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So where has all the money gone?

(180 Posts)
Bugsy2 Thu 29-Sep-11 09:25:11

I just don't get it & I need someone within an economics sort of mind to explain - please!
We live on planet earth, there are currencies circulating all around the world, people buy & sell things. How can it be that 10 years ago the economic outlook was good & certainly in the West most people were buying houses, getting more wealthy & everything was fine & dandy. Now, it is all doom & gloom, countries are going bust, people are losing their homes & its all going tits up. So where has the money gone? Who has it, where was it, where did it go to?

Robotindisguise Thu 29-Sep-11 09:39:14

OK.  You have a house.  It's very nice.  Lots of people want it, and as a result you're able to set a high price.  You're offered £500k, but you decide to stay put.  At that point, your house is "worth" £500k

Next year you do decide to sell.  But there isn't the interest.  You do need to sell though, so you drop the price, and eventually sell it for £400k.

Was there ever an actual £100k that you've lost?  No.  But things are only worth what people are prepared to pay for them.

And that includes companies, and companies' shares.  Like houses, their shares are only what people are prepared to pay for them.

Yourefired Thu 29-Sep-11 09:44:04

Ok, it was me I spent it on chocolate.  I am very very sorry.

No I don't understand it either.  I think it has something to do with it not being "real" in the first place, countries/people borrowing against what might happen in the future, then when it doesn't pan out they still have to pay it back.  As for who gets the money, think that it's all so interconnected now that the same countries/institutions that are profiting are at the same time incurring losses, hence markets' stall, confidence goes down, money illusion stops working and we all sit and wait until it starts up again.  

Would also welcome someone who understands it explaining it all.

Bugsy2 Thu 29-Sep-11 09:44:25

That makes sense, so in some ways the money was never really there. However, what I don't understand is how the cost of living is going up, so basic utlilities, food & very tangible real items cost more - yet we all seem to have less money? And what I really, really don't understand is how a whole blinking country, like Greece, can seemingly go bust?

DooinMeCleanin Thu 29-Sep-11 09:53:25

There's something that puzzles me about the housing market. Our house is now not worth what it was when we bought it but if we chose to move our new house would also be cheaper, so what's the problem? You sell for less but you buy for less, surely one cancels the other out?

ZephirineDrouhin Thu 29-Sep-11 09:54:47

Gillian Tett (who famously foresaw the crash) described it as being like candy floss - you start off with a small amount of sugar (or money), but by spinning it round and round (with complex financial instruments allowing you to endlessly repackage and sell on debt) you end up with what looks like something hugely impressive, but which in fact has no more substance than you started with. It's only confidence that keeps it puffed up: once people/banks/countries realise that those to whom they have lent money may not be able to pay it back, the whole thing starts to collapse.

yellowsubmarine41 Thu 29-Sep-11 09:59:04

It's like the emperor's new clothes. People believe what they want to eg that banks are secure backbones of society and have their customers' interests in mind and, funnily enough, they're not and they don't and it all goes tits up.

Bugsy2 Thu 29-Sep-11 10:01:24

Yes Zephirine, I think the selling of debt has alot to do with where it all goes very horribly wrong. Because by selling debt, you are in fact selling non-money. It is money that potentially doesn't exist. I know I am being slightly thick, by defining debt - but actually unless you analyse what debt means, it is hard to see how bonkers selling it actually was / is.

MerylStrop Thu 29-Sep-11 10:02:59

Depends on how much you borrowed to buy it, Dooin. Some people lose a lot of equity and haven't enough for a deposit.

witchwithallthetrimmings Thu 29-Sep-11 10:07:17

housing market is an easy one to explain. Lets say I bought a 3 bedroomed house in 1995 for £95,000. It is now worth £300,000. It is a nice house and quite big, so i know that i have the option of downsizing (a smaller house or a house in not so big an area, or simply renting). The money that you get from downsizing is like your finacial cushion or savings.

In 1995 if i downsized by 20% i would get less that £20,000. If i downsized at the peak i would get 60,000. Thus you are richer so long as house prices keep rising

Dooin, the problem with house prices is that most of us don't actually own our houses; the banks do. And they want back what we borrowed from them.

As long as you don't owe more on your house than your house is worth, then your equation works. But if you borrowed £200k to buy and you can now only get £160k, then you're screwed.

DamselInDisarray Thu 29-Sep-11 10:16:22

Dooinmecleaning: the problem comes when your mortgage is higher than or equal to the price you can get for your house.

Say you'd bought a house at the height of the market for £320k. You got a mortgage of £288k (90%). Or perhaps you were very silly and went with one of those lenders that would give you a 100% or 105% mortgage (in which case you owe up to £336k). Now you need to sell your house, but the market has fallen and the best you can reasonably hope for is £250k (and even then you'll need to be lucky). So, even if you can sell for £250k, you'll still owe thousands of pounds on your existing mortgage. Even if you can get the full value of the mortgage for the house, you're left with nothing afterwards to use as a deposit for your new house.

You're then stuck in a situation where it makes no difference that all the prices have come down because you'd need at least a 100% mortgage just to be able to buy anything (and deal with your existing debts). This is not going to happen. It doesn't really matter how cheap houses have got (largely because the bigger the fall, the more likely you are to be in negative equity). In the best case scenario, you can get what you owe on your house and move into rental accommodation without any debts. In the worst, things are really not good at all.

CogitoErgoSometimes Thu 29-Sep-11 10:41:36

Not all countries are bust. China, Russia, Brazil.... quite a lot of those have got buyoant, rapidly growing economies as they sprint to catch up with more developed countries, producing and buying the consumer goods that we've already got. That's where a lot of the money is, plus they also own a lot of international debt.

'Selling debt' isn't as daft as it sounds. Debt is an asset. The whole bailiff/debt-collection agency is built on buying debt. They buy the debt off the creditor, lob on a charge and collect the money plus charge from the debtor, making a profit. The numbers involved in international money markets are much bigger and China can't exactly come round with the heavies and take America's telly ... but it's the same principle.

KouklaMoo Thu 29-Sep-11 10:49:53

This is a link to the brilliant "The Great Hargeisa Goat Bubble". It's text only, I'm afraid, but well worth a read if you want to understand the relative 'values' of commodities/currencies etc. The audio play was on Radio 4 back in January and is very very good. Sadly not available anymore on Iplayer, but if you ever get a chance to listen to it - do.

www.juliangough.com/the-great-hargeisa-goat-bubble/

niceguy2 Thu 29-Sep-11 11:03:32

There is no money. All money is nowadays is a measure of confidence. Once upon a time you could take your pound to a bank and they'd give you gold coins. Remember "I promise to pay the bearer on demand....". Try that now. You'd probably get arrested and sectioned!

Booms & recessions are caused by confidence or lack thereof.

So during the boom, people felt good so they borrowed some money to buy the things they wanted. Factories felt confident that they'd be able to sell more widgets so they employed extra staff and so on.

Then one day something happened and everyone thought "Uh oh!". In this case, the "Uh oh" moment was the realisation that all our confidence was not based on anything of value but funny money being traded by banks & financial institutions. That lending money to people whom have nearly no chance of paying it back perhaps wasn't the greatest of ideas. So confidence evaporated. And here we are.

Bugsy2 Thu 29-Sep-11 11:25:17

Hmmm, so there is a lack of confidence in the housing market - fair enough. There certainly isn't a loss of confidence in gas, electricity & food though is there? Or is it that there is a shortage of supply for those things, which is pushing up demand?
Cogito, I get that debt could potentially be an asset, but that is only the case if you can collect the debt. With more & more people declaring themselves bankrupt - you are never going to get that debt - so you've sold non-money, to someone who has then sold it to someone else, except slightly differently split, who has sold it to someone else, in another different cut - but actually there isn't an asset there, because the non-money never existed in the first place & will never be collected! hmm Bugsy's small raddled mind wonders if she really has that right?

kelly2000 Thu 29-Sep-11 11:52:44

I do not think it was ever really there, it was just electronic figures bouncing around. Think of it this way, you go shopping a lot, but you may using credit cards, overdraft, and store cards. The shop does really well, business is booming etc. But then you have to pay back the money, so you stop shopping so as to not build up more debt, but then because you have to pay it back you start cutting down on other things (cheaper groceries, walking not using transport etc). The shops do less well, their supplies in turn do less well, the people transporting the goods do less well, to make up for it they lay people off and push up prices and it becomes a vicious circile.

China is a bit of an uncertain one though cognito,
Its property bubble is about to burst so its construction will go down (apparently they have whole towns they cannot sell), and there have been claims they are keeping the yuan artifically low to make it attractive for exports.

CogitoErgoSometimes Thu 29-Sep-11 11:57:25

The money is there and can potentially be collected. A mortgage company can hypothetically demand all of its money back from borrower by foreclosing. (They don't tend to do this for contractual reasons but the potential is there) And a bad debt is a bad debt.... it's the loss of an asset and is provided for in most balance sheets in the same way shrinkage or depreciation is accounted for. Lenders get charged interest on their debts to cover the costs of bad debts, administration, profit... for the privilege of spending someone else's money.

Gross that up to national levels and one of the reasons Greece is struggling so much is that, because they are bad risk, they are being charged extra interest on their loans - compounding the problem further. No-one is asking Greece for all the money back in one hit, but keeping up with the payments is sinking them

niceguy2 Thu 29-Sep-11 12:09:08

Or is it that there is a shortage of supply for those things, which is pushing up demand?

Exactly. There's only so much gas/oil in the world and with the massive growth in economies like China, India etc, they are all now demanding lots of energy. Hence people can ask for more money because they are confident that if you won't buy it then someone else will.

The following links are done as comedies but imo are well worth watching and explains what's happened but in a hilarious way:

Bird & Fortune Subprime Crisis

Clark & Dawe European Debt Crisis

Bugsy2 Thu 29-Sep-11 12:19:16

Ok, Cogito, I'm getting there, BUT, if the money loaned was never really capable of being paid back, was it actually there? So looking at the whole sub-prime thing. If a mortgage company loans someone £100k to buy a house that they don't ever really have the capacity to pay back. Where exactly did that money go? Let's say after one year of repayments, which wouldn't have even covered a tiny percentage of the interest being charged, let alone repay the loan itself, the house owner goes bankrupt. They don't have a bean to their name. The house gets sold for less than it was bought for, because the market has gone down & the mortgage company can't reclaim the full amount of the loan, they only get £60k back after the sale of the house, legal fees etc. So, immediately there is a howling gap of £40k - whose was that & where did it go?

livingonthedge Thu 29-Sep-11 12:24:02

Imagine that we are all cave men living in caves. You have been hunting and gathering all year but rather than preserving and putting stuff by personnally for the winter you have given your spare fresh food to the cave next door because they said that they already had loads of extra dried food in the back that they would give you over the winter. It is now winter and their store of "spare dried food" has turend out to be empty.

The same has happened here. People effectively borrowed against things that were not "real" and now there is way more debt in the world than there is "real stuff".

Taking the analogy further - imagine that there were lots of caves with "spare dried stuff in the back". Everyone has been giving each of these caves fresh food over the summer in return for a "promise" of the dried food over the winter. Each of these caves actually has a different amount of dried food in the back so each of the "promises" is really worth more - a promise of a dried cow off a cave with lots of dried cows in the back is worth way more than a promise of a dried cow off a cave with hardly any (as they probably will not deliver on the promise). This is how exchange rates work - how much each currancy (all currancy is effectively a "promise" of goods) is "worth" depends on the countries ability to fulfl the promise. Usually everyone keeps theri back caves locked so no one can see how many cows are really in there. What is happening now is that the caves are being unlocked.

Finally - in Europe we have promises made aginst one (Greek/Portuguese/Italian) cave which are valid against all the rest. It has transpired that the (Greek/Portuguese/Italian) caves have got hardly any dried cows in them and frantic hungry hoards are marching towards the well stocked (we hope grin) German/French caves demanding that they give up their cows to cover the promises made from the others.

CogitoErgoSometimes Thu 29-Sep-11 12:25:26

The £100k in your example paid the vendor. The person who sold the property has £100k in their back pocket. The missing £40k 'bad debt' goes on the balance sheet of the mortgage company as a cost of doing business. The same mortgage company may have just upgraded all their branches and had to chuck out a lot of old decor and furnishings with zero resale value. The cost of doing that will also be written down on the balance sheet.

The mortgage company offsets the cost of doing business (bad debts, rent on branches, IT equipment...) against the income from interest on the money they lend out. As long as the income is higher than the costs, they make a profit.

Bugsy2 Thu 29-Sep-11 12:32:12

Aha, so it is the risk element that we buggered up. When you don't store dried cow in the back of your cave because you think the other cave will give you their dried cow, you are taking a risk. Sometimes you have studied your cave & the amount of dried cow in it well & you know that there should be lots there, so the risk is minimal, but other times you just took their word for it & realised far too late they were fibbing - or an unexpected event happend, like all the cows got sick - so the risk back-fired. So, if I am getting this right, globally everyone got a bit carried away & took way too big risks, quite alot of which have now back-fired? All of which means they thought there was more dried cow (money) than there really was?

Bugsy2 Thu 29-Sep-11 12:38:39

Thank you Cogito. So what happened was the mortgage companies/banks had so many bad debts they stopped making a profit & then had to be bailed out (given money). Would I be right in thinking that this whole cascading financial crisis was all due to sub-prime loans? Are there other things involved too?

livingonthedge Thu 29-Sep-11 12:39:10

how a whole blinking country, like Greece, can seemingly go bust it is kjust like a household really. GDP is the amount of goods and services that a country produces. If the amount of goods and services that a country consumes is more than this then they have a trade deficit and have to borrow. They usually borrow by issuing government bonds. They have to pay interest on these and someone has to buy them (lend them the money). The theory is that each country has economic growth so people lend them money so they can consume more this year than then make because next year they will make loads more (because of economic growth) and be able to pay back the loan.

Greece have borrowed so much in this manner that no one really believes that they can pay the money back. This means that no one wants to lend them money any more so their bond interest rates are too high (like someone with CCJS trying to get a mortgage).

Even worse is that the debt is in Euros (like a child securing their mortgage against their parents house) so other European countries may have to pay the debt for them. They could probably manage this for Greece but there just isn't enough to cover all the other slightly dodgy countries (in particular Italy and Spain).

The problem is that the Greeks want to keep on spending. If they made lots of cuts and carried on working then it woudl be feasible that they could at least pay back some of the debt but they don't seem able to.

To put it another way - in Europe many countries have been effectively having a high standard of living because they have had Chinese people working for them to provide their goods and services. They have promised the Chinese people that they will give them lots more goods andservices back in the future so the Chinese have been puttign up with a worse standard of living than their work ought to entitle them to in the hope of getting a better standard of living in the future. They are now realiseing that this isn't going to happen so are not willing to continue with the arrangement.

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