Where does the money go when prices collapse....

[kevsuz]

i thought this was very good

[KhmerD0g]

money goes to commodities like sugar, cotton, wheat, gold, silver, oil, uranium, anything that people need and use. #LOL

[TheTrueJBV3737]

You have no idea what inflation even means? Look it up, the dollar is worthless, only items have value. Like physical gold, or 100 dollar bills for toilet paper.

[milestracy]

It appears that you have been taught by theory of the last twenty years. You neglect Bothe the English schools equilibrium theory and the Austrian monetary basis. The simple fact is that if you wright a check for more than is in your bank account you are in trouble. This is based on the THEORY that you live in a free economy. You don't live in that economy and to apply those natural laws to a slave bases economy is as Mises puts it an imaginary construct. You need to read the material from the

[Floralin]

Of course he has kept the picture simple by not mentioning tax , the intellectual property cost of Mr A (painting skill) etc ...

flaskofcoffee pls do one vid on currency trading ,i.e selling and buying positions.

[Floralin]

Thank you very much . That was very helpful.

[SBStreater]

Another nice video, but this one misses the mark slightly IMHO.

The painting is an asset which the seller could expect to be worth $50 before it is sold. So The total assets are $450 before and after the transaction. All the purchase/sale does is move assets around. Buying/selling does not create much wealth - actually making the painting does that.

In summary, you can make any accounting rules you like - but wealth has to be created.

[ogogosi]

Thank you for posting your thoughts. You are completely correct, and your explanation is just common sense really, but for some reason people don't see it.

Those who understand the matter think it is too obvious to need discussions, but there are many people who don't clearly see it so a bit of explanation can benefit them.

[Edocles]

What a waste of time. You've said NOTHING worth listening to: when prices go down, stuff is worth less. You never even touch on "Where the money goes". I want my 6 miutes &14 seconds back!!!!

[flaskofcoffee]

Hi Edocles. I'm sorry you feel that way, and can't agree.

Think of "price" as an asset in itself - a $500K home represents $500K of Money. If that drops in value to, say, $400K then there is $100K less money in the system. Not physical paper dollars in a pocket, but 'drawable' spending power which reduces as prices drop.

Put another way - if an asset you own goes up in value, you can sell it to release the increased wealth.... more dollars in your pocket.

[abuahmed680]

with all the respect this is all wrong ....

[mangoswiss]

PS. Who's Nick? and what videos?

[flaskofcoffee]

Hi Mangoswiss.

"Nick" is 'TheModernMystic' on youtube. Originally, this video was a reply to one of his economic videos.

[mangoswiss]

You've created some great videos here. See! The UK does have something to offer the world.

I'd like to see you and Jim Rogers have a discussion about this. Two relaxed and calm individuals discussing both sides of the deflation/inflation coin. (I think that coin should be redeemable in gold though)

You forgot Mr E who bought a HP Printer for printing money from Mr W in Japan. Well... when I say bought I mean borrowed. Mr E then lends 500 to A, B, and C. Wow! that painting is very cheap? $100?

[1mealperday]

your blog is my desert. thanks for the calmness.

[mtneagle2009]

Great video! The FED trying to control the credit or stock market boom / bust cycle is the height of arrogance.  A free market economy is a force of nature. Man cannot control either the weather as much as a free market economy.

[carzyscenctist]

i have no idea what you were saying, but generly because the value goes up ever thing goes up this include oil and food resources.

[redline601]

Oh shutup ..you boring little man

[flaskofcoffee]

Hi Redline.

Apparently an infinite number of monkeys would eventually type all the great books.

One little monkey has managed 6 recognizable words and 2 dots so far, it seems.

[redline601]

Yeah i ve also seen the film Planet of the Apes ...it could happen one day who knows...

Btw when it comes to world economics I think I could teach YOU a thing or two...

[cpswyl2]

Imagine trying to figure out how a car will get you from LA to New York by understanding the physics of its lubricant/oil. Cash, gold - it's all about a mechanism of exchange, lubrication of the economy. It's easy to lose track of value. Making sure when the music stops that you are left holding something of value/utility. Im starting to realise though, systems of exchange can change, and who can tell to what, but skills/talents/human value must count for even more.

[at1212b]

Good video. But forgot the key equation... Obama will solve all!

Hope overrides economics.

[flaskofcoffee]

Well, "hope" has overridden common sense for more than a decade, so maybe you're right. ;-)

[sinitskyd]

You forgot that Mr. C has to pay tax. The more expensive the painting, the more tax.

[flaskofcoffee]

Tax which is then used to bailout failed investment banker Mr D perhaps? ;-)

[axostech]

More importantly the original $400 were "fantasized" by the Central Bank and when D loses the final $100, that loss moves back to the Central Bank, how is it handled there? And what was the original Central Bank collateral to create the money?

Dave, FL USA

[derekO452]

nice try........u good at expaining things u did the uso vs contango however on this one i will give you a 5 out of 10, u could have just started with 100 deposited in the bank and the bank lends it out and so on...u know where am going creation of wealth you have the idea but u get a D in explainging creation of wealth, u missing the BANK's role

[flaskofcoffee]

Hi Derek. A 'D' is kinda harsh, imo. ;-) I can only repeat that I was NOT explaining money creation at all - just the illusion of wealth upon which values are based and how/why apparent wealth disappears completely when prices collapse. I'll do a video on money creation, gold, and currency sometime.

Thanks for the comment though.

Best wishes.

[davincij15]

You are forgetting that the bank can create money out of thin air when we borrow the money.

This is how money supply is increased in the economy. Once you pay off the debt the money is destroyed.

So in affect the money is transfered not destroyed if I borrow $100 to pay for X and it X goes to zero the wealth was transferred to the person who sold me X.

[flaskofcoffee]

Hi Davincij - thanks for that. I do understand fractional reserve banking and the creation of money through debt. However, please remember that my simple example included no fractional reserve banking, just a 'pure' monetary base plus some inflated *ideas* of what something is worth. Add in your suggestion, which is absolutely true, and the situation gets even worse. The point is that it is *perceived* value which fuels an unsustainable boom, not the actual real-wealth in circulation.

[axostech]

Nice,

So since perceived value is as durable as balsa wood, aren't all credit cycles destined to boom? What would be a better strategy for valuation (appraisal in the case of the house?) And if it is the cost of re-contstruction, what in the case of temporary material shortages?

-Dave N FL

[flaskofcoffee]

Hi Dave. Yes, all credit cycles are destined to retrace (or bust if too big) - however one which pulls back early and in an orderly fashion can then resume an upcyle, as we've seen many times before.

It is the bubbles which are created by trying to prevent the 'natural' cycle which cause the real pain... like we have now. This credit bubble has been years in the making - it is simply unwinding at a much faster pace than it grew.

Common sense is an asset which never devalues. Take care, all.

[axostech]

But if Quantitative easing can be used on the "downside" of the bubble, should a similar (but opposite) process be used to smooth the curve on the inflationary side?

[derekO452]

u mean the FED can create money out of thin air not the bank

[davincij15]

No, that's a common misunderstanding.  When you go to your bank for a collateralize loan, like a loan on your house. They do not lend the money they already have, no, no, they create out of nothing.

They then need to come up with the reserve amount to hold at the federal Reserve. So where can they get this reserve if there isn't enough savings? Well in today's environment the Fed purchased all the banks AAA loans (wink, wink) thus giving them cash for reserves or for other purposes.

[logic2reason]

they are the same thing.... the fed creates it first, and its expanded in the banking scams you see around you.... credit cards, car loans... all of which are legally invalid.

[Raycheetah]

Excellent, simple, and concise illustration of economic principles. 5 stars, favorited, shared! =^[.]^=

[flaskofcoffee]

Thanks Nick, hope it made some sense.

I also hope that everyone reads the notes in 'more info' which contain several points I would really like to share.

Contrary thoughts welcome - debate makes us all better informed. Thanks.