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
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.
>Can’t we all just
Any economic proposal that starts with these words can be safely dismissed. All it takes is for one country to ignore the agreement for it all to fall apart. And there would be incredible incentive to do so.
Even if you could force compliance through military action, you can’t “pause” the consumption of food, hospitals, pharmacies, police, utilities, etc. If you tried only “pausing” part of the economy, once you map out the chain of dependencies, you’d quickly realize how linked these are to every other industry.
You’re touching on abstract anarchist theories. P.J Prodhun asked the same question and designed the whole philosophy of anarchism around the idea that we don’t really need money.
To answer your question, there’s nothing preventing what you are suggesting. Except doing so would cause a breakdown of all market forces as we know them. Money and the markets are just very complex zero-sum games. But “pausing” that game would mean nothing within the game would function.
It would be like a game of monopoly, where the banker suddenly says that the bank would close down for three spins around the board. There is nothing stopping this scenario, except it violates the nature of the designed system, and therefore the system would collapse . In this case, the monopoly game would be very boring as no one could purchase property or mortgage or do anything but barter with the other players.
That’s basically what would happen in reality as well, but on a much grander scale.
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.
The simplest answer is because we cannot hit pause on our consumption of items that have “value”, e.g. food, rent, public transport or petrol for your car, etc.
Businesses need to continue to pay rent and salaries, people need to continue to eat, etc. And because the global economy is dependent on everyone continuing to transact with each other at an expected or ever-increasing rate, hitting pause is the exact thing that will cause a global economic crisis.
Money is an abstract concept, but it is tied to things that are absolutely real. When you monkey around with money in the way you are thinking its a bit like a carpet with a wrinkle in it. You can push the wrinkle about, but you cannot get rid of it. Someone is always going to be left short.
Think about it this way. If you and your friends all agreed to do chores for each other, and the chores you had to do were recorded on slips of paper, what’s to stop a slip from getting destroyed or new slips made? Nothing right? Except that destroying a slip means a chore doesn’t get done, and creating a slip means a chore gets done twice. There are real world consequences to those slips of paper with bits of writing on them.
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