In this earlier post, we explained that you can create your own personal mini recession by borrowing as much money as you can, spending it, and then not paying it back, because you can’t. You borrowed too much and can’t pay it back. What happens to you from that point on is your recession.
The essential point we were trying to make is that recessions come about from borrowing too much money on a massive scale. Sometimes it is the govt that borrows too much, sometimes it is businesses, sometimes it is average Joes, sometimes it is all of the above.
Also, we see that every recession will have a boom first, when the money is spent. The two together, the boom and the bust, are called a business cycle.
We also see that there is no magic fix for a recession. If you borrowed too much money, you have to tighten your belt and repay, if you are an honest person.
Even if you are not an honest person who has no intention of repaying ever, you will have to tighten your belt anyway. That’s because there will come a time when nobody will lend you anymore, you spent all you got earlier, and your high life has to come to a stop.
We said three questions have to be asked. In this post we will answer the first of them.
1. Where did all the money come from that was lent out? It doesn’t grow on trees.
In modern times, the answer is almost always from the govt just printing it into existence.
In the old days when the money was actual gold coins, there had to be another way the money came into existence.
For example, in the 1600’s in Holland, the Dutch passed laws making their banks very popular places for the whole world to put their gold in. This resulted in what is now called Tulipmania, a classic example of boom and bust in the tulip industry, with repercussions to their whole economy.
Another example is what happened to Spain after 1492. They found gold and gold and more gold in the New World, brought it over by the shipload to Spain, and that’s where they got the money to destroy their economy to this very day.
But in any case, that’s the first question to ask when there is a recession. Where did the money come from that caused the boom? And if the country in question uses paper and/or digital money, you don’t have to look very far.