Chapter 9: As discussed earlier, the United States experienced sustained deflation for most of its history. Then in , the Federal Reserve was established. The notes it issued, which promised to pay the bearer gold on demand, replaced the private bank notes then in circulation, which offered similar guarantees.
But as soon as the Fed came on the scene, prices started rising steadily. Chapter Any dictionary printed before defines inflation purely as an expansion of the money supply. During a recession people wisely stop spending. When they do, demand drops and prices should fall. But sometimes these forces are counterbalanced by an expanding money supply that diminishes the value of currency. When inflation is present in a recession, prices may go up if the printing is fast enough , stay flat, or fall less than they would have with no inflation.
But during a recession prices need to fall in order to rebalance the economy. Recessions should be deflationary. Falling prices will cushion the blow of low employment. Somehow, modern economists see falling prices as a neverending abyss toward demand destruction.
They forget that when prices fall far enough, people start spending again. The process allows unneeded inventories to be worked off, and for prices to fall to a level justified by underlying supply and demand. By keeping prices artificially high, inflation prevents this from happening. Chapter Many of these dollars held by foreigners are typically deposited in American banks, where they can be borrowed by Americans.
Without these savings from China and other nations, everyone in the United States including the government would have a much more difficult time borrowing, and they would likely have to pay much higher interest rates for the privilege. High interest rates and scarce credit would be a lethal combination for our debt-fueled economy.
As current American leaders come into increasing conflict with China, this lifeline needs to be clearly understood, before it is callously cast adrift. Of course, since this relationship cannot last forever, the sooner it ends the less painful it will be, particularly for Americans.
The longer you eat for free, the harder it is to feed yourself when the free food stops coming. Chapter For most of our history the United States exported much more than it imported, resulting in trade surpluses.
In some years, especially toward the middle of the twentieth century, these surpluses were truly massive. We used the excess funds to build more capital at home, and to buy up more capital abroad. In the process we became the richest country on the planet.
But in the late s the trade balance started to change, and by the United States began running persistent trade deficits. Without the built-in demand for dollars made possible by the global economic system, no country could long sustain such imbalances.
Normally, trade deficits tend to be self-correcting. A country with a trade surplus, in that it sells more abroad than it buys, will create an international demand for its currency.
If you want its stuff, you need its currency. The opposite is true with countries with weak trading positions. If no one wants your stuff, no one really needs your currency. This gives a competitive opportunity to countries with weak currencies to start selling some of their products into that market.
When they sell more, demand for their currencies rises. This currency counterweight should keep runaway trade imbalances in check. Chapter History can show us many episodes in which individual governments, out of fi scal desperation, hitched their wagons to worthless currencies. Those experiments always ended in grief, especially for the citizens of the offending country. Naturally, foreigners would refuse to take the worthless currency, and eventually a black market for real money would arise in the country itself.
This is the biggest monetary experiment ever conducted. Chapter Although these loan policies appeared to be a win-win for all involved, in truth, the system created great dangers. The Senate had distorted the credit market by imposing incentives that favored hut loans and education loans over other loans that had no guarantees.
Loans were now being made not because they were necessarily the best use of savings, but because the senators had a political stake in encouraging hut ownership and education.
Chapter With homes worth less than their underlying loans, the temptation to walk away from big payments became intense. This was especially true for those who did not put any fish down at purchase.
Having made no prior commitment of funds, these borrowers had nothing to lose by not paying their mortgages and allowing the bank to foreclose. All it has is what it collects in taxes and what it borrows or prints. And although the numbers look bad, we are still able to sell most of this debt on the open market, primarily to foreigners. Ultimately the U. Either option will lead to painful consequences. Default, which does offer the possibility of a real reckoning and a fresh beginning, is actually the better alternative.
Unfortunately, while inflation is worse, it is also the more politically expedient. Although there are many forms in which this discipline could be delivered, the most likely method is that they simply stop buying our debt. At that point they will refocus their productivity on domestic consumers, who will then fully enjoy the fruits of their labor.
When that day comes, we will have two choices: default or inflation. Both options will violently force American living standards downward through lost purchasing power and higher interest rates. Chapter As more products were produced for local consumers, Sinopian stores suddenly found themselves stocked with goods.
Increased inventories meant that prices could come down. With fewer products coming in from Sinopia, Usonian retailers were left with diminished inventories. The result of skimpier fish chasing fewer products was soaring prices! Inflation is simply a means to transfer wealth from anyone who has savings in a particular currency to anyone who has debt in the same currency.
Feb 10, Mark Geise rated it it was amazing. It is obviously a simple allegory, but I think it does a great job to illustrate things that have happened and continue to happen on a global scale. Due to the economics profession, most people believe that macroeconomics is beyond their understanding.
Much of the economics profession has I believe intentionally obfuscated basic concepts to put them out of reach of the layman. I laughed out loud a few times throughout this book; the Schiffs certainly have good senses of humor. Each of these men has to fish with his hands all day to catch the one fish he needs to survive to the next day. Finally, one of the three men decides to under-consume for a couple days to build a net-type device that he believes would make him a more productive fisherman in the future.
After this under-consuming, he succeeds in building the net and becomes much more productive than the other men on the island. He begins to hoard the fish that he catches at a much faster rate than the other two men, but then agrees to lend the other men fish for a couple days while they build their own nets in return for a payoff of more fish after they build their own nets. The others succeed in building their nets, repay the first man, and then the three are able to specialize because they do not need to spend all day fishing to have enough food to survive.
The rest of the book continues like this, building from the three men to a small society of people fueled by immigrants coming in from abroad. The island becomes a nation called Usonia and adopts a constitution much like the U. The country eventually creates its own currency and then manipulates its currency. I do not want to delve too deep into all of the details and ruin the illuminating parts of the book, but it is an interesting and accessible storyline.
Peter Schiff has been one of the most cogent voices throughout the Great Recession and its aftermath, so his analysis is worth the time to read. This is a quick read and is accessible for virtually any age and any familiarity level, so this could be a good introductory book for economic ideas for a young student.
A complete novice likely will not be able to appreciate some of the jokes, but it would be valuable and entertaining nonetheless. Economic laws do not cease to exist just because we apply them to a large country like the United States or to a complex global economy like the one in which we live.
It is difficult to take what has happened within the United States and apply it to a hypothetical small island society, but I believe that the Schiffs succeeded in doing so with this book. Feb 06, Lynda rated it it was amazing. This is the first book I have read two times back to back. For economics majors who were only exposed to Keynesian economics, this book serves as a wake-up call.
The book's substance and argument are profound despite its 'fun' tone with the wonderful cartoons displayed throughout and its compact size and accessible language; no American should go about their lives without reading it.
When reading the news about how Fed pondering raising interest rates later in since they claim the economi This is the first book I have read two times back to back. When reading the news about how Fed pondering raising interest rates later in since they claim the economic fundamentals are strong, that's when it's time to look deeper into the real meaning behind that confusing message. Unemployment and underemployment are still high in the U.
News about a 'strong economy' ring hollow for many Americans. We get bombarded by propaganda indicating that consumption in the US is vital for economic growth.
The reality is structural changes must be made to the US economy where its citizens start to save more, thereby generating capital for investment, which then will flow to production and create further value in the economy. Instead, we live in 'comfortable' times with low interest rates, low savings rates are low, so where is the incentive to save, and there is no need to produce anything, just buy cheap goods from China , cushioned by the US dollar's reserve status, allowing the government to spend its way out of debt by printing ever more money read: inflation.
Peter Schiff states that " If government is obligated to cure all hardships, then no one is really free in the first place. Take away the freedom to fail and you have obliterated the freedom to succeed. Feb 07, Bill Peacock rated it it was amazing Shelves: culture-politics , economics-business , children-s. Peter and Andrew Schiff wrote this book based on the book by the father Irwin. It combines simple explanations and cartoon-like illustrations on almost every page to lay out clearly the effects of government intervention in the market.
It begins with three men on a Pacific-style island who work all day to catch one fish with their bare hands--just enough to survive. One of them, Abel, finally gets tired of sustenance living and his desire for more leads him to invent a net. Abel has to go withou Peter and Andrew Schiff wrote this book based on the book by the father Irwin. Abel has to go without eating for an entire day without eating to expend the labor needed to build his net.
But his efforts paid off, as he netted two fih in just a matter of hours the next day. From there the island economy takes off and their way of life is changed for ever, However, when the island gets big enough that a government is formed, regulations and intervention in the money supply begin to unravel some of the prosperity brought about bu the market.
Crafty politicians, though, are able to hide their role in the islands problems and continue to get elected and mess things up even more. Sound familiar? My 11 year old son loved the book as i read it to him, but it also helped me see more clearly some of the ways that government today destroys the fruit of the creativity and industry that God has given to each of us. Jan 27, Clinton rated it it was amazing Shelves: economics , favorites , non-fiction.
Although the book only briefly illustrates the philosophy of Austrian Economics, How an Economy Grows and Why It Crashes is a wonderfully concise and entertaining story for those who are unfamiliar with Austrian Economics. The story begins with explaining the nascent of an economy through Crusoe Economics. Economic growth is expanding the use of land and labor through production and savings by restraining present consumption for future consumption in support of more efficient uses by investing in Although the book only briefly illustrates the philosophy of Austrian Economics, How an Economy Grows and Why It Crashes is a wonderfully concise and entertaining story for those who are unfamiliar with Austrian Economics.
Economic growth is expanding the use of land and labor through production and savings by restraining present consumption for future consumption in support of more efficient uses by investing in capital goods. As an economy grows, property is unprotected, and rule of law is established through a republic. However, over time, government has a deep propensity to expand in power and control, and the most dangerous is the manipulation of currency and interest rates through a central bank.
The manipulation of currency and interest rates is the cause of all recessions and depressions. Therefore, as America continues to over consume and over borrow and under produce and under save, it will bring disastrous consequences for posterity.
Nov 14, Arun Mahendrakar rated it it was amazing. The book discourses the subject of Economics in a highly comical way. The 'story', so to say, correlates with real life examples of the growth and fall of the US economy. The authors on the other hand transformed it into a highly entertaining and enlightening topic. The mantra "Productivity, not spending, is the key for economic growth" stand The book discourses the subject of Economics in a highly comical way.
The mantra "Productivity, not spending, is the key for economic growth" stands out for me in the entire book. The author encourages global free-trade and suggests that although some businesses might close due to inefficient practices in producing some goods, the countries involved will nevertheless grow in the long run. The latter part of the book concentrates on the interaction between US and China and shows how China is playing a bigger role than what meets the eye.
Readers also enjoyed. Self Help. About Peter D. Peter D. Peter David Schiff is an American investment broker, author, financial commentator, and was a candidate in the Republican primary for the United States Senate seat from Connecticut. He frequently appears as a guest on CNBC, Fox News, and Bloomberg Television and is often quoted in major financial publications and is a frequent guest on internet radio as well as the host of the former podcast Wall Street Unspun, which is now broadcast on terrestrial radio and known as The Peter Schiff Show.
Schiff is known for his bearish views on the dollar and dollar denominated assets, while bullish on investment in tangible assets as well as foreign stocks and currencies. Books by Peter D. Some of the best stories take a few hundred years to tell. But if you're in the mood for uncanny connections, hoping back and forth through Read more Trivia About How an Economy Gr No trivia or quizzes yet.
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