Possibly stupid economic question

[Goli]

This was posted on another forum and I'll put it here.

"""""Ok I'm sure there is an easy answer to this, but I've had a bit of trouble finding it.

My question is this - when you invest in shares etc. and they drop in price where does the money go?

For example I have $10. I give it a broker in exchange for $10 worth of shares. He then has $10 which he gives to the company I've bought shares in. The company has my $10 and I have $10 worth of their shares. Their share price then falls by 50%. I now have $5 worth of shares but surely they still have my actual $10? Even if lets say they spend my $10 and have $0, which is why their share price falls. Obviously they give my $10 to somebody, who maybe spends it or keeps it etc.

The point is that surely that $10 never disappears. I might only be left with $5 worth of goods, but my actual money should be floating around the economy somewhere.


With that in mind - when we have a global economic recession/depression as we are apparently in now - where is all the money? If lots of people are losing money, does that mean an equal amount of money is being gained by other people, and if that's not the case, where is the money being lost going?"""""

Is this all because the money was never real to begin with? Did the money simply go to Citibank or wherever and then they spent it on lobbying the government or paying employee's?

[wvbill]

This was posted on another forum and I'll put it here.

"""""Ok I'm sure there is an easy answer to this, but I've had a bit of trouble finding it.

My question is this - when you invest in shares etc. and they drop in price where does the money go?

For example I have $10. I give it a broker in exchange for $10 worth of shares. He then has $10 which he gives to the company I've bought shares in. The company has my $10 and I have $10 worth of their shares. Their share price then falls by 50%. I now have $5 worth of shares but surely they still have my actual $10? Even if lets say they spend my $10 and have $0, which is why their share price falls. Obviously they give my $10 to somebody, who maybe spends it or keeps it etc.

The point is that surely that $10 never disappears. I might only be left with $5 worth of goods, but my actual money should be floating around the economy somewhere.


With that in mind - when we have a global economic recession/depression as we are apparently in now - where is all the money? If lots of people are losing money, does that mean an equal amount of money is being gained by other people, and if that's not the case, where is the money being lost going?"""""

Is this all because the money was never real to begin with? Did the money simply go to Citibank or wherever and then they spent it on lobbying the government or paying employee's?

Forget about the company, the bank, and whether the money is paper or just an electronic digit in a computer in an account somewhere.

Look at it this way:

Say "A" owns 1 share of xyz stock, current price $10. He has an asset worth $10.
Say "B" has $10 in cash.
Now "B" buys the stock from "A" for $10.
At this point each has exchanged cash (an asset) for another asset of equal value.
"A" has $10 and "B" has the share of stock.
So far nothing has happened except assets changing hands.

If the share drops in value to $5, "B"'s asset has declined in value by $5. His net worth has declined by $5. And $5 of wealth has been destroyed. This is deflation--total money in the world is now $5 less. i.e. before if you added the assets of both "A" and "B" you got $20, now you get $15.

Bill

[jusme]

I have been reading about the swipe fee's debate. My vet won't take a debit card or credit card ,just cash or check.

Question:

We hear all the time that there is not enough paper money circulating, available.

Would using paper money more be a plus or a negitive in this crisis economy ?

Also less credit card use ?

Not less spending per se but less plastic spending.

jusme

[Higgenbotham]

As long as no money was loaned on the shares, then it's just a reduction in the net worth of all the people who own those shares. They feel poorer, but the money supply doesn't change due to any of the transactions.

On the other hand, if people are using their home equity as an ATM and that ability is lost due to falling house prices, then I think some measures of the money supply could go down because there could be less money in checking accounts and so on.

[Higgenbotham]

Question:

We hear all the time that there is not enough paper money circulating, available.

Would using paper money more be a plus or a negitive in this crisis economy ?

Also less credit card use ?

Not less spending per se but less plastic spending.

jusme

I do know this much. There is a grocery chain called Woodman's that doesn't accept credit cards. They have a sign in front that says they don't accept credit cards because they can keep their prices lower that way.

[jusme]

The Debit Card and I guess Credit Card's generates like 12 billion yearly.But that isn't where I'm going with this.Fee's are generating wealt in all commodities.

We know that when we say the Fed is printing more money what they are really doing is using computers ,putting in a # and hitting the send button? I haven't handled brand new crisp paper money in a long time ? Most people don't actually have their hands on their money. They direct depost,use bill pay for bills, use Debit and Credit Card's for purchasing. And from what I've read there is still a Credit Card bubble that is going to burst ? Vince just mentioned the speed of the computers in trading.Nano second's from what I've read.

I can remember back 40 some years ago I think there probably were Credit Cards? But I think only the very rich or business's had them ? The one's that come to mind were Diners Club and Carte Blank, I think it was called ? Personally, we applied to Visa in the early '80's' and were rejected. Reason, 'Not enough Credit Card experience? ' We were buying a house. Husband had good paying job. Someone said go to Sears and buy something. They will give credit to anyone! We did and the Credit Card offers filled our mail box from then on? We figured out that it wasn't about 'experience' but we weren't in enough debt , like paying them the minimum payment's so they could get interest. I can't recall what interest rates were back then ? At about the same time the invention of the Debit Card. The thing with the CDO's and CDA's were all inventions to create wealth but it wasn't backed buy any tangible dollars.

So I guess what I'm asking is, if we used more cash in purchashing would that help ?

Is it even possible ? Is there enough actual paper (fiat) money circulated that we could ?

if we all lost the benefit of computer banking,I guess before computers it was all hand written ? And Credit Card and Debit spending stopped.Would that be a new biginning for the better or the end ? Game over ?

We know in 1929 when people ran to the banks the banks didn't have the money for everyone .So they created FDIC. FDIC is going broke now with failing bank's.

I visulize the old picture of the guy pushing the wheel barrow full of money to buy a loaf of bread.

But what I 'm really wondering now is, would the wheel barrow's all be empty ?

jusme

[Higgenbotham]

The Debit Card and I guess Credit Card's generates like 12 billion yearly.But that isn't where I'm going with this.Fee's are generating wealt in all commodities.

We know that when we say the Fed is printing more money what they are really doing is using computers ,putting in a # and hitting the send button? I haven't handled brand new crisp paper money in a long time ? Most people don't actually have their hands on their money. They direct depost,use bill pay for bills, use Debit and Credit Card's for purchasing. And from what I've read there is still a Credit Card bubble that is going to burst ? Vince just mentioned the speed of the computers in trading.Nano second's from what I've read.

I can remember back 40 some years ago I think there probably were Credit Cards? But I think only the very rich or business's had them ? The one's that come to mind were Diners Club and Carte Blank, I think it was called ? Personally, we applied to Visa in the early '80's' and were rejected. Reason, 'Not enough Credit Card experience? ' We were buying a house. Husband had good paying job. Someone said go to Sears and buy something. They will give credit to anyone! We did and the Credit Card offers filled our mail box from then on? We figured out that it wasn't about 'experience' but we weren't in enough debt , like paying them the minimum payment's so they could get interest. I can't recall what interest rates were back then ? At about the same time the invention of the Debit Card. The thing with the CDO's and CDA's were all inventions to create wealth but it wasn't backed buy any tangible dollars.

So I guess what I'm asking is, if we used more cash in purchashing would that help ?

Is it even possible ? Is there enough actual paper (fiat) money circulated that we could ?

if we all lost the benefit of computer banking,I guess before computers it was all hand written ? And Credit Card and Debit spending stopped.Would that be a new biginning for the better or the end ? Game over ?

We know in 1929 when people ran to the banks the banks didn't have the money for everyone .So they created FDIC. FDIC is going broke now with failing bank's.

I visulize the old picture of the guy pushing the wheel barrow full of money to buy a loaf of bread.

But what I 'm really wondering now is, would the wheel barrow's all be empty ?

jusme

I'm not exactly sure about what you're trying to figure out.

There is about $900 billion in US dollar paper money. I like to figure out things like this in terms of per capita. I believe I've read that about half the US dollar paper money is outside the US. The leaves about $1500 per person in the US.

If people switch from using credit cards to using paper money, obviously money will come out of checking accounts and CDs and things like that and take the form of paper money instead. Naturally, the banks and the Fed will be reluctant to supply that. Banks will lose income as you've said.

In the reading I've done, the best information on the role of credit cards comes from a PBS story about how Walter Wriston led Citibank into that business to save the bank from insolvency. It discussed the role that the state of South Dakota played in that in terms of the interest rates. All the transcripts were still on the PBS web site last I looked, which was maybe a year or two ago. This is a fascinating story and something every person should read who wants to know the basics of how our financial system got to where it is today. I believe that if we apply the logic of the story in reverse it would mean that if people stop using credit cards the banks would fail. The story isn't completely fresh in my mind but I'm sure anyone who reads it can draw their own conclusions.

http://www.pbs.org/wgbh/pages/frontline/shows/credit/

[Higgenbotham]

What was the world like before credit cards, and why did you, why did Citibank, get involved in credit cards?

Well, the world was partitioned, and after the debacle of the Great Depression in the 1930s, a group of restrictive laws were passed, the net of which was that Citibank, for example, was prohibited from opening any offices outside the five boroughs of New York. And so the world [had] 30,000 banks in 1930, and by 1946, there were about 15,000 banks, and today there are somewhere in the order or magnitude, I suppose, of 6,000 or 7,000. Because each one was partitioned ... the object of the exercise on a credit card was to find a way to serve customers outside of the prescribed market area by the statutes...

Read more: http://www.pbs.org/wgbh/pages/frontline ... z1KwMxZL4b

Wow, that is VERY interesting!

[jusme]

Thank's Higge. I have Frontline in my favorites. Can't wait to read it.

So if the Credit bubble burst's they could all go down ? OMG ! And I hear there are a number of them every week that are going under ?

And yes you answered my question.Me thinks my Wheel Barrow will be empty !

No wait ! I don't have one, most likely won't have $ to even buy one !

I guess 'Tin Cup's' will be back in style !

jusme

[Higgenbotham]

So why come to South Dakota?

Well, [the government] had passed a law in the '30s called [the Glass-Steagall Act and it] was an attempt to keep big national banks from taking over all the banking in America. The trustbusters were involved in a lot of that back in the '30s, and so they had passed legislation that said that a nationally chartered bank cannot go across state lines into another state and practice banking. You have to stay in the state where you have your charter.

We had exceptions to that in the Great Plains, because our money-center banks were really the Minneapolis banks. They were the monolithic giants in this region. In those days it was called Norwest Bank and First Bank. Norwest Bank and First Bank were actually in Montana, Wyoming, North and South Dakota, Nebraska, Minnesota, Iowa, Wisconsin. They were in all those states, and so they were grandfathered in.

So we were allowed to have a Minneapolis bank in South Dakota. They had lots of branches. Between those two banks, they owned 30, 40 banks in this state, in little old South Dakota. Then they passed an amendment to all that called the Douglas Amendment to the McFadden Act. The Douglas Amendment, 27 years earlier, said that you could go across state lines if the state invited you in. You had to be invited in. And no state had ever invited, because all the community bankers made sure that no one would pass legislation inviting an out-of-state bank in.

Read more: http://www.pbs.org/wgbh/pages/frontline ... z1KxLgdvU5