Broadly speaking, banking, mortgage and insurance institutions are losing their shirts, today, for having practiced speculative, devious, dubious schemes involving VIS, CDOs, etc, fooling around with means to distribute risk, while raking in big bucks in commissions on multiple, mutual buying and selling, of what has been in effect worthless paper.
But even if they are losing their shirts now, these institutions have already raked in unprecedented profits and commissions over the past two decades, through inventive practices, above and beyond their present, so called current "losses".
Meanwhile, the FED, BCE and Asian central banks are pumping major liquidity into the banking system, at low interest, in a desperate attempt to keep the whole damn system of credit afloat.
But in point of fact, in global finance, money is never "lost". It simply changes hands.
My question is, where are these billions and trillions worth of resources going?
But the opium trade can really absorb only a small portion. The Fates are kind.
I must say I know very little about the parallel economy aspect, but I don't doubt it plays a role.
That is the way that our current system works, where money is "loaned" into existence by credit intermediaries aka banks and building societies.
This occurs either when:
(a) Central Banks print/mint cash (or interest-free electronic money - as the Bank of England is doing with Northern Rock right now); or
(b) Private banks create loans based upon an amount of capital set by the Bank of International Settlements.
For instance, after the Crash of 1929 huge amounts of credit which had been used to buy stocks on margin was called in and both borrowers and money wiped out, and in the Depression which followed thousands of Banks collapsed, and the economy was decimated as money literally disappeared.
The actual cost of credit has nothing whatever to do with interest rates set by Central Banks, and in reality is a combination of the operating costs of banks and the cost of defaults.
The consequence is that if Banks think the risk of default is high, and that there is an unacceptably high probability that that their loan is not going to be repaid,it really does not matter what the price is at which the Central Bank is prepared to provide the necessary credit=money to them: they simply will not (as is the case right now) lend, and thereby create money.
So this "liquidity" from Central Banks" is a chimera.
So where is the money going?
Well, part of it is already "destroyed" and more will be as the wave of defaults grows. But for the most part it is "tied up" in property, and will gradually trickle out over the years as loans are repaid, along with interest on the loans.
Central Banks are entirely powerless: the only real solutions are fiscal.
Cutting tax cuts is one possibility, except that the deficit is too high.
A good old Keynesian "New Deal" eg a massive programme of public expenditure on the infrastructure so sorely needed, would work, too, except of course that is politically impossible.
Basically, the system is f...d "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
When market values go down (because of transactions on the margin) - a lot of (virtual) money is destroyed. In the long run, we're all dead. John Maynard Keynes
That's the difference between marginal price and average value. But to properly account for that would require <gasp> using nonlinear functions. We have met the enemy, and he is us — Pogo
What is a cynic? A man who knows the price of everything and the value of nothing. Oscar Wilde, Lady Windermere's Fan, 1892, Act III
Oscar Wilde, Lady Windermere's Fan, 1892, Act III
Wealth is not Money, IMHO, but accumulated "Money's worth".
When prices (not values) go down "Money" is not destroyed in the way it is when bank debts are cancelled or written off. To me evaporation is a better word for this disappearance of potential Money.
As you know, I believe that it is through the widespread "unitisation" or "equitisation" of assets and revenues that an alternative to our present unsustainable "securitisation" lies.
A Debt/Equity swap of cosmic proportions, but not, of course, using the "Corporation" as a vehicle of which Exxon offers such a prime example of toxicity. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
