🎓 How does the economy work?

What is the Economy?

The economy as a whole is a connection between individuals, businesses, governments, and nations using currency, and goods to exchange for other goods or services.

People devote their whole lives to the study of economics or the study of the economy. It is obviously a deep topic and much like science it is constantly being tested and proven wrong. The issue is unlike science it is a lot harder to do tests to see how an economy would function under different rules or circumstances.

That being said the economy is always changing and evolving. Our current economy is based on capitalism. Capitalism or the free market is the process of letting individuals decide what to produce and who to produce it for in exchange for money.

The whole economy is basically just stuff being produced for people in exchange for currency. Now that you understand a little bit about what the economy is let’s talk about how it actually works.

How does the economy work?

The US economy works off of currency and debt. Debt is a little bit complicated to understand on the economic level so let’s go over it real quick.

A good visualization of how debt in the economy works is if you imagine you bought a microwave. You use the microwave every day, but not all day. While you are not using the microwave you let your roommate use the microwave. In this example the microwave is money, you letting your friend use your microwave is like putting your money in the bank. There is still just one microwave but two people are using it like two microwaves. It’s the same with cash in the bank, it’s still the same amount of money, but two people can use the same money.

This is why inflation is much more than just how much the government is printing. It is also how much money is being lent out at a time.

Because of this debt-based system, we have a business cycle. The business cycle is when people borrow more money causing good times in the economy causing people to borrow more money. This cycle continues until there is so much debt that everyone can not pay it all back. Then people start defaulting on debt causing banks to raise rates causing hard economic times causing more people to default repeating the cycle. This happens until defaulting slows down and borrowing picks back up.

The times of excess borrowing and good economic times are called times of “expansion” and a worsening economy with increasing defaults is called a “contraction” both of these are normal but are supposed to be made less severe by the government.

Now that you know the basics of the economy and the business cycle let’s quickly go over the government's role in the business cycle

The government’s role in the business cycle

The government is supposed to make the contractions of the business cycle not as bad. This means during poor economic times they need to pump money into the economy and cut taxes. This also means in order to pump money into the economy and cut taxes they also need to raise taxes and spend less during good economic times.

Unfortunately our government is only good at spending money during the bad times. They are not so good at cutting spending and raising taxes during the good times. This is why our country is in so much debt.

The reason the government is so bad at their job (this should be their primary job) is because the business cycle takes roughly 5 years, this means we have roughly 5 years of good times and 5 years of bad times. With a government that has its leader elected for only 4 years focusing on the future of the business cycle is not really in their best interest.

This is mainly the people’s fault though for not understanding how the economy works. Many people just think “more spending = good and more taxes = bad” when it is actually situational.

Why you NEED to understand the economy

We live in a democratic society meaning it is your duty and responsibility to become informed about the economy. It is the uninformed that have created our country’s debt issues, our high taxes, and our out-of-control spending.

Understanding the economy will also help you make more informed decisions about your future. It will also help you take responsibility for your own life. People who do not understand the economy blame investors, the government, and big institutions for the housing crises when it comes down to a simple supply and demand issue.

Developing an understanding of the economy and the business cycle will also help you know that the bad times never last despite what the news or media might portray. It will also help you understand the good times never last either and so you need to make sure you prepare for the bad.

In the end, I highly encourage you to do more research on your own, read some articles, watch some videos, or have a conversation with chat gpt (I don’t judge how you choose to learn). Learning about the economy is in your and the country’s best interest and understanding the economy will help save you and your family from financial struggle or misunderstanding down the line.

Brokers I use

• Webull Best for more active investing (get up to 75 free shares by depositing over $100)

• M1 Finance Best for more passive investing above $10,000 (get $75 if you invest more than $10,000)

• Charles Schwab Best for custodial accounts (get $100 by investing over $25,000)

• Fundrise Best for buying alternative investments such as real estate ($25 for signing up and making a $10 deposit)

Other tools

• Yahoo Finance Best for economic news

• Finviz Best for stock analysis and screening

Disclaimer: Most links are affiliates but I 100% endorse and use all of my promotions, we also split the promo reward when you sign up!