Economy Question (basic)

[mehuk]

Possibly a stupid question, however I am interested in as to how the UK (World) is facing a recession.

Basically my thoughts are:

1 – A lends $$$ from B
2 – A spends $$$ at C
3 – A fails to pay back $$$ to B

Results are that C comes out on top, with B having a loss and A getting bad credit.

So the money that has been lent out by companies is still around in the economy somewhere, just possibly not where C’ would want it to be….

Does that make sense?

Obviously things are on a grander scale, but my point of that all the lost money by the banks, must be someone else’s gain – or do banks deal in ‘virtual’ money in that, funds do not actually move accounts, just the premise of money is there?

As mentioned probably stupid and im missing something blatantly obvious, but I don’t see how all these ‘billions’ can just disappear from the economy??

 

[Dj_Jestar]

The funds either shift elsewhere, or the perceived value of something drops - e.g. previous estimates to somethings worth is found to be overestimated.

An example, you've been given a box. This box has been estimated to be worth £1,000 because it is a box filled with gold. You open the box and find lead, so it's now worth no more than £10. The money hasn't "gone" anywhere else, but the value has dropped.

 

[chimaera]

I believe that a lot of banks haven't been able to recoup their mortgage lending in the sub prime market.

Bank A lends $200,000 to Mr Smith, who then a year later defaults on the payments. Due to the reduction in the US housing market the bank takes the house and then sells it for $140,000.

I think the problem is increased when mortgage debt is sold onto another bank, who then sells it onto someone else. I personally believe that the trail is so long that no one knows where the bad debt is hiding.

 

[Samtheman1k]

The funds either shift elsewhere, or the perceived value of something drops - e.g. previous estimates to somethings worth is found to be overestimated.

An example, you've been given a box. This box has been estimated to be worth £1,000 because it is a box filled with gold. You open the box and find lead, so it's now worth no more than £10. The money hasn't "gone" anywhere else, but the value has dropped.

Yes, but in your example, the person who sold the box now has £1000.

 

[mehuk]

thats what i dont get - why is now my £1000 box worth just £10 if nothing has happened to it

who is making this decision and why are they making this decision?

surely its in everyones interest, to not make the decision that my box is now worth £10

 

[Dj_Jestar]

Yes, but in your example, the person who sold the box now has £1000.

But £990 is still "missing" because it can't be regained.

 

[Dj_Jestar]

thats what i dont get - why is now my £1000 box worth just £10 if nothing has happened to it

who is making this decision and why are they making this decision?

surely its in everyones interest, to not make the decision that my box is now worth £10

A real life example.. Enron. Board of directors published false figures to inflate shares (amongst other tricks) then finally the bubble burst and the real value of the company was exposed. I.e. nothing.

 

[mehuk]

so companies lying, makes the value of things fall?

to indepth for me, but im sure people are being screwed over by idiots 'higher' up

 

[semi-pro waster]

so companies lying, makes the value of things fall?

to indepth for me, but im sure people are being screwed over by idiots 'higher' up

A company lying could make the value of things fall but then it can also make the value rise for a period (or even indefinitely depending on how successful the lie is). It is only one of a number of possible reasons that values rise and fall and markets react.

You must have heard of the law of supply and demand? That causes prices to fluctuate and no-one needs lie in order for it to happen (although they might fib regardless).

 

[Stretch]

thats what i dont get - why is now my £1000 box worth just £10 if nothing has happened to it

who is making this decision and why are they making this decision?

surely its in everyones interest, to not make the decision that my box is now worth £10

Speculation made the prices rise. It's all down to the usual supply and demand concept. A strong economy (demand) meant prices were raising, so investors bought, which made prices rise faster. This continued for some time until for what ever reason, some people started to get cold feet. This could be high interest rates, rising unemployment, over supply in the market etc. Once the bubble bursts the down turn accelerates fairly swiftly as investors attempt to minimize their losses.

 

[banja]

But £990 is still "missing" because it can't be regained.

But the value of £1000 was never there to lose in the first place. If it were filled with gold that value would exist in the economy.

 

[mehuk]

got it

so things boomed become 'supply' of mortgages were plentiful, companies saw money to be made etc etc

people failing to pay back their mortgage/loans etc - are the problem? so they property that they had purchased with these mortgages/loans do not cover the value of what is loaned out.

hmmm - makes sense, but to make everyday person pay for what is essentially stupidity at a banking level is a disgrace.

let banks go bust - other companies do, so screw them too