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Economics in a Nutshell


One has to be amused at all the blather spouted on the tube coming from self proclaimed economists.  They all have their favorite pet theory, usually one that's very complex and hard to follow.  Something we "little people" could certainly never comprehend, so we should just 'trust them' to interpret economic law for us.

Well, in my humble opinion, economics is pretty simple to understand at its basic root.  Simply put, "Economic Law" is nothing more than a formalization of natural human behavior. 

Everyone understands economics, because you apply economics many times every day.  When you choose between various brands of bath soap at the store, you are applying economics.  You are choosing the features and pricing which best satisfy your needs in bath soap, toothpaste, bread, fruit, and everything else you eventually buy, or don't buy. 

When you find a bargain, you buy more and stock up.  When prices are too high, you find a substitute or do without.  You decide whether, and how much, to save for tomorrow's bargains.  You decide when to borrow money to buy an item on credit based on your understanding of your free cash flow.

Everyone can understand that there is a large group of people in our country who would like to borrow money to buy something they want or need.  When interest rates are high, some portion of that group cannot afford the loan payments.  If interest rates are lowered, more can now afford the payments and so the amount of loans increases.

Interest rates are nothing more than the price of borrowing money.  High prices mean less borrowing, low prices mean more borrowing.  Simple as can be.

Looking at things in this simple manner lets one see that the FED's repeated lowering of interest rates over the past 20+ years has resulted in ever greater levels of debt and higher prices for the things that borrowed money is used to buy.

When banks started making mortgage loans based on stated income, to people who obviously couldn't afford the payments after the teaser rates reset, it was only matter of time before the huge debt bomb exploded and dragged down the economy.

Now that things are tight, people are doing what comes naturally, reducing their spending and paying down their debt.  That means lower economic activity and a recession while all that excess debt is paid off.

It's not that complicated.  Anyone who puts a little thought into the matter can see what's going on.  It's the 'economists' who insist it's so complex only they can understand it.  But that's nonsense.

Just think what you would do under any set of circumstances and you won't be far off from figuring out how economic law applies to the mega-corporations and big banks too.