On recessions-confusing nominal value with real value of money

Recessions are measured by fall in a noisy number called GDP. We saw the 2008 recession and financial crash...and people still talk about it as if it happened yesterday. I lay the case here that there is no such thing as a recession. It is all nominal-the real value of things doesn't change.

Remember that the sole use of money is to exchange goods (Adam Smith). In the 2008 recession, you saw the stock market fall 50%, Luxury goods prices fall 50%, Airplane tickets fall 50%, Home prices fall 50%. In effect if everything falls 50%, nothing has changed. Unless you expect that people who owns loads of stocks and assets will be suddenly starving, they are exchanging one "asset" for another, and if the price of a luxury vacation falls 50%, and your stocks are down 50%, your REAL BUYING POWER has not changed.

In essence-a recession is nothing but an increase in the value of LIQUIDITY, of LIQUID MONEY-but the value of goods really remains the same.

Cases where you are stuck paying interest in money, etc. will of course be awful for people; e.g. mortgages on homes, rents, etc. But as you might imagine, unless bankers and landlords are really stupid, they can and have to reduce the mortgages and rents by 50% if they want to prevent en-masse bankrupcies. This is the reason a Government of central bank saving AIG or loaning money to Citibank is perfectly okay-they are simply helping liquidity.

But the real value of goods doesn't change for real investors/asset holders. They can exchange their assets just like before-if the stock market and a luxury villa both fall 50%, you can exchange your stocks for the luxury villa, nothing has changed in real terms. When measured it money terms, things have changed-but in reality it is all the same for savers. Given this-whether you hold on to a house or a diversified portfolio of stocks, the real value of both, the exchange value, doesn't change even in a recession.

In essence, someone with excess capital has a few options to loan money. Unless you want to loan money only to your friends and family members, you will be forced to loan money to your Government, or the stock market. You don't "know" both these entities-you will never meet the CEO of a company or the Finance Minister of your country-but that's okay, that's the beauty of human trust systems-we are loaning money to people who we don't know at all, will never know, and still we expect them to give it back to use, with interest or a return on investment. We are far more trusting of and dependent on each other than individualists will like you to believe; human colonies are much more interconnected than ants and bees. No ant colony or a bee colony reached a million individuals-but there are so many cities and countries working quite well together who have over a million people.
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The confusion with nominal and real value of money has many economists talking about China being a great saving nation, and the US being a consumption nation. They talk about how the Chinese banks are flush with cash and people are saving over there-whereas the US banks have empty coffers. They do not realize that the savings of a society, the capital of a society, are not just what's out there in the banks-it is the massive infrastructure, fixed capital, together with the circulating capital (goods, unfinished goods) etc and even the houses and furniture of the people. Just as a rich man or family has their savings in their house, their ownership of their factory, their computer etc-so it is for the whole society.

So America's savings are the vast and massive system of highways, the number of factories and other commercial establishments, the cars, the trucks, finished or unfinished, the massive structures of supermarkets together with all the inventory they have, the goods in the making in factories, the massive dams, electricity generation plants, mines, the military equipment, Nasa equipment, equipment in Universities and Research institutions, etc. All these are net savings, real savings of America. It is this what makes America a rich country, and you can see why China or India or Vietnam are not so rich countries when you compare them with these savings of the society as a whole of America (or Germany).

All capital is accumulated by Savings (Adam Smith). The capital in banks in the form of money is a very small portion of overall savings of a society, and is an irrelevant indicator of how much the society as a whole saves. It is because of the confusion of nominal and real values of money. The real savings of society are easy to see in a rich man's house or workplace vs. a poor man's house or workplace, without knowing their bank balance-and so they are for a rich country vs. a poor country.

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The true value of things is measured by Labor. It is the real cost, the only cost which decides the value of anything. If something is twice as hard to procure, it's value is double. Obviously one must account for the hardship in producing/obtaining something spread out over a long period of time. A doctor charges $100 per hour, and a large part of it is because he has to be compensated for all those years invested in getting a medical degree (both time and money).

Money is just a convenient value to measure things. But the real value of something is always decided by labor-the quantity of work and skill necessary to produce it. If we could just realize this-so much of the confusion between nominal and real value of money would go away.
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See also: The myth that central bank can create jobs

Sanjay