How the economy works

The economy runs like a machine, and essentially the economy is a relatively simple machine, however not always very well understood. My purpose in writing this article is to describe how the economic machine works, which is different from the traditional economists' description, and you need to judge and assimilate it for yourself. Follow along as I describe this simple economic machine. I believe that if you read it patiently, you will better understand how the economy works.

The economy is the sum of a large number of transactions, and each transaction is simple. A transaction consists of a buyer and a seller, with the buyer paying money (or credit) to the seller in exchange for goods, services, or financial assets. A large number of buyers and sellers exchanging the same good make up a market, e.g. the market for wheat contains a variety of buyers and sellers with different purposes who trade in different ways. Markets for various transactions then make up the economy. Thus, in reality it is difficult to understand that what appears to be a complex economy is really just a large number of simple transactions put together. s4D Leasing Perspectives

For a market (or for that matter, for an economy), if you know the total amount of money spent, as well as the total amount of credit, and the amount of goods sold, you know everything there is to know about understanding an economy. For example, since the price of any good, service, or financial asset is equal to the total $ spent by all buyers divided by the total quantity of production sold (Q), all you need to do to understand or predict the price of a good is to predict the total $ spent and the total quantity of production sold (Q). s4D Leasing Perspectives

However, there are a large number of buyers and sellers in every market, and the motivation of these buyers and sellers to transact with each other is very different from the motivation of the buyers and sellers. buyers and sellers do not have the same motives for trading, but the most important motives for buying and selling are always well understood, making it less difficult to think about understanding the economy. This can be illustrated in a simple diagram below. This perspective of explaining the economy is easier to understand than the traditional way of explaining it, which is based on the supply of goods, the demand for goods, and price elasticity.

The important concept you need to know about this economic framework is that expenditures ($) come from two ways - money or credit. For example, if you go to the store to buy something, you can either pay for it or pay with a credit card. If you pay with a credit card, you create credit for deferred payment (credit can be generated immediately as long as both parties agree, and the traditional rules about the flow of money, nominal GDP, go round and round in a way that tends to confuse people about what's happening), and if you pay cash straight away, you don't create credit. s4D Leasing Vision

The simple fact is that: different markets, different types of buyers and sellers and different payment methods make up the economy. For convenience, let's group them together in order to summarize the framework within which the economy operates: s4D Leasing Perspectives

-All changes in economic activity and changes in financial market prices result from 1) changes in the total amount of money and credit (total $) and 2) changes in the quantity of goods, services, and financial assets sold (Q), with changes in the former ($) having a greater impact on the economy than changes in the latter (Q), because changes in money have a greater impact on the economy than changes in credit (Q). The impact on the economy of a change in the former ($) is greater than a change in the latter (Q) because it is obviously much easier to change the supply of money and credit than the other. s4D Leasing Perspectives

-Simplifying the analysis, the buyers are divided into several broad categories: the private sector and the government sector. The private sector includes households and businesses, both domestic and foreign; the government sector consists mainly of the federal government (which also spends money on goods or services) and the central bank, which is the only one that can create money and use it to buy financial assets. s4D Leasehold

Money and credit are more likely to increase or decrease in response to supply and demand than are goods, services, and financial assets, so the economy and prices are more likely to increase or decrease than are goods, services, and financial assets. decrease due to supply and demand, hence the economic and price cycles.

Participants in an economy buy and sell goods, services, or financial assets, and pay for money or credit. In the capital system, this exchange occurs freely, and in this free market, buying and selling can be based on individual interests and purposes. The creation and purchase of financial assets (i.e., loans, investments) is called capital formation. Capital formation is accomplished because both buyers and sellers believe that the transaction is beneficial to them. Those creditors are willing to provide money or credit based on the expectation that they will get more back. s4D Leasing World

So the system works well if there are a large number of providers of capital (investors/lenders) and a large number of recipients of capital (borrowers, sellers of equity), and if the providers of capital believe that they will get back more than they put in. The central bank, on the other hand, controls the total amount of money; the amount of credit is influenced by monetary policy, but the amount of credit can be generated easily, requiring only that both parties agree on the credit. Bubbles occur when more credit is created and it becomes difficult to meet repayment obligations, which in turn causes the bubble to burst. s4D RentalViews

When a capital contraction occurs, the economy shrinks with it because there is not enough money and credit to buy goods. This contraction appears in two common forms: recession (more common) and depression. Recessions occur during the short-term debt cycle, while depressions occur during deleveragings. Recessions are well understood because they happen often and most people have experienced them, while depressions are relatively hard to understand because they don't happen often enough and are not experienced enough. s4D Leasing World

Short-term debt cycle: also known as the business cycle, the cycle arises when: s4D Leasing World

a) Consumer spending, or the growth of money and credit ($), is growing faster than the growth of production (Q), causing prices to rise. s4D Leasing Perspectives

b) The rise in prices prompts a tightening of monetary policy, which reduces money as well as credit, and a recession begins. s4D Leasing Perspectives

In other words, a recession is a slowdown of the economy as a result of a tightening of monetary policy by the central bank (often to fight inflation), which suppresses an increase in the private sector. s4D Leasing Perspectives

Because of the tightening of monetary policy by the central bank, which often fights inflation, a slowdown of the economy occurs. In other words, a recession is a slowdown caused by a tightening of central bank monetary policy (often to combat inflation) that suppresses the increase in private sector responsibility. s4D Leasing Perspectives

In order to end a recession, the central bank lowers interest rates in order to stimulate growth in demand and an increase in credit because low interest rates 1) reduce the cost of servicing a loan, 2) reduce the amount of monthly repayments, and thus stimulate the associated demand, and 3) due to the lowering of interest rates, the effect of the discounted expected cash flows, which will raise the amount of income-producing assets, is not as great as it could be. income-producing assets, such as stocks, bonds, and real estate, thereby creating a wealth effect and stimulating consumer spending. s4D Rental Vision

Long Debt Cycle: is due to the fact that debt grows faster than income as well as money until it can't grow any more because the cost of debt has gone to extremes, typically because interest rates can't be lowered any further. . Deleveraging is the process of reducing the debt burden (debt/income) . How is deleveraging accomplished? Primarily through a combination of the following: s4D Lease View

1) Debt restructuring to reduce loan repayments s4D Lease View

2) Belt tightening to reduce expenditures s4D Lease View

3) Redistribution of wealth s4D Lease View

4) Monetization of debt (government purchases of debt, increased credit). s4D Lease View

Depressions are exactly the kind of economic slowdown that comes from the deleveraging process. Depressions occur because central banks are unable to counteract shrinking demand in the private sector as well as shrinking spending by lowering the cost of money. s4D Leasing Perspectives

In a depression: s4D Leasing Perspectives

1) Many debtors pay back more money than they have actually committed. s4D Leasing Perspectives

2) The monetary policy that is implemented by altering the cost of servicing debt as well as by stimulating the credit s4D Leasing World

One: interest rates cannot be lowered indefinitely, which would not be enough to encourage consumer spending and capital behavior (creating deflationary depressions), s4D Leasing World

and two: growing money would flood into inflation-resistant assets, not increase credit (creating inflationary depressions), s4D Leasing World

and two. inflationary depressionsinflationary depressions). Depressions are generally ended by central banks printing large amounts of monetized debt as well as making up for the effects of private sector spending cuts. s4D Leasing Vision

It should be noted that depressions are the slow phase of a deleveraged economy, and that deleveraging doesn't have to cause depressions, if it is controlled well. (You can refer to the previous article "An In-Depth Look at Deleveragings") s4D Leasing Vision

The government's performance in recessions as well as depressions can be used as a weathervane for us to judge how the economy is performing at the moment. For example, in a recession, the central bank typically prints money to buy large amounts of financial assets to make up for the contraction in private sector credit, which is not the case in a recession. At the same time, in a recession, the government also spends more on consumption to compensate for the contraction in private sector consumer spending. s4D Leasing World

The above two types of cycles are two important parts of the economic operating framework, and the following is a more comprehensive introduction to the economic operating framework. s4D Leasing World

Economic Operating Framework: The three big force s4D Leasing World

I believe that the main drivers of economic performance come from: s4D Leasing World

1) trend growth in productivity s4D Leasing World

2) the long-term debt cycle s4D Leasing World

3) the short-term debt cycle (business cycle).