Where Is The World’s Wealth Going?
The weird thing about this economic crisis, and maybe it’s just me, because I am fairly new to economics and finance, but the thing I have noticed is that it seems as if everyone is going broke.
It seems that if America’s going broke, then China, or Europe, or Japan, or whomever would rise with our wealth being transferred to them, but all I hear is that Europe is going broke too, and China’s going to be hell up the creek, if we go broke. I’ve watch news segments that talk about Japan being exposed to our crisis too, so I’m asking, where is it going?
Common sense tells me that the wealth doesn’t just evaporate into thin air does it? It transfers to someone else, so who or what is that?
Is it the "International Bankers" or "Illuminati" or "Stone Cutters". . . . . . (Simpson’s reference)
Where is the wealth of the civilized world going?
Civilised really? Money is to me a game and those that make the rules win the game. Except in one respect in that people, in the civilised world, are prepared to work for it. Wealth is a concept (of the game, the matrix, the economy what have you) that has been round so long that it seems real. It was never real just the things made by peoples work are real. Those things if they are solid remain. The money game got too complex and got the speed wabbles. Poof – all the wealth has dissapeared. It was never there, we only thought it was IMO.
Much of the "wealth" is only the appearance of wealth gained through a mountain of debt. Leverage on the way down can obviously be as powerful as it is on the way up, but it ain’t nearly as purty.
"Speed wobbles"…..perfect. Sometimes I wonder if the one of the most unsustainable facets of the industrialized world is it’s level of complexity. Maybe I’m just getting old.
Black_Death: This link that was referenced by Davos on the May 16 Daily Digest could help answer your question:
I used to think along the same lines as you: the money is still out there, isn’t it? All the money used to build all those houses, buy all those insurance policies, and all those stocks is still out there – somebody received it at some point in payment for services (carpenters, plumbers, architects, engineers, real estate agents, AIG, etc etc etc). That much is true.
The problem, and the money destruction, comes from the fact that the housing loans used to pay all these people were paid in exchange for a repayment promise, at interest, collateralized against assets whose present value is less than what they are held as a guarantee against. When those repayments cease to perform, the cash-flows represented by those repayments dissapear as well. These loans, when solvent and being repaid, are rightfully considered "assets" on a bank’s balance sheet. When they go into default, they are no longer assets – they are "bad debt", which is another term for "money gone down the toilet". Wealth is destroyed.
Going back to the inverted pyramid cited above, the higher up you go, the more illiquid and risky the assets are. Much of that kind of wealth has been or is in the process of being destroyed. It is literally destroyed – poof, because "assets" in the form of loans that do not pay or insurance policies (AIG) that are unfundable are not assets – they are just lost money and it is gone forever.
Hence the endless money-printing by the Fed, in their atttempt to "reflate" the money supply. Hope this helps.
[quote]Common sense tells me that the wealth doesn’t just evaporate into thin air does it? It transfers to someone else, so who or what is that?[/quote]
What is money, and by induction what is wealth.
Surprisingly they’re not the same thing. money is (assuming the local population accepts your currency) the potential for goods and services, but is not the goods and services themselves.
Wealth is an excess of "owned" goods, resources and services.
Currently in our system the "Wealth" is just the same as it’s always been, there’s no change there. The change is in the money. The world has been for the past 30 or so years been betting on certain things happening (or not) some of these have happened, some haven’t. Right now the perceived wealth isn’t evaporating, it just never existed in the first place. Effectively to put it into laymans terms, the world has been borrowing for goods and services, that it did not have the money to pay for, and it’s just recieved its credit card bills, which it can’t pay for. So now its time to refinance (US Bailouts), economize, sell some goods, go bankrupt, or possible all of these things.
If you understand the fractional reserve banking system, you’ll see where the money came from, and can see why it never existed.
It actually can just go *poof*.
For example, to whom did all that money go when the stock market, as it just did, lost almost 50% of it’s value? It didn’t go to anyone, it just disappeared from the economy.
Where did the money go when securities backed by mortgages became worthless?
Where did the money go when Lemann Bro went belly up and investors holding holding their bonds discovered they were now only worth 6 cents on the dollar?
Yup, that money just went poof. Sad but true.
It is August. In a small town on the South Coast of France, holiday season is in full swing, but it is raining so there is not too much business happening. t is August. In a small town on the South Coast of France, holiday season is in full ing, but it is raining so there is not too much business happening.
Nearly everyone is heavily in debt.
Luckily, a rich Russian tourist arrives in the foyer of the small local hotel. He asks for a room and puts a Euro100 note on the reception counter, takes a key and goes to inspect the room located up the stairs on the third floor.
The hotel owner takes the banknote in hurry and rushes to his meat supplier to whom he owes E100.
The butcher takes the money and races to his supplier to pay his debt.
The wholesaler rushes to the farmer to pay E100 for pigs he purchased some time ago.
The farmer triumphantly gives the E100 note to a local prostitute who gave him her services on credit.
The prostitute goes quickly to the hotel, as she owed the hotel for her hourly room use to entertain clients.
At that moment, the rich Russian is coming down to reception and informs the hotel owner that the proposed room is unsatisfactory and takes his E100 back and departs.
There was no profit or income. But everyone no longer has any debt and the small town people look optimistically towards their future.
Could This Be The Solution To The Global Financial Crisis?
Or, is there a catch here?
None of those French folk were insolvent. They all had "balance sheets" that exactly matched assets (E100 owed to them) and liabilities (E100 owed to someone else). Hence that town had a liquidity crisis, not a solvency crisis. I understand that today we find organizations are insolvent, not illiquid.
The catch is that the hotel lost E100….
The catch is that the hotel lost E100….
I don’t think this is right. The net result was that the Hotel used the E100 it received from the prostitute to pay the butcher. It started with a balance sheet total of 0 euros and ended with a balance sheet total of 0 euros. Therefore it doesn’t appear to have taken a loss.