Recession explained

[johnyj]

--Chapter 1--

ABCD 4 people on an island

A hire C to capture 4kg fish each day
B hire D to pick 4kg fruits each day

1kg fish or 1kg fruit equals 1 shell in the island market

C and D's salary is 2 shells

Each day, A sell 4kg captured fish for 4 shells, pay C 2 shells, and use rest 2 shells to buy 1kg fish and 1kg fruit

B sell 4kg picked fruits for 4 shells, pay D 2 shells, and use rest 2 shells to buy 1kg fish and 1kg fruit

C and D use 2 shells salary to buy 1kg fish and 1kg fruit

So, everyone consume 1kg fish and 1kg fruit per day, and they produce exactly the same amount

Total GDP per day on the island is 8 shells

Total amount of money supply required in island market is 8 shells, e.g. 8 shells are enough to facilitate all the trading day after day

[johnyj]

-- Chapter 2 --

Now technology evolved, A can capture 4kg fish by himself and B can pick 4kg fruits by himself. Since the market consumption is just 4kg fish and 4kg fruits, A and B decided to fire C and D

C and D lost income and stopped consumption. This change the consumption of both fish and fruit to 2kg. Since A and B now have higher income, they can consume more, say 1.5kg fish and 1.5kgfruits, so the total consumption of both fish and fruit changes to 3kg.

Total GDP per day falls to 6 shells

C and D have problems for living, if there is social wellfare system, the problem will be shifted to government balance sheet

Even in this extreme example, there is only 50% of people get hurt. Although the total GDP reduced, the living standard of A and B actually improved.

In a larger economy, when only 10% of people lost their job, the rest 90% of people will actually get better life. Those 10% people will have to find another way to make a living, before that, GDP will be lower than before

So, recession typically comes from an increasing in productivity and no new vocation to absorb the jobless people

[GeniuSxBoY]

Also, giving free money to people that don't work (i.e. welfare, unemployed) is like:


A buys a pizza from me. I pay taxes. Taxes go to A.


Therefore it's like A gives me $20 to buy a pizza.
After buying the pizza, I give him the $20 back to buy another pizza.

This creates more and more work for me, but I keep getting poorer.

[hugolp]

What a useless example. Johnyj are you trying to be the member that exposes more economic fallacies per day?

Why would C and D not start doing something else? Or fish and get fruit for themselves? Why does GDP matter? If people want to consume less, so be it.

[johnyj]

Also, giving free money to people that don't work (i.e. welfare, unemployed) is like:


A buys a pizza from me. I pay taxes. Taxes go to A.


Therefore it's like A gives me $20 to buy a pizza.
After buying the pizza, I give him the $20 back to buy another pizza.

This creates more and more work for me, but I keep getting poorer.

Good point, if the island has a government, then C and D will get compensation from A and B's taxes. A and B will not get poorer since their efficiency is higher, they just not get enough rich

My model has not studied the tax in precise numerical way, so I can not say anything concret now. Anyway, A and B's technology advancing is the reason that C and D lost their job, they should have certain responsibility for the consequence, but not all of it

In a bigger economy, if 90% of people get rich because of adoption of a new technology, then if some part of their gain converted to higher tax and support those who lost their job, the overall impact could be reduced

[GeniuSxBoY]

For the lulz:  http://answers.yahoo.com/question/index?qid=20070419102245AAGqoZm

[YoYa]

Island /b/ comes along, and sell's Island A everything cheaper then they can produce themselves, but Island be uses conchs as currency and not sea-shells. As Island /b/'s economy only equates to 2 sea shells a day despite being more productive, island A think they have nothing to fear. But as time goes on Island /b/ accumulate so many sea-shells, Island A becomes dependent on them not to flood the market. Island /b/ has now pwn'd Island A without ever firing a shot, and Island A is now consigned to a future of low-paid employment in the generation of meme's and guro for island A.....true story.

[johnyj]

Why would C and D not start doing something else? Or fish and get fruit for themselves? Why does GDP matter? If people want to consume less, so be it.

This is a good and natual question, but my example just show the theory, not necessary to be 100% exact

In a developing economy, C and D can do other things that A and B are interested in to make a living, so expand the whole economy, this has been the case for hundreds of years

But in a developed economy, almost every thing that A and B are interested in have already been produced by E,F,G,H etc... C and D has become so specialized in their branch and if they quit the job, they might not be able to find other thing that A and B are interested in to make a living

And C and D basically lost the possibility to make a living by fishing and picking fruit for themselves, because the living cost is so high that just fishing and picking fruit all day is not enough to pay their rent

[johnyj]

Island /b/ comes along, and sell's Island A everything cheaper then they can produce themselves, but Island be uses conchs as currency and not sea-shells. As Island /b/'s economy only equates to 2 sea shells a day despite being more productive, island A think they have nothing to fear. But as time goes on Island /b/ accumulate so many sea-shells, Island A becomes dependent on them not to flood the market. Island /b/ has now pwn'd Island A without ever firing a shot, and Island A is now consigned to a future of low-paid employment in the generation of meme's and guro for island A.....true story.

Intresting story! If you can provide some numbers, that's even better, we then can analyze different possibilities in such a inter-island trading environment

[YoYa]

Island /b/ comes along, and sell's Island A everything cheaper then they can produce themselves, but Island be uses conchs as currency and not sea-shells. As Island /b/'s economy only equates to 2 sea shells a day despite being more productive, island A think they have nothing to fear. But as time goes on Island /b/ accumulate so many sea-shells, Island A becomes dependent on them not to flood the market. Island /b/ has now pwn'd Island A without ever firing a shot, and Island A is now consigned to a future of low-paid employment in the generation of meme's and guro for island A.....true story.

Intresting story! If you can provide some numbers, that's even better, we then can analyze different possibilities in such a inter-island trading environment

/b/ nevar kept records, and Island A had outsourced it's record keeping to /b/......

[kjj]

Why would C and D not start doing something else? Or fish and get fruit for themselves? Why does GDP matter? If people want to consume less, so be it.

This is a good and natual question, but my example just show the theory, not necessary to be 100% exact

In a developing economy, C and D can do other things that A and B are interested in to make a living, so expand the whole economy, this has been the case for hundreds of years

But in a developed economy, almost every thing that A and B are interested in have already been produced by E,F,G,H etc... C and D has become so specialized in their branch and if they quit the job, they might not be able to find other thing that A and B are interested in to make a living

And C and D basically lost the possibility to make a living by fishing and picking fruit for themselves, because the living cost is so high that just fishing and picking fruit all day is not enough to pay their rent

Ever hear of Ned Ludd?  This was pretty much his theory.

It was wrong then, and it is wrong now.

[realnowhereman]

Now technology evolved

Who did that then?

When you answer; you'll find it's worth at least 2 shells.

[johnyj]

Now technology evolved

Who did that then?

When you answer; you'll find it's worth at least 2 shells.

It could be C and D, and after A and B learned the trick, they fired C and D due to overproduction 

Of course you could say that C and D should keep their secret or even file a patent, but since A and B own the business, C and D's invention belong to the company

[Anonymous]

A recession is caused by A (Fannie) and B (Freddie) loaning wastefully to C-Z and depleting the society's savings. The loans are spent but nothing profitable is built to raise up the savings again. When there is more demand than the existing capital can supplement, there is a recession. Nothing can get done since no loans can be made and employment is cut-off.

[johnyj]

A recession is caused by A (Fannie) and B (Freddie) loaning wastefully to C-Z and depleting the society's savings. The loans are spent but nothing profitable is built to raise up the savings again. When there is more demand than the existing capital can supplement, there is a recession. Nothing can get done since no loans can be made and employment is cut-off.

Good point, over-loaning is also part of the reason to a recession, I will study this in a numerical way later. I believe, if the demand is higher than the capital, then we do not have a recession.

[jtimon]

A recession is caused by A (Fannie) and B (Freddie) loaning wastefully to C-Z and depleting the society's savings. The loans are spent but nothing profitable is built to raise up the savings again. When there is more demand than the existing capital can supplement, there is a recession. Nothing can get done since no loans can be made and employment is cut-off.

Good point, over-loaning is also part of the reason to a recession, I will study this in a numerical way later. I believe, if the demand is higher than the capital, then we do not have a recession.

So we just need demand to solve all problems?
Then yes, the fed should buy not only stock but everything. The fed should demand it all. Even the food I guess.
But wait, what does the fed want the food for?

[johnyj]

So we just need demand to solve all problems?
Then yes, the fed should buy not only stock but everything. The fed should demand it all. Even the food I guess.
But wait, what does the fed want the food for?

FED can just destroy them silently, like they destroy the money 

And most of the business are so blind that if they can sell their product to a big customer and make money, they do not care about the rest

[jtimon]

So we just need demand to solve all problems?
Then yes, the fed should buy not only stock but everything. The fed should demand it all. Even the food I guess.
But wait, what does the fed want the food for?

FED can just destroy them silently, like they destroy the money 

And most of the business are so blind that if they can sell their product to a big customer and make money, they do not care about the rest

So the fed should be buying things to destroy them. Awesome. That's even better than being attacked by aliens I guess.
Did you hear the video about Paul Krugman?

[johnyj]

So we just need demand to solve all problems?
Then yes, the fed should buy not only stock but everything. The fed should demand it all. Even the food I guess.
But wait, what does the fed want the food for?

FED can just destroy them silently, like they destroy the money 

And most of the business are so blind that if they can sell their product to a big customer and make money, they do not care about the rest

So the fed should be buying things to destroy them. Awesome. That's even better than being attacked by aliens I guess.
Did you hear the video about Paul Krugman?

Wait, after those business CEOs got the income from FED and go shopping, they found out there is almost nothing to buy since FED has bought up everything (inflation incoming...)

I think FED do not have the right to consume anything they bought, they have to sell to another user to get those money circulate back, if they can continously push this circulation, then economy activity will be accelerated. But if some one in the middle of this circulation start to save/hoarding cash, then the amount of money required to keep those activities are much higher

[Anonymous]

How do you create new innovations that requires tens of millions in funding if there are no savings in a society? There is no prosperity in a society with far greater demand than capital. It's like supplying water with no dam. People will dehydrate.