So... I have a question...

Our economy is in the tank. The global economy is in the tank. Iceland is about to implode; as Europe's first nation to completely collapse.

My question is, if all these economies are collapsing, where the hell is the money? Some country has to be doing pretty damned good. China? I thought I read that they are having problems too. Somebody has to have the money. Who is it? Anybody know?

I have three hundred bucks in cash in my wallet.

I think it's me.

Maybe someone with a background in economics can explain it better, but as I understand it, the money never existed. It was a house of cards built on promises and IOUs.

Don't say it too loudly!

But yes, all this "money" was created via fractional-reserve lending (what happens when loans get made). Normally that works out well except when a lot of people default on loans (say, 25% or so). Then all hell breaks lose because investor dividends don't get paid and people beginning to pull their seed investment (which may no longer be there to begin with).

If it's anything close to what I believe, the whole derivatives market was a scam and the mortgages were a rip-off for the consumers and a fraud for the buyers.

Deregulation gone haywire.

Like most bubbles for individuals, this was a global bubble.

Lets say you bought a house for $150,000 in 1990. By 2005 or 2006, it had a value of $350,000. You just "made" 200,000 in 15 years. Now you think, "that's cool" let's buy that big screen TV and that ski boat we've always wanted. Run down to the bank and take out a second for $50K, maybe $100K. Now you owe $230 or $240K. But the house is worth $350K so no problem. Never mind that you now have an adjustable rate mortgage.

2008/2009 and oops, your house is now only worth maybe the original $150K. Your underwater on your mortgage. You quit spending money like a drunken sailor. The economy, driven by consumer demand, starts contracting instead of expanding (they never realized just how much they depended on you feeling like you had money to burn). Layoffs happen, maybe YOU get laid off. Now there isn't anyway for you to make the mortgage payment. You try to sell the house, sell your ski boat, sell your big screen TV... along with everyone else... and, anyone who still has a job is worried about how THEY will make it, so no matter how cheap your stuff becomes as you try to raise cash, there isn't anyone to buy it. The bank forecloses and you are living at your brothers or moms or in a trailer or hotel.

Now the guys that gave you that second mortgage, they took both of your mortgages (back in 2005) and sold pieces of them (which wasn't allowed prior to some banking rule changes) to a lot of different investors from around to world ($2k in this portfolio, $4K in that one, and so on). Sold with other instruments like bonds. The entire package (Mortgage backed securities) was rated AAA which allowed even institutions to buy them. You default and it's not a big deal, after all, the package had $50K of securities in it and the piece of your mortgage might only be $2k. But what if EVERYONE (or a significant portion) defaults.

Ooops.

Now the investor (or institution) just lost billions of dollars. Dollars that never really existed.

They quit investing. Not only that, they try to remove their remaining investment (sell off the bad MBS thing for whatever they can get... but because SO many people are trying to sell, even the good performing mortgages are deemed to be almost worthless - oversupply of mortgages in the marketplace. Mortgages that NEVER should have been sold like this to start with.

Global recession sliding into global depression.

Nobody has your money. The money never really existed. Those homes were never worth $350K or $550K or whatever. That was all funny money. Trillions of dollars of funny money. To top it off, when the markets realized what was happening (the evaporation of consumers), the stock market lost value too, another few trillion in funny money. And when the world realizes that there isn't any possible way for Americans to repay the debt brought on by borrowing to pay for government programs and wars and such ($5T in the last 8 years), They will quit allowing the US to borrow money as well.

And therein lies the huge danger.

We have to have the government deficit spending like crazy right now (just like the 1930s). Doing big infrastructure projects. New green power, transportation, etc, etc. Government steps in to replace the consumer and primes the pump of the economy (hiring people, people get money coming in, they start spending again and off we go until the next bubble).

Only... how will the government pay for the spending. It's either tax (only the wealthy, the poor have no money), borrow (hmmm, we already OWE $10T, how will we borrow another $4T or so), or inflate (that has dangerous outcomes as well).

Tax cuts, as favored by the repukes and, apparently, some of Obama's economic team, won't prime the pump very much and will only serve to drive the government into more borrowing (and that may not be possible). Cut government spending and you remove the consumer of last resort... and the depression is even worse.

There isn't any good way out this time. Different than the 1930's.

Colored me scared.

I was discussing with someone earlier about reallocating government spending from one place to another as opposed to raising taxes. In particular, cutting military spending and using it for other purposes (education, infrastructure, job creation, etc.). Or does that money not exist either? In regards to government spending, is it a problem of not having new money to spend, or not having any money at all?

We could re-allocate from, say, military spending. What happens then is that military contractors layoff workers that build stuff for the military, missiles, aircraft, etc.

However, as most military hardware is overpriced, we get more effective economic "bang for the buck". The overpricing of military hardware is legendary, and the overcharge doesn't put those dollars directly into the hands of consumers (which is where we want them).

For example, assume two workers... one is building solar panels and making $20/hour, and the other is assembling parts to a predator drone (and also makes $20/hour). However, there are far fewer worker/hours going into the drone compared to the worker hours that would go into the same dollar amount of panels ($10 million dollars for example). The rest of the military money went to pay investors in the contractor, various levels of management, and for the R&D into coming up with the drone.

In addition, once the military hardware is built, it does nothing on it's own to contribute to our society (other than to be used when diplomacy fails or is not used). The solar panels directly contribute to our society by lowering the cost of power (assuming a completely elastic model for electricity generation).

So, while re-targeting government resources isn't a complete win, it does have some immediate impact (can hire MORE workers with the same dollars by investing in infrastructure than military hardware), it has a much bigger long term impact in that the hardware built (or things done) contribute over and over again.

Of course, this assumes that you don't really need a huge military to meet the threats of other countries. A safe assumption right at the moment.

No matter what, unless we increase taxes or inflate the currency, we still have to borrow more money. And the question that will be answered soon is "Can we still borrow?".

I guess there are no easy solutions.

Thanks.

money by itself does not appear to be a fix without goods, services and jobs. Also why should people with money bail out trillions of dollars of debt by banks.

I was listening to someone's show on the radio the other day and they had some highly renowned economist on explaining things. And there is some verbiage in the Constitution about how prints money and who makes coin... And if they were to play with some wording, it would be possible for the government to mint trillion dollar coins and essentially fix the whole damned thing.

I thought it sounded too simple to be true, but I wish I could remember if it was on Randi or Cenk.

institution says it exists and enough people believe in it.

Remember Peter Pan when Tink was dying? The kids all had to believe in fairies and clap their hands in order to save her. Well, that's essentially what money is. It doesn't have a corporeal existence - it's mostly numbers on various computers. So technically, the money's no where.

What about everyone else? sadly... LOL

we live in a world where economies are built on cash flow.

That's why access to credit is most often based on income measurements rather than asset holdings and net worth - all other things being equal of course.

Wealth creation as measured by access to funds has become more important than actual productivity.

If, for instance, you bought a house that was priced at $400,000 and it's real value is now $100,000 the $300,000 difference is the missing money.

Eventually, price will equal value and the recession will end. But, it's going to be a long and painful journey because just about everything is overpriced.

When that trust and credit goes so does money.

I don't know, but it sure isn't me!