How can a recession see a drop in profits and a rise in poverty? Where does all the money go, if not to the businesses or people?
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A recession is when the economy slows down, meaning people and businesses make less money. As businesses make less money, their profits drop, which means they have less money to spend on things like paying their employees. If businesses have less money to spend, it can mean that people who work for them might lose their jobs or have their wages reduced, making it harder for them to pay for things like food and rent. As a result, more people can become poor.
All the money that people and businesses don’t make during a recession doesn’t just disappear. Instead, it gets put into savings or taken out of the economy. This means that the money isn’t being circulated, and can’t be used to help people and businesses survive.
You’re focusing on the wrong metric.
In a recession, there is less stuff being demanded. Businesses and consumers want to buy less stuff. This means people whose job it is to produce that stuff lose their job and then demand for stuff decreases further. We can measure this loss of productivity in dollars, but it’s not that the dollars are going somewhere else. The stuff is just not getting made.
More generally, there is not a fixed amount of money. Banks create money through lending (which slows down during a recession) and central banks can also, in effect, create new money (which they generally do during recessions).
Recessions, like many measures of the economy, are a measure of ACTIVITY. It isn’t a measure of how much money there is. Money doesn’t go anywhere. It is how many transactions occur in the economy that determine it’s size and growth. Holding money in your wallet does NOT make the economy grow – earning and spending money makes the economy grow.
In a recession, there is less overall activity. Typically firms hire fewer people (less wages) etc and people spend less (less profits).
“The economy” means “money moving around”. If the economy is “growing”, then more money is moving around.
In a recession, less money is moving around.
Economies are reciprocal. My expenses are your income, and vice-versa. So a recession is a reduction of the rate of those exchanges. People spend less, and therefore they earn less.
A recession can be caused by anticipation. What this means is if everyone started seeing news stories about how a recession is coming, they then start spending less of it in actual goods and services. They save more of their money in anticipation of a recession.
When people stop spending, companies will scale back production or in the case of tech firms which really don’t produce anything per se, they scale back employees as we recently saw.
This leads to a cycle that feeds upon itself. If employees make less money or get fired, they spend less money in the market of goods and services. If less money is spent on goods and services, firms continue to cut back on production and employment. If less people have jobs… you get the idea.
Money is a representation of goods and services. If less goods and services exist then less money exist.
Well drops in profits and rises in poverty tend to correlate strongly, if there’s less money then people are poorer.
If I’m reading the question correctly, your premise is that there’s a set amount of money, and then either consumers/workers have the money or corporations are making the money with profits, which is totally false. There’s some good answers here about fractional reserve banking and economic cycles, but the question itself is flawed.
Recessions happen when the velocity of money slows…
In normal times, I buy a pair of shoes for $100. The shoe store owner takes his wife out for an anniversary dinner. The chef buys produce from a farmer. The farmer buys a part for his tractor. The tractor parts supplier pays for his daughter’s ballet class. That’s $500 in economic activity.
Now, because I fear for my job, I hold off on the shoes or buy cheaper ones. Maybe the shoe store owner picks a cheaper restaurant for their celebration. Maybe the chef goes with cheaper conventional ingredients vs. organic produce. Maybe the parts supplier decides he’ll take his daughter hiking on weekends instead of signing her up for ballet. As a result of these shifts in spending, economic output drops from the $500 above… maybe now it’s only $400.
Economic output has slowed by 20%. Money doesn’t “go anywhere”, it just moves hand to hand more slowly as people delay purchases or cut back on expenditures.
I have a car. You have $10000. You want to buy my car, we agree $10000 is a fair price. So I have a car worth $10,000, you have $10000 cash. Together we are worth $20000.
Before the deal goes through, we get some bad news and are in a bad mood. We now think the car is only worth $5000.
So you have $10,000 cash, I have a car worth $5000. Together we have $15000.
Where did the$5000 go?
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