Economics

Some years ago, experts at the Federal Reserve in Washington DC put together a model designed to predict future trends in the world's major currencies. They had access to more information on foreign-exchange markets than economists in any other country and they were confident of success. For months they worked on the project until, at last, it was time to switch on the machine.

In economics, everything finally comes back to unemployment. However much attention the experts and politicians pay to a country's gross domestic product, inflation, interest rates or wealth, the simple question of whether people do or do not have jobs remains central. The objective of full employment is usually one of the first manifesto pledges made by political parties around the world -- though the extent to which they stick to such a promise can vary wildly.

Unlike today, deflation -- in which prices fall each year rather than rise -- was not always seen as a threat. For a couple of hundred years up until the beginning of the 20th century, vibrant economies often experienced sustained bouts of the phenomenon. Indeed, Milton Friedman maintained that, in theory, governments should aim to sustain a moderate amount of deflation.

Economics actually comprises two subjects. First, it's the technical specialism of studying how and why people make certain decisions. Second, it's the broad study of how governments improve growth, tackle inflation, maintain their finances and ensure unemployment does not climb too high. The distinction between microeconomics and macroeconomics is central to understanding economics.

It was a phrase Karl Marx first used with disgust: 'The cult of the individual'. But by the late 20th century the idea that individual choices are of primary importance in economic policymaking had become dominant. This philosophy was the seed of Thatcherism and Reaganism, and it all stemmed from one small European nation: Austria.

For years it was one of the best-kept secrets in Jamaica. Coral Spring Beach was among the whitest and most glorious stretches of coast on the Caribbean island's north side. But then, one morning in 2008, developers building a hotel nearby arrived to discover something bizarre. The sand had gone. Thieves had been in under cover of night and stolen 500 truck-loads of the stuff.

For Francis Fukuyama it was the moment that marked the 'End of History'. For millions in Eastern Europe and beyond it heralded a greater freedom and prosperity than they had ever before experienced. For David Hasselhoff it was the crowning concert of a hearteningly brief music career. The fall of the Berlin Wall meant a lot of things to a lot of people.

Economics isn't all about money, but money makes economists of us all. Ask someone to pay a price for something -- as opposed to offering it for free, or for a favor -- and you'll flick an invisible switch inside them.
Behavioral economist Dan Ariely used an experiment to prove this. He offered students a piece of Starbucks candy at a cost of 1 cent each. On average they took four pieces. Then he changed the price to zero -- free. Traditional economics would assume that, with the price lower, demand would increase, but no. Once money had been taken out of the equation, something strange happened. Almost none of the students took more than one piece each.

However wealthy and influential we may be, we can never find enough hours in the day to do everything we want. Economics deals with this problem through the notion of opportunity cost, which simply refers to whether someone's time or money could be better spent on something else.

"In this world nothing can be said to be certain except death and taxes," said Benjamin Franklin in 1789. He was hardly the first person to complain about taxes. Ever since they came into existence governments have been devising ingenious ways of raising money. When Joseph and Mary traveled to Bethlehem, the Bible tells us, they were doing so to have their property registered for tax purposes; the Domesday Book Survey of England was ordered by William the Conqueror in 1086 largely in order to find out who he could tax; and as early as ad 10 Chinese citizens were having to pay an income tax.

Businesses, unlike people, are not created equal. There are some companies that would be missed if they ceased to exist, but life would go on. There are others whose collapse would cause vast sections of economies and societies to implode. Into this second category fall banks.

Depending on whom you listen to, inflation will either clean your teeth or knock them out. Former United States President Ronald Reagan described it as being "as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." Karl Otto Pohl, former president of the German Bundesbank, said: "Inflation is like toothpaste; once it's out [of the tube], you can hardly get it back in again."

The government raises taxes but rather than bringing in more money to its accounts this actually reduces its revenues. Conversely, cutting taxes brings in more cash. Economic logic has been turned on its head. But this is no black magic; it is instead the main tenet of supply-side economics.

Supply-side economics is among the most controversial of economic theories. The debate over it encapsulates the divide between those who believe in greater government distribution of wealth and those who believe, above all, in individual liberty and a free market.

In 2007 David Beckham made waves around the world by signing a five-year deal to move from Real Madrid in Spain to Major League soccer club LA Galaxy for a reported $250 million. It was the size of the deal that generated most interest. He may have been a good soccer star; he may also have been a massive marketing draw for both the soccer club and the league, which has struggled to compete with NFL, NBA and other American sports. But, really $250 million for one man?

A few years ago the British Broadcasting Corporation asked its radio listeners to vote for their favorite philosopher. As the votes poured in there were some obvious favorites from the start -- Plato, Socrates, Aristotle, Hume and Nietzsche among them -- but as the counting started it soon transpired that there was a clear winner for the title of Britain's favorite philosopher: Karl Marx.

The Spaniard looked up at the magnificent scene in front of him and gasped in amazement. The year was 1436 and he was in Venice to see how the Italian city state armed its warships. Back home, this was a laborious process taking days, but here before his very eyes the Venetians were arming ship after ship in less than an hour a go. But how exactly did they do it?

Absolute Advantage: When a country can produce something more efficiently, in other words at less expense and effort, than another.

Aggregate: Another word for 'total'. Refers to a big figure -- for example, gross domestic product or a company's total sales over a year.

Automatic Stabilizers: A government's expenditure or receipts, which expand or contract to compensate for the economy's booms and busts.

Bank Run: When fearful customers all try simultaneously to pull their savings out of a bank, often leading to its collapse.

Bear Market: When there is a steady drop in the stock market, which leads to widespread pessimism and downward growth.

Bond: A certificate of debt from a country, state or company.

Bull Market: When there is investor confidence, which leads to widespread optimism and upward growth.

Capital: Money or physical assets used to produce an income.

Capitalism: The economic system in which capital is owned by private individuals and corporations.

Capital Controls: State-imposed restrictions on the amount of capital allowed in and out of a country.

Capital Markets: The broad term for markets where equities and bonds are issued and traded.

Central Bank: The main monetary authority of a country. It issues the national currency and regulates the supply of credit -- most notably by controlling interest rates.

Communism: The Marxist idea that capitalism would be succeeded by a society in which the people (or rather the government) own the means of production within an economy.

Credit: A polite word for debt; a promise to pay someone in the future for what one borrows today.

Credit Crunch: A financial crisis which makes banks reluctant or unable to lend money, causing the rest of the economy to suffer.

Default: When a person, institution or country fails to repay its debts.

Deficit: A shortfall in an account -- be it a government's budget deficit or an entire country's current account deficit.

Deflation: A situation where the prices of goods in an economy are, on average, falling rather than rising.

Demand: The total amount of goods or services people are willing and able to buy at a given price. Usually, as the price rises, people demand fewer goods.

Depression: A severe recession. Usually defined as a gross domestic product contraction of 10 per cent, or a recession that lasts three years or more.

Employment Rate: The percentage of the workforce with jobs.

Equilibrium Price: The price at which the supply of goods matches demand.

Exports: Goods and services that are produced domestically and then sold to foreign countries.

Fiscal Policy: The decisions a government takes about what to spend its money on, how to raise taxes and how much to borrow.

Gold Standard: An international system in which countries' currencies are fixed in relation to gold prices.

Hedge Funds: A type of investment vehicle which can bet on a company's value decreasing or increasing, as well as many other more complex strategies.

Hyperinflation: When inflation runs out of control. A highly damaging phenomenon most notoriously experienced by Germany in the 1920s and Zimbabwe in the 2000s.

IMF: The International Monetary Fund. An international organization charged with monitoring the global economy and rescuing countries facing funding crises.

Imports: Goods and services bought from overseas.

Inflation: The rate at which the price of goods throughout an economy is increasing.

Interest: The amount, expressed in a percentage, that someone can hope to receive back on an investment. Conversely it can be the amount someone is charged for borrowing.

Laissez-faire: From the French 'let (them) do (as they choose); where governments try as much as possible to leave the market to its own devices.

Liquidity: A measure of how easy it is for someone to exchange an asset -- for instance a house, a gold bar or a pack of cigarettes -- for money or other types of currency.

Macroeconomics: The study of government and international economics: taking a step back and examining how whole economies work and perform -- what drives gross domestic product, prices or unemployment.

Marginal: The difference it makes to buy or sell one extra unit of something, as opposed to the average cost of a product.

Market: Where buyers and sellers meet (often virtually) to trade goods and services.

Microeconomics: The study of the minutiae within economies: what makes people take certain decisions, how companies become profitable, and so on.

Monetary Policy: The decisions a government or central bank (usually the latter) make about regulating the amount and price of money flowing around the economy.

Money: Assets commonly used to purchase goods and settle debts. It is a medium of exchange, a unit of account and a store of value.

Money Markets: The web of dealers and investors in short-term lending -- anything from a few hours to a year.

Money Supply: The amount of money flowing around an economy.

Monopoly: The exclusive control by one seller of a particular product in a market.

Negative Equity: Where someone's asset, usually their home, falls in value so much that it becomes worth less than the mortgage or loan that funded it.

Privatization: When a company or institution which was previously government-owned is sold off to a privately owned entity.

Productivity: The amount of economic output generated compared with the amount of effort (in terms of hours worked or number of workers).

Quantitative Easing: Methods central banks employ when interest rates no longer work, as happened in japan in the 1990s and much of the Western world in the 2000s. It attempts to influence the quantity rather than the price of money in the economy.

Recession: A fall in a country's economic fortunes: when GDP contracts rather than grows for two successive quarters-Securities Financial contracts that grant someone a stake in an asset: this can mean everything from bonds and shares to complex derivatives.

Shares: Also known as equities. A unit of ownership in a company. Shares entitle the owner to a dividend, and a right to vote on the company's plans.

Stagflation: When high inflation is coupled with stagnant economic growth.

Subsidy: A sum of cash given by someone -- usually a government -- to support a particular business or industry. They are often reviled as a form of protectionism.

Supply: The total amount of goods or services which can be bought at a particular price. Together with demand, this is what powers a market economy.

Tariff: A fee imposed by a government on goods imported from overseas.

Zero-Sum Game: Where the winner's gains equal the losses of the losers. This contrasts with positive-sum games where both parties can profit to some degree.

At the heart of economics and the very core of human relations lies the law of supply and demand. The way these two forces interact determines the prices of goods in the shops, the profits a company makes, and how one family becomes rich while another remains poor.

If there is one figure worth knowing in economics then it is surely that of gross domestic product (GDP). It is literally the biggest economic statistic of them all, dwarfing everything else, from inflation and unemployment to exchange rates and house prices.

A country's GDP is quite simply the measure of its entire income (gross = entire; domestic = in a particular economy; product = economic output, or activity). It is the most widely recognized measure of a country's economic strength and performance.

The job of a central banker, said William McChesney Martin, is to 'take away the punch bowl just when the party gets going'. The legendary former Chairman of the Federal Reserve meant that it is up to the man or woman in charge of a country's monetary policy -- its interest rates -- to ensure that the economy neither overheats nor sinks into depression.

No economic or currency system is flawless. There is a reason we use a fiat system, as we ran into problems in the past with other currency systems. However, I think it's now coming to the point where we can see fiat currency isn't all its cracked up to be. It all stems from the fact that the currency systems of the world aren't real. What I mean by that is currency has become ‘just a number' that we place a value on. Currency isn't backed by gold, silver or anything real. In fact, it's just a piece of paper (well it isn't paper, but close enough) and often times it isn't even printed but lives in bank accounts and within the economic system digitally.

I have generally had a negative outlook on the economic future for a while. I'm not even a negative person... that is the scary part. I see the world from an entrepreneurs viewpoint... the world is filled with needs and problems that are there to be solved and in solving them you can make the world a better place and make good money doing so! With innovation and invention we can continue to make the world a better place where the standards of living improve for all. But we need to acknowledge the problems our society is facing so we can begin to address and SOLVE them. THAT IS WHY I'M WRITING THIS.

America was a great nation. The concept of America is great. America can be great. America is not currently great. America is no longer the world's richest nation, nor the most successful economy; It is the poorest country and it's economy is the biggest liar, masquerading debt as capital. America has been living a lie, forced to take on increasing amounts of debt (selling future) to hide her true problems. This is unsustainable.

For far too long the US and other Western Nations have been financing growth through debt. They've increased the amount of cheap capital available to consumers and that in turn allowed the citizens to bid up the price of homes (often the most pricey item consumers spend money on). As the price of homes were bided up over the last several decades, so too was the amount of ‘equity' many home owners could use as collateral to get more debt by refinancing their homes. This money was used doing renovations, buying rental property or selling the house and moving up the property ladder and getting an even larger mortgage. The era of cheap capital may be coming to an end. With the fall of the sub prime lending, many lenders are being a lot more cautious about who they lend to and the collateral requirements are stricter.

I originally wanted to sit down and start writing about what the Future Economy would most likely look like. I was then going to use the macro-economic trends to reverse engineer my way down to find great investment ideas. But I've decided to write about a different topic today. Over the last few years I've seen a bunch of articles outline how more companies are beginning to outsource. Outsourcing is not a new trend, but with each passing day, the effects of this practice are accumulating to the point where the question about what the future economy will look like is fuzzy.