The Economy Explained

For those of you wondering about the economy I thought I would take a minute and explain it.

Generally a recession is triggered when something everyone knows to be true turns out not to be true (usually the belief that prices will always go up).   The shock triggers fear so that people who have money don’t spend it.  This causes the normal market adjustment mechanisms of supply and demand to break down.  People who would have purchased at a given price before they were scared hold on to their money.  The liquidity of assets is lessened and the market based wealth calculations suffer.  Making people feel poorer increasing fear and the cycle is repeated.

Ask any responsible person with a job what they did the last couple of years and they will say they limited discretionary spending.  Give these people a tax cut and they will put the money in the bank.  Saving rates have increased but bank lending has decreased.

What is needed to break this cycle is someone to act “irresponsible”; to buy when every one is selling to invest, even if you are not sure that the market has reached the bottom.  Government (We the people : all of us collectively)   is the only entity capable of doing this.  Government can also help on another front with a safety net, which decreases fear; which is the root cause of the recession and, Conservatives.