Thought I’d take a stab at explaining how economy works, generally speaking, in layman’s terms and from the macroeconomics’ perspective. I’m not trying to write a Ph.d dissertation so don’t be shooting me with reference whereabouts as I am just writing off my head, with what I know and being reasonable.
I suppose it’s hard not to be thinking about economy since that’s the hot issue right now, with 2.4 million jobs being lost—the most since 1940. Yikes. So, I’ve been thinking what economy really is. At first, I thought it is just a cycle that if studied and know how it works, enables you to become rich and have a great life, or in other words, living out the “American dream”.
Let me say that economy is purely abstract. It only exists as math in your head. Numbers. It used to be based on the value of gold till someone realizes that’s not necessary and break off the valuation. That’s because there are enough goods, services, and possessions created that apparently, people want them badly enough. Dollar simply provides the means for it. Want a Porsche? then you’d have to work your ass off till you have enough to afford it. Want some hot flesh lap dance and more some than that ? Pay some fat dollars. Nothing to do with gold. Just numbers.
Price is simply the amount that you would be willing to pay for it. Marketers are expert in pricing their items in such a way that it’s not too high that customers won’t pay nor too low as to lose the profits. They aim to achieve profit margin as wide as they can. No buy? then lower the price (called a sale) till customers say “hey, this is pretty affordable. I can purchase this.” A sale is made—seller gets money and the buyer is now one happy customer with the wanted good.
Inflation is defined as a rise on the general level of prices of goods and services but why does it keep rising every year? The answer is money supply. Plainly summarized, Federal Reserve Banks supply money to banks, then banks loan to businesses. Businesses make sales, get profits, and pay back the interests to banks. Then, banks supposedly pay the money back plus interests to the Federal Reserve Bank, which obviously isn’t the case right now. They need a bailout from the government, which is sad. The more money the Federal Reserve issues, the higher inflation will be. Because there are now more money in the end and someone who’s able to garner cash can afford these. Hence this common phrase, “Rich gets richer, poor becomes poorer.” That’s why you keep hearing economists saying that it’s necessary to keep growing your wealth ahead of the inflation rate due to a greater money supply now.
What smart people would do is to find a job that pays steadily and at the same time, gives them a sense of rewarding feeling that it isn’t too much of a chore to come to work everyday. Then, with the right kind of investments that grow steadily, they become financially independent and no longer need to work because they would have gained enough money that pays itself via interests, dividends and to cover their living expenses plus some extra to enjoy such amenities such as traveling and seeing friends/families. One obvious reason why the government convince people to become home owners is because that’s where banks make the most money, via the mortgage interest.
Credit cards work a lot like a bank loan except it doesn’t require the same level of approval that banks take. It is purely buy it now and pay later. But at the consequence of a much higher interest rate than bank loans. If you got yourself unable to pay back the amount and fall into a debt, well, you’ll have to keep working and that won’t be too pleasant if you happen to be 60 years old now and cannot enjoy life as much. Recession occurs when people stop spending. The economy cycle stops flowing. So, the government has to get creative and inject more money supply and hope that people will once again happily spend. Then businesses can make profits, banks get interests and pay to the Federal Reserve. Everyone is seemingly happy.
So, to me, economy is simply a way to make the most out of your life, enabling you to accomplish things that your previous generation couldn’t. Just remember that it is purely abstract and can only go as far as your American dream take you to.