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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I’ve struggled with this concept also. My stumbling block is that I don’t truly, deep down, understand that the economy isn’t a zero-sum system.
The explanation or answer that most resonated with me was told to me by an old college Econ professor of mine, who suggested I imagine that all of a sudden all of the gasoline on the planet simply ceased to exist.
That would be real, material wealth that no longer existed. The entire world economy would have suffered a loss, and nobody would have gained the equivalent wealth to offset it.
Similar things can and do occur in the real world. If behaviors change – suppose we learn that eating beef WILL cause you to die sooner and everybody confidently believes that, and suddenly stops eating beef, for example – then suddenly a lot of wealth related to the beef industry just diminished.
(REALLY, believe me, it was just a hypothetical. I’m not giving up my cheeseburgers or steaks!)
Watch the south park episode it actually explains it somewhat well, you have to believe in the economy and keep spending
Money isn’t the issue. Money is how we hold things of value we have bought, sold, or created. It’s the creation part that slows down in a recession. People lose their jobs and businesses do less business, both creating less wealth. There’s less new money being earned.
Just commenting to say this is a great ELI5 question. A bit of economics is hard to grasp initially unless someone explains it for you.
As other’s have stated, it’s that “money” isn’t going anywhere. Elon Musk “lost” 100 billion dollars. He didn’t actually lose anything. He didn’t spread his wealth out to other people, the gov’t didn’t take it.
Another way to think of it is if someone had a Mona Lisa painting. We can pretend it’s worth 100 million dollars, and then we say that person has 100 million dollars, but in reality, they just have a painting that is “currently” worth 100 million dollars. If no one wants a Mona Lisa anymore, the value of it would drop, and now they’re only worth 50 million dollars. But in reality, they still have 1 Mona Lisa.
When people stop buying houses, the value of houses drop. Money didn’t “go” anywhere. When people stop shopping at a grocery store, sure the grocer actually loses money in the products not being bought, but also the grocer “loses” money because the value of its stock generally drops as well.
Money is a made up thing. It’s worth only as much as market values it.
As in, a phone costs 100$. Now inflation hits, and the exact same phone costs 150$. That amount of bills is still there, it’s around, but it isn’t worth as much anymore, and basically, money lost value. Your money can’t buy what it could anymore, meaning you won’t buy it, meaning companies won’t sell it, meaning they’ll have less profits, and remember that materials that they need are paid in money too, and the same thing happened to that – 100$ of plastic 2 years ago is now 150$.
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