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?

Question

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

Answer 1

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.