How The Economy Works

How the Economy Works

On the whole, I fear Americans are pretty ignorant to how the economy actually works. We hear things like inflation, stagnation, recession and we know they are bad, but we can't really explain why they are what they are. 

Then we hear the solutions are found in places like the Federal Reserve. The Federal Reserve or 'Fed' for short prints money. Wait a minute. I thought the U.S. mint did that. I also thought the Fed was a non-government entity. What do you mean they are printing money and buying bonds. How is this a thing?

I thought if something went up in price it just meant it was now worth more. Wait, why is an egg all of the sudden worth more? Why are interest rates going up? And there's that damn non-government entity, the Fed, again. What do they have to do with interest rates? 

How can raising interest rates be a good thing? They are raising them to save the economy? What about this thing called the gold standard. What was that all about and why do libertarians morn its passing?

When I was in business school, my study group was much like me playing in a golf scramble. First, you're as likely to see Big Foot as you are to see me playing golf. However, if by some very odd shift in the universe you find me playing in a golf scramble (where each team member takes a shot and you play the best ball) it's highly unlikely we will be playing my ball--ever. I suck. I'm awful. 

True story..the last business golf outing I participated in we were three holes in. I was playing as I usually did--like a monkey with ADHD and an undiagnosed condition only seen in the worst golfers on earth. It was ugly. Finally, I said, 'Boys, I'm out.' 

I caught a ride to the clubhouse from a perfect stranger and vowed to never hit the links again. I think I only have once for a charity tournament. By the end of the tournament there was a new charity. "The Jason Wright Should Never Play Golf Again Foundation" was formed. 

Before I leave this long overextended golf rambling, I have to share this link with you. If you have never seen Robin Williams 'How Golf Was Invented Video' you are missing out. In my opinion this captures Robin Williams genius as well as any of his performances-ever! Do me a favor. Stop reading and watch. I want you to be happy.

Well, in business school, much like in golf we weren't likely to play my ball in our study group. I am not a naturally gifted student. However, there is one subject in which I have always flourished. I have no idea why but I just get economics. It makes sense to me. 

Forget Red vs. Blue. We need more citizens educated on economics. Instead of people yelling about jobs being outsourced, need for a $15 minimum wage, trade deficits because they think they are supposed to yell about these things they need to know WHY these things matter.

Much of our current fiscal policy can be understood by knowing what happened during the Plaza Accord. Never heard of it? Didn't think so. Most people haven't yet it very well may be the reason we don't have people wringing their hands over the Japanese buying America. Some of you reading this aren't even old enough to remember this. However, there was a time when it looked like the Japanese were going to buy everything from The Empire State Building to Disney World.

Then came the Plaza Accord. Everything changed. It's worth a skim to get a better picture of how trade works in America.

Let's discuss what's happening now. We have too much money chasing too few goods. What does this mean in real practical terms? Here's a real life example. I'm shopping for a new camera. I've decided on a Sony mirrorless (model not important and I'm too lazy to look it up). I went to my favorite camera site B&H Camera and no go. Out of stock. Damn.

I then started to crawl the web for alternative retailers. Turns out it was out of stock almost everywhere. Ah, but then I found it. It was twice the price of the advertised price everywhere else. Why? Supply and demand grasshopper. This retailer knew they had the camera many people wanted. they knew there weren't that many of them out there. So they jacked the price.

Then there's the problem with too much money sloshing around in the economy as a whole. The federal government dumped money like Monopoly money on the American economy as a way to try to keep people calm and fed and at home during COVID. I'm not here to demonize that decision. I'm just stating as matter of factly and giving the benefit of the doubt as best I can.

This put the supply and demand equation way out of balance. The more of anything available makes it worth less. It's why salmon eggs are worth less than caviar. There's a lot more salmon eggs. Right now dollars in America are like salmon eggs. There's just too many of them and not enough of the stuff they are used to buy. So the thing they are used to buy takes many more salmon eggs or dollars.

And here's a really big problem. Just because there is more of them doesn't mean they are easier to obtain. Nope. Same game to get em. They are just wroth less when you do. Imagine having to hit two home runs in baseball to count a run because all of the sudden so many people were hitting home runs. Still just as hard to hit em for the individual, just a worth less. (I think that analogy works. If not, I'm sure one of you will correct me).

All of this is a lead up to what I think might be one of the best videos ever produced on the economy and how it really works. Ray Dalio is one of the most successful hedge fund managers ever. In recent years he has started sharing his wisdom and knowledge for free in multiple mediums. His book 'Principles' is a recent classic. He also has an app by the same name you can use for making better decisions.

I highly highly recommend you watch the video below. Share it with your kids and grandkids. How can you play the game if you don't know how the game works? Heck, you may still not play it well but at least you'll know when to play and when to stay away. You know, like me and golf! Thanks for reading.