Book Notes: In this Economy? How Money & Markets Really Work
Overview
This post contains my notes on the book In this Economy? How money & Markes Really Work.
You can find the book on Amazon
I’ll be adding my notes to this post as I read through the book. The notes will be organized by chapter and will include key concepts, code examples, and any additional insights I find useful.
Chapter 1: The Economic Kingdom
Chapter 1 introduces the concept of the “Economic Kingdom,” which is a framework for understanding how money and markets operate in our society.
The chapter discusses the following key concepts:
- Monetary Policy Castle: Manages the entire kingdom and is owned by the Federal Reserve. Generally in charge of inflation and the labor market.
- US Dollar Castle: Secret weapon of Monetary Policy Castle.
- The Commodity Castle: Basic goods used by everyone.
Contractionary monetary policy: things slow down, people don’t spend, people loose jobs Expansionary monetary policy: things speed up, people spend, people get jobs
Chapter 2: The Vibe Economy
Chapter 2 begins by explaining the relationship of households and businesses and the flow of resources.
Note: The book offers a diagram that illustrates the flow of money between households and businesses.
Households: Inputs: - Income - Buying Goods & Services Outputs: - Spending - Land, Labor, Capital
Businesses:
Inputs:
- Resources
- Revenue
Outputs:
- Selling Goods & Services
- Wages, Rent, Profit
Fuel Vibes:
Fuel: As gasoline prices rise, consumer sentiment tends to decrease.
Higher prices make us feel bad => if we feel bad, the economy feels bad
Oil Market influenced by: - how much oil is being produced
- how many people are consuming oil
Sentiment drives the economy:
- If people feel good, they spend more money
- If people feel bad, they spend less money
Sentiment is influenced by emotions. These emotions are summarized in varius theories:
- Prospect Theory
- Framing Effect
- Anchoring and Adjustment
- Endowment Effect
- Regret Theory
- Intertemporal Choice Theory
- Affective Forcasting
- Social Identity Theory
- Consumer Emotional Engagement
Reflexivity: The idea that the economy is influenced by people’s perceptions and beliefs about it, which can create a feedback loop.
- Initial Perception/Believe
- Market Action Based on Perception/Believe
- Refliexive Feedback Loop
- Bubble Bursts
Benefits of reflexivity to companies:
- attracts investments based on expectations of future growth
- gain critical edge in hiring top talent
What is sentiment?
Expectations Theory Reality
How we feel X How everyone else feels = Sentiment
Consumer Confidence Survey is an example of consumer sentiment measurement
Chapter 3: The Weird World of Money
What is Money?
- A store of value
- A unit of account
- A medium of exchange
Evolution of money:
- Growth of societies and contact with other civiliations led to the need for a common medium of exchange.
- Barter System: Direct exchange of goods and services without using money.
- Example: Is a bag of grain worth 15 cows or 10 cows?
- Coins solved the problem of barter by providing a standardized medium of exchange.
American Currency:
1700s: American colonies depend on European currencies (piece of eight) 1775: Continental Congress issues Continental Currency to fund the Revolutionary War 1785: Due to inflation, the Continental Currency is replaced by the US dollar
Hamilton’s Financial Plan:
- a federal bank that provides credit to the government and businesses
- issue a stable national currency
- safe place to store money
1791: First Bank of the United States is established 1811: First Bank of the United States charter expires, states issue their own currencies 1816: Second Bank of the United States is established Wildcat Banking Era: state-chartered banks issue their own currencies, leading to instability and bank failures 1863: National Banking Act creates a system of national banks and a national currency, only national banks can issue currency 1971: US dollar is no longer backed by gold, leading to fiat currency
The federal reserve enforces the promise and collective trus in the US dollar.
Chapter 4: The Mechanics of Modern Money
Banks:
- Gatekeepers of money
- Money business model
US Government:
- Creator of money
- Facilitator of what banks do
How is money created?
- Issuing coins and notes
- Through credit markets: issuance of government bonds
Banking Blueprint:
Built on:
- trust
- ability to borrow short (customer deposits)
- lend long (loans)
Fractional Reserve Banking: Banks are allowed to keep a fraction of deposits as reserves and lend out the rest.
- Banks use money, invest in securities, and make loans to earn interest.
Art of Lending: Banks hold a balance sheet of assets and liabilities.
- Assets: loans, securities, reserves
- Liabilities: customer deposits, borrowings
- Net Worth: assets - liabilities
Excess reserves: reserves held by banks above the required minimum.
Hedging: Banks use various strategies to manage risks, like interest rate fluctuations. Example:
- Interest rate swap: an agreement between two parties to exchange interest payments on a specified principal amount.
How banks fail:
insolvency: liabilities exceed assets illiquidity: unable to meet short-term obligations
Examples:
- Silicon Valley Bank (SVB): no hedges to protect against downside risk of rising interest rates
- 2008 Financial Crisis: use of Collateralized Debt Obligations (CDOs) and mortgage-backed securities (MBS) led to widespread defaults and bank failures.
Dollar’s Reign: Countries worldwide use the US dollar as a reserve currency.
- the dollar’s value goes up when there is uncertainty in the global economy as more people want to hold dollars.
- the dollar can be an inflation hedge as it tends to hold its value better than other currencies during inflationary periods.
Structure:
- least nasty alternative
- surplus and deficit national economies
- balance of payments
Chapter 5: Supply and Demand
low demand: no one wants it, price goes down high demand: everyone wants it, price goes up
Factors that influence demand:
- supply chain (issues)
- example: semiconductor shortage
- example: used car prices during the pandemic
- example: egg shortage during the pandemic
presumed infinity of resources
Chapter 6: GDP and the Economy
Measuring GDP:
- GDP = C + I + G + (X - M)
- C = Consumer Spending
- I = Investment Spending
- G = Government Spending
- X = Exports
- M = Imports
Consumption:
What people buy fueled by:
- income
- borrowing (credit cards)
- Savings
Investment: spending $$ for economic benefit over time Government Purchases: goods and services that government buys Net Exports: exports - imports
Nominal vs Real GDP: includes inflation vs adjusted for inflation
Increased borrowing can lead to increased nominal GDP.
Limitations of GDP:
- does not account for health and happiness
- does not account for environmental degradation
Real GDP per capita: total gdp / population
Productivity: ratio of output to input
Alternatives to GDP:
- degrowth
- ecological econmics
- postgrowth
Future of GDP:
- Big Growth Policies probably won’t work forever
- global challenges: climate change, income inequality, resource depletion rethinking of success; GDP may not be a holistic measure of well-being or social progress
Chapter 7: Commodities
What are commodities?
Commodities are raw materials used to create the building blocks of the economy.
Globalization + Free Trade & Comparative Advantage - Shipping issues & Floods & Fires
Oil: crude price is indicator of economy’s health Gas: direct impact to consumers as oil prices rise and fall
However: relationship between oil prices and gas prices is not symmetric
Gas Prices: Rocket and Feather Effect
- The market power of gas stations
- Fear of price variability
Metals: Steel, Aluminum, Copper Supply issues in one can affect the others
Renewables:
- We still need oil to build out EVs, solar panels, and nuclear reactors
- renewable isn’t just about tech
- problems to solve:
- ease trade barriers
- sharing tech in energy storage
- commit to collective action
AI and Commodities:
- AI can help manage crops
- predict and locate resources
AI’s computational power is linked to raw material
Symbiotic Relationship
Taxonomy
- Fiat Money: currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issues it.
- Inflation: rise in prices that create a decrease in purchasing power.
- OPEC: Organization of the Petroleum Exporting Countries, a group of oil-producing countries that coordinate their oil production and pricing.
- Sentiment: the overall attitude or feeling of consumers and businesses towards the economy, which can influence spending and investment decisions.
- Prospect Theory: a behavioral economic theory that describes how people make decisions based on perceived gains and losses rather than absolute outcomes.
- Framing Effect: a cognitive bias where people react differently to the same information depending on how it is presented or framed.
- Anchoring and Adjustment: a cognitive bias where people rely too heavily on the first piece of information they receive (the “anchor”) when making decisions, and then make adjustments based on that anchor.
- Endowment Effect: a cognitive bias where people value something more highly simply because they own it, leading to a reluctance to sell or trade it.
- Regret Theory: a behavioral economic theory that suggests people anticipate regret when making decisions and may avoid choices that could lead to regret, even if those choices are rational.
- Intertemporal Choice Theory: a behavioral economic theory that examines how people make decisions about trade-offs between immediate and delayed rewards, often leading to preferences for immediate gratification over long-term benefits.
- Affective Forcasting: a cognitive bias where people predict their future emotional states based on current feelings, which can lead to inaccurate predictions about how they will feel in the future.
- Social Identity Theory: a psychological theory that explains how individuals derive their self-concept and identity from their group memberships, influencing their behavior and decision-making.
- Consumer Emotional Engagement: the emotional connection and involvement that consumers have with a brand or product, which can influence their purchasing decisions and loyalty.
- Comparative Advantage: the ability of a country to produce a good or service at a lower opportunity cost than another country.
