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
Most money in circulation (up to 90%) is created through credit. If I earn 10 bucks and deposit all of them in a bank and someone asks for a loan, 9 of my 10 bucks could be given to that person. Now you have 19 bucks in existence. If the person who got 9 bucks as a loan spends then in a shop, and the shop deposits them in a bank, the bank could lend 8.1 of those etc. You can end up with 100 dollars in circulation that are basically the same 10 dollars being exchanged.
However during a recession banks won’t give loans so easily because it’s harder for people to repay them. This means that the amount of money circulating will contract, despite the amount of paper money being the same.
Latest Answers