Lots of folks will be looking at their 401K statements and their mutual-fund logs this weekend. 95% of that money is neither smart nor sophisticated. MUCH of it will guess wrong; I suspect on the SELL side.
I think we should wait to see what they decide to do before we get too anxious/enthusiastic.
One or two more major plunges in stocks will attract every bit of sideline-CASH, and PMs will be left in the dust. THEN, it will be time to start buying PMs, slowly.
Folks Who Bite Get Bitten. Folks Who Don't Bite Get Eaten.
I'm a bull, and I'm right here. It's not a "trading range". And it's not that I'm a bull by choice - I'd much rather live in a USA where money is worth something, the stock market isn't rigged, and where the government is by and for the people. But, none of that's the case.
Q: Are You Printing Money? Bernanke: Not Literally
Central Banks had to sell off large amounts of gold to cover.
Next week the majority of the hedge funds comes due.
Yes, we are in a deflationary economy, but there is more to it than that.
A bank holiday wouldn't surprise me at all, and I don't mean Columbus Day.
"Lenin is certainly right. There is no subtler or more severe means of overturning the existing basis of society(destroy capitalism) than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose." John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
I agree, the bank holiday is coming, sooner rather than later.
where are the bulls now? my trading range seems to be holding up.
Right here, same place as last 4 years, through up times and down times.....we've never left. Your trading range is being helped by the PPT. Thank them for today's dollar and stock market gift. But $75 down in gold from $925 to $850 feels a heck of a lot better than $825 to $750. A move to $850 seemed to be very realistic. I would nto be surprised to see a drop even further...though it won't last long. The gold market is all papered up, no teeth in those prices. If you want 1 oz gold coins be prepared to pay big premiums and wait days or weeks until they show up in your local B&M. The paper to physical disconnect is getting worse, not better, regardless of where the PPT sends the gold futures price.
Inflation is being primed by these $$ trillions that the FED is racking up. Figure a year or so until you see big-time inflationary pressures returning after this bout of deleveraging winds down. Then it will be a combo of deflation-inflation all over again...only more severe. It normally takes at least 1-3 years for inflationary effects to be fully visible. We should not expect to see these huge liquidity bumps in a month or two.
700 billion NEW ones might have been added by the congressional package, but several TRILLION have been eliminated by the stock market meltdown.
the net result is that inflation will be under control.
hence the drop in commodities including gold, silver and platinum.
we are in a deflationary economy. >>
Please explain. The money from all of the stock market losses is not gone, it is just in different hands. Here's a scenario.
Starting out: I have a company worth $200k with 200k shares worth $1 each. Me: $200k stock Party A: $100k Party B: $120k Total assets: $420k Total Cash: $220k
I sell half of them to Party A for $100k. Me: $100k + $100k stock Party A: $0 + $100k stock Party B: $120k Total assets: $420k Total cash: $220k
The company does well and is now valued at $240k total. Party A sells his shares to Party B for $120k. Me: $100k+$120k stock Party A: $120k Party B: $0 + $120k stock Total assets: $460k Total cash: $220k
The company does poorly and is now worth $160k. Me: $100k + $80k stock Party A: $120k Party B: $80k stock Total Assets (cash and stock): $380k Total Cash: $220k
In this "closed" economy scenario, the value of the assets changed, but the total cash in the system stays the same. There's no more or less dollars at the beginning than at the end.
Am I missing something or over-simplifying? It appears to me it is the stock that has deflated, not the dollars. The same dollars now buy more stock - or conversely, the stock buys less dollars. The amount of stock (200k shares) and the amount of cash in the system ($240k) stays the same.
The problem in our economy is that the number of dollars has increased dramatically, and no dollars have been removed from the system (quite the contrary). Our dollars now buy lots more stock, but arguably about the same (maybe a little less) goods and services as a few months ago.
The $700B that has been or will be introduced to the system will take some time to spread into the economy and cause an effect since it was not introduced directly to the general populous.
The $700B that has been or will be introduced to the system will take some time to spread into the economy and cause an effect since it was not introduced directly to the general populous.
The only part of that $700B that reaches the end consumer will be those funds that were earmarked to begin with (ie rum runners, arrow makers or race track owners). The bulk of it will disappear into the cesspool of banking liquidity to balance off losing derivative positions, pay off irate foreign banks who got stung by Fannie and Freddie, or to shore up banking short positions to allow the game to run even longer. J6P got his $600 and that will be about it.
700 billion NEW ones might have been added by the congressional package, but several TRILLION have been eliminated by the stock market meltdown.
the net result is that inflation will be under control.
hence the drop in commodities including gold, silver and platinum.
we are in a deflationary economy. >>
Please explain. The money from all of the stock market losses is not gone, it is just in different hands. Here's a scenario.
Starting out: I have a company worth $200k with 200k shares worth $1 each. Me: $200k stock Party A: $100k Party B: $120k Total assets: $420k Total Cash: $220k
I sell half of them to Party A for $100k. Me: $100k + $100k stock Party A: $0 + $100k stock Party B: $120k Total assets: $420k Total cash: $220k
The company does well and is now valued at $240k total. Party A sells his shares to Party B for $120k. Me: $100k+$120k stock Party A: $120k Party B: $0 + $120k stock Total assets: $460k Total cash: $220k
The company does poorly and is now worth $160k. Me: $100k + $80k stock Party A: $120k Party B: $80k stock Total Assets (cash and stock): $380k Total Cash: $220k
In this "closed" economy scenario, the value of the assets changed, but the total cash in the system stays the same. There's no more or less dollars at the beginning than at the end.
Am I missing something or over-simplifying? It appears to me it is the stock that has deflated, not the dollars. The same dollars now buy more stock - or conversely, the stock buys less dollars. The amount of stock (200k shares) and the amount of cash in the system ($240k) stays the same.
The problem in our economy is that the number of dollars has increased dramatically, and no dollars have been removed from the system (quite the contrary). Our dollars now buy lots more stock, but arguably about the same (maybe a little less) goods and services as a few months ago.
The $700B that has been or will be introduced to the system will take some time to spread into the economy and cause an effect since it was not introduced directly to the general populous. >>
Yes, you're missing something.
try this example that I think is appropriate in these times.
Your house in 2002 was worth 300K. It 2006 it was worth 600K. Now in 2008 it is worth 300k. Where did the 300k go from 2006 to 2008? I could also ask, where did the 300K come from in 2002 to 2006?
I was missing something, but your scenario is not any different than my stock scenario.
Another member has helped me to understand what I was missing had nothing to do with the appreciation or losses in housing, stocks, etc.
Money is not just injected into our economy by the Fed Reserve as we've seen a lot of recently, but it's mostly created when a consumer borrows money in our fractional reserve lending system. When a person borrows $x, 10 x $x is actually injected into our economy. Thus, when banks slow or stop lending, the flow of money into our economy slows as well.
I'm still trying to relate this to the current situation and draw conclusions.
moneyLA, Yes, the value of the stock is lower, but the money did not go anywhere. The only thing that has changed is the exchange ratio. No dollars were created or destroyed, and no shares were created or destroyed. Since every stock transaction involves a buyer and a seller, there is no loss of dollars as the price changes. The dollars just trade hands. Go through my example again.
<< <i>How in the hell does the value of ANYTHING (dollar) jump when 700 billion new ones will be added to current supply? >>
Safety in numbers?
Seriously, the dollar may be "up" because many other currencies are doing even worse than it is.
TD
Numismatist. 50 year member ANA. Winner of four ANA Heath Literary Awards; three Wayte and Olga Raymond Literary Awards; Numismatist of the Year Award 2009, and Lifetime Achievement Award 2020. Winner numerous NLG Literary Awards.
the stock market differs from commodity markets which is a zero sum game.
in the stock market, everyone can lose, and everyone can win.
but these days, everyone is losing.
if everyone holds on to their stocks, but prices drop, everyone loses even if not one share changes hands.
example: there are 100 shareholders each with one share of google at 400, the next day the bid on google drops to 300. everyone has lost a total of 10,000 without one share changing hands.
<< <i>moneyLA, Yes, the value of the stock is lower, but the money did not go anywhere. The only thing that has changed is the exchange ratio. No dollars were created or destroyed, and no shares were created or destroyed. Since every stock transaction involves a buyer and a seller, there is no loss of dollars as the price changes. The dollars just trade hands. Go through my example again. >>
It would take too much, if you believe your example is sound to explain it all. I will sketch out a few examples, but it is too much for an Internet group. It would be like trying to teach a complex subject that normally requires several months or years of study in a few paragraphs--can't be done because there are too many prerequisite courses needed.
Stocks represent a share of ownership in a business. In a vibrant and growing economy, businesses are worth more, than if the economy is sour. I will use the example of a local restaurant. Maybe it is not the best example, but it is one most people can fit in their heads. Say you own shares in a local restaurant. Business is good, customers spend freely, the value of the shares goes up. Then hard times come, money is tight, layoffs are everywhere in that neighborhood. Virtually no one goes to the restaurant anymore. The price of the shares plummets. In your example you posit that there is no difference in the two situations. Would you trade your shares in the busy restaurant for the ones in the one that is losing money? No one would trade one for one, because there is a real world difference. Now multiply the example of one restaurant to a thousand different businesses all across the country.
Future expectations and perception play a large role in valuing businesses. When the price of most shares in most companies are going down, the economy is shrinking, wealth is destroyed. When capital markets function properly, good businesses can get money to expand and grow, and the wealth of the neighborhood (or the country increases). When the markets stop working, or have excesses to work off, real wealth can be destroyed, businesses suffer. Each business may in turn lay off employees and real people do suffer, wealth is destroyed, economic activity dries up.
In the 1930s the capital markets collapsed, and there was much less economic activity. Taxes were raised, as were tariffs. To say that no money was lost during that time, shows a fundamental lack of understanding. Semantically your argument might make sense to some folks, but to me, it is a "how many angels can dance on the head of a pin" type of argument and has little connection to the real world or how markets work.
Take another example during the great boom of railroad building during the 1800s. Railroads were mostly financed by selling stock. Was economic activity greater, the total value of the economy greater, before or after the railroads were built? Of course after. The value of many of the shares soared and wealth was created. Efficiencies related to better transportation rippled through the economy and people benefited. If your example were true there would be no difference and there would be no economic benefit to building the railroads and no increase in national wealth or economic output. Again, to me it sounds like how many angels dance on the head of that pin, the argument that money becomes devalued or increases in value.
I know these examples are brief sketches. I try to relate them to things that people can understand rather than abstract concepts.
Before I respond, I want you to know that I'm not necessarily trying to defend my example, I am trying to understand this more.
In my example, the value of the company goes up and goes down, I get that. In my example, Party A makes money and Party B loses money, but in the end the total amount of dollars is the same - only the distribution changes.
The question is, is it inflationary? In other words, are new dollars being created (inflation) and introduced to the system (or destroyed and removed)? You seem to argue that dollars created and/or destroyed as the value of a company goes up and down.
In my example, I don't see it. Party B's stock value is lost, but Party A still has Party B's dollars from the sale when the stock was high. Part B's dollars existed at the beginning, before the value of the company went up, and it still exists (in Party A's hands).
So the number of dollars in the system remains the same, but the value of the stock fluctuates. The fed is the only one who can create or destroy dollars, right? All dollars come from the Fed Reserve, and the Fed isn't removing or adding dollars to counter or augment any moves in the stock market.
<< <i>try this example that I think is appropriate in these times.
Your house in 2002 was worth 300K. It 2006 it was worth 600K. Now in 2008 it is worth 300k. Where did the 300k go from 2006 to 2008? I could also ask, where did the 300K come from in 2002 to 2006? >>
I would say that I never had that extra $300k. All I had was a house. If I had sold the house, someone would have traded me $600k dollars for my house. They would have $600k less dollars, and I would have $600k more dollars, but the effect is net zero - merely a transferring of dollars from one person to another. No new money is introduced (assuming they paid cash and didn't get a loan).
proof collection, I am really amazed that you don't get it. several of us have tried to explain to you some simple principles here. I can't believe you don't get it??
let me try one more time.
you buy a house for 600K. you bought the house from Mr K who gets your 600K. together, you have a 600K house and Mr K has 600K cash. a total of 1.2 million.
a year from now, the housing market goes into a tailspin and you are forced to sell your house. you sell it for 500K back to Mr K.
you have lost 100K of value.
the buyer, Mr K, might have had 600K available, but you only get 500K. and together, Mr K has your 500K house plus 100K left over, and you have 500K which is what you sold your house for.
together you have 1.1 million. and 100K has vanished. and it vanished out of your pocket, but its 100K out of the economy.
do you understand this?
in the current stock market environment, lots of investors are losing money on their houses (or stocks)
<< <i> Money is not just injected into our economy by the Fed Reserve as we've seen a lot of recently, but it's mostly created when a consumer borrows money in our fractional reserve lending system. When a person borrows $x, 10 x $x is actually injected into our economy. Thus, when banks slow or stop lending, the flow of money into our economy slows as well. >>
That's right. The vast majority of money is actually created by banks as credit, "out of thin air." The paper currency and coins we use are just a tiny fraction of the money supply. When you pay back money you're borrowed to the bank, it disappears (it goes to money heaven, if you prefer). Thus, when banks stop lending, or they lend less money than is being "destroyed", the money supply overall will shrink.
It's a weird process and hard to understand, but there is video series on Youtube that explains it pretty well (I forget the name of it).
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
<< <i> 100K has vanished. and it vanished out of your pocket, but its 100K out of the economy.
do you understand this?
in the current stock market environment, lots of investors are losing money on their houses (or stocks)
money is vanishing. there is no "wash." >>
This is true only when you sell. Proof Collector is asking what happens to the money supply if you just hold - in which case, the answer is "nothing." The VALUE of houses or stocks (as opposed to the credit financing them) is not counted as part of the money supply by any measure that I am aware of. Thus the decrease in housing values or stock values does not immediately decrease the money supply. However, lower home values will likely eventually result in a decreased money supply as bad debts are written off and as new purchases of the same home are funded with less debt.
Lower stock prices may also eventually decrease the money supply because as there is less wealth, there is likely to be less future borrowing and spending.
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
By ERIC CARVIN, Associated Press Writer 1 hour, 57 minutes ago
NEW YORK - Trillions in stock market value gone. Trillions in retirement savings gone. A huge chunk of the money you paid for your house, the money you're saving for college, the money your boss needs to make payroll is gone, gone, gone.
Whether you're a stock broker or Joe Six-pack, if you have a 401(k), a mutual fund or a college savings plan, tumbling stock markets and sagging home prices mean you've lost a whole lot of the money that was right there on your account statements just a few months ago. But if you no longer have that money, who does? The fat cats on Wall Street? Some oil baron in Saudi Arabia? The government of China? Or is it just gone?
If you're looking to track down your missing money to figure out who has it now, maybe ask to have it back to you might be disappointed to learn that is was never really money in the first place. Robert Shiller, an economist at Yale, puts it bluntly: The notion that you lose a pile of money whenever the stock market tanks is a "fallacy." He says the price of a stock has never been the same thing as money - it's simply the "best guess" of what the stock is worth.
"It's in people's minds," Shiller explains. "We're just recording a measure of what people think the stock market is worth. What the people who are willing to trade today - who are very, very few people - are actually trading at. So we're just extrapolating that and thinking, well, maybe that's what everyone thinks it's worth." Shiller uses the example of an appraiser who values a house at $350,000, a week after saying it was worth $400,000. "In a sense, $50,000 just disappeared when he said that," he said. "But it's all in the mind."
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
<< <i>you buy a house for 600K. you bought the house from Mr K who gets your 600K. together, you have a 600K house and Mr K has 600K cash. a total of 1.2 million.
a year from now, the housing market goes into a tailspin and you are forced to sell your house. you sell it for 500K back to Mr K.
you have lost 100K of value.
the buyer, Mr K, might have had 600K available, but you only get 500K. and together, Mr K has your 500K house plus 100K left over, and you have 500K which is what you sold your house for.
together you have 1.1 million. and 100K has vanished. and it vanished out of your pocket, but its 100K out of the economy. >>
Thank you secondrepublic, that explains what I was trying to say. The change in any percieved value of any asset cannot cause inflation/deflation aside from banks' willingness to lend more or less against those assets.
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
in the stock market, all investors can make money and all can lose money.
in commedities, one must lose for another to gain.
by the way, there are different definitions of "money supply."
there are the well known M-1 (cash) and M-2 (short term deposits).
but there is also M-3 which contains a wide range of "long term deposits" and other financial accounts.
when discussing money supply, which M are we talking about? >>
The discussion was in relation to whether there would be inflation or deflation. moneyLA and other suggest that because of the declining stock market overwhelms the reported amount of new money recently created by the fed, there is deflation. My argument was that it didn't matter what the market did, inflation depended upon the number of US Dollars in existence which has grown considerably very recently. I'm not sure if this would be M1, 2, or 3.
The stock market would be zero sum if you assume that all companies eventually fail and become worthless. The reality is that a company can keep operating perpetually and increasing in value. One possible scenario to illustrate would be a company that IPO's at $1/share, and the value of the stock increases $.10/year until the end of time without ever decreasing. There would be no losers, only winners. A zero sum game would require there to be a loser.
M1 is the total of cash and demand deposits M2 is the sum of M! plus other investments M3 is the total of M1 + M2 + additional investments
inflation can reflect any or all of those.
back in the 1970s the big issue was the M1 money supply. thats what the FED had a tight grip on. in part because the components of M3 were small in relation to the economy.
today, M2 and M3 are more than the M1 component.
in general you can watch both M1 and M2 for signs of inflation. M3 is no longer published by the FED so we have to guess as to what M3 is.
but since M3 would include all of the exotic wall street investments that are now frozen or crashed, I would suggest that M3 has dropped to very low levels.
I think the M1 money supply is a direct indicator of consumer activity, and with consumers not spending out of fear, I would suggest M1 has dropped as well.
what about M2? well that is more CDs and other long term investments. what is your sense? doyou think consumers are locking up their money? if so, M2 has grown BUT money in M2 accounts are not inflationary because these are timed money accounts which do not create immediate spending.
that brings us back to M1. how mcuh cash is out there and is it being spent????
mrearlygold
Posts: 17,858 ✭✭✭
Comments
CASH is popular tonight.
<< <i>Time to BUY ??????????????? >>
Physical, yes (if you can find it at a reasonable premium)
<< <i>Time to BUY ??????????????? >>
////////////////////////////
I fear it is NOT.
Lots of folks will be looking at their 401K statements and their mutual-fund logs this weekend.
95% of that money is neither smart nor sophisticated. MUCH of it will guess wrong; I suspect
on the SELL side.
I think we should wait to see what they decide to do before we get too anxious/enthusiastic.
One or two more major plunges in stocks will attract every bit of sideline-CASH, and PMs
will be left in the dust. THEN, it will be time to start buying PMs, slowly.
Cash is king today...rationally or not.
If and when inflation becomes an issue...then gold will be king.
Honestly, I hope inflation doesn't run wild...not a good situation for anyone or anything!
only way to raise needed cash is PMs
and the stock market. This will present
severe pressure on these two markets.
Add the problem of margin calls and we
have a continuing cascade effect. We know
confidence is a fragile thing. Break it and
it is an irrational stampede for the exits.
Camelot
<< <i>How in the hell does the value of ANYTHING (dollar) jump when 700 billion new ones will be added to current supply? >>
I don't think the dollar jump, I think the value of everything else dropped!
San Diego, CA
<< <i>
<< <i>Time to BUY ??????????????? >>
Physical, yes (if you can find it at a reasonable premium)
But does anyone on the internet have any good prices? Nothing in this town :-(
Thanks
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
Yeah!
A year that will be remembered as "one of the worst ever"
for the WORLD economy.
A month that will be remembered as "one of the worst ever"
for the WORLD economy.
Some of my firearms are up more than GOLD in the past year.
...........
Looks like a good parking lot that can empty out - or fill up - with ZERO notice.
<< <i>Some of my firearms are up more than GOLD in the past year. >>
Watch it jump even more after Nov 4 (if NObama wins).
www.AlanBestBuys.com
www.VegasBestBuys.com
I knew it would happen.
When more than 700 billion of them are destroyed?
Doggedly collecting coins of the Central American Republic.
Visit the Society of US Pattern Collectors at USPatterns.com.
Thanks for the good laugh today. The government was sold in 1913.
700 billion NEW ones might have been added by the congressional package, but several TRILLION have been eliminated by the stock market meltdown.
the net result is that inflation will be under control.
hence the drop in commodities including gold, silver and platinum.
we are in a deflationary economy.
www.AlanBestBuys.com
www.VegasBestBuys.com
People wanted cash, not paper.
Central Banks had to sell off large amounts of gold to cover.
Next week the majority of the hedge funds comes due.
Yes, we are in a deflationary economy, but there is more to it than that.
A bank holiday wouldn't surprise me at all, and I don't mean Columbus Day.
John Marnard Keynes, The Economic Consequences of the Peace, 1920, page 235ff
<< <i>where the government is by and for the people.
>>
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
where are the bulls now? my trading range seems to be holding up.
Right here, same place as last 4 years, through up times and down times.....we've never left. Your trading range is being helped by the PPT. Thank them for today's dollar and stock market gift. But $75 down in gold from $925 to $850 feels a heck of a lot better than $825 to $750. A move to $850 seemed to be very realistic. I would nto be surprised to see a drop even further...though it won't last long. The gold market is all papered up, no teeth in those prices. If you want 1 oz gold coins be prepared to pay big premiums and wait days or weeks until they show up in your local B&M. The paper to physical disconnect is getting worse, not better, regardless of where the PPT sends the gold futures price.
Inflation is being primed by these $$ trillions that the FED is racking up. Figure a year or so until you see big-time inflationary pressures returning after this bout of deleveraging winds down. Then it will be a combo of deflation-inflation all over again...only more severe. It normally takes at least 1-3 years for inflationary effects to be fully visible. We should not expect to see these huge liquidity bumps in a month or two.
roadrunner
<< <i>MrEureka, let me answer you.
700 billion NEW ones might have been added by the congressional package, but several TRILLION have been eliminated by the stock market meltdown.
the net result is that inflation will be under control.
hence the drop in commodities including gold, silver and platinum.
we are in a deflationary economy. >>
Please explain. The money from all of the stock market losses is not gone, it is just in different hands. Here's a scenario.
Starting out: I have a company worth $200k with 200k shares worth $1 each.
Me: $200k stock
Party A: $100k
Party B: $120k
Total assets: $420k
Total Cash: $220k
I sell half of them to Party A for $100k.
Me: $100k + $100k stock
Party A: $0 + $100k stock
Party B: $120k
Total assets: $420k
Total cash: $220k
The company does well and is now valued at $240k total. Party A sells his shares to Party B for $120k.
Me: $100k+$120k stock
Party A: $120k
Party B: $0 + $120k stock
Total assets: $460k
Total cash: $220k
The company does poorly and is now worth $160k.
Me: $100k + $80k stock
Party A: $120k
Party B: $80k stock
Total Assets (cash and stock): $380k
Total Cash: $220k
In this "closed" economy scenario, the value of the assets changed, but the total cash in the system stays the same. There's no more or less dollars at the beginning than at the end.
Am I missing something or over-simplifying? It appears to me it is the stock that has deflated, not the dollars. The same dollars now buy more stock - or conversely, the stock buys less dollars. The amount of stock (200k shares) and the amount of cash in the system ($240k) stays the same.
The problem in our economy is that the number of dollars has increased dramatically, and no dollars have been removed from the system (quite the contrary). Our dollars now buy lots more stock, but arguably about the same (maybe a little less) goods and services as a few months ago.
The $700B that has been or will be introduced to the system will take some time to spread into the economy and cause an effect since it was not introduced directly to the general populous.
The only part of that $700B that reaches the end consumer will be those funds that were earmarked to begin with (ie rum runners, arrow makers or race track owners). The bulk of it will disappear into the cesspool of banking liquidity to balance off losing derivative positions, pay off irate foreign banks who got stung by Fannie and Freddie, or to shore up banking short positions to allow the game to run even longer. J6P got his $600 and that will be about it.
roadrunner
<< <i>
<< <i>MrEureka, let me answer you.
700 billion NEW ones might have been added by the congressional package, but several TRILLION have been eliminated by the stock market meltdown.
the net result is that inflation will be under control.
hence the drop in commodities including gold, silver and platinum.
we are in a deflationary economy. >>
Please explain. The money from all of the stock market losses is not gone, it is just in different hands. Here's a scenario.
Starting out: I have a company worth $200k with 200k shares worth $1 each.
Me: $200k stock
Party A: $100k
Party B: $120k
Total assets: $420k
Total Cash: $220k
I sell half of them to Party A for $100k.
Me: $100k + $100k stock
Party A: $0 + $100k stock
Party B: $120k
Total assets: $420k
Total cash: $220k
The company does well and is now valued at $240k total. Party A sells his shares to Party B for $120k.
Me: $100k+$120k stock
Party A: $120k
Party B: $0 + $120k stock
Total assets: $460k
Total cash: $220k
The company does poorly and is now worth $160k.
Me: $100k + $80k stock
Party A: $120k
Party B: $80k stock
Total Assets (cash and stock): $380k
Total Cash: $220k
In this "closed" economy scenario, the value of the assets changed, but the total cash in the system stays the same. There's no more or less dollars at the beginning than at the end.
Am I missing something or over-simplifying? It appears to me it is the stock that has deflated, not the dollars. The same dollars now buy more stock - or conversely, the stock buys less dollars. The amount of stock (200k shares) and the amount of cash in the system ($240k) stays the same.
The problem in our economy is that the number of dollars has increased dramatically, and no dollars have been removed from the system (quite the contrary). Our dollars now buy lots more stock, but arguably about the same (maybe a little less) goods and services as a few months ago.
The $700B that has been or will be introduced to the system will take some time to spread into the economy and cause an effect since it was not introduced directly to the general populous. >>
Yes, you're missing something.
try this example that I think is appropriate in these times.
Your house in 2002 was worth 300K. It 2006 it was worth 600K. Now in 2008 it is worth 300k. Where did the 300k go from 2006 to 2008? I could also ask, where did the 300K come from in 2002 to 2006?
Knowledge is the enemy of fear
Another member has helped me to understand what I was missing had nothing to do with the appreciation or losses in housing, stocks, etc.
Money is not just injected into our economy by the Fed Reserve as we've seen a lot of recently, but it's mostly created when a consumer borrows money in our fractional reserve lending system. When a person borrows $x, 10 x $x is actually injected into our economy. Thus, when banks slow or stop lending, the flow of money into our economy slows as well.
I'm still trying to relate this to the current situation and draw conclusions.
a year ago stock A had 100 shares worth $10 each, total $1,000
today, stock A still has 100 shares, but they are worth $5 each, which is a total value of $500
the value of stock A is down $500.
now, just use that for the 5,000 different stocks traded on the major exchanges and you will see that money (value) has disappeared.
www.AlanBestBuys.com
www.VegasBestBuys.com
Yes, the value of the stock is lower, but the money did not go anywhere. The only thing that has changed is the exchange ratio. No dollars were created or destroyed, and no shares were created or destroyed. Since every stock transaction involves a buyer and a seller, there is no loss of dollars as the price changes. The dollars just trade hands. Go through my example again.
<< <i>How in the hell does the value of ANYTHING (dollar) jump when 700 billion new ones will be added to current supply? >>
Safety in numbers?
Seriously, the dollar may be "up" because many other currencies are doing even worse than it is.
TD
the money went poof, its gone forever.
the stock market differs from commodity markets which is a zero sum game.
in the stock market, everyone can lose, and everyone can win.
but these days, everyone is losing.
if everyone holds on to their stocks, but prices drop, everyone loses even if not one share changes hands.
example: there are 100 shareholders each with one share of google at 400, the next day the bid on google drops to 300. everyone has lost a total of 10,000 without one share changing hands.
www.AlanBestBuys.com
www.VegasBestBuys.com
<< <i>moneyLA,
Yes, the value of the stock is lower, but the money did not go anywhere. The only thing that has changed is the exchange ratio. No dollars were created or destroyed, and no shares were created or destroyed. Since every stock transaction involves a buyer and a seller, there is no loss of dollars as the price changes. The dollars just trade hands. Go through my example again. >>
It would take too much, if you believe your example is sound to explain it all. I will sketch out a few examples, but it is too much for an Internet group. It would be like trying to teach a complex subject that normally requires several months or years of study in a few paragraphs--can't be done because there are too many prerequisite courses needed.
Stocks represent a share of ownership in a business. In a vibrant and growing economy, businesses are worth more, than if the economy is sour. I will use the example of a local restaurant. Maybe it is not the best example, but it is one most people can fit in their heads. Say you own shares in a local restaurant. Business is good, customers spend freely, the value of the shares goes up. Then hard times come, money is tight, layoffs are everywhere in that neighborhood. Virtually no one goes to the restaurant anymore. The price of the shares plummets. In your example you posit that there is no difference in the two situations. Would you trade your shares in the busy restaurant for the ones in the one that is losing money? No one would trade one for one, because there is a real world difference. Now multiply the example of one restaurant to a thousand different businesses all across the country.
Future expectations and perception play a large role in valuing businesses. When the price of most shares in most companies are going down, the economy is shrinking, wealth is destroyed. When capital markets function properly, good businesses can get money to expand and grow, and the wealth of the neighborhood (or the country increases). When the markets stop working, or have excesses to work off, real wealth can be destroyed, businesses suffer. Each business may in turn lay off employees and real people do suffer, wealth is destroyed, economic activity dries up.
In the 1930s the capital markets collapsed, and there was much less economic activity. Taxes were raised, as were tariffs. To say that no money was lost during that time, shows a fundamental lack of understanding. Semantically your argument might make sense to some folks, but to me, it is a "how many angels can dance on the head of a pin" type of argument and has little connection to the real world or how markets work.
Take another example during the great boom of railroad building during the 1800s. Railroads were mostly financed by selling stock. Was economic activity greater, the total value of the economy greater, before or after the railroads were built? Of course after. The value of many of the shares soared and wealth was created. Efficiencies related to better transportation rippled through the economy and people benefited. If your example were true there would be no difference and there would be no economic benefit to building the railroads and no increase in national wealth or economic output. Again, to me it sounds like how many angels dance on the head of that pin, the argument that money becomes devalued or increases in value.
I know these examples are brief sketches. I try to relate them to things that people can understand rather than abstract concepts.
In my example, the value of the company goes up and goes down, I get that. In my example, Party A makes money and Party B loses money, but in the end the total amount of dollars is the same - only the distribution changes.
The question is, is it inflationary? In other words, are new dollars being created (inflation) and introduced to the system (or destroyed and removed)? You seem to argue that dollars created and/or destroyed as the value of a company goes up and down.
In my example, I don't see it. Party B's stock value is lost, but Party A still has Party B's dollars from the sale when the stock was high. Part B's dollars existed at the beginning, before the value of the company went up, and it still exists (in Party A's hands).
So the number of dollars in the system remains the same, but the value of the stock fluctuates. The fed is the only one who can create or destroy dollars, right? All dollars come from the Fed Reserve, and the Fed isn't removing or adding dollars to counter or augment any moves in the stock market.
<< <i>try this example that I think is appropriate in these times.
Your house in 2002 was worth 300K. It 2006 it was worth 600K. Now in 2008 it is worth 300k. Where did the 300k go from 2006 to 2008? I could also ask, where did the 300K come from in 2002 to 2006? >>
I would say that I never had that extra $300k. All I had was a house. If I had sold the house, someone would have traded me $600k dollars for my house. They would have $600k less dollars, and I would have $600k more dollars, but the effect is net zero - merely a transferring of dollars from one person to another. No new money is introduced (assuming they paid cash and didn't get a loan).
let me try one more time.
you buy a house for 600K. you bought the house from Mr K who gets your 600K. together, you have a 600K house and Mr K has 600K cash. a total of 1.2 million.
a year from now, the housing market goes into a tailspin and you are forced to sell your house. you sell it for 500K back to Mr K.
you have lost 100K of value.
the buyer, Mr K, might have had 600K available, but you only get 500K. and together, Mr K has your 500K house plus 100K left over, and you have 500K which is what you sold your house for.
together you have 1.1 million. and 100K has vanished. and it vanished out of your pocket, but its 100K out of the economy.
do you understand this?
in the current stock market environment, lots of investors are losing money on their houses (or stocks)
money is vanishing. there is no "wash."
www.AlanBestBuys.com
www.VegasBestBuys.com
<< <i> Money is not just injected into our economy by the Fed Reserve as we've seen a lot of recently, but it's mostly created when a consumer borrows money in our fractional reserve lending system. When a person borrows $x, 10 x $x is actually injected into our economy. Thus, when banks slow or stop lending, the flow of money into our economy slows as well. >>
That's right. The vast majority of money is actually created by banks as credit, "out of thin air." The paper currency and coins we use are just a tiny fraction of the money supply. When you pay back money you're borrowed to the bank, it disappears (it goes to money heaven, if you prefer). Thus, when banks stop lending, or they lend less money than is being "destroyed", the money supply overall will shrink.
It's a weird process and hard to understand, but there is video series on Youtube that explains it pretty well (I forget the name of it).
<< <i> 100K has vanished. and it vanished out of your pocket, but its 100K out of the economy.
do you understand this?
in the current stock market environment, lots of investors are losing money on their houses (or stocks)
money is vanishing. there is no "wash." >>
This is true only when you sell. Proof Collector is asking what happens to the money supply if you just hold - in which case, the answer is "nothing." The VALUE of houses or stocks (as opposed to the credit financing them) is not counted as part of the money supply by any measure that I am aware of. Thus the decrease in housing values or stock values does not immediately decrease the money supply. However, lower home values will likely eventually result in a decreased money supply as bad debts are written off and as new purchases of the same home are funded with less debt.
Lower stock prices may also eventually decrease the money supply because as there is less wealth, there is likely to be less future borrowing and spending.
All that money you've lost - where did it go?
By ERIC CARVIN, Associated Press Writer 1 hour, 57 minutes ago
NEW YORK - Trillions in stock market value gone. Trillions in retirement savings gone. A huge chunk of the money you paid for your house, the money you're saving for college, the money your boss needs to make payroll is gone, gone, gone.
Whether you're a stock broker or Joe Six-pack, if you have a 401(k), a mutual fund or a college savings plan, tumbling stock markets and sagging home prices mean you've lost a whole lot of the money that was right there on your account statements just a few months ago. But if you no longer have that money, who does? The fat cats on Wall Street? Some oil baron in Saudi Arabia? The government of China? Or is it just gone?
If you're looking to track down your missing money to figure out who has it now, maybe ask to have it back to you might be disappointed to learn that is was never really money in the first place. Robert Shiller, an economist at Yale, puts it bluntly: The notion that you lose a pile of money whenever the stock market tanks is a "fallacy." He says the price of a stock has never been the same thing as money - it's simply the "best guess" of what the stock is worth.
"It's in people's minds," Shiller explains. "We're just recording a measure of what people think the stock market is worth. What the people who are willing to trade today - who are very, very few people - are actually trading at. So we're just extrapolating that and thinking, well, maybe that's what everyone thinks it's worth." Shiller uses the example of an appraiser who values a house at $350,000, a week after saying it was worth $400,000. "In a sense, $50,000 just disappeared when he said that," he said. "But it's all in the mind."
Link to rest of the article
<< <i>you buy a house for 600K. you bought the house from Mr K who gets your 600K. together, you have a 600K house and Mr K has 600K cash. a total of 1.2 million.
a year from now, the housing market goes into a tailspin and you are forced to sell your house. you sell it for 500K back to Mr K.
you have lost 100K of value.
the buyer, Mr K, might have had 600K available, but you only get 500K. and together, Mr K has your 500K house plus 100K left over, and you have 500K which is what you sold your house for.
together you have 1.1 million. and 100K has vanished. and it vanished out of your pocket, but its 100K out of the economy. >>
excellent explanation. thanks for posting.
NO money vanishes. It simply trades hands.
You buy a Krug for $500.
You sell the Krug for $400.
YOUR seller has the "extra" $100.
the stock market is not zero sum.
in the stock market, all investors can make money and all can lose money.
in commedities, one must lose for another to gain.
by the way, there are different definitions of "money supply."
there are the well known M-1 (cash) and M-2 (short term deposits).
but there is also M-3 which contains a wide range of "long term deposits" and other financial accounts.
when discussing money supply, which M are we talking about?
www.AlanBestBuys.com
www.VegasBestBuys.com
<< <i>the commodity markets are zero sum.
the stock market is not zero sum.
in the stock market, all investors can make money and all can lose money.
in commedities, one must lose for another to gain. >>
////////////////////////////////////////////////////////////////
The stock market IS a "zero sum game," though some folks incorrectly argue that it is not.
Stock Market Is A Zero Sum Game
<< <i> by the way, there are different definitions of "money supply."
there are the well known M-1 (cash) and M-2 (short term deposits).
but there is also M-3 which contains a wide range of "long term deposits" and other financial accounts.
when discussing money supply, which M are we talking about? >>
The debate over money supply is a bottomless pit of complexity
www.AlanBestBuys.com
www.VegasBestBuys.com
<< <i>the commodity markets are zero sum.
the stock market is not zero sum.
in the stock market, all investors can make money and all can lose money.
in commedities, one must lose for another to gain.
by the way, there are different definitions of "money supply."
there are the well known M-1 (cash) and M-2 (short term deposits).
but there is also M-3 which contains a wide range of "long term deposits" and other financial accounts.
when discussing money supply, which M are we talking about? >>
The discussion was in relation to whether there would be inflation or deflation. moneyLA and other suggest that because of the declining stock market overwhelms the reported amount of new money recently created by the fed, there is deflation. My argument was that it didn't matter what the market did, inflation depended upon the number of US Dollars in existence which has grown considerably very recently. I'm not sure if this would be M1, 2, or 3.
<< <i>The stock market IS a "zero sum game," though some folks incorrectly argue that it is not.
Stock Market Is A Zero Sum Game >>
That paper was not very convincing.
The stock market would be zero sum if you assume that all companies eventually fail and become worthless. The reality is that a company can keep operating perpetually and increasing in value. One possible scenario to illustrate would be a company that IPO's at $1/share, and the value of the stock increases $.10/year until the end of time without ever decreasing. There would be no losers, only winners. A zero sum game would require there to be a loser.
M1 is the total of cash and demand deposits
M2 is the sum of M! plus other investments
M3 is the total of M1 + M2 + additional investments
inflation can reflect any or all of those.
back in the 1970s the big issue was the M1 money supply. thats what the FED had a tight grip on. in part because the components of M3 were small in relation to the economy.
today, M2 and M3 are more than the M1 component.
in general you can watch both M1 and M2 for signs of inflation. M3 is no longer published by the FED so we have to guess as to what M3 is.
but since M3 would include all of the exotic wall street investments that are now frozen or crashed, I would suggest that M3 has dropped to very low levels.
I think the M1 money supply is a direct indicator of consumer activity, and with consumers not spending out of fear, I would suggest M1 has dropped as well.
what about M2? well that is more CDs and other long term investments. what is your sense? doyou think consumers are locking up their money? if so, M2 has grown BUT money in M2 accounts are not inflationary because these are timed money accounts which do not create immediate spending.
that brings us back to M1. how mcuh cash is out there and is it being spent????
www.AlanBestBuys.com
www.VegasBestBuys.com