Notes for: In This Economy? How Money & Markets Really Work
title: In This Economy? How Money & Markets Really Work author: Kyla Scanlon published: 2024 edition: 1 ISBN: 978-0593727881
Summary
This book focuses on giving a high level introduction to the current US economy in an intuitive way instead of focusing on rigorous models or statistics.
Vibe Economy
- Economics is a dynamic map of human behaviour
- The basic cycle of life in economy is the classic circular flow model
- the flow of resources and value
- households buy goods and services from businesses
- businesses obtain resources (hire labour and borrow capital from savings) from households
- the flow of money
- households spend to buy goods and services
- businesses receive revenue
- businesses pay out wages, rents, and dividend or interest payment
- households receive income from labour or savings it provides to businesses
- the flow of resources and value
- on top of the model, the economy is influenced by vibe and emotions of all participants in the economy
- Prospect Theory: our emotions such as loss aversion impact our risk choices
- Framing Effect: emotions can be influenced by how info is presented
- Anchoring and Adjustment: emotions may affect how individuals anchor on initial info and adjust from there
- Endowment Effect: our emotional attachment to possessions influences their valuations
- Regret Theory: our emotions of regret impact our decision-making and risk aversion
- Inter-temporal Choice Theory: impatience can influence our choices between present and future outcomes
- Affective Forecasting: predictions of future emotions impact our decision-making
- Social Identity Theory: our emotions tied to social identity influence economic behaviour
- Consumer Emotional Engagement: our emotional connections impact our preferences and brand loyalty
- Reflexity Theory: we act on our belief in the market, which raise valuation and further reinforce our belief in a reflexive feedback loop, until the bubble bursts
- all actors in the economy faces uncertainty, created by imperfect information and also sentiments
- Expectations: how we expect things to be
- Theory: how things are supposed to be
- Reality: how things are
How Money Works
- Money must fulfil 3 requirements
- a store of value: it has to hold value over time
- a unit of account: so that it can be used to compare the value of different goods and services
- a medium of exchange: it can be used to easily exchange for goods and services
- The banks holding of saving deposits and lending to businesses is how they facilitate the flow of money.
- US dollar is still the dominating currency for global trade because
- it is the best currency compared to alternatives: it is issued by USA which has clear, liquid financial markets, transparent corporate governance. Or it is the least nasty alternative.
- it is the best structurally: USA is absorbing trade surplus from all over the world, and those countries need the dollar to stabilize their own currencies. USA has a deficit in its current account (trade) but it has a surplus on its capital account (incoming foreign funds and investments) which helps balances out payments for USA.
- and legacy structure is hard to erode
- instead of worrying about dedollarization, USA should worry about other economic woes
How Money is Measured
- demand and supply of goods and services determines the price
- GDP = C + G + I + NX
- consumption
- government purchases
- investment
- net exports
- alternative measure of economy, can be Real GDP per Capita or Productivity
- between 2000 to 2020, despite big tech, AI, cloud computing, EVs, productivity was stagnant
- growth at any cost is the current paradigm, but it is not sustainable. some alternative schools are Degrowth, Ecological Economies, and Postgrowth.
- inflation has many causes, like fiscal and monetary policies, supply chain breaking, expensive energy etc. But historically we have seen the following amplifiers
- greater than expected price hikes by monopolistic producers
- wage-price spiral as companies passes higher wages back to consumer prices
- undoing globalisation by moving production back to the country
- energy price shocks
- deflation is the opposite of inflation where prices and economic activities drop in a downward spiral
- hyperinflation is when prices accelerates causing instability in the market and no trust in the currency
- a way for labour market to be part of the growth story is for employees to own shares
- the housing cycle is the business cycle
- residential investment impacts many different industry related to construction
- poor economic sentiment is also reflected by poor residential home sales
- stock market is supposed to help provide liquidity and help companies secure funds for their projects
- it has become distorted in the modern age and may not always reflect business fundamentals, due to various reasons
- market enthusiasm: due to social media
- risk-on sentiment: people have higher risk appetite and YOLO attitude
- Liquidity: spare cash from QE and stimulus flows to the stock market
- Meme markets: SPACs, NFTs, GME are examples where the price no longer reflects business realities and are influenced by viral memes
- Globalization of markets: users around the world can easily buy stocks using online brokerage platforms
- in the bond market, the yield curve is a good indicator of sentiments, but it is not a perfect predictor (nothing is)
- yield curve graphs the relationship between bond yields and maturity date
- upward sloping: higher yield for longer term bonds, to compensate for uncertainty and it is also a sign on optimism
- flattens: investors don’t expect much economic opportunity in the long run
- inverted: investors don’t expect economic growth in the future
- yield curve is important, because the people’s sentiment determines the economy, and expectations manifest reality
- fictional account from Jesse Livermore, from the book Reminiscences of a Stock Operator:
- Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics, the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature.
- cryptocurrency has four narratives
- it is a get rich quick scheme
- it provides ownership, governance and participation
- it is a technological infrastructure
- and it is a diffused networks
- but in the current state, cryptocurrency cannot meet the 3 requirements for money and will be hard to take over as a currency since it lacks stability.
- recession is just a label that we declare, to describe a certain economic situation, because no two recessions are the same. some important metrics to consider are
- depth: how much economic indicators deteriorated
- diffusion: how broad the deterioration is across the economy
- duration: how long the deterioration lasts
- typical manifestation of a recession
- retail: consumers cut back on discretionary spendings
- restaurants: cut back on dining out. fast food may be more resilient
- travel/tourism: businesses cut cost, travels by households drop
- leisure/hospitality: see declines in booking and fewer patrons
- service purveyors: non essential or luxury services see reduction in patrons
- real estate (residential): homebuyers delay purchasing, sales drop, and prices may also drop
- real estate (commercial): businesses may shut down, demand for office and retail spaces decline
- real estate (manufacturing/warehouse): dependent on consumer demand, may also decline
- zombie companies, defined by Ryan Niladri Banerjee and Boris Hofmann, are firms that cannot cover debt servicing costs from current profits. They don’t make enough money and stays afloat by borrowing money and seeking government aid. These may be the results of excessive government stimulus and QE, with the objective to keep jobs.
- vibecession is when economic data still looks fine but sentiments and vibes are declining
How Money Moves
- fiscal policies are not always bad
- spending on improving productivity is good in the long run, even if it causes slight inflation in the short run
- government deficits are also fine in the short run, if the long run productivity gain offsets the cost
- trade deficits are also fine, if capital flow balances and is in surplus, as we invest in productivity improvement
- possible government spendings
- social programs
- defense and security
- infrastructure development
- public services (government agencies, law enforcement)
- debit interest payments
- research and development
- subsidies and grants
- foreign aid
- taxes finance govt spendings but are often insufficient. the difference is made up by government bonds
- debt ceiling becomes a hot topic that is argued in congress and may even paralyse the govt.
- if debt ceiling is breached, potentially the treasury would stop functioning, the US goes into default.
- examples of when it happens can be seen from UK, and Eurozone crisis.
- The Federal Reserves has two mandate
- price stability
- maximum employment
- the Feds uses monetary policy to balance and achieve the two targets. There are a number of tools in the toolkit
- determining the reserve requirements of banks
- open market operation by buying and selling US treasury securities
- Quantitative Easing (QE): buy T-bills from bank, increasing bank reserves, causes rates to drop
- Quantitative Tightening (QT): sell T-bills to bank, decreasing bank reserves, causes rates to rise
- repo agreements: requires banks to buy and sell the same securities with the Feds overnight, at different price points
- discount rate: is the rate that banks can borrow from Feds as the last resort to solve liquidity problems.
- for Feds to function, the market must belief in this institution.
- for Feds policies to work, the people must also belief in the intention, and behaves according to how Feds expected them to behave.
- because in truth, the economy is so complex that no one can truly know how it works and what exactly the results of policies will be
Theories, Problems, and Opportunities
- the field of economics is riddled with theories, but theories worked on paper under certain assumptions, but the real world never fits the theories perfectly
- classical theories promote free market
- keynsian economics promotes govt intervention to stimulate the economy
- monetarism promotes using money supply and hence inflation, to stimulates the economy
- new growth theory says that humans will always try to obtain knowledge and create innovation, and that is what contributes to growth
- modern monetary theory (MMT) says that govt can spend as much as they want since they can never run out of money, and can always print more
- Marxism focuses on social classes, and economic produces should be shared equally by all participants regardless of classes.
- economic theory provides a framework for understanding behaviour, it may not fully capture the complexity and nuances of real-world human decisions. Because humans are not always predictable, and we are influenced by various factors like emotions, social pressures, individual circumstances.
- therefore, adhering to economic orthodoxy without being flexible or give room for nuances, will lead to disastrous outcomes.
- problems that people in the US face
- death of the American dream
- mental health crisis causes people to be less productive at work, affecting the economy
- shifting nature of work, as tech jobs that used to be glorious are no longer so
- demographics shift in the labour market, the new generation enters the workforce with massive disillusionment
- the system has failed, and there is no safety net for the average American
- the attention and advertising economy is dominating our lives
- social media exaggerates and accelerates anxiety
- media literacy crisis caused by the media constantly bombarding us with sensational news and words
- nostalgia caused us to be stuck with trying to chase the good feelings of the past (remakes of movies, products etc) to squeeze out profit without trying to innovate
- commodification of the self, as we align ourselves to the narratives of brands
- memefication of the stock market
- economic inequality is being worsened by political polarization
- The book finally offers some solutions and opportunities of how US economy can improve. It can be summed up by having an Abundance Mindset. But I didn’t take note since I myself am not too hopeful of the situation. The political structure of the US simply would not allow those solutions to come to fruition.
Advice
Martin Zweig Investing Rules:
- The trend is your friend, don’t fight the tape.
- Let profits run, take losses quickly.
- If you buy for a reason and that reason is discounted or is no longer valid, then sell!
- If the values don’t make sense, then don’t participate (2+2=4)
- The cheap get cheaper, the dear get dearer.
- Don’t fight the feds. (less valid than #1)
- Every indicator eventually bites the dust.
- Adapt to change.
- Don’t let your opinion of what should happen, bias your trading strategy.
- Don’t blame your mistakes on the market.
- Don’t play all the time.
- The market is not efficient, but is still tough to beat.
- You’ll never know all the answers.
- If you can’t sleep at night, reduce your positions or get out.
- Don’t put too much faith in the “experts”.
- Don’t focus too much on short term information flow.
- Beware “New Era” thinking, i.e., it’s different this time because…
Alberto Brandolini:
The amount of energy needed to refute bullshit is an order of magnitude bigger than to produce it.