Where Did the Money Go?

My roommate from China asked me this. Very good question. Simple answer: It was never there. It was all fake. It was all debt. Debt (or credit) is not money. If people don't think you'll pay, its worth less or even worthless.

All the money was just a giant printing scheme. OPEC and emerging markets printed money and bought what we printed, which was Treasuries and MBS. Wall Street made up new stuff with higher yields and fake safety ratings, and the rest is history.

Also, here's a philosophical question: If holding dollar-denominated reserves makes a currency more valuable, why isn't the decline in, say, the Peso offset by the rise (in Peso's) of the central bank's reserves? Again, simple answer: The reserves aren't enough to offset the printing they did. So, if they start selling T's to buy Pesos, the drop in their reserves will offset the Pesos they buy. What? Huh? Doesn't one side equal the other? No, it doesn't. Subtracting the reserves upsets the valuation ratio more than not subtracting them. Here's an analogy: if you're losing in Chess, you don't want to just trade pieces.