I know there must be reasons and this is a dumb question, but I’m a bit of an abstract thinker and have trouble grasping it from a big picture presepctive. Can someone break this down for me? Can’t we all just kind of agree to just kind of… Reset some numbers or something?
Sincerely,
I’ve never taken an economics class in my life
In: Economics
As long as people do not suddenly “pause” to need stuff, the economy is running for the better or worst. Problem is, we all need to eat at the very least.
Economy is a side consequence of the humans needs and the overal peaceful share of ressources, not because we decided to build a fun convoluted thing someday.
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Technically the government can do it. Unfortunately, it makes the government poorer. While that may not sound a problem by itself, it usually leads to depreciation of the currency. When a currency depreciates, inflation rises. Inflation makes everything expensive and ends up eating your savings one way or another.
Great question, you should totally take an economics class, you’ll love it!
>You’re not wrong, the Federal Reserve Board (FED) exists for exactly this reason, to “pause” the economy.
>But the economy is made up of lots of people who may not all agree with what the FED thinks those people should be doing (spending) and so the FED has to convince those people to spend more by a series of levers that make spending seem more attractive than saving.
>Once more people are spending more stuff can be made, fueling economic PRODUCTIVITY which is a measure of the TANGIBLE amount of goods and services created.
>You may have also heard the terms SUPPLY and DEMAND thrown around a lot, it’s for good reason, for one, it helps us distinguish between economic problems that are as you say “man-made” and those which are caused by a decrease in economic productivity. The first of these we call a DEMAND-SIDE RECESSION, people are worried and spending less, the drop in demand causes supply to fall to meet demand. The second we call a SUPPLY-SIDE RECESSION, something has fundamentally damaged the ability of the economy to produce goods and services, causing unemployment and reduced spending.
>The FED has tools to gin-up consumer confidence and get people spending money, but there’s no way to manipulate the economy to fix a supply-side recession, other than to address the fundamental issue causing supply to be lower. In our case Coronavirus.
>As an example, the hardest hit regions in China and Italy are both Auto manufacturing hubs. Due to Coronavirus people can’t go to work and the things they would have created are counted against the economies productivity. Worse than that, there’s a whole domino effect as parts become unavailable manufacturing slows down around the globe where other plants are relying on the parts built in those Chinese and Italian plants.
>What you’ve hit on with your question is the distinction between economic measurements that are “man-made” and those which measure the TANGIBLE, how much stuff did we produce. The first of these we call the NOMINAL VALUE and measure it in money, the second we call REAL VALUE its units are barrels of oil, bushels of corn, and meals prepared and served.
Doing my best on two semesters of introductory economics here. Reddit please let me know if anything is incorrect or misleading.
pause no. Calculated stimulus in several forms happens. which is like free money to keep things going that they balance out later. Bailouts are essentially this kinda thing. Lowering interest lending rates of fed., injecting money into the market… Imho this should include micro loans for businesses and individuals, but so far the way we do it does not include the little guys accept in theory.
The easiest, simplest way to think about economics is one of my favorite lines from MiB (and one of the most quoted): “a person is smart. People are dumb, panicky animals and you know it.”
If we, as a unified species, could decide “you know what, let’s not panic this year” it would be as simple as that. Goods could be bartered, services could be traded, and we wouldn’t have these cascading crashes.
But we, as a species, are panicky idiots. Panic causes more panic and people are afraid to spend their money. Lenders are afraid to lend. Governments invest trillions just to keep money flowing. The panic causes imbalance, and the imbalance causes failures, and it takes us a long time to get our shit together.
So remember: no economic theory or outlook can trump the simple fact of people being dumb, panicky animals.
My ma always told me that the markets are driven by fear. Her degree is in journalism but she does a lot of complicated financial writing.
Basically what you’re asking for would require absolutely everyone across the world to agree not to panic and also trust that things would continue on after the pandemic, exactly the way they did before. Which are both longshots at best. So people start to hedge their bets. Which creates a downturn. Which people see and think it’s a sign of things to come.
It becomes a cascading effect snowballing across entire market and totally unrelated sectors. At the end of the day people are the market, not things. If people don’t have confidence in a global outlook, the market reflects that and ends up becoming an egg that created the chicken.
It’s really fuckin silly. However it’s also an evolutionary response to some degree. Shit starts going south, people start getting nervous.
Unfortunately not, precisely for the reason you correctly pointed out…”value” is effectively man-made, which inherently makes it incredibly subjective.
The abstract of the ‘economy’ is that it’s just the aggregate of one party entering into an agreement with another party…repeated over and over again, at all different sizes and places and times, for lots of different things.
That is to say, one side has to agree to provide the other side with something, at a price that’s agreeable to both…otherwise the transaction won’t occur (assuming there’s no force or manipulation involved).
You can see this everywhere…someone buying a piece of fruit at a farmer’s market or grocery store, someone taking an Uber, someone buying a home, etc.
These people are effectively saying…I value the thing the other person has (fruit, ride, house) as much, or more, than the thing I have (the agreed upon amount of money). Conversely, the other person is saying…I value the thing you have (the agreed upon amount of money), more than I value the thing that I have (fruit, ride, house).
That scenario above plays out in the stock market (which many people think of when they hear the word ‘economy’), but instead of buying a piece of fruit, a ride, or a house, investors are buying a share of a company…which is a sliver of ownership. That sliver of ownership effectively entitles you to a sliver of the company’s profits, both now and in the future, should you still own that share.
In reality, most companies choose to take most, or all, of the profits they make and reinvest them back into the company so that the company can continue to grow. In this scenario, which is most cases, instead of taking your sliver of this year’s profit, you are agreeing to let the company use that money in the hopes that future profits will be even bigger, which should result in your sliver of ownership being worth more than it would’ve been before.
If that sliver of ownership is in a company that’s publicly traded on the stock market, you have the ability to sell your sliver to someone else, or potentially buy a new sliver from another owner. The price at which either of those transactions occur will likely depend on whether or not you feel that sliver of ownership will be worth more, or less, in the future.
The share price of a publicly traded stock reflects the price at which each party was willing to exchange what they had with the other party. Fundamentally that means that one party wanted to own a share, while the other party wanted to get rid of a share.
If the world was to hypothetically hit ‘pause’, then you’d have two unhappy people because neither would get what they wanted.
What we’re seeing a lot of now…which is often described as ‘destroying value’…are investors fleeing the market. Individually these investors all have different concerns depending on who they are and what their age is and what level of risk they are willing to take, but the primary reason for the fleeing is uncertainty. That uncertainty is largely driven by the belief that Covid-19 is going to result in less revenue and less profits for lots and lots of companies around the world.
Without getting into the details, the fundamental value of a company is calculated by adding together all of the company’s future cash flow, adjusted for inflation. If a business gets temporarily shut down, or customers stop coming in for some time, then the value that the current investors already assumed was going to be created this year will diminish, which means the share price will likely go down.
If you’re a young investor, you can generally afford to take a loss now because you have many years to make that back up. And history says timing the market can be dangerous…because the market is very unpredictable in the near term, but exceptionally predictable over time…so you could just stay invested in the market and ride it out.
If you’re an older investor, however, you have far fewer years to make up what you might potentially lose. As such, you’d likely take your money out (sell your stocks), even though it means you would miss out when the market goes back up at some point in the future (which is what the stock market has always done, on average, over time).
At this point, the economy is no longer a machine, it’s a complex system. The system as a whole is greater than the sum of its parts. A car is a machine, if you take a part out, the car doesn’t work. Since the economy is a complex system, every element of the system influences the development and trajectory of the system, so if you remove any part, the system is drastically changed. Even if you hit “pause” on the system, when you hit play again it’ll be different than it was when you paused it. The economy is surprisingly fragile, often just teetering on the edge of stability and while it’s generally resilient to perturbations and change something like Covid-19 can come along and easily push it off the cliff, especially as the perturbations against it increase in the lead up (trade wars, tax cuts for the rich, etc.) the resiliency of the system will decrease and it won’t take much to push it off.
Economic crisis means that goods and services are not being produced and distributed to the right people and places. We can’t just all pretend that they are any more than we can pretend that the sun didn’t come up in the morning. These are actual things that aren’t at the right spot on the planet at the right time in the right amounts. We’re making too much of one thing and not enough of another. Supply chains have broken down. So on and so forth.
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