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Where does the money go during a recession?

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I am kinda new to economics

Here's an excellent way to start studying it: http://www.econlib.org/library/Say/sayTContents.html.

can somebody tell me where money goes during a recession?

It is not money that goes away during a recession: wealth does. A recession is when producers encounter obstacles and cannot produce as much wealth as they otherwise can. The money may well be still there, but it won't help, because there are not enough goods it can buy, because people can't produce them.

The fundamental principle behind this is the primacy of production. It is the most important principle in economics, and unfortunately also the most neglected one. This is why I recommend Say's Treatise as the best reading on the subject: he is the only major economist so far whose theories are fully based on and integrated with the primacy of production.

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I am kinda new to economics, can somebody tell me where money goes during a recession?

People stop spending it on consumer goods, instead beginning to pay off debts and rebuild financial capital. The money is then sent by financial institutions into the business sector, who then spend it on producer goods. See Cap's link to Say's work.

The other thing that can happen is that people start withdrawing cash from their accounts and keeping more of it in their wallets and purses for "just in case." The total sum of cash remains constant, but through a long and tortuous process the total accounts are reduced by a much greater degree than the amount of cash in people's pockets going up. The total supply of money is diminished, and the difference just ceases to exist.

JJM

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A related question:

When the Reserve contracts the money supply in an inflationary enviroment this cannot be a permanent contraction, only a temporary halt in the growth of money supply as the more bonds they issue or whatever it is they use these days to contract the supply the more they will have to pay later. Right?

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A related question:

When the Reserve contracts the money supply in an inflationary enviroment this cannot be a permanent contraction, only a temporary halt in the growth of money supply as the more bonds they issue or whatever it is they use these days to contract the supply the more they will have to pay later. Right?

The central bank is technically capable of doing whatever it wants, moneywise, so long as it can make a case that its actions were honestly intended to fulfill it's mandate.

As a matter of practice, the growth is only a temporary halt at best, and more often than not it's just a slow-down. It's the official policy of the Reserve Bank of Australia, for instance, to keep CPI growth at 2-3%. I'll try to dig up the particular RBA publication that describes their reasoning if you really want, but basically it is Keynesian defrauding of employees by "reintroducing a measure of wage flexibility" through devaluing the real value of nominal incomes.

As another matter of practice, the central banks don't issue the bonds, Treasury does that. What the central bank does is buy and sell them. To make a contraction, it wants to keep overnight interest rates higher than what the market rate would be. To effect this it does a "repurchase agreement" ("repo") to temporarily sell bonds to the banks. The central bank then has to buy them back again at the end of the agreement (which can last from a few days to a few weeks). To maintain a contraction policy it has to keep on recycling repo after repo, each one becoming more expensive than the last, with the difference being the amount of money that the central bank is withdrawing over the course of the contraction policy being in effect. A decent textbook on central banking practice would explain it better than this, though.

JJM

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People stop spending it on consumer goods, instead beginning to pay off debts and rebuild financial capital. The money is then sent by financial institutions into the business sector, who then spend it on producer goods. See Cap's link to Say's work.

You make it sound like it was Say who said those things. He didn't; you probably got them from some Austrian.

To maintain a contraction policy it has to keep on recycling repo after repo, each one becoming more expensive than the last, with the difference being the amount of money that the central bank is withdrawing over the course of the contraction policy being in effect.

Why would a financial institution want to enter an agreement where it has to pay more interest than the market rate?

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You make it sound like it was Say who said those things. He didn't; you probably got them from some Austrian.

I didn't say it was, though I implied it and I apologise for that. The actual original source of the idea of the split of incomes to distribution between consumption versus production is James Mill, who developed it from Says work. The result was Mill's Doctrine of Proportionality.

Why would a financial institution want to enter an agreement where it has to pay more interest than the market rate?

The central bank can do whatever it wants, and isn't bound by the need to make a profit. The private banks must do what their central bank tells them to do, despite being bound by the need to make a profit. The central bank usually encourages and cajoles, and does engage in market operations using funny-money to manipulate things to its satisfaction, but the threat of something more direct is always there.

JJM

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