Where does all the money go during a crisis?


Other answers have made some points about money but if you consider your example and stop at the first step in your reasoning, you might get another insight about the nature of the current recession. If airlines stop flying, nobody gets from A to B, that's a service that is not produced nor consumed. Someone is a little poorer in a sense because they haven't taken their vacations, haven't visited their loved ones, etc. That's what our economy and growth is made of, goods and services people enjoy.

Now, if you haven't booked your flight yet and you have cash in the bank, you might have the feeling that you haven't lost much as you can postpone your trip. But that only works if the economy as a whole stays as productive as it has been until now. And the current disruptions will have a lot of ripple effects: airlines face massive cash flow problems, banks and insurers incur additional liabilities they might not have properly estimated, aircraft manufacturers are worrying about their orders and investments, suppliers to both industry will see their orders and turnover decrease, employees in all these sectors have less money to spend, everybody is less inclined to spend money given the current uncertaint…

At the end of the day, the fact that money is digital, based on trust, etc. is a second-order consideration. Even if we were bartering with commodities, if we produce less (from agricultural products that are not harvested all the way to services like flights or haircuts), we are poorer than we would have been otherwise. As a limiting case, consider the following thought experiment: if the whole economy stops, you won't find food or goods to buy or people to do something for you so what is your money (no matter its nature: electronic transactions, banknotes, metal) worth to you?


what happens with the money, is had to go somewhere

Nope.

Money is ultimately a fiction, not real. It is a representation of trust that the economy will keep working, that people will give you things in exchange for numbers in a computer or fancy pieces of paper.

It absolutely can and does simply go "poof". That's of course not the case for physical currency (it can only lose value), but a lot of the money our economy is built in is not physical. I'll give two examples:

  • Stocks. Their value is determined purely by how much people are willing to pay for them on an exchange, which depends on how well the company is doing. So one day you have 1000 stocks of Airline XY which are "worth" $50k - and in some ways you can use that like money, borrow against it or even exchange it for something else. A month later, airlines are faltering and somehow your 1000 stocks are only worth $20k. The other $30k have disappeared into thin air, nobody else has them either.
  • Debts. You took a $10k loan to fix your house's leaking roof. The bank that issued the loan counts it as an asset, it's worth $10k plus interest, which they count on receiving over the next few years. They can even sell that loan to someone else, so it's very much like money to them. But then because of the crisis, you lose your job, you cannot pay the rates anymore. Worst case, you have to go into personal bankruptcy. The loan will never get repaid. The value it represents, the money has disappeared. Bonds actually work very much like that as well.

A lot of the money our economy depends on is like this, and in a crisis you get cascading effects where customers default on debts which makes the company that issued the debts (and their stocks) lose value, which means stock traders that borrowed against those stocks have to get money quickly to satisfy a margin call, so they have to sell other stocks, which makes the price of those stocks go down...


I'm curious about what happens with the money. Let's say airlines go out of business, and a lot of people gets laid off, these people will have no money for paying rent, so the landlord isn't getting money either, and can't pay that mortgage, so the bank is going to stop receiving money, and the problem continues.

If an airline goes out of business, it means people won't buy airplane tickets. That is saved money right there. At these times when most people won't dare to invest in stocks, they probably:

  • Depositing it to a bank account
    • Guess what? Bank loans the money to someone else who needs it, and the other person can continue/increase consumption. Banks will have to find someone to give a loan. If there are not enough 100% reputable borrowers, a bank will have to find someone reputable enough (let's say 99% reputable) for it to make business sense.
  • Invest it to government bonds
    • Guess what? Governments have a problem that people are willing to loan money to them at negative rates, so governments can increase e.g. social security payments quite easily, and people receiving such payments can continue/increase consumption.
  • Use it to buy something else instead, e.g. face masks to protect against coronavirus
    • Guess what? The money will be in circulation again, the company producing face masks will have to increase its workforce probably

The money will find new paths to circulate! It might take a while, but it will happen.

I don't agree that everyone is without any money. In particular, I'm lucky enough to not have shortage of money.

I do understand that some people are without money. I'm supporting the idea of government borrowing money from bond investors to increase social security payments, even though I won't currently invest to bonds at these ridiculous interest rates. I invest to stocks. But, for every stock I purchase, there is a person selling a stock and probably exiting the stock market out of fear. By buying stocks, I enable other people to get rid of their stocks, and buy bonds instead. So, the money I get will probably be channeled to consumption somehow even though I won't consume all of it immediately.