Silly economics question
- Thread starter Big Rig
- Start date
wrong answer
it is your stock that is worth less
the real answer is Capitalism is uncontrolled chaos
Our economy is based on the laws of survival. It is void any real structure and can collapse and destroy us all at any given time
Let's say you dig up a chunk of gold in your backyard, you think it is worth $30,000. Believing you have a windfall you buy a new car, then you find out your gold is actually fools gold worth $5. You never had $30,000 but believing you did you made some decisions that cost you a lot, and subsequently you declare bankruptcy.
Where did the money go? It never existed except by your mind. You just didn't realize it until later that you weren't as rich as you thought.
Celiling Cat is right, money is there, but just out of circulation. For example, banks stop lending, lack of liquidity in the market place for businesses to grow, maintain operations, so people are not getting paid. When people have no money, they save more and less money is circulated back to the economy/business in the form of reduced consumer spending.
Also, when market crashes, people tends to buy more physical assets such as precious metal (gold). Also people may choose to invest in foreign assets that are relatively more stable. Or invest in government bond as an alternative source of saver investment.
I'm not an expert in this topic, but I think this not far off from the basics.
Also, when market crashes, people tends to buy more physical assets such as precious metal (gold). Also people may choose to invest in foreign assets that are relatively more stable. Or invest in government bond as an alternative source of saver investment.
I'm not an expert in this topic, but I think this not far off from the basics.
There is nothing wrong with Capitalism, except when it is subverted for the benefit of the top 1%. In a functioning democracy, the people elect leaders who are going to pass laws that are going to protect them against criminals. During the Clinton years and after, laws designed to protect the public against the excesses of merchant banks were repealed, resulting an a massive Ponzi scheme that funnelled money to the very rich. When it all collapsed in 2008, those banksters who now control the politicians, extorted from those politicians massive bailouts at the cost of austerity for the rest of us, under threat of collapsing the entire world economy. Those banksters also control the mass media, and they have been brainwashing the masses into thinking that all is ok with the economy. If you're making less than 10 years ago, it's the individual's fault, not the system.
The money spent to buy something is always in circulation even
if that thing you bought becomes worthless all of a sudden. The person
who received the payment might have left the money in the bank
instead of spending it right away. But idle money rarely sleeps for long.
The money is still there but the credit of speculators who bought
stocks on margin vanishes. This and the wealth effect in reverse could
change the velocity of money circulation in a big way.
To sum-up:
- Money vanishes because stock is worth less. If you were sitting on $100,00 worth of stock hoping to buy a German car tomorrow, but the market crashes and the next day it is worth $100, you may only get a hh from Backpages with what was previously going to be an Audi.
- When the stock market crashes and things are worth less, those that have loaned money want to "call-in" their loans, so that they can make-up the difference in what they lost. As has been said, there are people who buy stocks on loan (or margin), and they will have to pay-up on their loan. If they don't have the money to do so (because they thought the stock would go up), they have to find it somewhere. Other lenders can also call their loans too, sucking money back to the lenders.
- If the market crashes, there is more volatility and uncertainty in general. People who lend money to others be it credit card companies or mortgage lenders or even banks with small loans or lines of credit become much "tighter" with who they lend it to. With less credit available, businesses may have to let employees go and/or close up shop.
What is interesting is that with each major crash or recession, those that regulate the economy tend to learn more to make policies that avoid these effects should the market crash again. For example, John Maynard Keynes argued fairly successfully that if a recession happens (or if a stock market crashes), and there is less money available, governments should actually spend a lot of money again in order to stimulate the economy. That is to say, when all others are calling back their loans, or not lending out money, government should take on the responsibility to put money back into the system that has been taken-out.
- Money vanishes because stock is worth less. If you were sitting on $100,00 worth of stock hoping to buy a German car tomorrow, but the market crashes and the next day it is worth $100, you may only get a hh from Backpages with what was previously going to be an Audi.
- When the stock market crashes and things are worth less, those that have loaned money want to "call-in" their loans, so that they can make-up the difference in what they lost. As has been said, there are people who buy stocks on loan (or margin), and they will have to pay-up on their loan. If they don't have the money to do so (because they thought the stock would go up), they have to find it somewhere. Other lenders can also call their loans too, sucking money back to the lenders.
- If the market crashes, there is more volatility and uncertainty in general. People who lend money to others be it credit card companies or mortgage lenders or even banks with small loans or lines of credit become much "tighter" with who they lend it to. With less credit available, businesses may have to let employees go and/or close up shop.
What is interesting is that with each major crash or recession, those that regulate the economy tend to learn more to make policies that avoid these effects should the market crash again. For example, John Maynard Keynes argued fairly successfully that if a recession happens (or if a stock market crashes), and there is less money available, governments should actually spend a lot of money again in order to stimulate the economy. That is to say, when all others are calling back their loans, or not lending out money, government should take on the responsibility to put money back into the system that has been taken-out.
I am not an economist but it sounds good to me
no money went anywhere, only credit and over pricing bubbles. In the recent example it was housing. In the great depression it was the stock market
Your money is gone to the seller the moment you buy the stock.
The potential to get some back is what disappears as the price drops.
A lot of stocks are nothing more than a greater fool pyramid or a game of musical chairs.
The stockmarket is a zero sum game. When stock prices reduce, no money disappears - it disappeared from your pocket when you bought the stock, shifting into the sellers pocket.
For example, if you buy a stock for $100, you handed over $100 for the stock to the seller. You value your stock that day at $100, cause you just paid that for it. Sounds fair. No money was introduced or lost in the overall supply though.
Say the next day other people buy the same stock, and demand pushes the price to $110. Hey, you think, your stock is now worth $110 too! But where did that $10 come from? You feel richer, but where is your $10? Nowhere, it doesn't exist! It is a paper gain only for you, until you actually sell.
The money supply didn't expand when the price went up, as the other buyers/sellers also engaged in zero-sum transactions. (The sellers may have realized a gain, and have more money now than before, but you haven't.)
When the market collapses, the market capitalization reduction amounts they quote doesn't mean money was destroyed. It's a convenient sound bite.
Market collapses do have implications though.
While I agree that we need to accept more personal responsibility for our own finances, it is not just our fault if we make less than 10 years ago. The new economic reality is that no one is safe from being laid off, restructured or right-sized or whatever politically correct term a company wants to assign it.
You have to remember that people are behind ups and downs of the stock market. So the value of a stock (or the market as a whole) is what people believe it to be and not it's actual value. There's infinite examples where the fundamentals of a business did not change, but the stock went up or down for no obvious reason other than people over-reacting to some news.
I would suggest you read Economics in One lesson by Henry Hazlett and Basic Economics by Thomas Sowell
http://mises.org/sites/default/files/Economics%20in%20One%20Lesson_2.pdf
http://www.amazon.com/gp/aw/d/0465060730/ref=mp_s_a_1_1?qid=1423289155&sr=1-1&keywords=Thomas+Sowell&pi=AC_SY200_QL40&dpPl=1&dpID=41DmJtOy2tL&ref=plSrch
http://mises.org/sites/default/files/Economics%20in%20One%20Lesson_2.pdf
http://www.amazon.com/gp/aw/d/0465060730/ref=mp_s_a_1_1?qid=1423289155&sr=1-1&keywords=Thomas+Sowell&pi=AC_SY200_QL40&dpPl=1&dpID=41DmJtOy2tL&ref=plSrch
It actually isn't. The derivatives market is a zero sum game. The stock market isn't zero sum because the underlying companies are (hopefully) profitable and do either rise in value over time, or pay the created value out to investors through dividend distributions.
Yeah, i can see that as a clarification, but they distribute profits directly to the stockholders, not via the stock market. I was focused on the market mechanics.
Note that the profits don't create money either though.
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