Basic Economics

Economics is a study of how people and institutions behave and interact with each other in regard to exchanging value.

It is important to know some basics about this to understand how the TICK has accomplished what they have.

Since most people think of economics as incomprehensible and boring, we will explain these basic concepts as simply and concisely as possible.

Also in this chapter: More About Inflation

Key Economics Concepts

Scarcity, Demand And Supply
As our current economic system has developed, people, business enterprises and governments all compete for what are considered scarce resources and other goods.

Economics studies the methods that have been developed for making goods and services available, marketing and distributing them, and receiving appropriate value in return.

The amount of "demand" for something desirable compared to the available "supply" is usually the major factor in the pricing of that good or service.

Uniqueness, quality, processing expense, risk and promotional costs, are other factors in the determining of a price.

When there is a high degree of control of a widely desired resource or product, or dominance of the marketing of that item, a significant extra profit may be built into the price of it.

Our global economic system is based on the concept of scarcity and the idea that individuals and social organizations are all separate entities with competing interests.

Currency
Originally, simple, small items of agreed upon value that are easy to store and carry were used as "means of exchange". In a barter economy, so many beads could be exchanged for so much grain or blankets for example.

Certain metals became recognized as precious, and nuggets, bars and coins made of these metals became a common means of trading at some point long ago.

Eventually, with development of the banking system, paper currency representing precious metals in storage, became the common way of transacting business.

The tie between paper currency and gold was loosened in the 1930's. The U.S. government attempted to stimulate the depressed economy, under guidance of the Federal Reserve Bank, by pumping out more dollars than all the gold in Fort Knox could back.

In 1971 the dollar was divorced from gold entirely. Soon inflation became a serious financial concern as government spending for the Viet Nam War and other projects mushroomed.

Inflation
There is a major economic problem that can effect virtually every business and household which they cannot really control. The gradual erosion of the value of a currency known as "inflation" results in a lessening in the value of all cash-type assets.

The term inflation is derived from the idea of pumping up dollars with air so they look bigger, but each one has less "weight" and will actually buy less. This results from an increased money supply without a balancing increase in the amount of goods produced for consumers to buy.

Anyone who has experienced "cost-of-living raises" probably understands that their paycheck increased, but the total received would be worth about the same or even less in purchasing power than in the past.

We usually think of inflation as rising prices. The "Consumer Price Index" is the average retail value of a common selection of consumer goods that economists use to detect what prices are doing.

Deflation
The term "deflation" refers to air leaving an inflated dollar, meaning prices going down. This may occur during a period of stagnation where economic growth subsides to practically a standstill, or recession when the economy contracts.

We have seen a period of some amount of deflation after the Crash of 2008. Producers and vendors have lowered prices or are running sales and specials as they attempt to prompt reluctant consumers to purchase. Deflation may worsen, but it is not likely to last for a very long time.

Deflation has been rare in modern times. Our modern economic slowdowns have been times of "stagflation" where inflation continues in a stagnant economy, or even recessions where there is still a little inflation.

The government will be pouring more and more money into the economy. With massive corporate government spending, significant inflation is likely to return before long.

Contraction
If the economy slows down, companies cut expenses. Workers are laid off; then people may have less in their bank accounts and also spend less. Merchants have lower receipts and not as much to deposit in their bank accounts.

As a result, the banks have less loan money available and fewer loans are made. Then even less funds are available to be spent or deposited.

Economic contraction develops in waves, usually anticipated by dives in the stock market. We have seen major market dives and waves of contraction already, and there are more to come.

Recession and Depression
Economic slowdowns are not unusual. They are an aspect of a modern economy continuously changing to reflect new trends technologies and markets; and changes in interests and in lifestyle.

Deflation is more likely during a serious recession, a time of economic contraction and sluggish activity; or worse, a depression in which the economy suffers a longer period of decline and greater unemployment.

An inflationary recession or depression could also occur, especially when there is massive amount of debt, particularly government debt.

Business Organization
Economists describe four different forms of industries or markets:

~ pure or perfect competition -- There is easy entry to the market and a lot of competitors, each with little control over resources or price. A business in such a market must respond quickly to changes to be able to survive. This is the most efficient way of doing business.

~ partial or practical monopoly -- An example is a local store that serves a neighborhood or a larger area with particular products or services. Within price extremes and depending on levels of service, they control most of their market within a certain radius. Their appeal diminishes in the areas where the nearest similar store's regular customers reside.

~ oligopoly -- There are several giant companies striving for brand identity and a bigger share of an important market. The competitors monitor each other, and strategize their product development, advertising, marketing and determination of a pricing range that makes them the most money.

Reactions to financial or economic changes are sluggish. There is a lot of waste. This is a less efficient way to do business, but it is how most major industries function, usually involving a corporate structure with officers and a boards of directors. Example: the auto industry.

~ monopoly -- There is one source for a good or service, with no competition, no motive to have a low price or to strive for quality, minimal control on spending, and a slow response to changes in the market. Monopoly is the least efficient way of doing business.

Which of these do you think a government is most like?

More About Inflation

Inflation has been one of the most persistent aspects of economic life for about fifty years. A modest amount of it has been built-in throughout the economy.

When inflation continues year after year, it accumulates and currency becomes worth far less than it used to be. Most people are aware that it takes a $10 bill today to buy what used to cost about $1.

Reasons For Inflation
There are different reasons for inflation. Economics textbooks talk about some of them.

~ "Demand-pull inflation" occurs when consumers have access to extra bucks, and increase their spending on various wants (perhaps before the prices go up anymore!).

~ "Cost-push inflation" puts the blame for price increases on rising costs. There could be greater costs of raw materials or supplies, or increased transportation costs from higher gas and diesel prices, or organized labor may have negotiated for wage hikes.

Borrow Into Inflation
Inflation benefits those who borrow (including governments), because they can pay back their loans with dollars that are worth less than the ones borrowed earlier.

Lenders try to compensate for inflation by charging a high enough interest rate to cover it. In fact, inflation does not usually hurt the big banks.

Whether banks are borrowing from other banks through the FED or from their depositors, inflation causes the value of the dollars they pay back later to be less than when they borrowed.

Meanwhile, if they lend or invest the money at a rate-of-return greater than the interest they pay, they earn income using "other people's money".

Companies and individuals may also take advantage of inflationary times by borrowing, especially for business purposes.

On the other hand, access to credit may lead to increased debt spending, adding to demand and contributing to inflation.

Inflation Hedges And Losers
Sometimes real estate and other real assets like gold and silver will rise in price along with inflation and be a "hedge", a protective buffer, against suffering losses from holding depreciating dollars.

Actually, gold and silver coins are real money and currently worth far more than their face value. In an economy where paper currency is no longer trusted, gold coins could be used for larger purchases; and silver coins would be good for small buys and making change.

Many experts believe it highly likely for the dollar prices of silver and gold to increase dramatically in the next few years. Relative to the high oil prices of 2008, gold should have been nearly $2000 per ounce or more. The price of gold was strangely subdued as the oil price was rising.

This may be partly due to unfamiliarity with purchasing and storing "hard assets", but there has also been manipulation of the gold market by big time players taking losses on options contracts to hold the price down.

Nonetheless, gold and silver are good assets to have, and they should be a part of any investment portfolio.

Significant losses can result from holding assets in a cash savings account, CD, cash value life insurance policy, etc., during times of inflation. These may not return enough to give you any real gain after accounting for inflation, and may be serious losers!

Recent Low Inflation
In recent years, inflation has been modest for several reasons:

1) Even though the economy was operating at close to full employment not long ago, workers were willing to work more hours rather than demand more in wages per hour.

2) Increased world trade and low labor costs in developing areas have resulted in competitive prices from imported goods and incited an emphasis on improving productivity.

3) There was an over-capacity of capital equipment in many U.S. factories, so there was less need for investment in new machinery (which would have raised the cost of making products).

4) Consumers are price-wise in their shopping for bargains.

5) Now we are in a world-wide recession, with high unemployment and a lower price of oil. These conditions cause other prices to remain low or be reduced.

The temporary deflation we are experiencing may be assisted by the TICK financiers. It gives them more time to gather up available assets at bargain prices, while stemming a consumer uproar over the economic downturn with some price relief.

Is Inflation Inevitable?
In the long term, the main reasons for inflation are expansion of debt, and the way that our currency is issued and handled. Major inflation is due to an overly increased amount of dollars in use.

Inflation can be described as "too many dollars are chasing too few goods."

Because of the excessive debt of both individuals and governments, the supply of dollars (mostly as computer credits in bank accounts) has increased substantially, so the value of each unit of cash is greatly lessened.

As long as the U.S. government spends more than it takes in, borrowing more by selling bonds through the Federal Reserve Bank is the way it pays its bills. There is a consequent interest on the growing "National Debt", but when the rates are very low government is more likely to borrow and spend.

The government doing business this way means ever more debt and more interest to pay. The value of the U.S. dollar diminishes with high government expenditures and inflation.

GO TO NEXT PAGE

If you have a question or comment, CLICK HERE to contact us.

THANK YOU FOR YOUR ATTENTION

Copyright 2008-9 by Jonathon David Miller -- All Rights Reserved