If people can’t / don’t spend en masse and therefore cause businesses to collapse on a large scale, meaning they aren’t paying staff, where does all the money go?
And where do governments borrow money from?
[Edit] en masse not on mass.
In: Economics
> If people can’t / don’t spend on mass and therefore cause businesses to collapse on a large scale, meaning they aren’t paying staff, where does all the money go?
It just sits there in investments and accounts. The transfer of money (paying for stuff) it was keeps the economy going. If businesses stop making money then they can’t pay their workers and suppliers anymore.
> And where do governments borrow money from?
Governments print money and they can print as much as they want, at least theoretically speaking.
It used to be that money was backed by something, so currency represented Gold or some other commodity. Today though the majority of countries use a fiat currency which means that currency is backed by the strength of the economy of the government that issued it.
So the value of say the US dollar is based on the strength of the US economy.
The US government can print as much money as it wants, but doing so de-values the currency causing inflation. So only so much money can be printed if they want to keep the value high. But if the US economy or government has a serious financial problem they can theoretically print money until they solve the problem, but doing so would de-value the currency so much that inflation would cripple the economy.
The central bank of the US (part of the government) is responsible for maintaining this balance. They issue currency in the form of paper + coin as well as digital currency (in a bank account, not bitcoin) typically to the banks. They loan this money to banks at an interest rate, the prime rate that everyone is always talking about.
Banks in turn loan this money to people to buy houses etc, and make money with the loans.
The government can therefore also recall these loans and destroy currency to make the value go back up.
Depending on which economic theory you subscribe to, the risk of inflation is primarily the reason we pay taxes to fund government services instead of the Government just printing money to pay for everything. Taxes in a sense remove money from the system.
When you talk about government debt, this is the government borrowing money in the form of Bonds. A bond is a contract loan in which the government agrees to borrow your money for X number of years and then pay you back with a set interest rate. The government borrows money like this to pay for things without having to raise taxes, which is a political minefield.
Government Bonds are super important to the economy, as much of peoples retirement savings are in bonds. Bonds are considered a very safe investment.
So why doesn’t the government just print money to pay off the debt? It would cause massive inflation and cripple the economy.
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