Here are some general principles of the economy that I hope help have insightful discussions:
Resources and wealth
Resources and wealth
- Wealth is the sum of natural resources, human-made artifacts, and human capital (knowledge and expertise ).
- Wealth can only be created through work either performed by humans, animals or machines.
- The source of energy for plants is the sun, for humans and animals is food, the source of energy for machines is fuel or electricity
- Wealth can only be created by performing work which requires energy.
- War is the destruction of wealth
- Growth follows a sigmoid curve, while interest rates follow an exponential curve; the discrepancy between these two curves is the root cause of all banking crisis: eventually growth tapers and can't keep up with the growth of interest rates.
- Money is many things: a store of value, a means of exchange, the unit of account in a country
- Modern countries use fiat ( so be it in latin) money.
- Fiat currency's value is supported by the demand for that currency; taxes are the ultimate form of demand: you need a currency to pay taxes.
- Money is both an asset and a liability created (and destroyed by financial institutions); it is created by a journal entry : credit- deposits( liability) , debit - credit ( assets)
- When banks issue a loan, money is created,
- The formula for the total amount of money in a country is the following :
Money = sum over time of ( ( government spending - taxes ) +
interests on bonds +
( loans - loan payments ) +
( exports - imports ) - Money and currency are not the same: Money refers to the journal entries created in books by financial institutions, currency refers to the bills and notes issued by the central bank.
- Most economic transactions have two flows: one of money and one of resources; they flow in opposite directions.
- Exporting means a country sends its resources and the product of many work hours in exchange for money ( foreign currency).
- Importing means a country acquires resources and finished goods that are exchanged for its currency.
- Some transactions are purely monetary: credit , loan repayments, selling and buying financial assets; these transactions are de-coupled from the resource component of the economy.
- They create a monetary flow that produces no growth , but inflates the price of financial assets.
- The economy is made up of five sectors : government, banks, firms, households, the external sector.
- The economy is a set of interleaved balance sheets; hence the loss of a sector is the profit of another sector.
- The government is the only sector that can be permanently in negative financial equity; allowing the other sectors to have a positive financial equity.
- Wages are a cost for producers, but wages also allow households to consume goods.
- Firms that export are ideal for any capitalist firm: the consumption of their goods is not subjected to the wages they pay; hence the most common way for a country to grow is export-led growth.
- When wages are too low, people will often find other ways to survive: from informal jobs to criminal activities.