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The "money" in the economy is actually mostly credit, and during a recession it contracts (usually from defaults) so the amount of "money" in the system is now

The "money" in the economy is actually mostly credit, and during a recession it contracts (usually from defaults) so the amount of "money" in the system is now less Since the value of a stock is it's future cash flows discounted to the present and it's had it's current cash flows impacted, usually that makes forecasts revise those future earnings downward lowering the valuation of the company. Other reasons are assets are sold to make up for lost income needed to pay for expenses, and stocks being liquid often get sold first.

DeathArrow 5y ago
>The "money" in the economy is actually mostly credit But how can you borrow money to somebody if you don't physically have those money?
- tacitusarc 5y ago
  See fractional reserve banking: https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking
- yakubin 5y ago
  The money is created when someone borrows it. But you cannot lend more than a certain multiple of what you have as deposit. This multiple is decided by the central bank.
TekMol 5y ago
The "money" in the economy is actually mostly credit, and during a recession it contracts What arguments are there to support the theory that a recession (decline in overall productivity) causes the amount of credit in the system to shrink? From a look at the M2 and M3 money supply, there never seems to have been a contraction: https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/MABMM301USM189S https://fred.stlouisfed.org/series/MABMM301USM189S That seems to be a pretty strong argument against the money contraction theory.
- analyst74 5y ago
  Fractional reserve. Also, recession causes people to spend less and save more. Further reducing demand.
- atwebb 5y ago
  Another example (I am no expert) is a margin call. If I am purchasing using $100k of margin and my collateral drops to the point that I no longer have the margin. That 100k is gone. It wasn't a real 100k in the first place, it was leveraged and backed by a volatile asset.
lamontcg 5y ago
And people sit on their cash because they don't want to make bets on the future. So they park it in something which is believed to be incredibly safe like money market funds or a savings/checking account because a 0% to 1% rate of return beats the risk of a 20%/50%/100% haircut by investing in anything else which gets hammered by the unwinding of the recession.

DeathArrow 5y ago

>The "money" in the economy is actually mostly credit But how can you borrow money to somebody if you don't physically have those money?

tacitusarc 5y ago
See fractional reserve banking: https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking
yakubin 5y ago
The money is created when someone borrows it. But you cannot lend more than a certain multiple of what you have as deposit. This multiple is decided by the central bank.

TekMol 5y ago

The "money" in the economy is actually mostly credit, and during a recession it contracts What arguments are there to support the theory that a recession (decline in overall productivity) causes the amount of credit in the system to shrink? From a look at the M2 and M3 money supply, there never seems to have been a contraction: https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/M2 https://fred.stlouisfed.org/series/MABMM301USM189S https://fred.stlouisfed.org/series/MABMM301USM189S That seems to be a pretty strong argument against the money contraction theory.

analyst74 5y ago
Fractional reserve. Also, recession causes people to spend less and save more. Further reducing demand.
atwebb 5y ago
Another example (I am no expert) is a margin call. If I am purchasing using $100k of margin and my collateral drops to the point that I no longer have the margin. That 100k is gone. It wasn't a real 100k in the first place, it was leveraged and backed by a volatile asset.

lamontcg 5y ago

And people sit on their cash because they don't want to make bets on the future. So they park it in something which is believed to be incredibly safe like money market funds or a savings/checking account because a 0% to 1% rate of return beats the risk of a 20%/50%/100% haircut by investing in anything else which gets hammered by the unwinding of the recession.