where did the money go?

Disclaimer: this post is on a topic about which I don’t really know that much. Thus please don’t feel slighted if I fail to cite you or a favorite scholar on the topic.

NPR ran a fun story this morning with two reporters and a GMU economist (horror of horrors!) to address the common-sense question: where did the money go when the housing bubble burst? Essentially the economist and one of the reporters traded hundred-dollar bills for a plastic house, and they noted that the “size” of the economy wasn’t any smaller at the end of the set of transactions than it was at the beginning, even though the economist (ha!) had lost money on the purchase and resale of the house. The economist then pointed out that the problem was really that he “might have” decided to “behave as if” he had more money in the house than he would eventually be able to sell it for because of the run-up and subsequent decline in the housing market. It was this money — which he said “never materialized” — that “disappeared” in the market collapse.

The story was nicely done, and I think it’s an example of the clever way NPR sometimes goes about reporting to answer questions many listeners have. However, it occurred to me that a number of issues emerge from the discussion that could use further addressing:

  1. The “size” of an economy is a funny idea, but it’s probably not best measured by the money supply, which is essentially what the reporters did. It’s probably best measured by something like GDP, which in turn is really about the flow of money over time, since that represents value traded. That leads to my next point:
  2. Time is tremendously important in economic behavior. A fixed number of dollars loses value over time; interest represents money over time; and in this particular case, home values matter not because of beliefs but because the home needs to be monetized at a particular time. Thus value itself can only be understood as value in a particular temporal context. Finally, that leads to my third point:
  3. You can’t understand any of this stuff without understanding the productive role of debt. I remember the “eureka” moment in my undergraduate macroeconomics class when I understood what the prof meant when he said that banks literally make–as in create–money. Debt can be understood as a risk-value package over time. So it’s not just that the economist “might have behaved” as if he had money because of the home’s point-in-time value, he really did have money at that point because of the debt system’s role in producing money.

I’m sure there are nuances and distinctions here, and I hope y’all will help out with them.

Author: andrewperrin

University of North Carolina, Chapel Hill

2 thoughts on “where did the money go?”

  1. At the risk of starting a bank run:

    I’ve been reading Niall Ferguson’s “The Ascent of Money” today. It’s for this reading group we have here at Columbia on the bailout/financial crisis. One of the interesting points of this book, which should be obvious to anyone who actually thinks about this stuff or who has an MBA is that most money doesn’t actually “exist.” Really, it’s trust. So banks typically keep about 10% of their holdings in actually money. The rest is promised, on the assumption that it would be highly unlike that over 10% of holders would ever ask for their money.

    Money is really just trust, in and of itself. Currency is worth nothing as an object in and of itself. As least not coins or paper bills. You basically trust someone to back up the value (the bank, and in the last instance, the state).

    I never thought of this until now. I have no real assets. Only trust. Trust that the virtual deposit of my salary would be honored by the bank. Which would honor my claim for paper. And that others would honor my paper for goods.

    Where did the money go? It never existed.


  2. Just one thought, though there are lots of juicy questions here, “the economy” is a relatively unstable object (ontologically speaking). Timothy Mitchell has some excellent work on how the economy is a relatively recent invention, dating back perhaps to the 1930s (a claim he makes starting in a 1998 paper in Cultural Studies, “Fixing the Economy”, and elaborates in his book Rule of Experts and some later articles).

    Questions about how to measure the economy are very closely related to questions about what the economy is (Philip Mirowski, talking about value rather than the economy as a whole, writes “…behind every measurement controversy lies a deep problem of metaphoric interpretation.”). The measures we now most commonly use (like national income statistics including GDP and GNP) were not designed to measure the economy at all, as they precede it slightly (and I would argue that their first official tabulations help to create the economy). Indeed, Simon Kuznets (the first official calculator of the US National Income) spent the first chapter of his report on the National Income discussing all of the problems with its use as a measure of overall well-being, ranging from standard measurement problems, to thornier inclusion/exclusion issues (how do we count housework?) to serious ontological problems (is government expenditure productive? Consumptive? Etc.).

    So… long story short, there is no good single measure of the economy, because there is no good single definition of the economy.


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