3 ms·

So let's say I have lots of level 2 money. I go to various banks and trade in the level 2 for level 1. I take my billions of level 1,and stick it in a warehou

So let's say I have lots of level 2 money. I go to various banks and trade in the level 2 for level 1. I take my billions of level 1,and stick it in a warehouse. Maybe one day I even set it on fire. What does this mean? Does the fed recognizes the loss, and just print more? Have I in effect just shrunk the economy? My level 2 money is still in the system, its just the paper has vanished. By extension, say every person loses one $10 bill every year, in an unrecoverable (by anyone) way. Presumably that's factored into the money supply? Is changing the paper (as in the UK this year) a way of "cleaning the balance sheet" - effectively preventing some truly monster hoard from suddenly appearing? So many questions...

galaxyLogic 4y ago
What I'm wondering is .. when you own stocks of companies it is like having one type of currency, one per company or fund. (right?). Now when the stock-market goes down I lose money. And so do most people who own stocks. Where does that lost money go? Everybody lost a lot in the most recent downturn and (most) nobody gained. We simply have less "value" now. Where did that value go? How could it have just vanished?
- jack_pp 4y ago
  For the value of a stock to go down people have to sell it. What the people who have not sold lost, the people who have sold gained. Overall the money supply has not changed, money has just moved from holders to sellers
- bruce511 4y ago
  So that's level 3 value right? It's not money (level 1) or even chips (level 2). So I'd say it's inaccurate to say you lost money. More accurate to say you lost value. When the shares were issued (out of thin air) they had speculative value - they are promises for future dividends (presumably level 2) based on future profits. The stock market acts as a level 2/level 3 swap place, and hence let's you calculate the "current level 2 price" of your level 3 paper. So yes, the value simply got lost. But balance that with the way it simply got created in the first place. And bear in mind that _all_ shares go to 0 in the long run. Ultimately the future arrives and that future value speculation is fully realised.
- htag 4y ago
  Company A issues 100 stocks and sells each one for $100. Company A has a $10,000 market cap. Investor X sells a share of Company A to Investor Y for $110. Company A now has a market cap $11,000 because each of their 100 shares are now valued at $110. Investor Y sells the share of Company A, but can only find a buyer (Investor Z) willing to pay $90. Company A now has a market cap of $9,000 because each of their 100 shares are valued at $90.
  - pixelmonkey 4y ago
    Very nice, concise, and de-jargoned explanation of how value is “created” and “destroyed” in stock ownership. Also, here is a relevant Gordon Gekko quote from "Wall Street": "Money itself isn’t lost or made, it’s simply transferred –- from one perception to another."[1] [1]: https://amontalenti.com/2011/12/16/wall-street-the-movie-25-years-later https://amontalenti.com/2011/12/16/wall-street-the-movie-25-...
- ralph84 4y ago
  Stock isn't currency. It's an ownership claim on the assets and future profits of the company. If a stock price goes down it means people in aggregate have judged the assets and future profits to not be worth as much as they used to be. No value was lost, the stock still represents the same ownership claim. People just in aggregate changed their prediction for the future of the company.
- darkarmani 4y ago
  > Everybody lost a lot in the most recent downturn and (most) nobody gained...Where did that value go? How could it have just vanished? Didn't the other side of the transaction make the money that you lost?
misja111 4y ago
> My level 2 money is still in the system, No it is not, when you exchanged it for level 1 you removed it from level 2. > Does the fed recognizes the loss When your level 1 money went up in flames, it just meant a profit for the fed.
thelamest 4y ago
Yes. If the (overall) nominal money flows decrease but (overall) real economy size stays the same – to the extent that it’s going to change prices for no “real” reason – people and central banks are likely to notice and may react. Central banks are tasked with stabilizing price levels. (Why? Predictability helps people make decisions and plans, and get rewarded for them. Caveat: price changes that originate in changes to real economy convey valuable information about real scarcities and surpluses. This one, kinda, doesn’t.) Prices are closely related to the ways money circulates in the economy – so CBs keep a close eye on these stats. (Why? In short, it’s a big factor in the simple monetary formula, MV=PQ, that is: overall amount of money * money velocity = price level * quantity of real consumption.) The fact you froze or burned a lot may influence how that looks, in turn possibly influencing CB decisions to put the finger on this or that scale. Of course, the CB doesn’t know what you did exactly, it’s playing an aggregate game. Right now it would appreciate that you counteracted inflation – made everything a bit cheaper by not spending or loaning your billions for others to spend.

galaxyLogic 4y ago

What I'm wondering is .. when you own stocks of companies it is like having one type of currency, one per company or fund. (right?). Now when the stock-market goes down I lose money. And so do most people who own stocks. Where does that lost money go? Everybody lost a lot in the most recent downturn and (most) nobody gained. We simply have less "value" now. Where did that value go? How could it have just vanished?

jack_pp 4y ago
For the value of a stock to go down people have to sell it. What the people who have not sold lost, the people who have sold gained. Overall the money supply has not changed, money has just moved from holders to sellers
bruce511 4y ago
So that's level 3 value right? It's not money (level 1) or even chips (level 2). So I'd say it's inaccurate to say you lost money. More accurate to say you lost value. When the shares were issued (out of thin air) they had speculative value - they are promises for future dividends (presumably level 2) based on future profits. The stock market acts as a level 2/level 3 swap place, and hence let's you calculate the "current level 2 price" of your level 3 paper. So yes, the value simply got lost. But balance that with the way it simply got created in the first place. And bear in mind that _all_ shares go to 0 in the long run. Ultimately the future arrives and that future value speculation is fully realised.
htag 4y ago
Company A issues 100 stocks and sells each one for $100. Company A has a $10,000 market cap. Investor X sells a share of Company A to Investor Y for $110. Company A now has a market cap $11,000 because each of their 100 shares are now valued at $110. Investor Y sells the share of Company A, but can only find a buyer (Investor Z) willing to pay $90. Company A now has a market cap of $9,000 because each of their 100 shares are valued at $90.
- pixelmonkey 4y ago
  Very nice, concise, and de-jargoned explanation of how value is “created” and “destroyed” in stock ownership. Also, here is a relevant Gordon Gekko quote from "Wall Street": "Money itself isn’t lost or made, it’s simply transferred –- from one perception to another."[1] [1]: https://amontalenti.com/2011/12/16/wall-street-the-movie-25-years-later https://amontalenti.com/2011/12/16/wall-street-the-movie-25-...
ralph84 4y ago
Stock isn't currency. It's an ownership claim on the assets and future profits of the company. If a stock price goes down it means people in aggregate have judged the assets and future profits to not be worth as much as they used to be. No value was lost, the stock still represents the same ownership claim. People just in aggregate changed their prediction for the future of the company.
darkarmani 4y ago
> Everybody lost a lot in the most recent downturn and (most) nobody gained...Where did that value go? How could it have just vanished? Didn't the other side of the transaction make the money that you lost?

misja111 4y ago

> My level 2 money is still in the system, No it is not, when you exchanged it for level 1 you removed it from level 2. > Does the fed recognizes the loss When your level 1 money went up in flames, it just meant a profit for the fed.

thelamest 4y ago

Yes. If the (overall) nominal money flows decrease but (overall) real economy size stays the same – to the extent that it’s going to change prices for no “real” reason – people and central banks are likely to notice and may react. Central banks are tasked with stabilizing price levels. (Why? Predictability helps people make decisions and plans, and get rewarded for them. Caveat: price changes that originate in changes to real economy convey valuable information about real scarcities and surpluses. This one, kinda, doesn’t.) Prices are closely related to the ways money circulates in the economy – so CBs keep a close eye on these stats. (Why? In short, it’s a big factor in the simple monetary formula, MV=PQ, that is: overall amount of money * money velocity = price level * quantity of real consumption.) The fact you froze or burned a lot may influence how that looks, in turn possibly influencing CB decisions to put the finger on this or that scale. Of course, the CB doesn’t know what you did exactly, it’s playing an aggregate game. Right now it would appreciate that you counteracted inflation – made everything a bit cheaper by not spending or loaning your billions for others to spend.