Where is the money going?

Discussion of the Stock portion of the Permanent Portfolio

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Pet Hog
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Re: Where is the money going?

Post by Pet Hog » Tue Jan 26, 2016 5:28 am

lordmetroid wrote: No, you clearly say it yourself. The money doesn't disappear.
The money was given to someone else when you bought your stock or house or whatever, it was never destroyed. Then when you sell, you receive someone else's money.

Paying off credit is the only way currency can be destroyed.
I agree.  Let's consider a little hypothetical adventure:

Pointedstick has $500,000.  I have a house.  Lordmetroid has $300,000.  Together we have $800,000 and a house.

PS buys my house.  I get $500,000 (thanks, PS!).  LM covets PS's house, but keeps his $300,000 for a time when houses aren't so expensive.  Together, we have $800,000 and a house.

The housing market falls and PS is forced to sell.  LM says, "I'll give you $300,000 for it."  PS grumbles, but accepts the deal.  Final score:  LM, one house; PS, $300,000; me, $500,000.  Together, we have $800,000 and a house.  No money, or real estate, has been destroyed.

-----

I'm reminded of the classic puzzle of the three fellows who get a room for the night at a hotel.  They are told its $30 for the night.  They each pay $10.  The owner realizes later on that he made a mistake -- the room costs only $25 -- so he gives the bellhop five dollar bills to take up to the room.  The bellhop is a bit of a cad; he thinks up a scheme.  "I'll tell these three fools that the room is $27 for the night and I'll keep a couple of bucks for myself.  Nobody will be the wiser.  My boss gets what he wants, they get a refund -- what's not to like?"  The three travelers are delighted to each get a dollar back.  They've paid $9 each.  Add on the bellhop's $2 and that's only $29.  Where did the other dollar go?
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jafs
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Re: Where is the money going?

Post by jafs » Tue Jan 26, 2016 10:59 am

That's a great puzzle, and it always takes me a bit to figure it out.

The trick is you have to subtract the bellhop's $2, and it adds up to $25, right?

$30-$5=$25.  And 3x$9=27-$2=$25.

What's really happening is that the three guys give the motel owner $27 in total, and the bellhop takes $2 of it.
Last edited by jafs on Tue Jan 26, 2016 12:30 pm, edited 1 time in total.
Jack Jones
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Re: Where is the money going?

Post by Jack Jones » Tue Jan 26, 2016 12:21 pm

Pet Hog wrote: I'm reminded of the classic puzzle of the three fellows who get a room for the night at a hotel.
Oh man, I was just thinking of this too!
Reub
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Re: Where is the money going?

Post by Reub » Tue Jan 26, 2016 1:57 pm

Who's on first?
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buddtholomew
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Re: Where is the money going?

Post by buddtholomew » Tue Jan 26, 2016 7:46 pm

Desert wrote:
Pet Hog wrote:
lordmetroid wrote: No, you clearly say it yourself. The money doesn't disappear.
The money was given to someone else when you bought your stock or house or whatever, it was never destroyed. Then when you sell, you receive someone else's money.

Paying off credit is the only way currency can be destroyed.
I agree.  Let's consider a little hypothetical adventure:

Pointedstick has $500,000.  I have a house.  Lordmetroid has $300,000.  Together we have $800,000 and a house.

PS buys my house.  I get $500,000 (thanks, PS!).  LM covets PS's house, but keeps his $300,000 for a time when houses aren't so expensive.  Together, we have $800,000 and a house.

The housing market falls and PS is forced to sell.  LM says, "I'll give you $300,000 for it."  PS grumbles, but accepts the deal.  Final score:  LM, one house; PS, $300,000; me, $500,000.  Together, we have $800,000 and a house.  No money, or real estate, has been destroyed.

-----
Hmmm.... unless you turned around and bought a house with that $500,000 and it also fell to $300,000. 

But actually I think you're right and I was wrong.  It depends where one draws the boundary (control volume, if you will).  But I believe if one zooms out far enough, that's correct ... no money is destroyed.
I don't think the example is correct. If PS exchanges 500K for your house, then your house is worth 500K for a total of 1.3M. PS ends up losing 200K, you have 500K and the house is 300K for a total of 1M. Maybe I'm mistaken but the difference is the 200K loss in home value.
Last edited by buddtholomew on Tue Jan 26, 2016 8:05 pm, edited 1 time in total.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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lordmetroid
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Re: Where is the money going?

Post by lordmetroid » Tue Jan 26, 2016 7:58 pm

Value and money are two different things. Money is objective and value is subjective.
The value is determined by the preference of a person. Someone who dislikes the house or have no need for a house will value that house much lower than someone who wants the house.
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buddtholomew
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Re: Where is the money going?

Post by buddtholomew » Tue Jan 26, 2016 8:05 pm

The house is marked to market.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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Pointedstick
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Re: Where is the money going?

Post by Pointedstick » Tue Jan 26, 2016 9:24 pm

Yes, it depends on if you count the value of the asset as "money." If you do, then a decline in asset value is money destruction. It's ambiguous, to be sure. There are definitely people whose planned spending or purchasing power is based on asset values.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
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