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  • Book Review: "the Little Book of Economics" 0 comments
    Feb 19, 2011 8:23 PM

    Investors examine macroeconomics and world financial events to evaluate the affect of the events on their investments, predict short and long term events and make investment decisions. Author of this book, Gerg Ip, editor for the Economist magazine, will help you understand the basics of economics in a concise and well written book. He goes beyond defining the economic terms and provides a fresh look at the fundamentals with good examples.The little book of economics

    Strange as it may seem, inflation also depends a lot on what people think it will be. Suppose an employer and its union work on a new contract. If both parties agree inflation will be 2%, they will quickly agree to a 2% cost-of-living increase and the firm will plan on setting prices to cover those costs. If every firm in the country and its employers do the same thing, inflation will settle at 2%.

    Talking about inflation, author points out that investors may look at gold prices to measure future inflation but they are a better measure of fear of inflation. He continues explaining what affects prices, “so many other things [than inflation] affects them. Gold responds to global unrest, the demand for jewelry, and the dollar,

    Indicators of a healthy economy, political forces and incentives, and the power of Federal Reserve to print and destroy money are well discussed. At the heart of this book business cycles, the reality and the expectations, are discussed in depth. 

    Business cycles and market cycles reinforce each other. As ebay profits rises more investors bid for the stock to a nosebleed level, … fewer borrowers default and… investors buy more subprime mortgage. The markets then feed back into economy. Higher stock prices make CEOs think they are genius and expand the companies. Easy credit tempts both businesses and consumers to borrow more than they can safely handle… Every business expansion dies. Only the cause of death changes.

    Author points out to leading indicators like yield curves and commodity prices to forecast the business cycles.

    What I most like in this book is the topic of crisis and bubbles.

    Markets are normally self-correcting, as lower prices bring out buyers. Crises are self-reinforcing as lower prices brings out more sellers.

    You will find conditions of bubbles and the certain traits they share including leverage and contagion, and predictions for the next one.

    Overall, the author explains economics concepts with good and easy to understand examples, often comparing intentions of counties and institutions to those of an investor’s. You will like the Little Book Of Economics if you are looking to review the economic forces and their effect on your investments in a well-explained content.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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