Value Vanishes
We've never so much as contemplated what "might" happen if massive losses like the ones occurring now actually took place. We've been "taught" that money just moves from one asset class to another, that losses are offset by people on "the other side of the trade," or that the money always goes "somewhere."
But what if no money actually changed hands? Ever? Suppose all transactions were electronic blips, bytes, and data entries? Along with those happy facts, remember that value has always been invisible.
There is a difference between actual money and value. If you own a Picasso painting that you paid 100K to somebody so you could become its custodian until you decided to sell (always at a profit) the real concern has to be the value, not the money paid. Every dollar the painting drops in value is value vanished. So if you borrowed 25K with the painting as collateral, the 25K does not vanish. That is because you bought stuff with the monies so in theory the value is spread over the assets you purchased. The problem is that today the value of all asset classes is falling. All monies paid for every asset are somewhere in the system IF MONEY WAS ACTUALLY PAID. In the good ol' modern world payments are never made. All sales are electronic blips and are in a major sense invisible. It's tracking the billions of bytes, blips, and data entries that is a major component of the current problem. A problem without a solution. In a sense we have all purchased something with nothing. And what is the value of nothing? Ho do you refi nothing?
What we have today is a search for true value on a world wide scale. Nothing, is worth what we paid for it. Except for the Rolex that a street vendor sold to me for $12. I fucked him good. Compounding the problem is the worth of the U.S. dollar. If you bought gold back in '04 for $300 per ounce with strong dollars how much is it actually worth now when it is $860? Answer: what you paid for it back in '04 in adjusted dollars. Click on the gold vs dollar chart above (dollar is green). Nothing escapes inflation or the disappearance of value.
As an aside regarding gold. Unlike every commodity on earth, 99% of all the gold EVER mined is still in the possession of somebody. Gold that has been made into Ancient Egyptian jewelery is worth vastly more than the raw gold. This means that the price of gold can have VALUE added to it.
3 comments:
I think the value disappears when the loan is not repaid. someone borrows 100K to buy a 100K condo. the condo goes down to 50K so the borrower does not pay and walks away. The lender forcloses and sells the condo for 50K.
Net in this transaction:
lender lends 100K
seller gets the 100K
borrower gets nothing
lender gets 50K back
Just as banks can create money with fractional reserve lending, this bank destroyed money - it only had 10K of deposits for 100K loan so 10K of the loss was the bank's skin in the matter and 40K was value distruction.
Of course, accounting rules, the fed, everything is manipulated to obscure what really went on. If only one loan in 100 default, only profit on other loans is decreased, we never see the value distruction. But if enough default there is no profit to fill the bucket and we have destruction of money and deflation.
No, the transaction you describe is with real money. It's a daisy chain of loans starting with the first loan to the builder, the bridge loans, and so on. The mortgage isn't on the books for more than a nano second before it is securitized (packaged into a bond) and sold to the public or commercial banks. The "loan" is then repackaged along with every kind of quality paper and sold again. The value of the house is impossible to discover, nor is the original loan and so on. Value is determined when you go to sell the house and cannot until you lower the price. When you go to refi the house and discover you are already belly up in the mortgage. The actual money you gave to the lender doesn't vanish, it's just converted to an "asset." Of course since you are out the money you might say it vanished but it didn't. When you talk about fraudulent loans you have criminal activity but even so the actual MONEY doesn't vanish. Value does.
Throw a home loan into the equation. The seller is the one that loses then, he has to pay that back before he can sell the house. So the seller loses the money.
But, of course, the seller spent that loan money when he got the loan. But he was expecting to get that money back when he sold the house. He was going to spend that money too! So consumption of goods decreases if a lot of people get into this jam, which is what's happening now.
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