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?
In: 6
Money these days is usually just numbers in a bank’s computer. The bank can lend you a million pounds to start a business – just by creating a new account for you with a million pounds in it, if they want – then write off the debt when you can’t pay it back. Did that add or remove money from the world? It barely matters, as long as people still trust the bank.
I like to try imagining a recession in a world without money. Let’s say in a stone-age village, the shaman declares that the sky gods will give everyone great treasures if they build a huge stone circle. Lots of people take part in the project, setting aside the normal stuff they would be doing. They beg food from other villages, promising to pay them back later. They all anticipate great wealth in the future. The people in the other villages also believe they will get rich when you pay them back.
When the stone circle is complete and nothing happens, the people who felt rich now feel poor, even though nothing in the physical world has changed. The same kind of thing can happen in the financial world with bad debts, stock market crashes, cryptocurrency, etc. You think you’re rich, and then you find the thing you have is worthless. It’s not the money that’s disappeared, it’s the perceived value of stuff.
Latest Answers