Stupid economic question about this crisis

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Rexindex
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Joined: Sun Mar 20, 2011 7:12 pm

Stupid economic question about this crisis

Post by Rexindex » Mon Mar 23, 2020 6:26 pm

Crazy stupid question. Before that, let me preface I genuinely feel for those who have or may lose income and the anxiety that produces.

As for an economic question, I understand a deep recession or depression will reduce earnings, which in turn reduces employee and owner income, hence less to invest, BUT, and here is my question:

If the losses in our markets and savings are relatively speaking, equal, how does it matter, since it affects so many? Of course this also assumes pricing for goods and services will also need to come down to meet demand as well.

In other words, if all savers lose a similar amount of savings, why does is matter if “wealth” is relative to others?

Does that make sense?
“Attention is the rarest and purest form of generosity.” | — Simone Weil

Seasonal
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Re: Stupid economic question about this crisis

Post by Seasonal » Mon Mar 23, 2020 6:30 pm

There's more to wealth than being relative to others. There will be less actual stuff (goods and services). Some companies will go out of business and won't recover. Equities may be down 30%, but prices aren't declining that much. Losses are not in fact uniformly distributed.

Is that what you meant?

Lee_WSP
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Re: Stupid economic question about this crisis

Post by Lee_WSP » Mon Mar 23, 2020 6:36 pm

Not everyone is losing value at the same rate.

Treasuries are booming. Toilet paper stocks are booming. Some companies are relatively unaffected. Etc etc. The economic effects are not actually equally spread out.

Worst hit are the wage earners in service related industries. Next would be any other wage earners who have lost hours. Etc etc.

boogiehead
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Re: Stupid economic question about this crisis

Post by boogiehead » Mon Mar 23, 2020 6:40 pm

This is not an equal redistribution of wealth. The hospitality and travel industry is in life support right now vs. the consumer goods and medical industry is thriving just look at the stock prices where the former have >50% lost where the other is <20% lost.

dboeger1
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Re: Stupid economic question about this crisis

Post by dboeger1 » Mon Mar 23, 2020 6:50 pm

Wealth is actually not just about the amount of money, but also the "velocity", basically how it moves through the economy. If we each have a million dollars but aren't willing to shine each other's shoes for less than a million and a half, we're pretty poor. If we each only have $10, but I'm able to charge you $1 to set up your company's IT system, and you're able to charge me $1 to buy equipment made by your company, we're pretty wealthy. Many of these recessions essentially lock up the markets and industries due to a lack of liquidity, perhaps due to debt problems, fearful hoarding of capital, sudden disasters, etc. That's why so much of the Fed's response revolves around injecting liquidity into the markets.

UpperNwGuy
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Re: Stupid economic question about this crisis

Post by UpperNwGuy » Mon Mar 23, 2020 6:54 pm

Rexindex wrote:
Mon Mar 23, 2020 6:26 pm
Crazy stupid question. Before that, let me preface I genuinely feel for those who have or may lose income and the anxiety that produces.

As for an economic question, I understand a deep recession or depression will reduce earnings, which in turn reduces employee and owner income, hence less to invest, BUT, and here is my question:

If the losses in our markets and savings are relatively speaking, equal, how does it matter, since it affects so many? Of course this also assumes pricing for goods and services will also need to come down to meet demand as well.

In other words, if all savers lose a similar amount of savings, why does is matter if “wealth” is relative to others?

Does that make sense?
A millionaire can can lose 30% without much pain. A family struggling to get by on $50,000 a year.... not so much.

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dmcmahon
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Re: Stupid economic question about this crisis

Post by dmcmahon » Mon Mar 23, 2020 8:29 pm

A person unemployed for a year makes us all poorer by the value of whatever that person would have produced. Like an unused seat on an airline flight or an unsold night in a hotel room, it’s a wasted opportunity. Real value is lost, as a group we are all poorer, therefore less wealthy. To make it worse, it falls unevenly on all of us, as noted by other posters. This is not “just” a stock market decline. That also can have real effects but they are largely knock-on effects due to restrained buying by people losing money on their investments.

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firebirdparts
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Re: Stupid economic question about this crisis

Post by firebirdparts » Mon Mar 23, 2020 10:06 pm

There is a small fraction of the people creating all the material goods we have. Then there are really essential services that are going to stay a high priority no matter what. Then there are services that nobody really needs, but that we just enjoy. People cooking each other's breakfast.

Between the goods we don't really need and the services we don't really need, there is a lot of money going around and around needlessly. It gives people (pretty much everybody) a chance to work, earn an income, and spend on things they actually do need. And it makes life more fun. A recession is when this flywheel slows down. It'll slow down when people just simply decide not to spend as much, and I think where we are today is the most drastic case of that ever. It's hard to imagine a more dramatic change in economic activity. Even world wars are localized; this is not.

This recession actually has limited direct impact on some investments. Some investments will be ruined by the recession, that's true. Some companies will have earnings significantly compromised. But at least as great an effect is the threat of bank failures. Banks are fragile, because they put all their money at risk as much as they are allowed, and frankly, they do it with people of average intelligence. The money that is flying around on that flywheel, a lot of it is credit. Also, the money that is invested in investments, a lot of that is credit too. That is why you hear people on the news saying the Federal reserve had to "inject liquidity". They are injecting it into Wall Street traders and big enormous banks. They're not injecting any money into, say, buying groceries for people stuck at home. Congress can do that, but the Fed doesn't.
A fool and your money are soon partners

CoastalWinds
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Re: Stupid economic question about this crisis

Post by CoastalWinds » Mon Mar 23, 2020 10:13 pm

Unless the cost of everything goes to zero, how is it “relative” for those who lose their job and income?

CoastalWinds
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Re: Stupid economic question about this crisis

Post by CoastalWinds » Mon Mar 23, 2020 10:16 pm

firebirdparts wrote:
Mon Mar 23, 2020 10:06 pm
Banks are fragile, because they put all their money at risk as much as they are allowed, and frankly, they do it with people of average intelligence.
This made me smile ... it is awesome!

Redlion
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Re: Stupid economic question about this crisis

Post by Redlion » Tue Mar 24, 2020 10:31 am

Someones going to win and someone is going to lose.

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