Anonymous
Anonymous asked in Social ScienceEconomics · 1 decade ago

Where does all the money go during a depression?

We still have the same resourses and the same willingness and means to produce goods. Isn't it half-shekel mentality to be held to ransom by ...(what ever the answer is you give to the above question)?

Update:

With regard money suppy. Isn't the ultimate first lender only loaning the priciple but expects to get paid back both priciple and intest. Doesn't this mean there isn't enough money supply to pay back the debt meaning mortage defaults etc are built in to the system as soon as new loans dry up?

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  • 1 decade ago
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    Have you ever been to a sports game? Why aren't people standing and cheering for the whole three hours? It would give the team home field advantage. If the home team is winning and the game is a rivalry or a playoff game, then people usually do stand and cheer. When the home teams starts to really fall behind, people vacate the arena as if it were catching on fire. People at a sports event are driven by what is going on in the field and how the people around them act. This is the same thing in the market.

    Markets are all about consumer confidence. The more confidence, the more people are willing invest and spend. When the technology sector took off in the late 90s, there were companies that couldn't possible be supported by the lack of demand. Investors had a lot of confidence in the market. Tech stocks were in demand. People were making money and the nation's GDP was very high*. When investors are feeling confident, that's when investors start pumping capital into the market.

  • 1 decade ago

    If you ask specifically where the money goes, there are two answers:

    1 - People hold on to their money. They still have it, they aren't spending it. So companies start holding on to their money rather than investing it to make more products. Then people are unemployed ... so money sat in someone's pocket that would have gone from a consumer to a company to an employee who could spend it again.

    2 - The "money supply" is a complex subject, but key to the current depression. Think of money as a flow, rather than a "dollar bill." If a bank gives you credit (say a credit card) based on you assets, like the value of your house. Then you spend that money, someone else makes it and puts it in a bank, then the bank lends it to someone else, and so on. If the value of your house drops, then suddenly the bank gets nervous about its loan to you. If this happens on a big scale, then people lending to the bank get nervous about the bank. And since a single physical dollar is the basis for a whole flow of loans, a few people or banks getting nervous and pulling back loans has a cascade effect.

    It's not about the number of printed dollar bills, it's about how fast they are used (which is fastest when people use credit back and forth.)

  • Anonymous
    1 decade ago

    Most consumers didn't have much money to begin with. They were borrowing lots and lots of money from whoever would lend and spending this money like crazy on houses, cars, vacations, and various entertainments.

    Now many consumers can't pay back their debts. Which means that banks have lost a lot of money. And they are afraid to lend more.

    It's true that the Chinese, the Japanese, and the OPEC still can produce just like before. But most US and European consumers can't borrow money and waste it on things they can't really afford just like before.

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