Where has all the money actually gone?

Because credit created the illusion of economic prosperity and a vibrant market place. Money didn’t go anywhere, because it never existed. The dangers of a commercial culture based more and more upon deferred payment, and a parasitic subculture that enthusiastically trades not in goods or even services or indeed in anything tangible but in credit and derivatives.

@auntydeb you’re from the Uk right? do you remember when KLF burnt £1000,000, remember that?

The Grave,

Money system is a value system,which uses cash as tangible value representation of tangible things, and the actual value is in the mind of those who uses this system.

Now those who benefits most from the system are those who are most greedy…
and a greedy person is actually a grave, one who takes and give nothing unless he can get more.

Now again all physical things are destined to the grave also,
simply because they break down and become worthless because of that or merely because it has lost all value in the eyes of it’s owner except it’s cash value.

So money is in the hands of the grave minded and would only spend to enslave you to their grave minded way, thus gaining more unto it self.

And the rest are sitting in their physical graves rotting.

To be free stop seeing value in cash and other tangible things, but only that which is you that would live indefinitely….

and that is Truth.

@mammal – (re The KLF) yup, I do. So?
I also remember them telling us they were all off to moo-moo land, with Tammy Wynette.

@kess – thought provoking and evocative answer…

@coffeenut – Wow! Wondrousness abounds. That was hilarious and interesting.

OK, I have a male relative who works in a Bank in Central London. His role has to do with security, the transport of ‘money’ about the place in vans etc. He also has had dealings with the sorting and disposal of old paper money and has an unusual claim: to have juggled £200,000 in bundled notes… The amount of money sounds great, but actually, the feat itself is more memorable, a silly and ordinary thing to do while working in a pretty mundane job.

My Husband and I live simply, we have very little income and would not choose to be wealthy in the monetary sense. Life, in all its amazing complexity, is far more important than the tokens with which we trade. Still, where did all the digits go? Is it simply that the heads of finance pegged the nominal values down?

If you paid $100,000 for a house, you feel like you have a house worth $100,000 (if not more, when you sell it) and will make decisions based on that. But if the house is suddenly only worth $50,000 because peoples’ opinions about the value changed, then you feel you have lost half the value in your house. $50,000 is gone. But where did it go? It’s not like someone came and took 50K away from you. It’s just gone – because you can’t get it.

That’s what it’s like. It came from you, but it went… nowhere really. It’s not money that disappeared, it’s value – or at least perceived value – because this way, the money system got smaller. And every market indicator is screaming for more money to be injected into the system. That’s why we have things like Stimulus and Quantitative easing going on, where the Fed “prints” more money to use to buy back bonds it has issued in the past. The economy still depends on all the cash that ‘disappeared’ when your house lost half its value (and so did the junk investments that people bought that were based on it). Yet that’s exactly the thing that much of the Right and some of the Left wants to avoid – this injection of cash into the economy to replace all that lost value.

@auntydeb well, that’s when a million quid genuinely did disappear. btw if i had made a million quid out of that particular song i would burn it to. Were they taking the piss?

This is worthwhile, a 3 minute video:

Planet Money’s Toxic Asset
Planet Money is committed to following the financial crisis to the bitter end. And what better way to do that than to own a piece of it. We bought one of those things that no one wanted, one of those things that almost brought down the global economy: our very own toxic asset.

And here’s an hour on the subject. You can listen online or download a transcript. I think it’s also available free as a podcast in the iTunes store.
The Giant Pool of Money
A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s?

One of the measures of money is its velocity through the system. If you earned $10 today and spent it at the grocer’s, and he spent the same $10 on a haircut, and the barber spent the same on cigars, etc., then the same $10 bill would be ‘counted as’ a multiple of itself at tax time. On that particular day, the $10 could have been ‘worth’ $30 or $40 or more.

So as times are perceived to be tougher, then perhaps you don’t even earn the full $10, decide to stay home and save what you have instead of shopping, and thereby slow the economy by the money you might have otherwise spent. Multiply the actions of this one person by the many millions of other individuals making the same decisions, and the economy naturally slows.

That’s one way.

But money is actually created from ‘nothing’, and can disappear the same way, quite literally. In the US, banks ‘create’ money every time they make a loan. With the fractional reserve system, a bank can lend money that it doesn’t actually have in its vaults or on its books. If the bank has $1,000,000 in its vault, for example, it would never lend all of that in the form of cash to a borrower. But it can actually lend more than that, and borrow what it needs to from its own lending bank. This process goes all the way upstream to the Federal Reserve (and I’m not going to detail the entire process!) but the Fed starts the whole process by selling Treasury Bills which are nothing more than promises to pay later… which created the ‘money from nowhere’ that can then be lent downstream to commercial banks.

@laureth‘s answer is also correct. “Perceived value” is also another form of wealth that can come and go based only on people’s feelings about worth.

A culture built around how lovely the Emperor’s New Clothes look… through a glass darkly! This is lovely stuff, thanks @CyanoticWasp , @laureth , @jaytkay (will look at link when have more brain space, up to ears in Christmas cards at the mo!) all confirming worst simple fear. Hmmm, I know there have been questions about alternatives to a money economy, no simple answers, but surely all this bluff must eventually find a call – in the waste it creates and the pointlessness of pursuing such imaginary goals? More please!

Money used to be backed by gold and banks were required to keep a significant portion of customer deposits on hand in case customers needed it. Banks lent money a small portion of funds out to other customers to build houses, start businesses, and buy products. After a while, clever bank managers noticed that they never touched most of the money that was sitting in the vault. They began to lend out more and more while reducing the reserves. They made a bigger profit and customers did not notice. Win-win. Or so they thought until there were a few bank failures due to customer panic, (run on the bank). Policies were implemented that stated banks needed to keep 16% (it varies) of their funds in liquid reserves to cover customer demand. If all of the 84% was lent out to customers and put in circulation they effectively increased the economy 6x. Houses are bought and sold, TVs are purchased, people are working to make these products.
Companies are created and sell shares of stock with the promise that they will make money. Investors contribute funds that the company uses to make products or provide services.
Now imagine the products are made elsewhere. The cars and TVs are made in another country that is using the funds to fuel their own growth. Factories close, people lose their jobs. They cannot afford to pay their loans. The houses they bought for $250k cannot be maintained and are moved to foreclosure. The loans the banks previously valued at book-plus-interest are sold as toxic assets at 1% of face value. More homes go up for sale and property values begin to plummet, due to the laws of supply and demand. Banks an businesses no longer have the bright future they had so stock prices begin to plummet as well. Fewer people are working and more require services and assistance. The funds must come from somewhere and that usually means either increased taxes or the country may provide the services by deficit spending – effectively borrowing form other countries.

Throw in a war or two costing a couple of trillion dollars, a medical system that uses expensive equipment and drugs to care for an increasingly older population working fewer years and living longer. Season that mix with the flow of illegal drugs that further suck resources from society with its attendant increased crime rate, medical expenses, education system failures, birth defects, and the services a magnanimous society provides and you can imagine where the money went.

From now on I’m keeping mine in a sock.

@worriedguy thanks, yes, imagination runs a-riot. With the time of year, perhaps a Christmas stocking would be more appropriate?

I recall as a child, seeing some programme on TV about The Bank of England, the gold reserves etc and how it served as our ‘wealth’. The weirdest thing was watching the endless dance of forklift trucks, a whole team of chaps driving them, moving piles of gold bars from one cage to another, assigning the ‘wealth’ to the holding bays of different countries. Just moving about the gold bars, in response to the tickertape messages about value of money ‘above ground’ so to speak. Pointless.

Sigh.

In the words of Tears for Fears, (original) it’s a ‘very, very Mad World’...

Your question has three obvious answers: greed, credit cards and unions. this is a deadly mix for any states economy.

Greed results in crimes. credit cards result in over useage, and unions create a vicious circle of money demands and benefits that never end.

It was just a matter of time, before all of the above, would hit countries and humans in their pocketbook.

The good times were good and now the bad times are here.

@auntydeb By inventing banking, stock markets, derivatives, credit cards, the players have managed to increase the perceived wealth of a country and all its inhabitants well beyond the piles of gold being shifted about on fork lifts. It is truly a great invention when applied correctly.
Three things add to the true wealth of a country – mining, farming and manufacturing. All the rest is a shell game moving funds from one place to another while allowing handlers to take a cut. Since the three contributing industries are on the decline, service industries and credit have taken their place.
I try to keep my money in my sock, house, town, state and country, in that order.
Sorry, luv, they’ll be no Fortnum & Mason hampers from me this year. ;-)

My FB status just today: “So they pulled off the greatest swindle of all time… replacing the trade of goods and services with a trade in a would-be worthless material, except they say it has value. Then, armed with their now invented resource, they systematically purchased the things with intrinsic value. Novus ordo seclorum, indeed.”

@JeanPaulSartre Let’s take the magical mystery tour one stop further down the road – to “Derivatives”. Most people haven’t a clue what they are. In my two previous posts I spoke about stocks – effectively shares of a company that has value due to the promise of profit. The value of the stock, is at least tied to the mythical assets and net worth of a company:
the company does well, the stock goes up, the company does poorly, the stock goes down.
Even that did not give the money guys the leverage they wanted.
Derivatives are devices like Options – puts and calls. A call is the right to buy a stock at a certain price by a certain date. A put is the right to sell a stock at a certain price by a certain date. What does that mean? An example makes it easier to understand.
I will make up some numbers. Let’s say a stock is selling around $49 per share If you have 100,000 to invest you can only buy 2040 shares. If the stock goes up $1 you will make $2000. (the handlers have to get their cut, of course.)- But that is not enough for the money guys. They want a way to get more. So they might check Black Scholes and see that the Call 50 option on that stock is selling for $1 per share. For the same $100,000 they can have 100,000 of these . If the stock moves up one point to 50, the option might go to $2. They make a cool $100,000 in three or four days. But what if it goes down? Don’t worry. They won’t go hungry. They borrowed the money from a pension fund or other source of funds. It is OPM – other people’s money. If they are successful, they take $20,000 – $30,000 bonus for being a genius. If it goes down they lose nothing The yield on your mutual fund is slightly lower. You don’t even notice.
Magic.

I simplified a bit. Options are sold in lots of 100 and the numbers are not quite so round. Ther are more opportunities for handlers to get cuts.You can look up true values on google or yahoo finance.

Money represents the level of trust and confidence people have that the amount of money equates properly to the amount of stuff there is in the world. Through various mechanisms, it became clear that a lot of people were manipulating things to make it appear as if there was more stuff than there really is. As a result, people lose confidence that the money is an accurate reflection of all we value.

When confidence goes, people buy less and when people buy less, demand is reduced and when demand is reduced, there is lower employment, and people have less money, and go bankrupt or can’t pay their mortgages and companies go out of business.

We need to rebuild confidence and that takes a couple of things. First it takes some regulation to make sure we can’t get ourselves into the same trouble as we are in now. Second, we have to rebuilt trust—and as with relationships, that takes a long time.

@worriedguy
You also simplified the part about how options are not just in place to help speculators make a killing with OPM, but were developed for and are mainly used by owners of stocks (and other goods) and potential owners to hedge their predictions. Speculators provide liquidity to the market, as they provide liquidity to all financial markets, by being ready buyers and sellers.

@worriedguy – the word ‘invention’ has solved it for me, effectively, thank you. Methinks the necessity of our times may in fact parent new invention, I hope so anyway. Very disappointed not to be looking forward to a Fortnum’s Hamper though.

@CyanoticWasp True. I tried to keep my answer to a reasonable length or else TL,DR sets in. I figure if anyone cared to know more they can google the terms.

Interesting question. As I read through the thread I see a lot of explanations on why it happened rather than where the money went. Heck, it gives everyone a chance to vent their own political agenda. Kinda fun. But it doesn’t really address the question.

Let’s look at a typical person making $1,000 week ($52K annually). Owns a home (with a mortgage) and hasn’t lost thier job. Net worth is a composition of all you own and rightly or wrongly, we tend to gear our spending on how much we have and how much we have left after the bills are paid. If this guy hasn’t lost his job nor taken a pay cut, he should not be any worse off, right? Not quite.

Say you had a typical small SUV, getting 20mpg. Before all this started you were paying about $1200/yr ($100/mo) for gas. At the peak of the recession you were paying $2400/yr ($200/mo) where did that money go, Saudi Arabia. Right now you are paying about $1800/yr. The Saudis are doing quite well. So that’s a piece. Also, since you are paying more for gas, you may want a more economical car. Unfortunately your car is worth less because of the mileage, so your trade in has less value, anywhere from a few hundred to a few thousand in trade in value. Where did that money go? It simply evaporated. There’s no question it was real money when you bought the car but the value is no longer there.

It doesn’t stop there. Say your house was worth $200,000. Now it’s worth $160,000 (a 30% decline). Also say you were a responsible citizen and bought it with 20% down. Your 20% ($40,000) is gone. Where did it go? The evil bank didn’t take it, hell their losing money as well. It was real when you bought the house but it’s gone, evaporated. To make the problem worse the bank now has to scramble to come up with the difference in thier asset base.

Let’s say the bank has one depositor and one borrower. The deposit was $160,000, the same $160,000 you borrowed to buy the house. The bank had the asset (mortgage on your house) with plenty of room to spare (house was worth $200,000. Now however, the need to come up with an additional $20,000 just to cover their deposits. Once again it was real when it was deposited and real when you borrowed it. Now it’s gone, evaporated.

This is how some of the banks went bankrupt. Their revenue didn’t change, their expenses didn’t change, but the value of thier assets went down and they could no longer cover the deposits. Bankrupt!

So back to our guy making $52,000/yr. He’s paying more for gas, less income. He may be paying more on a car loan to compensate but again less income. He now has a mortgage that’s under water so he feels broke and has lost $40,000 in real money. He no longer has an asset to borrow against if things go bad, so he’s trying to save a little, less spending. With less spending comes a reduction in goods and services, maybe he’ll fix that old dryer instead of replacing it. Consequently fewer jobs. the only people that made out were the Saudis, the rest just evaporated.

It’s a bit more complex than this and yes derivatives and play a part in making it worse but the general concept is valid.

The U.S. owes huge amounts of money to China ($2trillion) It reminds me of that old saying: “If you owe someone a thousand dollars, then you’ve got a problem. If you owe someone a million dollars, then he’s got a problem.” Now, the US owes China two trillion dollars. Who’s got the problem?

The U.S. GDP is about as high as it ever was. The problem is that it is mainly in the hands of the rich. The rich got richer, the poor got poorer and the middle class got squeezed. Wealth distribution in the U.S. is more skewed than at any time since the Great Depression.

@worriedguy The gold standard is a seductive illusion of stability for financial markets. Actually, gold is just as much a fiat currency as cash. Remember that the largest loss of perceived value in US history was the Great Depression of 1929. The gold standard was in force them. To see the fallacy of gold’s intrinsic value, consider this. If people were starving, and you owned the world’s only productive corn field, how much gold would you want to sell your field and eat gold instead of corn?

@mammal, @jaytkay, @laureth, & @CyanoticWasp all have given you part of the answer. There was FAR more apparent money in circulation than actually existed. The total real estate portfolio was about $5 trillion in the US. Wall Street firms played Casino Capitalism thanks to the deregulation handed them by Republicans with the Gramm-Leach-Bliley Act of 1999, which to be fair, Bill Clinton signed into law. This law allowed the creation of enormously leveraged debt instruments called derivatives built mostly on the $5 trillion of mortgage debt. $62 trillion per year in derivatives were traded in the USA in 2006.

Now many of the loans, particularly the sub-prime loans, used to create the massive derivatives market were known to be bad debt at the time they were created. The lenders were not as stupid as the public they seek to deceive. Some on Wall Street were peddling the derivatives to well-healed suckers while secretly betting against them in their own investment portfolio. They are the ones that the first wave of lost money went to. They were only earning a billion a year or so, and so desperately needed more money.

Then the billionaires that understood money well enough to be ready enjoyed a fire sale. They bought up (and are still buying) houses and commercial properties that had been repossessed and sold at auction. Mind you, some of the buyers were the very Wall Street billionaires who created the whole fiasco to begin with, and lost nothing in it because they knew they were “too big to fail.”

So lots of money got transferred from the average Joe taxpayers of the developed world to the privileged few who already held most of the wealth. Now, to balance the budgets, we have to cut any support to the people they took all that money from. They have no intention of ever giving it back.

Let me add that this is NOT an indictment of billionaires. Many earned their wealth by hard work or inheritance and had no part in the debacle, nor did they try to profit from it. But there is a growing group of oligarchs around the developed world that wish to put their families in position to perpetual rule the planet for their own benefit, and they are putting their money to work supporting politics and candidates that will allow them to do it.

Refresh my memory, but wasn’t the derivatives market around $65 trillion that never really existed when the bottom dropped out? I think the derivatives market is currently around five times the combined GDP of every nation on Earth, in effect making most of what we use to buy stuff with only a small step above Monopoly™ money in actual value.

@Jaxk Do you have the numbers on that?

To the rich, who threw some out the window.

@jerv The number I have seen was $62 trillion annually for the US and over $300 trillion for the world as of 2006, the last full year before the crash began.

Money is monopoly money. So is gold. Corn has intrinsic value because you can eat it. A house has intrinsic value because it keeps you out of the rain, snow, broiling sun and freezing cold. A boat has intrinsic value because you can fish with it or go where you need on the waters. Gold only has value when you have food, shelter, and transportation solved; and want pretty jewelry to show you are above all that.

@ETpro And if the US marketplace is to be believed, humanity has no intrinsic value (just perceived value), which tells me that our economy is at odds with reality :/

If money is worthless then why does it matter so much where it went? Or are people very good at confusing perceived and intrinsic values?

@jerv I did not mean to say money is worthless, only that it does not have intrinsic value. It is worth what we collectively believe it to be worth.

@ETpro “Worthless” may have been a bad choice of words there. Mea Culpa.

Money just goes in a circle. It is created by the federal government, circulated, and returned to the feds, except for the portions that end up getting horded for some reason. When no transactions exist, no money is spent. It is not about the money. It is about the transactions between people.

Everything has value that is applied by society. Your house is only worth what someone will pay. It doesn’t matter what it is or what currency you use. Pay for it with bushels of Corn and you’ll still find the value of your house will fluctuate. Hell even the value of the corn will fluctuate, just take a look at the commodities market on any given day.

If you own a home, have a nice car in the garage, maybe a big screen TV, even a painting or two. Your net worth maybe as high as a $million. Then the house burns down. You have nothing. Where did the money go? Up in smoke.

@Jaxk Well put. Buy fire insurance.

For applications, call 1–800-555–1212.

@ETpro

Can we assume your an insurance agent?

@Jaxk Trust me. Just dial the number.

A lot of information has arrived here, as a result of my original question. Much of it is excess to my personal interest – as mentioned, explanations of the actual workings of markets were not really my aim. My concerns are ultimately with ‘value’. There are some long explanations here about market values and some shorter comments regarding ‘intrinsic’ value, it is this that interests me.

The ‘invention’ of an abstracted system of tokens of exchange has enabled the growth of civilisation, and economy. In my question, I mentioned the term ‘wiped’, as in ‘millions wiped off the stock market’ etc. The banks, governments and trading posts of the world are viewed as telling a ‘real’ story, of value, as stocks, sterling and markets rise and fall; massive digits get ‘wiped’ in front of their eyes.

But the ‘real story’ is actually the one where I cannot afford, they cannot afford, or you cannot afford…

Not having enough money to live by is where the system comes undone and is thoroughly at odds with it’s own necessity. Unless of course, we (and that is all of us who have the privilege of being able to discuss the situation, essentially) condone and participate in exploitation at its worst. For every person in the UK on a very low income, whether in work or not, the choice is largely to buy cheap or to go without. Keeping up any kind of healthy diet, standard of living or cleanliness, becomes a daily matter of detailed management. Many don’t manage at all well. I imagine it is similar in all the First World countries, where people like myself just get by, those less well off don’t.

Living like this, maintains the need for low cost goods, which in turn are produced by cheap labour in countries where the work force live by hard labour and desperation. Profit has become its own nemesis, as seen in the sub-primes and losses that have taken place in recent years. And in Paris Hilton. Oh, and Joan Rivers’ face. No one should have to live that way.

Money itself is only a system of tokens. It is abstract, it is a tool. Y’know the phrase ‘flogging a dead horse’? The pointlessness of banging away at something long gone…? Well, what happens when someone finally tows away the carcase? Or points out in certain terms that the flogging is a total waste of time and energy? D’you keep flailing away at thin air?

I hope I see that happen in my lifetime. I think it is time for a new invention, or a new view of this one.

Many thanks for the contributions here, I will move on now. Merry Christmas, happy holiday, all the best for the New Year…
Debs