Where does all money and wealth go in the recession?
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The value of something is only worth as much as the next person is willing to pay for it. If that’s stock then a share price could go from $100 to $1 in a single share transaction. That would reduce to market cap of the company 99% with a single $99 trade. I know that’s extreme but it shows that reported “losses” are only superficial. What is the actual value that the share of that company? Is it $1 or $100, or something in-between? So when market value drops it’s the market buyers that are saying “we don’t want to pay the same risk premium to own those shares”. So the market buyers push the stock lower since that’s where all the liquidity goes.
Housing will face a liquidity wall again with a rise in interest rates. Buyers don’t want to take on the debt burden at higher rates and therefore don’t take out big loans. So the value of everything starts to come down to where the liquidity is.
Liquidity is the point where buyers and sellers agree on the price for a transaction.
So it’s not that wealth disappears, it’s more that higher risk premiums have been lowered to match liquidity.
Some of it never existed in the first place. All of this “worth” that people had is largely hypothetical.
The same place it goes when the economy is good: to the richest people. When times are good, though, a little of it is available to the non-aristocratic classes through wages and other work benefits.
Four people are living in a village.
– one person makes food
– one person makes fuel
– one person makes baskets
– one person makes shows for Netflix
It’s going great. The food person makes money and has no problem paying his expenses. The fuel person likewise. And the basket person is selling a lot. And they all subscribe to Netflix.
Then Netflix starts doing poorly, and the person making Netflix is let go.
The Netflix person needs to cut down on costs. She buys less fuel, completely stops buying baskets to save money, and buys as little food as possible.
Suddenly the basket person has trouble making ends meet, because the Netflix person no longer buys any baskets. He needs to stop buying fuel and buy the cheapest foods to be able to pay rent for his shop and buy twigs for his baskets. He needs to charge more for each basket sold if he wants to continue being able to survive on his job, so he raises his price for baskets.
Now the fuel girl is almost going out of business because her income has decreased so much. She really needs to increase prices and cut down on spending.
And the food guy is also in trouble. He used to be able to use his income to produce more but now that he earns less he can’t afford it. It’s more costly per unit to produce less, and he needs to cover other costs as well. Can’t afford fuel, baskets, and definitely no Netflix subscription.
Now it’s going REALLY bad for the basket person. Twigs have increased in prices as well because the twig people’s living costs and production costs also increased, which increases the price the basket guy must sell his baskets for even further, yada yada yada…
This is of course a very exaggurated example, but the economy slows down and can in extreme situations almost grind to a halt.
A lot of it was on paper but illiquid. If enough people want to convert their wealth to money the assets they’re trying to sell crash.
GDP is a flow, not a stock. A recession means we *produced* fewer goods and services this year than we did last year. It’s not so much that money and wealth disappear, more that we create less wealth than we expected to.
Whoever pulls their money out first. Institutions know to put money in in the bear market and sell during the bull run. That is what makes them the wolves and most people the sheep.
Money itself doesn’t go anywhere. Non-monetary wealth — such as the market value of real estate or investments — is what decreases, because that wealth was always dependent on the state of the market at any given moment.
So for example, if you have a lot of cash when a recession hits and do not depend on many assets whose value is market-driven, you will do fine in a recession. If you have a *really really whole lot* of cash, you might actually do well in a recession, because you will be in a position to buy a lot of stuff on the open market at low prices. (Warren Buffett famously did this during the “dot com bust,” for example.)
Well okay that’s not 100% true. Macro-economically, money can be affected too, indirectly, because during a recession most people tend to hoard their cash more. Since most people do not have a lot of cash, and they ideally don’t want to sell their market-backed assets at a low recessionary value if they can at all avoid doing so.
So while the actual value of money may not change as the result of the recession, monetary scarcity can become a thing on a large scale.
wealth, unlike energy, can be destroyed. if you say you want to buy an nft for a million bucks , it is ostensibly worth a cool mil. if in the next minute you say you dont want to buy said digital artifiact, it is worthless (at least until the next sucker steps up to the plate). nothing has changed except the desirability of the nft.
So, without going into too much detail, the vast majority of money that exists only exists in a computer database somewhere. It’s not as if there is 100 grand in the bank that suddenly goes missing.
That money in the computer, a lot of it anyway, is based off of how much something is worth. If someone was in Bitcoin, and they had 2 million USD “in bitcoin”, when the value of it goes down that person now has less of a value in USD. Basically, it is how valuable something is. Same with the stock market. If all of a sudden, someone with 1 million USD in x stock, then x stock crashes and becomes less valuable, that person has that much less.
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