, that flooded the market after the 90's crisis, yet
> > remained in deflation because it could not compensate the value loss. In
> any
> > case, I have seen this argument being used by serious economists
> >
> >
> > PROBLEM 2
> >
> > - Thomas says that when A creates a loan for B, and B repays that loan,
> that
> > money is destroyed, yet, this is money that the bank can lend again. On
> the
> > other hand, if person B invests that money  in a diamond, which turns out
> to
> > be glass, and looses that value, then the money is not destroyed, even
> > though he cannot actually use that money again .. The issue is the same
> here
> > I think: do we consider that this lost value was at least paid to
> someone,
> > who presumably could use it. If that is the case, then the money was not
> > lost. However, that doesn't change the argument concerning the bank, and
> the
> > illogicallity of pretending that a repaid loan that can be used for new
> > loans actually means that the money was destroyed ...
> >
> > Michel
>



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