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The Perfect Economics Class

The Perfect Economics Class

James Altucher

Posted September 29, 2022

James Altucher

Everyone knows about this crisis. I guarantee very few people KNOW about this crisis. 

This is what I would teach in a class on economics. A combination of principles, backed by economic history.

1: Inflation: what the heck is it? 

Supply shocks 
Monetary inflation 
Plus solutions:

  • interest rate hikes 
  • the Fed selling US Treasuries 
  • Resolving supply shock issues 
  • Organic market pressures (my preferred choice) 

2: What does the Fed do? 

When people think Fed they focus on interest rate hikes. The Fed also

a. Buys US bonds, but in more recent years has also bought assets "further out on the curve", even including mortgage bonds.

b. What this does? When the Fed buys something, they make money appear out of thin air. This is the "printing money" part. And then give cash to people/institutions who want to sell bonds.

c. Because cash that didn't exist before is now entering the economy, the money supply of the economy grows, people spend, borrowing is easier, companies invest, and if the economy doesn't grow to keep pace, then inflation results.

d. The Fed could pay interest on bank reserves. If you want banks to lend less you have two choices, raise interest rates (so people are less willing to borrow from banks at higher interest rates) OR, a brand new Fed thing:

e. lend banks money based on their reserves. They started doing this during the Great Recession to incentivize banks not to lend.

f. These are a few of the main tools of the Fed 

3: What does Congress so to create inflation or deflation

A spending bill (e.g. $500 billion to build highways) increases inflation.

The US government gets more in debt every year. They then have to borrow money. The money they borrowed is used to buy things in the US.

The result of this is that people have more money so they spent it and (as always) if the economy doesn't grow to absorb this new increase in spending, inflation will result.

If the Fed they wanted to create deflation they would simply raise taxes. If there's a 90% tax, people are spending less.

Spending less means, "There is less demand for products in exchange for cash." Less demand equals price doesn't go up equals deflation.

There are many reasons inflation picked up starting in the 60s but one of them is because tax rates went down, giving people more disposable income.

This leads to the next thing.

4: Inflation good. Deflation bad. Hyperinflation Very bad.

Inflation is a good thing. You would think, But don't we want prices to go down? Wouldn't we want deflation?

Yes, as individuals. But there's a reason the Fed has a target rate of 2% inflation. Not NEGATIVE 2 %inflation or 0% inflation. Inflation gradually increases money supply, which ultimately finds its way into the hands of good, innovative companies trying to grow faster.

Too much inflation means many people who don't have incomes that increase with inflation will be able to buy fewer goods. And senior citizens on a fixed income can go broke.

So it's reasonable that inflation gets too big, for instance, 9.1% like in July, people get nervous.

But note that the economy right around 9% (or, as is reported to the media, slightly negative "real" growth, which subtracts inflation). But note that i's a complicated subject because GDP is stil growing and it depends on which part of the economy it's not growing faster than inflation since of this can be segmented.

But Deflation. Bad.

Example: A house is for sale for $100,000. I love it but should I buy? If there is deflation I might think, "It was $110,000 less month and $100,000 now, so if I wait a money it will be $90,000". When people think like this, it could be a death spiral. People stop spending because they want to wait for cheaper prices.

So companies stop selling.

So companies fire people.

And those people start spending less. And the cycle repeats.

So cheaper prices could be a horrible thing as evidenced by when they occur: 

  1. A) The Great Depression in 1933 
  2. B) 2009.

AND, we are about to have one of the fastest paces of deflation in history. It's not that inflation slows. It's that deflation occurs. When inflation goes from 9% to 8% (a good thing), that's deflation of 1%.

But if deflation occurs too fast, it's very bad. I would not be surprised if by the end of the year we see 5-6% inflation which is very deflationary. In the next inflation report I expect we see about a 7% number, The Fed will stop raising rates, the markets will surge, and in the November numbers we might even be in the 6s. This could end badly although the market rising, plus the recently passed spending bill, plus (hopefully) settlement in the Russia/Ukraine war could help balance things.

5: The Financial Crisis of 2008-2009

Everyone knows about this crisis. I guarantee very few people KNOW about this crisis. 

 It's an incredibly instructive example of when the wheels of the economy were exposed to the general public and it teaches many aspects of economics and economic history. While I won't right the full description of everything here it covers many aspects:

  • Fannie Mae - why is the government involved in housing loans.
  • The widening of subprime loans by Secretary of HUD Andrew Cuomo when he insisted banks lend out more subprime loans 
  • The collateralization of mortgage bonds by Wall Street and the implementation of more esoteric housing related mortgages
  • credit default swaps, 
  • interest rates stripped from derivatives and collateralized.
  • The Wall Street fervor for subprime derivatives because of the higher interest rates 
  • the widespread incorrect modeling of subprime defaults because of the lows implemented in the 90s 
  • FASB 157, which changed the way banks value assets. This one rule turned all banks bankrupt overnight 
  • So why didn't all banks go bankrupt? Look at the banks that bailed out Long-term Capital Management versus the two that didn't (Lehmann and Bear Stearns) in 1997, 9 years earlier.
  • The repeal of 157, which ended the slight in the stock market that very weak.
  • Bernanke. Studying Bernanke is also a study of what wrong in the Great Depression. He did his PhD thesis on it in the 70s and he had the chance to use the techniques described in his thesis in 2008-2009 he did so and they largely worked.

Why was it a jobless recovery?

6: Why has the Fed been more worried about DEFLATION in the past decade than inflation. 

This is why they felt comfortable doing so much quantitative easing in the pandemic. They were desperate for inflation and then overshot.

7: Why has the world been relatively poor despite the fact there has been non-stop economic growth for 6000 years and then in the year 1900 this all changed. 

8: Investing. Some people separate investing and economics as topics. I don't 

All of investing is related to the risk-reward comparison of any one asset (like a stock or a house) compared with the world's hypothetically risk-free investment (the US Treasury Bonds).

Since these are mostly pegged to the rates the Fed sets it's very much an economic issue and is a perfect model to understand supply and demand.

9: Poker 

Economics is often about decisions involving money.

Should I take action A or action B?

Using probability and statistics you determine the expected value (EV) of each action and then make the decision accordingly.

The perfect laboratory to understand this is poker.

If I have a flush draw with a 33% chance of making my flush and the pot is $3000 then I have an expected value of $1000 (f I suspect all other players will have than a flush so you have to adjust accordingly for how much I suspect they would have a weaker hand. I do this by remembering how they bet and baking that into my probabilities).

If it costs me $1001 to bet into a pot that has an expected value of $1000 than the expected value of the bet is $-1 which means I should not bet. This is decision making in a nutshell.

10: Entrepreneurship 

- Models of entrepreneurship 

- Examples of some of the greatest companies in history and what their humble beginnings.

- A subject that is not taught a lot: not every entrepreneur is a tech entrepreneur:

a. tech 

b. franchising 

c. commodity businesses 

d. raising money 

e. the skills of an entrepreneur based on stories from history.

f. the stages of a corporation and who are the players involved at each level:

g. pre-product startup

h. first customers

i. growth / maturity

j. fundraising, Series A to going public

How companies keep going after public. How innovation can continue. Build or Buy decisions.

11: Of course, Crypto 

Forget all current use cases of crypto. The most important use case (or not, if people don't use it this way), is redoing the entire financial ecosystem to take advantage of "the internet of value". The aspect that anything of value can traded for anything else of value 24/7. This is where crypto will shine once there are enough users.

12: This is a start, but these are the first issues to come to mind. 

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