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Author Topic:   A lot of organizations and people lost a lot of money - Where did it go?
NosyNed
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Posts: 9004
From: Canada
Joined: 04-04-2003


Message 4 of 6 (497094)
02-01-2009 5:57 PM
Reply to: Message 1 by Minnemooseus
02-01-2009 4:57 PM


Easy Come Easy Go
To give the same answer as post 2 and 3 but at much greater length:
For example, let's say you are a farmer and have a storage fridge full of kilograms of butter you have produced. You have over 5,000 kgs of the stuff. Today at the market you sold 10 kgs of it for 4 $ each kg. You calculate that you have 20,000 $worth of butter in storage. Maybe you take that number to your banker and borrow 20,000 $ with it as collateral or maybe you just feel good because you are so rich. Feeling rich you buy a nice new pair of work boots on the way home.
Now say that there is a new diet craze that requires a butter candy. Huge new supplies of butter candy are needed to supply this appetite. Much more butter is needed and you have the best local supply. Today when you went to the market you sold 50 kgs of butter at 10$ each because so many people wanted butter to make butter candy. Now you calculate that you have 50,000 $ of butter and might borrow more money or feeling so rich you buy a better car on the way home.
Oh oh, But the diet doesn't work and ppl get too fat and stop eating butter candy!! The next day you go to sell butter no one needs any more. You manage to sell only 2 kgs at 2$ each. OMG! Now your butter supply is "worth" only 10,000$. You have "lost" 40,000 $ in a day!!!
Actually you still have the butter. You've made a few $ and have the money in your hand. All that has changed is the numbers in calculations you make. They went up, they went down.
However, the bank is now nervous. It thought you were worth 50,000 $ when it lent you money. It decides it needs you to repay some of the money it lent you. But you don't have any money, all you have is numbers. Now the bank is in trouble. Other banks lent it money because it was doing good business lending you money. Now you can't pay and your collateral (house, butter or whatever) isn't worth very much. Those banks demand that your bank pay them but your bank only has numbers too.
Now people who have owned bank stocks that they thought were worth a lot of money (the numbers in the accounts said they were) decide that the banks aren't such a good investment. Just like the value of butter before the diet craze started the value of those stocks ("value" being what other people will pay) goes down and all those people owning bank stocks (like me) feel poorer because their stocks (butter) isn't worth so much to other people.
So the "money" (numbers in computers) really does "disappear". Just like it appeared.
ABE
Of course, some real money was made, you sold some of your butter at a good price. Some people lost some, if they bought high priced butter and got stuck with it. But the vast majority only saw numbers on paper change. Just like most people didn't buy or see a house while the prices were all over the map.
Edited by NosyNed, : No reason given.

This message is a reply to:
 Message 1 by Minnemooseus, posted 02-01-2009 4:57 PM Minnemooseus has not replied

Replies to this message:
 Message 5 by Straggler, posted 02-01-2009 6:07 PM NosyNed has not replied

  
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