DocRock wrote:Jagattack wrote:Unfortunately your money theory is incorrect - asset bubbles arise and then deflate, the money comes mainly from debt and is not real when people can't pay it back.
Like I said, I'm not an economist. I don't even know what that means.
Yeah you do, say you buy a 50th anniversary R9 by borrowing the money ($5k), when you take possession of the guitar the value of DocRock P/L
has gone up by basically $5k, although resale value will be the true amount. Everything goes along fine for 6 months then you can't make the repayments.
The lender takes the R9 and the value of DocRock P/L falls by possibly more than what you borrowed - lender sells it for $3k because they don't
care and then come after you for the other $2k to close out the loan. So, not only have you lost an R9 that you could have sold for $5k but also lost another $2k.
Of course you wouldn't let this happen in reality, you'd sell the R9 yourself before the lender moves in, and I chose the anniversary R9 as the example
because you'd probably get what you paid for it. You can see where the problems arise when we have regular goods needing to be sold to cover debts,
unlike the luxury limited edition R9, the regular goods can't be sold for anything like their purchase price. The valuation of these goods is not equal to
what they are costing you in foreclosure.
Now, make it even worse, financial companies were running their business like this - assets were suddenly not worth what they were bought for,
and where they were purchased using finance (debt) the balance sheet suddenly collapsed: assets did not cover liabilities anymore and the company
was bankrupt in a few short weeks (Lehmans etc).
