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Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: Ilaine who wrote (1605)	3/17/2001 4:55:29 PM
From: GraceZ	Read Replies (1) \| Respond to of 24758

Fiat money in the US is backed by the full faith and credit of the US government. Depending on who you talk to, "full faith and credit" has a greater value than either gold or silver. Although, you can say that "money" disappeared in the Great Depression, what mostly happened is that the dollar value of assets dropped. Debt instruments are backed up by hard assets. Although hard assets are priced in dollars you shouldn't confuse them with dollars. The dollar value of all hard assets varies, minute to minute, day to day, etc. The values can fluctuate slowly over a period of years or they can fluctuate rapidly over minutes. This sometimes results in a violent translation down to a lower level. Debt tends to accentuate these kinds of violent translations. The reason debt helps this along is that people, individuals and corporate bodies, tend to not pay off loans made against assets whose value has dropped below the value of the loan. Using a loan allows you to buy something with less of your own money. The leverage you gain in borrowing money to buy something works against you when that asset drops in value faster than the principle on the loan. If the asset drops in value, your money is the first to disappear because the loan is independent to the value of the asset that it is secured by. Although a loan is made against a hard asset, the loan and the asset are two separate entities. If I borrow 25k to buy a car and I total it without adequate insurance, I no longer have the car, but I still owe the bank the money I borrowed. The same is true of a house with a mortgage. The bank does not own your house, they own a lean on your house. If your house drops in value, the full mortgage amount is still due the bank when you sell it. The bank doesn't share the risk that your house won't maintain it's value. The risk they carry is that you may not repay the loan if the asset value drops and then they will own your house through forclosure.

To: Ilaine who wrote (1605)	3/17/2001 6:29:26 PM
From: ahhaha	Read Replies (2) \| Respond to of 24758

where did the money go? It didn't go anywhere. Money is an abstraction. There are several easy answers. When the stock market crashed, a lot of it went to money heaven. Stocks rarely trade at their book values. They trade at a higher value because people are reasonably confident that company business activity will continue long enough into the future so that the accumulation of earnings would increase book value higher than it is initially. When the investors defaulted on margin loans, the brokers and the banks couldn't collect. We talked yesterday about the farm land bubble and someone mentioned the Florida land bubble. That money went to money heaven, too, and the banks couldn't collect on those loans, either. When a bank makes a loan there is risk that the loan will fail. They charge some money now to cover the chance the loan will fail later. Most loans don't fail, so they don't charge much for that consideration. The rate of charge is the rate of interest. One of the things I am wondering about is how much money was lost due to the definition of money. None. The founders of the Federal Reserve system believed in the gold standard and real bills doctrine. How much of what you call fiat money and I call money was defined out of existence? None. Another unrelated question intriguing me is whether stock prices in 1929 really were in a bubble. They weren't. In the '50s the DOW surpassed the '29 high. It depends on how one defines "bubble". The Fed thought the economy was in inflation because of the way inflation was defined. No, the FED feared that opening the money floodgates would lead to inflation, so they lowered rates slowly. The way we define inflation now, this was not true. Few can define it now and fewer know what causes it. Practically no one during the '70s had it right. I don't know whether anyone has actually looked at the balance sheets of all the companies traded on the New York stock exchange to see whether the prices were unrealistically high. Relative to what? Expectations? Apparently not relative to the '50s. Apparently so, relative to the '30s. It all depends upon confidence. So the worth of money is intimately connected to psychology and therefore is as ephemeral. There was an expectation of increased future earnings which was realistic - the economy was in great shape. But the Fed defined inflation by the number of loans outstanding and stepped on the brakes. Why do you believe that?