During An Economic Recession, Where Does The Money Go ?

Thanks to Coronavirus, the world might slip into one of the worst economic recession in decades. While a lot of reports are declaring global economic recession has already set in, we looked at what it actually means.

If economic terms make you dizzy (like it does to me), the explanation below will make you understand what actually happens during an economic recession.

What a ‘typical’ recession looks like

A recession occurs when there’s a significant decline in economic activity as consumers and businesses spend less money. Many economists define a recession as two consecutive quarters of declines in gross domestic product (GDP), which is the sum of the value of all goods and services produced in an economy.

Still Confused? Good. Read on. 

There was a discussion on a Reddit thread and following is the winner explanation by the user DuncanBaxter who explained the whole situation as simply as possible.

The impacts of a recession are not about value, but about the velocity of money, and economic activity, and that disappearing.

You have Rs.500. So you go and spend that Rs.500 at the local barber. That barber goes to spend that Rs.500 on a few bottles of wine from the local winery. And the vintner spends that Rs.500 on groceries. And the grocer puts that money into savings because he’s looking to buy a house.

That Rs.500 creates Rs.1,500 of economic activity (ie. our GDP = Rs.1,500), and the velocity of money is 3.

But you are in shut down, and you google how to cut your hair yourself. You spend the money instead on groceries, and the grocer puts it into savings. The Rs.500 is still the same Rs.500. It never disappeared, but the velocity of money is only 1 this time. It’s only created Rs.500on economic activity, our GDP is only Rs.500.

This is an overly simplified example, but illustrates that how quickly we spend money actually has an impact on our GDP. The money never really disappears, it’s just the economic activity it enables goes away.

Still Confused? No? Good. Read on. 

While the above explanation is to the point, there is another aspect to the whole situation, which is covered by the user depressive_anxiety.

Also, a recession doesn’t necessarily mean a lack of money. Sometimes, it’s just a lack of spending and liquidity.

When people are afraid, have low confidence in the economy, or are quarantined in their homes they tend to spend less money. The lack of spending decreases demand and lowers the profits for businesses. People start taking money out of banks, stocks, and other assets because they want cash on hand “just in case”. Businesses have a harder time getting loans and are less likely to take risks. These things all interact with each other in a vicious cycle that essentially stagnates the economy.

What this looks like from the outside is high unemployment, low stock value, people spending less, businesses spending less, and just a lack of growth. 

If you want to learn more about this, go explore and share this newfound information with others and educate people about it.

Stay Safe, Stay Home. Be a responsible Human. 

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