Where does all money and wealth go in the recession?


Where does all money and wealth go in the recession?

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“The economy” is money moving around. A recession is when there is less money moving around. So it doesn’t really *go* anywhere – which is the problem.

The cheeky answer would be that rich people and banks are hoarding it. But that’s (kindof) a misleading understanding.

A recession is when spending and investment slow down. Consumers are afraid to make purchases, banks are afraid to make loans, businesses and investors are afraid to make investments in expansion. So instead of money *circulating* and moving quickly between buyers and sellers and lenders and debtors, people are kindof holding back, keeping what they can in savings, not taking any risks.

Also, and perhaps even more importantly, some of the “money” wasn’t exactly there in the first place. Loans/debts were getting passed around and treated as if they were money, but then some shock or failure happens and it turns out some of those debts aren’t going to be paid eventually, they’re just going to default. So that debt someone owns that was supposedly “worth” $10,000 or something is actually only worth $2,000, or maybe even just 0. Money gets wiped off of balance sheets.

Imagine a two person economy. Joe makes hamburgers, and Jane makes clothing. And for the sake of argument, Joe starts with $5 and both hamburgers and shirts cost $5.

So Joe buys a shirt. Jane now has $5, so she buys a hamburger. So Joe has $5 and he buys a shirt. Etc.

The economy isn’t $5, it’s the amount of hamburgers and shirts being sold. If times are good, they’re trading that same $5 back and forth lots of times. If times are bad, Joe sticks that $5 into his sock drawer and then neither of them get any food. The same $5 is there, but it isn’t moving back and forth.

Normally the recession happens in part due to the overinflated value of something. So the money that didn’t exist just simply disappears.

Wealth is very fluid. The values of everything constantly fluctuates, including how much a dollar is worth. During a recession when markets crash, wealth on “paper” can simply vanish. If I own $1000 in stocks, and the value drops by 50%, and then sell, my wealth has dropped by 50%. But somebody else bought those shares, and if they hold and it rebounds they gain a lot. If I just held those shares until they rebounded, then I didn’t lose anything(no including inflation to sinplify this).

Takpeople often think of their wealth as how many dollars can I sell this or that for, but it really isn’t that simple. That metric only really matters when it comes time to sell an asset, so you can use those dollars for some other product or service.

That is why we have paper gains and realized gains. Paper gains are what you could sell for, while Realized is what you have sold for to get currency.