How the economy works? Is it like the water cycle?

Factual Questions
1

Please, PLEASE don’t make fun of me. I know. This is a weird pair of things to ask.
It’s stupid, even.

But I’ve really been thinking about these two things in tandem a lot lately.
Isn’t all the water that was ever on Earth STILL here, existing in some form? That is to say, the water cycle just moves it all around? So it’s either frozen someplace, in a river/groundwater/etc or being cycled through the rain cycle/human water use? Am I ballparking the reality…?
I asked my college bio prof what the concept of wasting water was all about. My understanding was the more you dismiss treated water as grey water (ie letting clean water run down the drain unused) the more energy required to re-treat and re-service said water for human consumption. Something akin to washing clean clothes for no reason.
Her rebuttal was that water goes down the drain and that’s it. It’s gone. Forever. Used. Buh-bye.
She was an adjunct, so bless her heart. I guess she thinks it goes down to hell or something.
Wasting clean water means you’re unnecessarily treating tons of unused, clean water, wasting energy. That’s the whole “wasting water” thing, correct?

So—ok. Doesn’t money work the same way? Like water, it exists either aqueously, vaporously, or as ice. (liquidity, credit, savings, I guess).
So what’s the problem with the economy? All that same money exists from back when the economy was good, it’s just being shuffled around in a different way, so how can the economy just “go bad?”
I think about it like a drought. The missing water is SOMEPLACE, just not where you need it. Drought here, monsoon there.
Is this logic wrong?
Likewise, does the economy tank because there’s an expenditure drought? Is it because money is being hoarded by the 1%…? Is a bad economy the result of stock-piled moneys are not getting moved around and distributed via commerce?

Since my analogy is already bizarre, let’s get weirder:

There are more people currently alive right now than any time in history. If we are a certain percentage make-up of water, does that mean with each extra living person there is less physical water on the planet to go around?
By the same token, I found an article outlining the largest bank heist bounties. There are two relatively unknown MASSIVE robberies in Iraq that yielded in one case, I believe, some many HUNDREDS OF MILLIONS and in another case more than a BILLION dollars in US currency. Untold hundreds of millions of dollars of this money is as of yet unaccounted for.

I know physical cash doesn’t exactly represent the reality of “money” that exists, but there is some kind of agreed upon ratio of how much US cash is printed in congruous to (whatever) value standard.
But it makes me wonder: if there’s unknown and untold billions of dollars of US money in random banks, like in Baghdad, isn’t that just less money Americans have to cycle about via commerce? Does the ever-growing populace also mean we need more capital per human, making the over-all distribution average lower?
Be nice to me. I really am this stupid.

2

I know a lot of people who are buying stock piles of gold because of the nature of the economy. Try as I might, I cannot get my brain around the concept. If the monetary system collapses in a way that we’ll need physical gold for currency, won’t gold not matter anymore, either?

Gold is so weird. You can’t do ANYTHING with it. It simply looks pretty. If the global economy collapses, why would gold mean anything? You can’t eat it. It will not help you survive in any physiological manner. It just LOOKS PRETTY.
Something seems bewilderingly primitive about this…

3

This is a monstrously huge question. Best to get a college macro book if you want to know in any depth. I have a small library of them myself, and I can give a rundown on strengths and weaknesses of various texts.

But I guess I can hazard an attempt at a short answer.

That’s not quite accurate for a couple reasons.

First, money can be destroyed. What “money” is in its broadest forms, basically, is liquid assets that people believe they can totally rely on to buy stuff when they need it. Sometimes people rely on things that aren’t safe. In a crunch like we had in 2008, the illusion of safety vanished and so the supply of “money” collapsed, in a way. Money can literally vanish in that way.

Second, it’s not about missing money being SOMEPLACE. I mean, there’s a helluva lot of money sitting on the computer ledgers of the Federal Reserve system. That money is right there, in a place, existing as excess reserves. But so what? What we care about in the economy is not just money, but money moving. It’s not the number of banknotes that matter, or even bank reserves, or even broad-based debt-money. What we care about is how much stuff that money actually buys from day to day. The economy isn’t about money just existing. The economy is about circulation.

The problem that we have, written short, is that money has stopped moving as fast as it was.

No need to blame only the 1%.

It’s pretty much everyone. Everyone has stopped moving their money so quickly. We did this collectively. You can call this an expenditure drought, sure. We’re trying to save collectively and this is impossible.

Think about this way: If we all had $100 in our wallets, and suddenly all of us, collectively, became scared about the future and wanted to hold $200 dollars. How would we do that? By increasing our income or decreasing out outgo. Hard to increase income on short notice, so we decrease our outgo and we try to save.

Micro speaking, an individual can do this. This is possible. Macro speaking, looking at the big picture, it is utterly impossible. Can’t be done. Why? Because every single dollar of income is equivalent to a dollar of outgo. I can’t spend a dollar of outgo without someone else receiving a dollar of income. I can’t receive my own income without someone willingly giving up their money as outgo to give to me. As far as the whole economy goes, income is outgo, period.

So what happens when we all try to have 200 dollars in our wallets instead of 100? We save money, by trying to have less outgo. But! That means someone else is losing income. And that person? That person is already trying to have 200 dollars in their wallet. And they’re losing income! So that person also saves instead of spending, and they try to save even more to make up for the income they’ve lost. And therefore yet another person loses income. A world of people trying to save money is a world of people losing their incomes. There is no other choice. Less outgo is less income, always.

If prices were fully flexible, that wouldn’t be a problem. Eventually, prices would be really low, and we’d all be satisfied with 100 dollars in our wallets because those 100 dollars would buy twice as much stuff. But plenty of things aren’t flexible. The mortgage payment isn’t so flexible. Nor is credit card debt. Nor are wages in general, for that matter.

When money stops circulating, we have problems. So the trick to the economy right now is as simple as getting money moving more quickly again. That’s pretty much it, as far as our short-term problems.

4

Wealth can be created and destroyed. I can buy ground beef for 2 dollars a pound and make hamburgers that sell for eight dollars a pound and have thus created six dollars of wealth for every pound of hamburgers I sell. However, if I burn the hamburgers and can not sell them then I have destroyed 2 dollars of wealth for every pound of hamburgers I can not sell.
Money is just a way to measure wealth, it is not wealth. Look at Zimbabwe where everyone had hundreds of millions of dollars and wealth was being destroyed at a incredible rate.
Money can impact wealth because of the money illusion in which people think of wealth and wages in terms of nominal value and not real value. It is up to the central bank, in the US the Federal Reserve, to keep the supply of money steady of slightly increasing in order to insure that the money keeps its value at a predictable level so people who are trying to create value can have confidence what their return on investment can be.
There are two prevailing theories about how the current recession and most previous recessions occurred. One theory is that the central bank stopped making enough money to supply the economy with the all that it needed and the economy had to readjust to the new level of money and since wages are sticky the only way to do this was unemployment. This unemployment then causes other bad things to happen as demand is lowered and the economy now has to adjust to lowered demand.
The other theory is that wealth was destroyed as the real estate bubble collapsed. Developers were buying billions of dollars worth of land and putting billions of dollars worth of houses on the land. Then the market for housing crashed and the houses and land were worth much less than the developers paid for them destroying all of the wealth that was allocated to buying and building them. This loss of wealth destabilized the banks which had lent the money to the developers and made it harder for other businessmen to have access to the capital they need to create wealth. The economy had had to adjust to losing all of the wealth that was put into housing and is trying to find another way to create value.

5

One common myth is that it is a zero-sums game, i.e. if one person becomes richer, it must mean another person becomes poorer. This is not the case.

As stated by puddleglum, wealth can be created, and not at the expense of someone else.

Obligatory Wiki links:

Growth Economics
Wealth
Multiplier Effect

6

I need to add that you’re also thinking of water in the wrong way. It’s certainly true that the sum total of water molecules on the planet doesn’t change now. That’s true but totally irrelevant to our lives. Our lives depend on the easy availability of clean, fresh water. Water we take out of ground (lakes, rivers, aquifers) must be expensively treated. Once it is used, the vast majority of it escapes from our hands and is added sooner or later to the oceans, where it is almost useless to us. In that sense used water is gone, wasted. And we are wasting water so fast that many easily available sources of fresh water will be used up in a comparatively short time.

The easy availability of money is equally much a factor in the health of the economy. When the total amount of wealth is increasing on a nice steady predictable basis, money is more available for everyone. People can make more money and spend more money and get more usefulness out of that money. If the economy tanks, then wealth disappears. It’s like a huge reservoir drying up. It doesn’t matter what other water exists: the lack of that available water is a crisis. That’s what happened to us.

Oh, and there is no connection between physical currency and money or wealth. None. No ratio exists. Money can be all electronic and will soon be almost all electronic. The lack of currency will mean nothing then.

7

So exactly what is cash a surrogate for…? I mean, it’s not gold anymore. What does it represent? If one were so inclined to convert their cash into the tangible asset it theoretically represents, what would it be?

Or is there even a thing anymore…?

8

I’m not sure this is factually correct or especially useful as an analogy to economics.

By no means all water must be expensively treated. And a vitally important part of the hydrologic cycle is the evaporation of water from the oceans, some of which then falls as rain (or snow) over land, refreshing lakes, rivers and aquifers with water that is anything but useless.

9

Since the OP talks about water and money, perhaps it’s not too far off-topic to discuss more about water too.

The sum total of water molecules on the planet does too change. Water can be created and destroyed all the time, in real natural life, not just in the laboratory.

[biology lesson]
Plants soak up water and carbon dioxide and sunlight. They dismantle the H[sub]2[/sub]O and CO[sub]2[/sub] molecules, and use them + energy from sunlight to build all the big organic and hydrocarbon and other molecules that plants are made of. When they are done with that, there is some excess oxygen left over, which they release into the air.

Animals do the opposite. They eat those plants (or they eat other animals that ate those plants), and break down those big organic molecules. Some of this, they use to build new molecules of their own. Some of this, they use just for the energy. In breaking down those big organic molecules, water and carbon dioxide are the by-products. But also, in the reverse of what plants do, this requires more oxygen than those big molecules already have. So animals have to breathe oxygen.

Combustion (fire) does basically the same as metabolism but much more dramatically – breaks down (oxidizes) big organic molecules, consuming oxygen, releasing water vapor and carbon dioxide.
[/biology lesson]

BTW, I lived in a rural area for some years, where the water came from a well. Straight out of a hole in the ground, it was perfectly good clean water that didn’t need any processing to make it drinkable.

10

Some water in some places in not expensively treated. In the U.S. most water is. The bulk of the population that lives in metropolitan areas, which is the bulk of the population, does not get untreated water from the ground.

We use in the U.S. far more water than returns to us through the hydrologic cycle. If you haven’t heard the warnings about lowering the great aquifers of the country you haven’t been paying attention.

I’m pretty sure that similar conditions exist in cities all over the world. There simply is not enough good clean water to support a world in which everybody lives a modern western lifestyle. Nor is it true that the total amount of water varies by any significant degree. It probably hasn’t since the end of the bombardment of the earth comets early on. Our current cycle is strictly one way: fresh water disappears into the oceans faster than easily tappable sources are discovered.

The coming crisis of the 21st century is not the lack of oil, which is a trifling, easy-to-solve problem by comparison. The big crisis will be the lack of fresh water.

11

It’s a miracle!

12

Money represents the agreed-upon value of the issuing government. There isn’t a tangible asset and doesn’t need to be. Money is an opinion. It always has been, of course, no matter what goldbugs think.

13

Seems unlikely. Desalination works, and isn’t even that expensive–it would cost about $1250 a person per year to replace all current water use in the US (~2.5M l/y). That’s not trivially cheap, but it’s a worst-case scenario (obviously, the hydrologic cycle isn’t going to stop), and is based on current desalination prices, and assumes we make no effort at all at further conservation. Also, the cost won’t simply be a bill at the end of the month, but instead will show up as higher prices for meat and such, making it easier to cut back on those things most sensitive to water prices. It’s not a cost worth starting a war over, at any rate.

On the other hand, there’s simply no replacement for oil for some applications–like airplanes. We might convert to electric cars wholesale, but there’s just no replacement for good old kerosene–biofuels are the best you can do and there’s not enough land for that.

14

This is a different position from your original statement that water we take from the ground “must be expensively treated.” And I note that New York city is among the exceptions to places where water requires such treatment.

Again, a position rather different from the contention that what drains to the oceans becomes almost useless.

In fact, we receive from the oceans precipitation that’s many times what we use. We don’t make efficient use of it, in large part because there has historically been little need to. Before the predicted worldwide water crisis comes to pass, it’s likely that attention will be given to increasing this efficiency.

15

Nothing. Anything. Cash doesn’t need to be a surrogate for one thing in particular, and so it isn’t anymore.

Money today represents what you can buy with it. Anything you can buy with it. It’s a general claim on resources, a game piece, a token that says GIVE ME STUFF, and the amount of stuff you can buy with it is not constant, though it is most useful when prices stay fairly consistent. There’s no purpose for money to represent One True Good, when it serves us to compare every good and service on the market.

16

I totally disagree. However, there is no point in continuing an argument that can’t be settled until 2112.

17

Yes, it certainly is true that we use water incredibly inefficiently. However, the vast majority of that water use is for agriculture and industry. The water we dump onto dry fields to grow corn and wheat isn’t expensively treated. In fact, it’s very cheap. And that’s why it is used wastefully.

Yes, we’re depleting aquifiers more quickly than they fill up. This means that in the future we won’t be able to dump nearly as much cheap water onto crops, and so we’ll be obligated to use more water efficient methods of agriculture. Probably millions of acres of irrigated semi-desert agricultural land will simply revert back to wilderness, and the mountains of cheap corn and wheat and soybeans created by cheap water and cheap fertillizer and cheap transporation will be a thing of the past.

The alternative would be to stop wasting so much water NOW. And the result would be…the same thing, except now instead of 40 years from now. It would make more sense to conserve those aquifers instead of turning that fossil water into commodity crops that are so abundant they’re almost worthless, but I guess we’ll have to wait for the resource to actually be scarce before we’ll treat it as scarce.

In a perverse way, the sheer wastefulness of our current water use is a reason for optimism. If we were stretching every drop of water and still were having trouble, then we’d be right to worry. But we’re flushing water down the sewer and all we have to do is stop.

18

I have a degree in civil engineering and an MBA so I’m actually qualified to talk about both economics and water treatment.:cool:

Sort of. One thing that the economy does that the water cycle can’t is incur “debt”. Debt is basically an agreement to receive some asset (usually money) now in exchange for a promise to return it at a later date, plus a fee (interest). Usually people will incur debt so they can use the cash to create some wealth producing asset - get an education, start a business, buy a mortgage. Sort of like damming a reservoir so that you can give people drinking water over time, with the anticipation that the rain will return the water to the reservoir.

But where water for all intents and purposes isn’t destroyed, wealth can be. Homes can burn to the ground. Businesses can fail. Often the loans can’t get repaid because the revenue the lendee was depending on didn’t materialize. If enough people can’t or won’t repay their loans, the bank can go out of business or simply stop lending. Sort of like a when there is a drought and the reservoir doesn’t get refilled.

19

What the heck is money, anyway? Money is a particular type of good that can be used as a medium of exchange, a store of value, and a unit of account. Back in olden times, there was barter. Your chickens for my baskets. Except what if I don’t want chickens, I want clay pots. So then we have to go to the potter and work out a three-way deal.

Except, what if, even though I don’t want your chickens, agree to take them anyway. And I do that because I know that I can take your chickens to any other farmer in the village and trade them for what I really want. And what if everyone decides to just take chickens in exchange for everything. You want baskets, you give people chickens. They take the chickens and trade them for clay pots. The potter doesn’t want chickens, but he can take the chickens to the blacksmith and trade them for metalwork. The blacksmith doesn’t want chickens either, but he can take them to the local prostitute and trade them for sexual favors. And so on.

And so we have now established chickens as a form of money. This type of money is called a key good. But note that chickens are a lousy key good and a lousy form of money. They die, they need to be fed, some are good egg layers and some aren’t, some are small and scrawny and some are healthy, they run away, they’re hard to carry around. Other types of goods make better key goods. And these types of goods arise naturally in different places. You’ve probably heard of how the Aztecs used cacao beans as money. Or prisoners use cigarettes. Whiskey, cowrie shells, cloth, and so on have been used as money. And what makes these goods useful as money is that they’re durable, they’re portable, storable, identical, and dense in value.

And it turns out that little bits of certain rare metals were very useful as key goods. A tiny lump of gold or silver is pretty valuable, it lasts forever, it can be cut up into smaller bits, it’s hard to fake. And so gold and silver and copper were used as money all over the world. You could load up a caravan with gold, travel hundreds of miles, and when you got to your destination you’d pretty easily find someone willing to trade your metal lumps for other goods.

Of course, this sort of thing lead to more elaborate systems. Governments would weigh out little metal ingots, and these became coins. But the coins have value only because the metal in the coin had value, it could be melted down and made into anything.

But metal coins are a problem. What if you could put your metal coins in a safe place and get a reciept, and if you wanted them back, just go to this place–we’ll call it a “bank”, and show them the reciept and they give you back the same weight of precious metal? It doesn’t matter if it’s the exact same gold or silver you had before. And what if you could, if you wanted a chicken, instead of going to the bank and getting your gold and trading it for the chicken, you could just give the chicken-seller a gold reciept, and he could go and get the gold?

And now you have paper money. Of course, pretty soon governments realize the power of this, and instead of banks issuing receipts we have government receipts for gold. And so we have paper money on what is called the “gold standard”, because the paper money can be taken to a bank or government office and exchanged for gold. Except when there’s a war or economic turmoil, sometimes the government decides that you’re going to have to wait for your gold. Gold yesterday, gold tomorrow, but never gold today. So you have a note that is theoretically exchangable for gold, but in actuallity is just a coupon promising that maybe someday you might get gold for it.

And eventually, governments realize that they don’t actually have to ever provide gold. And so we have fiat money. This is money that is not tied to any commodity and represents nothing more than a government’s promise that it will take that fiat money as payment for your taxes.

This money can be used as a medium of exchange–you can trade it for goods and services, and people accept in as payment for goods and services because they can trade it for the goods and services they themselves want. It can be used as a store of value–you can accumulate dollars this year, and spend them later. It can be used as a unit of account–you can use it as a way of comparing the value of different goods and services over time. And of course, you don’t even need a piece of paper, most money today isn’t in the form of paper money but as notes in accounting books, or computers.

So modern money doesn’t represent ANYTHING. It’s just an idea and it works as money because it fulfills the functions that need to be fulfilled for something to work as money. If you want to convert your money into a tangible good, just take a look at the goods and services offered for sale, and choose the ones you want. You can convert your fiat dollars to gold or silver or cowrie shells or cacao beans or whiskey or chickens or star wars figurines. The exact amount of the good you can get for your money depends on the negotiation between you and the seller, But this would be the case if you were using gold coins as money, the gold coin doesn’t have a fixed value, it’s only worth what you can trade it for, which would depend on thousands of factors.

20

cool. I’m learning.
soon I’ll be able to sew leather elbows onto my tweed jacket.

SOON.