Why the Economy Collapsed - A Tale of Fish, Dollars and Economics

This book is a very vivid account of the origins and proposed solutions to the economic crisis that arose from economics and is now underway. I have benefited a lot from it. The following is an excerpt from the book, as a reading note for reference. Chapter 1: A Good Idea is Born - The Surplus Generated, which is the Origin of a Healthy Economy 1) In economic terminology, capital refers to a device, the construction and use of which has no significance in itself. The point is to utilize the construction and make something else that is needed. 2) Abel's action demonstrates a basic economic principle that improves people's standard of living: underconsumption and risk-taking. 3) Real surplus is the lifeblood of a healthy economy. Chapter 2, Sharing the Wealth with Others Abel's choices: 1) Shoot more fish for himself, he loses nothing 2) Stop working and consume the fish 3) Rent out the nets and collect the rent. Half a fish a day, and on and on. The risk is that when Baker and Charlie make their own nets, they can stop renting them.4) Lend two fish to Baker and Charlie, but charge 100% interest.5) Combine the four options above. When all three have nets, there are more fish on the island. "Hunger, the economic term for which is "demand," is only a necessary but sufficient condition to stimulate economic growth. So, even if there is demand, the economy may not grow. Consumption growth and economic growth are both growth, but it is possible that the economy does not grow and consumption grows, but the overall fish on the island grows. Most economists believe that giving more money to the people will increase demand, but this does not change the real demand, it only causes people to spend more money on products that have already been produced. Chapter 3, Multiple Uses of Credit Cards Governments have always interfered with the savings approach to credit. Governments do not have savings, only individuals do. Social savings can be in the form of business loans, consumer loans and emergency loans. Chapter 4: How the Economy Really Works 1) Three men build a fish trap to get more fish, and with the fish they solve the problem of starvation, Charlie builds a surfboard, Abel starts a clothing company, and Baker designs a wheelbarrow and a canoe. 2) Saving is not only a means of increasing one's spending power, but it is also a buffer against unforeseen factors that can affect the economy. 3) To many economists, saving is a liability, and Keynesians argue that saving is detrimental to development because the practice prevents the circulation of money and reduces consumption. But we have a modern society in which money circulates beyond national borders, and money printing machines have the infinite magic to deceive the American public into not recognizing a simple fact-we cannot consume more than we produce, and we cannot borrow more than we save-at least not in the long run. 4) Consumption is simply the yardstick we use to measure production, because everything that is produced is ultimately consumed. If there were no production, there would be nothing to consume. Therefore, production has value. Chapter 5, After the Fish is Designated as Money 1) Efficiency and Deflation As production becomes more efficient (savings, innovation, and investment results) the price of a canoe goes down and more customers can enjoy the benefits of the canoe. The United States has been deflationary in the 19th century, due to technological innovations that led to the price of products falling while people went to be able to use more and more of what they had. In addition, such as Ford's brought down the cost of automobiles. Modern economists incorrectly believe that: consumption promotes economic growth, and thus as soon as deflation occurs, people are reluctant to consume (so that prices will continue to fall), whereas if people continue to consume, the effects of falling prices will diminish, which is absurd.2) Employment The capital is optimized with the, the greater the value of labor. For example, for the same amount of labor, your resistance to driving a bulldozer is much greater than your kang with a shovel. Therefore, it is best to work with the optimal resources available. Chapter 6, Why Savings 1) Banks came into existence when everyone had more and more fish, banks came into existence, they helped people store fish and loaned money to people who needed fish urgently for investment, the interest rate on deposits and loans was the key to making money for the banks 2) There were some projects that were too risky and banks were reluctant to invest in them. A new co-investment organization, the Fund, emerged. 3) Not only did the government disrupt the credit market by making laws that favored certain types of loans and people, but it also affected the flow of credit in another, more fundamental way, by manipulating interest rates. For nearly 100 years, the Federal Reserve (theoretically a privately owned bank, but in reality an extension of the U.S. Treasury) has set the benchmark interest rate on which the entire interest rate structure in the U.S. is built. There are two flaws in the Fed's mechanism-1) it replaces popular decision-making with a small group of people who have no stake in it, and 2) the Fed's decisions are always based on political considerations rather than economic factors. Chapter 7: Infrastructure and Trade 1) Infrastructure investment can have a huge impact on the economy. However, such investments are only effective if the benefits outweigh the expenditures. Currently, many economists believe that infrastructure investment is not an investment that is likely to bring long-term gains, but rather a direct means of increasing employment and boosting the economy. Chapter 8: Thus was born a **** and State 1) In order to safeguard the interests of its citizens, the **** and State was born. The United States was founded on strict limits on the power of government, but sadly, few Americans recognized this. Chapter 9: The Functions of Government Begin to Change 1) To please the people more money was needed to support programs, but there wasn't as much in kind, and governments on fishing islands began printing fish coupons in lieu of physical fish.2) Deflation persisted for most of U.S. history.In 1913 the Federal Reserve was created. The Fed issued paper money with the promise that holders of the paper money could exchange it for gold at any time. Thus replacing the privately owned bank-issued currency in circulation at the time. Since, the Federal Reserve came onto the stage of history, prices in the United States began to rise continuously. The original purpose of the Federal Reserve was to create a "flexible money supply". It was envisioned that the Fed could expand or tighten the flow of money depending on economic activity. Chapter 10, Shrinking Fish Like Money 1) Economists have been very successful in confusing the causes of inflation, such that everyone thinks that rising prices are inflation. But rising prices are only the result of inflation. Through inflation is actually an increase in the money supply. Chapter 11: The Nakashima Empire: A Lifeline from Afar 1) For years, economists have been wrong about the U.S.-China relationship. In fact it wasn't reciprocal, the U.S. took advantage, they didn't have to produce to get goods, they didn't have to save to get loans. As for the Chinese, they work hard but can't consume what they produce, they save hard Qiu can't get a loan. 2) The low interest rates in the US are largely caused by high savings abroad because its the world's currency. Keep in mind that to get a loan, you have to save first. So far, the trump card in the hands of the U.S. has been the status of the U.S. dollar. As the world's official reserve currency, the dollar is the settlement currency for all international trade. Chapter 12: How Services Rise 1) If a country is in a trade surplus, that is to say going to export more than it imports, it creates an international demand for its currency. If you want that country's products, you need that country's currency. So, a strong trade position will keep a country's currency strong. However, once a country's currency appreciates, the products of the changing country will increase in price accordingly. This gives countries in a weak trading position access to that country. The more they sell their goods, the greater the demand for their currency in the international market. This currency balancing force would bring the runaway trade imbalance under control. However, the reserve currency status of the U.S. dollar and the Chinese government's decision to keep the renminbi pegged to the U.S. dollar undermined this mechanism, the renminbi was in an underpriced strategy, and trade was no longer balanced. Chapter 13, The Breakdown of the "Fish Standard" 1) Unable to rely on his people to suffer to pay off his debts, he decided to let foreigners take the losses. He closed the bank exchange window to foreign savers. From then on, the value of the Fish Federal Savings Note no longer depended on the real fish it was exchanged for. Its value on the international market was determined only by the value of the commodity the other party wanted to exchange. In fact, the Fish Federal Savings Certificates had value only if the USSR retained its status as an economic and military power. 2) For the USSR, the closure of the bank exchange window allowed them to survive the crisis without losing power. 3) But now we are in a "world of mirrors", where no country has issued a real currency in the last 40 years. In the last 40 years, no country has issued a real currency. This is the biggest monetary experiment in history. No one knows how it will end or what the results will be, but it is certain that it will end one day. CHAPTER 14: HOW HOUSE PRICES RISE 1) Although mortgages do not provide for the productive capacity of the island and its borrowers, they are profitable for the financial institutions. Therefore, the bank set a down payment. 2) To facilitate the loan process, two organizations were set up - Shanti Mae and Shanti Limei - to receive loans from the bank for the purchase of shanties. The buyer could then make direct payments to these two organizations. The banks could take back the principal and re-lend it to someone else.3) While these lending policies seemed like a win-win situation for all parties involved, in reality, there was a greater risk to the system.4) Since the "two sheds" wanted to offer investors a rate of return that was greater than the savings rate of the Fish Federation, the Nakashima empire invested a portion of its trade surplus in the "two sheds". The Nakashima Empire invests a portion of its trade surplus in the "Two Sheds". The inflow of investment from the Nakashima Empire greatly increases the supply of credit, further depressing the interest rate on loans and making large loans available to more people. Chapter 15: Soon, Soon, the Housing Market Is Going to Crash 1) After the real estate bust, the Nakajima Empire provided loans again. Mesonia is trying to get people to think its still rich enough to continue spending on its own, then the economy can grow again. Therefore, the prerequisite for the U.S. to recover is for U.S. housing prices to rise.2) American speculators can make thousands of dollars by exchanging a small amount for a large amount with no down payment. The hand has a profit at the same time also increased consumption of other products. But this is short-lived. The U.S. government, in the face of the crisis, has been encouraging consumers to spend like they did before the housing market collapsed, but where is the money coming from? How can consumers have that much money if unemployment is rising and incomes and housing prices are falling? The government doesn't have that much money either; all the government has is taxes, loans and printing money. (Chapter 16, Things Getting So Bad 1) Just like the Senate funded shack loans, these are by no means the most efficient way to utilize the island's resources. In fact, none of these could expand capacity. What people don't see is that because of the scarce labor and resources you are spending on activities that the Senate thinks are more important, it results in a lot of other jobs not being well resourced. The market has the ability and power to figure out how these resources are utilized and allocated.2) The stimulus packages of the Bush Jr. and Obama administrations slowed down the process by creating even more massive debt. Now the U.S. government dodged a punch, but the U.S. budget deficit grows year after year and the Social Security and Medicare systems are on the verge of collapse (partly caused by the retirement of the Baby Boomers), so the punches will be even more powerful and more frequent. Chapter 17: No Fish, No Wave 1) The Nakashima Empire begins to stimulate domestic demand, and it buys in-kind with fish coupons. 2) Mesonia plans to use an even bigger stimulus program. 3) When will the experiment end? And what will be the result? But the growth of the manufacturing industry as a support for the product was necessary. Historically there have been many governments that have not been able to make ends meet, how do you increase revenue? Open up sources of revenue and cut down on expenses. That is, increasing taxes will cause many businesses to go bankrupt, and if raised to a certain point riots will occur. On the other hand, reducing expenditures will likewise lose some people. There is also the debt repayment, and the use of inflation to dilute the number of repayments.