Where is the money ?

2009-02-28T11:56:00.000-08:00

Today having conversation with my father , i came across a recurring question ,if everybody is losing money then where is all the money going ?

To answer this typical question , one needs to know the fundamental of economics that the money or matter of fact that capital is not zero sum game i.e if one is losing money the other needs to gain . this is not how the capital flow works . there are distinct cases when both ot the trading parties are in profit or both are in loss simultaneous .

So how does this takes place is the critical question . Actually what is happening is that the Assets on which the valuation of an entity takes place are falling at such a brisk pace both the parties seem to be making loss , the one who is suppose selling and the other who is buying .

For eg. take the case of bank which lends the mortgages to the customer against the property .
bank takes a gurantee on this which could be a property with a valuation .now comparing it with the present situation , suppose the customer is not able to pay the mortgage , so he faulters . now the bank recovers by selling the guranteed asset , but as the markets are in whirpool of recession , the guranteed asset prices fell so rapidly that the bank is not able to recover . so both the customer and the bank show a loss

Imagine this happening on the grand scale , the domino effect and the banks have no where for cover , so they head to the central banks which have to bail them out because the banks are so pivotal for the economy that they can't be allowd to fail .

FINANCIAL CRISIS

Where is the money ?