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What should everyone know about economics? Which websites or books do you suggest for someone dipping their toe into the subject?
I think it's about time I learned a little more about how the economy works. I don't want to become an expert, just get a rudimentary understanding. What, in layman's terms and bite-sized bullet points, are the absolute must-know things about tax codes, interest rates, inflation, national debts, bubbles and bursting and all that?
Which websites or books do you suggest for someone dipping their toe into the subject?
Which websites or books do you suggest for someone dipping their toe into the subject?
societyunderstand
Inflation
Back in the 90s I could buy a chocolate, crisps and drink for £1. Also £40 would fill two shopping trolleys, and now it can't even fill half. The reason why your $ cannot buy as much things, as it once did, is because of inflation. Inflation is a value of how much currency is printed in the country. If everyone was a millionaire, diamonds would cost a billion dollars - inflation would skyrocket with it. Consequently, the more money gets printed, the more worthless it becomes.
*Before any smart aleck starts commenting to correct the above graph, money would be immensely valuable in the left red section and not worthless, but it would practically be worthless as only few people would have it. (Money would be as good as dead.) Both lines are correct.
You might be wondering why a government would allow their country to get more "worthless". We'll get to that later.
Did you know that products have actually gotten cheaper over the past couple of years and decades? If you was to match today's prices with the level of inflation in the 90s, things would be way more expensive. (It's the services that have got more expensive, but nobody cares about that.)
Exchange Rates
The rate of inflation is calculated by the government annually, by taking prices of hundreds of products and services, including a loaf of bread, minute phone call and the price for a taxi and haircut. With that said, exchange rates can be easily calculated, by comparing how many stuff can be purchased locally with £1 than it can with $1, and then calculating a ratio from there. The exchange rate is most likely affected by the stock market, but I'm not really into markets, so I don't know and would have to ask.
Circulation and Fractional Reserve Banking
Did you know that when banks lend you money, they don't actually give you any of their money. None of the money you use to deposit in your bank accounts is lended for people's mortgages and loans, contrary to mass belief. Instead the money is created from thin air. The person just types numbers into a computer, and the money is created from thin air. Yes I'm being serious. Let's call this money virtual money
Nowadays the governments regulates this, and bank accounts in the UK legally must have ~2.5% of the money in the vault, that they actually lend.
So banks borrow you money, that they don't have. Alex has £50. Kelsey has £25. Taylor has £25. If there is a total £100 in the economy, and a bank is borrowed £20 of magic virtual money, to someone, how are they going to find the money? Good question. Of course any of the three people could get £20 off someone else, but there's going to be a point where there isn't enough money in the economy to do so. What if the bank borrows all three people £20? That's only adds up to £60 and that's less than £100, but how can all three pay it back.
The answer is, they can't!
If you did not understand what I meant about the Alex, Kelsey and Taylor situation, I will explain it to you again below with a nice image.
Picture the economy like this. Please only take the inner circle into account for now.
Each square represents a person, and the lines in-between them represent a passing off money between them. I've tried to get this as realistic to a normal society as people. The triangle represents the rich with a lot of money they don't share. Maybe they are investment bankers. The green square has a lot of lines on it, so it could be a small business owner like a newsagent. The red square is a poor person with only one line. The others are random and normal.
Let's imagine that there is only £100 in the economy, and that the 3 rich bankers own £50 between them. This leaves £3.84 for each of the 13 people left. That seems generously realistic, seeing as 10% of people own 90% of the wealth in the world. Let's imagine that one of the people borrow 50p off one of the bankers, and have to pay 10% interest, to make a total repayment of 55p. Let's imagine that the banker lends someone 50p and asks for 5p interest. Where are they going to get that 5p from? Someone else. Eventually people will run out of someone else's and the bankers will end up with all the money.
This is why we have inflation. The government solves this problem by making the economy bigger to the size of the outer purple ring. This is the real reason why we have inflation, and why our wages go up each year - to support the banking system.
It's time to tell you something about virtual money, it is like antimatter, it has to be paid back. You see, when banks make money out of thin air, it causes adverse effects on the economy. I will not get into why this is. Just know that virtual money messes with the balance of things, and that the money has to be put back to put the economy back to how it should be.
When banks lend you antimatter virtual money, you are given -£, and you pay it back with £ that comes from the inflated economy. They cancel each other out. The credit crunch happened when the banks gave out too much -£ to irresponsible people, so that the £ couldn't be paid back.
What did countries do to deal with the credit crunch?
Britain decided to reduce VAT by 2.5% for a year to increase the spending.
America decided to make many people bankrupt, to fix the balance of things.
(I will not explain what caused the credit crunch in this answer. That ended in 2008 and is old news.)
I forgot to mention that the reason why people go bankrupt, is not because they're poor, but instead because there's not enough money in the economy to pay of the debts. It's musical chairs. I'm being serious. You could be or know someone who was a victim of not being able to pay back interest. Now you can see why many streets and avenues had houses with evicted people in it.
Also, guess what happens when you pay banks back your loan.
They destroy the money you paid back as the positive and negative cancels out, and they only keep the interest. When you pay back loans, the bank only has access to your interest.
Federal Reserve
I believe that the Federal Reserve should be shut down because it is a non government organisation (NGO), run by a load of billionaires (namely the Rothschilds), which lends money to the US government whenever it prints it, for it to pay back. The US government, contrary to popular belief, does not print its own money. How the Federal Reserve, about treasury and bonds, how that works, is a whole new question for itself.
Why the deficit doesn't exist, and is a big lie made up by governments.
Think of the economy like a workhorse. The horse has to work in order to earn food. You find out the horse is in debt. Would your first option be to cut off its food?
That's what the British Conservative government is, and maybe that's what the President is doing.
Spending cuts do not help the economy to grow, and they in fact do the opposite. You have seen what happens to the economy when there is a lack of spending, or circulation of money being distributed round fairly, and that is the 2008 Credit Crunch. (You also saw what happened when banks refused to offer loans as there wasn't enough money circulating around.) You might want to watch The Crisis of Credit to see how it all started. https://vimeo.com/3261363
Using an excuse of cutting a deficit in order to make public service cuts, is a case of the shock doctrine, of which politicians and other powerful leaders use in order to justify doing something bad, by making you scared. You're reacting on pure emotion with that one, if you accept it. Those people work like Robin Hood but in reverse. They take from the poor and give to the rich. Those people are also like Nazis. They kill the poor and weak, but slowly like air pollution (CFCs) instead of in reverse.
http://www.mibba.com/Articles/Politics/4101/The-Shock-Doctrine/
Interest Rates
I shouldn't have to explain this, but there are too many naive or gullible people who buy tracker based mortgages. These are the mortgages that are a certain % above the base rate. Having a mortgage that is 2% above the base rate of ___% sounds good in theory, but when the Credit Crunch happened, the government put the base rate up, so people couldn't afford their mortgages and went homeless. Make sure you buy a fixed rate mortgage or one where you can keep paying the same thing every month no matter the base rate.
Supply and demand
Charcoal and diamonds are all made of carbon. Diamonds are C⒕ and Charcoal is C⒛. It just has a different molecule structure. Did you know that peanut butter can be converted into diamonds? If that's the case, why are they so bloody expensive? That is because the advertising execs have managed to make worthless diamonds into something so expensive, by ramping up the demand for them. Did you know that some miners burn diamonds they find in mines, so they can make more money? That happens. The value of diamonds is set artificially. When you buy them, you are not paying the price you really should be paying for them.
There are some things which are priced fairly purely by supply and demand, which have their price free from government intervention or monopolistic siphoning. Such an example are Credits (discontinued Quora feature). When you use Credits (discontinued Quora feature) pay for stuff, you are paying market rates, exactly what the Quora Community people have said they're worth. When the Feed was full with too many promoted questions, the price of Quora Promote got doubled.
Gross Domestic Produce
I don't know much about this, but I do know that the Big Mac Index is a very good metric. http://www.economist.com/blogs/graphicdetail/2012/07/daily-chart-17
Forex and Shares
I trade in forex, which is trading commodities such as gold, silver, oil, and also trading currencies. Other people of the group deal with shares. I know very little about this, and I've been given 4 books to read and I haven't read them yet. They are to help me understand the stock market and learn how make up strategies. This also reminds me to go on that game website that simulates a stock market of years ago and asks you to make choices then you pick one and see the result. Also China is being evil and manipulating the value of the dollar to keep it down. It gets advanced like that.
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I only have a basic understanding of economics, and I'm aware that economics is far more complicated and vast than this.
There's also stuff to do with deficits, debts, retail, logistics, tax, treasury, bonds and many other topics I don't know about. How does Gilt's business model work?
The 4 books I'm meant to read as an investor to learn about shares and markets, I haven't listed as I haven't read them yet. http://reddit.com/r/finance is a good site to ask economic questions and learn about new things on you could never think of asking about.