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0 pointsalistairSH4y ago0 comments

Yes and no. Money is an abstraction over resources. However, it's not quite that simple once you add credit/borrowing into the mix. We no longer trade sheep for lumber; we no longer buy lumber with cash from our wallet. Instead, we borrow from the bank, buy more lumber than we could otherwise afford, on the assumption we can turn around and sell finished houses before the loan comes due.

If the bank stops lending, we can no longer buy enough lumber to build the houses. The market slows significantly - instead of building 100 houses at a time, we have to build them one at a time. The demand for 100 houses hasn't changed (all else being equal), but the supply has. Prices probably go up, but until the bank starts loaning, the pace of the economy doesn't return to previous levels.

Or something like that. Way too complicated to distill into a single post.

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nostrademons4y ago

Credit is an abstraction over future resources. When you take out a loan, you're basically saying "I am betting that I can produce enough in the future to pay back the resources that I am using now." And if you don't, you're on the hook for it, and potentially go bankrupt.

That's why the financial sector is the weak link, and also why it's very well-compensated. Finance is a future-prediction problem: you do well if you successfully predict which investments will pay off, and you go bankrupt if you fail. Predicting the future has always been hard.

The reason we get these boom/bust crises is because instead of using their own judgment, many people, when faced with a hard problem, will just do what everyone else is doing. So the whole financial industry lemming-trains into bad investments, and then when they bust, they all go bankrupt and there's no resources to go around until the wreckage has been cleared away and placed in more independent manager's hands.

dalbasal4y ago

Credit is an abstraction over future resources from the perspective of either party. To the economy, there is no future. If everyone saves all their money, the economy ceases to produce. It doesn't hold that production in reserve.