Originally posted by: shortylickens
That part I did know but not from formal education. Mostly from books I read on my own.
Money is not value. Money is a representation of value somewhere else. It used to be the stockpiles of gold the US government kept. But then we went off the gold standard and that changed things.
I do know that part of the problem was real estate taking in more money than its actual value. Too many homes were being sold at a price of $300,000 that werent actually worth it. Their value was closer to 150 or 200.
Now I know lots of folks say "its worth whatever someone is willing to pay" but thats just not the case. You actually need to have some value behind the money. You cant just create value out of thin air. Money can be created easily, but its not value.
Actually, it is worth whatever someone is willing to pay. That's how we formed the bubble in the first place. That's also why they're called "toxic assets" now - the price people are willing to pay dropped like a rock.
I mean, where were people putting their "non-money" value to maintain it? Remember how everyone is always encourage to buy a home rather than rent one because at least then you have equity? Well, the bottom line is it doesn't matter what asset you put your money into, it matters how the market values those assets. Two years ago, people's ARM/sub prime mortgaged houses were worth $400,000 because they were exchanging for those amounts. They aren't any more, so they're not any more.
Actually, I learned that from Starship Troopers (the book, not the movie). One of Rico's teachers was talking about how you could make value by combining various resources. You take some flour, wheat, sugar, and apples (each of which has value on its own), then apply a little little time and effort and you have apple pie, the value of which is higher than all the individual parts.
Houses were somewhat like that. You take a bunch of wood and a bunch of labor and you get a house. Its value was higher than the raw materials, but too many folks were asking for outrageous amounts of money for it, and they could get it easily because the banks were willing to make the loans.
Sort of. Sometimes. It's all about supply and demand. If we took the world supply of flour and baked it all into apple pies, we'd have oversupply of one and not enough of another, and flour would suddenly be more valuable than apple pies.
To wit:
We built a shit ton of houses because everyone wanted a house. The problem was, not everyone who wanted one was a good credit risk. Illegal aliens, drug addicts, convicted felon highschool dropout janitors...these people are considered unlikely to repay their loans. So, we came up with a
new loaning system which basically allowed these people to lie their way into owning a home.
Now, suddenly everyone has a house. These houses are overvalued because appraisals kept rising on the assumption that this demand would continue indefinitely. Bad assumption. Now that you're out of stupid people to sell unfair loans to, demand has screeched to a halt.
It was theorized many years ago that this would cause problems. Eventually the money going back and forth would get outrageous and sooner or later someone would question the actual value behind it all, not the money.
A lot of things get theorized all the time.
Money in and of itself it basically useless. It just represents some other sort of value, and when things flucuate in the economy items of real value are much more useful than money. Part of our current problem was too many people using houses and not realizing how valuable they really were. They were basing the value on what they got for it, or what they paid for it, and that number was way out of alignment with its actual worth.
That number is way out of alignment *now*. It wasn't when you could sell a 1/4 acre lot to a cross-eyed McDonald's employee for $350,000.
Money is just a universal value exchange system. It's basically a way of solving the barter problem. You want some sheet metal. Jimmy wants some corn. He has sheet metal, but you don't have corn on you. However, you do have something that can be exchanged almost anywhere for corn. Jimmy takes that in lieu of the actual corn. You have your sheet metal. Jimmy eventually has his corn.
The best part? Monetary value is completely based on worldwide acceptance of value. It's fake too. If enough people worldwide decided the dollar was going to be worth less tomorrow, down goes the dollar.
In light of that, the national debt is kind of a good thing in a roundabout way. With so many people worldwide holding on to so many US dollars, they'd be screwing themselves to devalue our currency. We're economic suicide bombers!
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