1) Economic growth. 2) Boom and bust cycles
An economy is defined by the products and services provided by a society.
A growing economy means the availability of value is increasing, so the standard of living is improving.
Economics is the social science that tries to understand how an economy develops by studying the human action.
FREE MARKET ECONOMY
Competitive experimentation to satisfy consumers' desires in an efficient way is what drives an economy.
Producers guided by the expectation/opportunity of profit, deploy capital for the creation of products and services. (Efficient = relatively few costs).
Profit occurs when final goods provide more value than is destroyed in the creation process, that is, when the aggregate value for them is more than capital is depreciated . It means the producer added economic value to society.
Interest generated guide new producers in their activity and are key to this coordination process of value creation. High interests make some producers/business to rise while negative interests make business to fall.
Voluntary exchanges also add economic to society because individuals are able to satisfy their preferences by getting goods they value more than the products and services they exchange.
The coordination of multiple exchanges is called markets. Exchange rates denominated in monetary units are called prices. Prices signal the scarcity of a good compared to the scarcity of a money. Signal a spot where the preferences of good providers and money holders are satisfied.
Exchange: spontaneous cooperation.
Scarcity involves availability of new units (inflation) in conjunction with the availability existing units (holders relative appreciation)
Value, cost (detriment of value) are subjective.
Through money it is possible to somewhat approximate them through prices and approximate their quantifiability which allows economic calculation.
-The most stable is the availability (scarcity) of a money the more neutral will it be as unit of account.
-The less perishable the good (cost of storing it), the more distant future expected increasing scarcity its price will be able to signal because market participants anticipate them and adjust current prices accordingly, smoothing scarcity changes, providing liquidity of goods and money "current price could discount future prices". (speculate). Arbitrage (instant or through time).
Bubble: malinvestment (boom) -> adjustment (bust). Graficamente: en precios y en produccion.
Recession y depresion: produccion. Boom and bust (bubble): capital prices, speculators. Pero puede afectar a la producción si los especuladores o sus deudores producían.
Cuando la burbuja de precios de algunos bienes de capital es importante (extendida en tiempo o alcance en número), la economía se adapta a ello, asi que luego, pinchazo de la burbuja = recesion.
-Prices in free market: the exchange rate where supply and demand coincide. where demand and supply are at equilibrium.
pronunciados ajustes a la baja tras prolongados aumento de precio sostenidos en el tiempo: burbujas. when there is a general ignorance / lack of knowledge. Normalmente desmedido optimismo sobre pasado, se contagia entre gente con poco conocimiento y basan su decision de compra basicamente en que ha subido en el pasado, se retro-alimenta: se extiende como sabiduría general y no se observan riesgos. los ultimos compran sólo xq ha estado subiendo en el pasado. Cuando deja de subir, deja de interesar y boom:
es una situación en la que se produce un incremento desmedido y descontrolado del precio de un bien, separándose de su valor razonable
es un fenómeno que se produce en los mercados, en buena parte debido a la especulación, que se caracteriza por una subida anormal, incontrolada y prolongada del precio de un activo o producto, de forma que dicho precio se aleja cada vez más del valor real o intrínseco del producto
is an economic cycle characterized by the rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive sell-off occurs, causing the bubble to deflate.
Because prices signal scarcity, production adapts to those signals.
price below: accumulation of goods and smooth the price. Price above: selling of inventory and smooth price and accomodate availiability.
phase characterized by false expectations that lead to malinvestments (allocation of savings into capital goods that end up wasting value).
Bubble is a relative term for the last part of an extreme boom phase. At that stage there is a self-reinforcing mechanism where the actions from some investors feed even more incorrect assumptions.
Bust or crisis:
economic adjustment once losses have been revealed. The uselessness of capital has been made visible, so the creation of new savings is needed before being allocated into well suited capital.
Depression is a relative term for a big and generalized recession/bust.
Not so free market economy: Intervined economy (distorsion)
When markets are (economy) intervened or centrally planned, prices don't reflect a natural supply-demand relation, so (calculating with money) profits don't represent creation of value anymore (and favoured producers get value that is not correspondant with demand). Therefore, capital is attracted by such (money numbers) profits and allocated into the favoured producers instead of into those that increase value availability the most.
1) As a consequence there is a reestructuration of the economy that lowers economic growth/progress because of a non-natural allocation of capital.
2) (Because of policies) Those suddenly created distortions that are not allowed to self-correct, may create false expectations, which may trigger or exacerbate business cycles, transforming them into economic cycles and bubbles.
Economic cycles consist of generalized business cycles, those that affect simultaneously different sectors.
Usually, when the destruction of value is evident, those policies are somewhat reverted, or further policies are enforced at different places of the value chain.
Example: fiat money (intervened):
1) Fiat money results in a value-redistribution scheme from holders of that money to the Central Bank that issues new units. Each previously existing unit represents now a smaller portion of wealth, which destroys previously acquired knowledge through the price mechanism and tends to harm any formerly established recipient of payments while benefiting the payer.
The fact that the Central Bank doesn't look for a return when it distributes those units constitutes an advantage for inefficient producers, specially for those directly connected to it.
Businesses that otherwise would be bankrupt, are able to profit and expand. Companies that are able to survive because of the cheap credit "subsidized" by the constant injection of fiat, are called zombie companies.
Rescues and guarantees are intermittent injections of fiat money that incentivize the benefited companies to disguise capital consumption as profit.
E.g. commercial banks receive compensation from excessive risk taking. Prior to the 2007-2010 financial crisis, they assumed extreme investment risks that appeared very profitable until the market correction came. They had actually been depleting their reserve, so they had to request a rescue when their bankruptcy was evident.
The abuse of the fiat money system conducts the economy to an anemic growth (poor growth in which business that destroy economic value are able to capt the new money that flows from the Printing Press).
2) The unpredicted variations of the monetary base and its distribution provoke unanticipated abrupt changes into the sectors where it flows to. This can feed incorrect assumptions that do not identify such a temporary flow as the main cause.
E.g. in Iceland's prior to the 2008 economic collapse, there was an artificial wealth illusion due to a spectacular growth in asset prices. Excesses were spurred by a massive growth in debt. The natural barrier for the containment of debt was demolished by the current of money from Central Banks to debt markets. Iceland's bust phase started at the time its credit expansion finalized.
The pumping of money is stopped when the Central Bank considers that the value of fiat money is diluting too quickly. The restructuring of the economy that follows is called crisis.
Income: value received per unit of time.
Savings: value accumulated. It may include money, capital and final products.
Wealth: a relative abundance of savings.
Trade: a voluntary swap of property between two people.
Capital - Asset - Property - Good: anything useful - valuable - possessable - desired.
Investors - Producers - Companies - Businesses: economic agents whose main role is the coordination of capital use.
Investing: the allocation of savings into capital goods looking for a return.
Speculation: a form of investing in which the expected profits come from selling back the asset after price changed. To own in expectation of price increase, also to borrow in expectation of price decrease.
Interest: the return that a producer obtains (because of its investments or its products and services) less the cost of production. The cost of production is the depreciation of its reserve. Profit in relation to capital.
Creation reflects production. Destruction (property depreciation) reflects consumption.