The last couple of weeks the media have been on a glorified dance of doom and gloom about the economy.  This is a message that catches attention and so is step number one to a good story which leads to readership and associated revenue (whatever the revenue model is).

Some will argue the media goal is to share information objectively to keep the public informed, and while in some cases that might be true I believe profit is still an underlying objective (cynical me).

Economic Downturn Impacts

Investing to drive economic growth comes in a variety of flavors. Simplistically there are two classifications for investments:

– low risk investments which typically have a define fixed rate of return (fixed income) and often are “guaranteed”.  These are typically things like Corporate Bonds, Government Bonds, Guaranteed Investment Certificates, Bank Accounts.

– higher risk which usually are intended to achieve a greater return could result in not only no return but even loss of the original investment.  The most common of these is equity type investment and can include stocks, funds, options, commodities.

High Risk Investments and the Economy

At the summary level, monetary investment is a key way to drive economic growth.   Money is invested to enable more production (whether a physical product or service).

The increased production leads to increased profit which is returned to the investor.  Basically this is a key goal of investing.

As time goes by, if revenue and profit in the target investment continue, the return on investment continues.

So what happens when money is invested and production does not continue to increase or even worse declines?

Where does the money go?

Usually the low risk investments are not effected, it would require a long, deep and traumatic downturn like the world wide depression of the 1930’s to impact them.  This is not the case for the higher risk types.

For equity investments, when the economy climbs the monetary value of the investment rises and when the return drys up the monetary value of the investments drops.   So when the economy is in a downturn, profits drop or even worse turn to loses and so does the investment value.

Since the increase in the equity of the investment is based on demand the higher value just appeared – that is more money was not printed nor did the investment itself change so the increased amount of money someone would pay for your investment is just perceived worth.

The same is applies for the underlying income supporting the investment (for example the profit the company you invested in dried up).  The profit just disappeared, but the amount of money in the economy did not really change.

So in the economic downturn the monetary value of the investment disappears, but since it never really existed in the first place – did it really?

The answer to where does the money go is simply, it never existed in the first place so it did not need to go anywhere.

Disclaimer – This is a very complex topic for which only some basic concepts are commented on here, in future posts I will continue to build and explore this topic.