Where does all money and wealth go in the recession?
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Let’s say you want to open up a lemonade stand. Your parents invest $50 so you can afford start up costs. You use that money to buy a table, lemons, materials, some signs and markers, and everything else you need.
Now let’s say you spend that money and now have a working lemonade stand business, let’s call this business Lemon Inc. Lemon Inc is in theory worth $50 on paper, however it doesn’t actually have any cash. Maybe you make a few sales here and there, but let’s say it doesn’t do too hot and the lemonade stand fails.
Let’s say you made $20 in total sales, and another $10 from selling whatever materials you could. Sure you can give your parents $30, but what about the other $20?
That $20 in cash and wealth didn’t literally “disappear”, it was spent on a bad investment so it’s effectively gone. Had the lemonade stand been successful, it would have made that and more. So that’s how you made $20 “disappear”.
Now imagine thousands of lemonade stands, each with $50 investments. And almost all of them failing. Imagine they make back $30 each, that’s still $20 of investors money they will never see again. So $20 x 1000 = $20,000 in lost wealth.
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