Wednesday, August 17, 2011

Of Course It's Going To Take A Long Time To Recover

Look, FLG gets that most people haven't taken and don't get economics. Although, the economic knowledge of his fellow MBA classmates does often bug him because they mostly just repeat what they hear and read on the news.

But FLG got in a bit of a debate with one of his classmates when he said that the slow recovery of the economy was easily foreseeable to anybody who knew anything. After a bit of back and forth, FLG had to break it down like this, which he's pretty sure he's done here on the blog before:

People can do one of two things with their money -- consume or save. Consume means spending it now. Save means consume in the future. Once you've added savings, however, this makes borrowing possible. Borrowing is spending money you haven't earned yet. Financial crises are so painful and take so long to recover from because, pretty much by definition, the crisis was caused by people borrowing too much, .i.e. too much leverage. Thus, people have lost money they haven't earned yet and so it will take a longer time to recover because people have to 1) earn money in the weakened economy and 2) then pay it back to the people whom they owe that money before they can start spending again.

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