Posted: 1/24/2010 12:57:46 AM EDT
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For those of us who aren't students of economics, I pose this question:
Where did the money go? There was (supposedly) hundreds of billions lost in the recent economic crash. Where did it GO?? My brother sold a crackerbox of a house in Central California a few years ago. He got FIVE HUNDRED THOUSAND bucks for it! A year ago it went for just over two hundred thousand. Someone got hosed. The only thing I can guess (and this is pretty accurate) is that the high price of all this stuff us due to demand. But WHERE DOES THE MONEY GO? The VALUE drops because the DEMAND drops. But if there is (in my brother's example) 500 thousand bucks in the house, then the value drops to 200 thousand, is there 300 thousand bucks in the economic "black hole?," severely devalued, dragging the economy down with it? The Fed released that 500 thousand bucks at some point*; the other 300 thousand must be out there, right? The only answer I can come up with to this is, "Dollars are good at defining REAL value, but suck at defining FALSE value." Comment. No trolling. *I realize that that money wasn't "cash" as we know it, but numbers in a computer somewhere. |
If you buy a house for 500,000 and then sell it for 300,000, that's not the same money. You traded your dollars for the house, then someone else traded their dollars to you for the house.
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Think in term of what is tangible.
Economics isnt physics, and the value of a dollar doesnt follow the law for conservation of mass. Simply put, value is subjective....entirely. The ONLY value that ANYTHING can EVER have is what a human being assigns to it, at some point in time. That value may (and always seems to) change. Its not that somewhere, someone has a pile of cash, the result of the variance of all these market offsets. What it comes down to is that for a given house, at one point in time, the average consensus in a given community was that it was "worth" a certain amount of money. At a different point in time, the collective opinion changed. No actual cash went anywhere...people simply changed their mind. That said, bank loans are written for the amount you borrow the day you sign the dotted line....and when the market decides that your home is now worth less than you thought it was the day you borrowed the money, you still owe the bank the same amount. Think of it this way. You buy a house for $500k, and in your heart you know its worth that amount of money to you. The work you do to earn the money each month to pay the mortgage, in your mind, is well worth the value you place on the home. The market shifts and now that same house is worth $100k, and obviously you still have the same monthly payment....and still owe $500k. If you never sell the house....and plan to live there until you die......you DIDNT LOSE ANYTHING!!! You only lose money if you sell. The market value of a home is important when it comes time to sell one, or buy one. While you are living in one, as long as you were happy with the price you paid at the time of the sale, what happens on the open market is pretty irrelevant, at least until you want to sell, or take out a home equity loan. And remember, at its core, cash is just a medium of exchange.....its nothing more than really detailed wampum. The notes themselves arent worth anything.....just what value the government assigns to it. If you were stranded in a desert, 100 miles from civilization, and were dying from dehydration, what holds more value.....a briefcase containing $1M in cash......or a 1 gallon jug of water? Value...you choose what it means to you. |
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There is this thing called "realization".
If it doesn't happen there is no real money. And if you look at an industry's total value, there are times when some of it is vapor value, especially when there is a bubble. Lets take CA real estate as an example. After the real estate inflation all the houses were really expensive. And when a person sold he got that inflated value and thus realized that gain. BUT If you added up the total value of all the houses, that TOTAL CA housing value did not really exist. This is why. The ONLY reason the values were high is because of demand. But once people start selling more than buying the demand vanishes and so do the high prices. Thus if EVERYONE tried to cash in on the high price peak NOONE would be able to sell and thus realize those gains. Stock market example. Sure when the DOW was at 14K everyone THOUGHT they had the value in their accounts. But unless they sold at that time they really did not. About 33% (we have found) of that value was vapor value. Once the selling started that vapor value vanished. Thus those people REALLY did not have that bubble value in the accounts. Because that money you are talking about vanishing was really vapor value it in reality DID NOT EXIST, unless of course you realized "SOLD HIGH" that value. Hope that helps. |