Published in 2010.

I wonder how much this book would make sense to one without any sort of economics background. I think it would, and you don’t need to have that foundation. Though if you do and your day job isn’t being an economist, then the understanding would increase vastly.

This book clarifies the basic economic concept of Demand and Supply, the concept of money Vs barter, the money and banking system, balance of trade, fiscal and monetary policy. All in layman terms and concept but it doesn’t dumb down.

P11. “The simplest definition of economy is the effort to maximize limited resources… to meet as many human demands as possible. Tools, capital, and innovation are the keys to this equation.”

There are no new economic concepts (not the aim of the book) but there is a new level of understanding, for me, as to the origin of government debt and economic insolvency, e.g. Why countries can default and loans and go bankrupt.

Basic premise, as I understood it: It all starts with people saving money. Real economic growth comes from productivity increases (efficiency in production, given the same labour) and not because people are spending more. Savings go into banks, who offer loans with interest to people/ companies to start production. The products and then comes services help generate more goods (supply). The author argues it’s not demand that generates economic growth but the availability and supply of goods. Any economic downturns are a way to correct the unsustainable consumption.

P21. “Most economists think that demand can be increased by giving people more money to spend. But that doesn’t change real demand, just how much people can spend on items that have been produced*. Only by increasing supply** can people actually get more of what they demand.”
* which leads to inflation when money supply increases without increases in supply.

(** chapter 14 and 15 explains the the US housing market crash, albeit a simplified version. US govt offering indirect subsidies (Fannie Mae; Freddie Mac) and tax breaks that basically led to banks lending to people who ordinarily didn’t qualify for the loans (people borrowing more than what their earnings/ savings could cover). And people deciding it was more lucrative to borrow to buy and sell houses than save or start a business. It came to a point people were speculating on houses, which led to them borrowing more to speculate, thinking they can cash in anytime, and that raised demand and prices even more. Then came refinancing schemes.)

P178 “It’s hard to say when the market first turned.” (basically the housing crash was preceded by herd instinct; everyone wanted out and then prices and confidence plunged. Those who still had to service their housing loans now found the payments a burden and their property values vastly decreased. Many decided to default on their loans. The housing boom was up to 2007/ 08).

But when the government starts to tweak into just giving people more money to spend (ultimately by selling their debt to other countries and also printing more money to redeem those debts), it does not solve the root cause of supply and productivity.

Other countries buy up the debt (e.g. China buying US debt) but will reach a point where they have to continue buying the debt. If they don’t and the borrower-country cannot pay, there’s nothing to redeem and the debt is worthless.

Although interesting, I wonder if government debt can be backed by a collateral like state land. So instead of wars, countries conquer more territories if the borrower cannot pay. But I’d imagine it’ll still be war, just like loan sharks harass and threaten the borrower to pay up.

Later parts, the book obviously talks about the USA and the problem of its national debt. Where the US economy and its citizenry’s high spending/ low savings is fueled by borrowing from other countries. Basically, the US cannot continue to spend (and hence US citizens) without saving more. It also ends by saying the current fiat-money economy has no precedence and there’s a certain sense of uncertainty how it will all play out.

I got a better understanding of the root causes of the global finance crisis. The book covers the developments in the US housing and loans market, putting the cause as populist government policies that encourages banks to make risky housing loans, in the interest of making housing affordable. (aside: there’s nothing wrong with the intent, but I think the point of the book is that the combination of Populist tax cuts and policies that don’t allow the market forces to self-correct, and imprudent government over-spending)