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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Money is valuable because of what it can buy. You are paid according to how valuable you are to the economy, and a banana is priced according to how much people wanna eat it. Money itself is used as something to trade for what you want.
In a recession, money isn’t worth so much. That means you need more of it to buy what you want. This is called the inflation, and prices go up. Usually your wages don’t go up so fast, unless you’re really good at negotiating. The reason for inflation is complicated, but basically it happens when there’s not enough stuff for everyone who wants to buy it with the money they’ve got.
The job of government is to be careful with how much money to create (mostly by promising to bail out lenders, but also through useful public works and services like schools, hospitals, and roads), without making so much money that inflation happens.
Recently, theres lots of reasons why there’s not as much stuff around, including the fact that people weren’t building too much the last couple years, and also it got harder to ship things from around the world.
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.
Turns out the money was never there to begin with. Debt = money, when people fail to pay debt it’s less money in circulation. Less money is burrowed because its riskier and more expensive, that means overall there is less money moving around, the economy is smaller, people and businesses go bankrupt.
What do you mean go? Recession itself is that it means that money doesn’t go… The whole economy slows down, people spend less, either because their wages worth less or prices are higher.
Lower demand slowly decreases prices because the supply hadn’t catched up. Lowering supply means less jobs, less people employed, less money to spend and so on an so forth it is a self reinforcing cycle
It would be better to look at the velocity of money. During a recession, money doesn’t move around as fast, meaning less goods and services are consumed/produced.
Another issue to think about in relation to the money question is that largely, most of the world’s wealth doesn’t actually exist as money.
It exists as debts or loans owed to someone else, which aren’t liquid wealth. Liquid being a reference to a liquid being able to take the shape of its container, I.e. a form of wealth that can be easily transformed such as currency. Most investments like stocks or gold bullion are only partially liquid, in that they have to be sold first and are difficult to directly trade with. Things like real estate or lending are even less liquid, as their value is usually tied up in contracts that can’t be easily traded for monetary value.
So in addition to there being less stuff in demand, there’s usually less liquid money being spent
It’s easier to think of it as wealth being a fixed quantity. Wealth is squeezed from the ‘bottom’ and the ‘top’ bloats.
>Where does all the money go, if not to the businesses or people?
It doesn’t go.
If you have a loan and pay it off, the money is gone. The bank doesn’t really get the money, they’re all run by fractional reserve, so it means they could loan out more, but that’s only of people take out a loan. If there’s a recession less people are going to take on debt, which means literally less money flowing about in the system.
The idea of there only being X number of coins minted meaning “the money has to be somewhere” hasn’t been a real thing since banking became common and dominant. Even before money became fiat.
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.
Don’t be fooled. This recession is t accompanied by a loss in profits. Companies are seeing record profits.
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