The money doesn't disappear. It just didn't exist in the first place. People will still have money, wealth will still exist and people will still have something to give for tangible and useful services.

It's like when people say that file-sharing is losing £x million for the economy. It's not like that money doesn't exist anymore it just goes somewhere else. Relative wealth of individuals is more important to an operational society than the actual figures involved.

I don't think it's like how a company's revenue drops. Money does really exist; it's backed by future promises of labour and/or resources and/or things you build.

The money actually does disappear. That's how our debt-based currency system works. Money is created through loans (from the central bank), which are granted because you agree to pay it back through your own industry--that is future labour you do and/or resources you extract and/or things you build. If a loan goes bad, that money is destroyed.

Because loans require interest, this pushes the economy to continue to expand through increased industry. Eventually it cannot expand any further, and the only way to move forward is to have a wave of bankruptcies. The survivors buy assets on the cheap which then inflate in value after the economy recovers. That helps them pay back their own interest.

This cycle creates a bit of punctuated equilibrium where the strong (at the point of economic collapse) survive, and the weak die off. This creates room for a new phase of growth and innovation.

The trick for you is to be in a strong position at the front of a recession rather than a weak position so you can make it through to the new phase of growth. This is also why people say it's good to start / build a business in a recession.

However, the more important trick is the banks must keep the creation of debt to within the bounds the economy can withstand. After the Great Depression a series of regulations were put in place to keep things under control, but since Reagan, the banks have been increasingly deregulated. This led to such things as the real estate bubble in the 80's, the Savings and Loan crisis, the Dot-Com bubble, and the Subprime Mortgage Crisis we're in right now.

If this is abstract, think of it this way. The worst thing a government can do is create so much debt that they have sold off their entire population's labour for decades to foreign creditors. That sounds a bit menacing! ;)

You are right, but it is more complicated than that. About $13 trillion has disappeared/ been destroyed through mal-investment and the collapse of the credit bubble. Those dollars are GONE. The problem is that large parts of our economy were geared around those resources/cash flows/projected revenue streams, so the rebalancing to the "new normal" is painful. (Think autos, finance, consumer electronics, malls, housing, retirement savings).

"About $13 trillion has disappeared/ been destroyed through mal-investment and the collapse of the credit bubble."

But how much of that money actually existed in the first place, and how much was just someone's imagination running away with them?

I agree that people should not talk about "money" disappearing. But liquidity definitely has disappeared; a lot of people who thought they had liquidity turned out to not have it, and have curtailed purchases as a result.

That has real economic effects; it's not just some paper game.