Where’s the money going during recessions?

Question

It vice versa where’s it coming from when the economy is booming?

When the economy is bad, it feels like there’s not enough money to go around, but when it’s good there’s plenty.

In: Economics

Answer 1

Credit. When the economy is good then money flows often time based on available credit line. The credit line/limit is a self-propagating function.

You’ll get a higher credit line if your assets (business cash flow, home equity, stocks) increase in value. In a growing economy, the credit lines will go up which will essentially “create money”.

However when times are bad, then spending slows down and then those assets decrease in value which will cause banks to decrease credit limits (to fend off risk) and now a bunch of that created-money from before disappears.

The economy is basically a big self-amplifying loop of gains or losses of money.