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Forums - General - The basics of how an economy works (or, how to impress your Grandma)

alephnull on 30 January 2009

A few things off the top of my head which you might want to go into:

Simple
1) Monetization of various assets - Specifically debt.
2) The role of leverage in the current crisis
3) The failure risk modeling in the "long tail"

Less simple
4) Underlying assumptions in the orthodox model general equilibrium models (Arrow-Debreu)
5) Path dependent nature of general equilibrium if agents allowed to trade in out of equilibrium prices.
6) Existence of multiple equilibria, and assumptions required for number of equilibria to be finite.



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Angel_DwK on 30 January 2009

Great read

so basically what caused this recession was people saving money in the banks and the banks then investing that money into drowning companies and thus losing more money then they have?



Predictions.

1. Wii will never reach 50% market share.

2. Kz2 will sell 1.3 first week 3.5 LT.
Sales predictions for 09.

Wii - 69 - 72
PS3 - 32 - 34
X360 - 39 - 41


SamuelRSmith on 31 January 2009
reask said:
OK Sm here's my question and btw very good analysis i might add.
What happens when confidence ebbs out of an economy especially a small economy.
Are your savings safe or could there be a major run on that banking system.
When confidence goes everybody stops spending regardless of income or job security which in effect has a profound effect on said economy.

People start hiding money in case there savings are lost or worse still they lose there shirt on there investments or pensions.
I suppose what I am trying to say is what happens when the bottom falls out of an economy and you find out that the Emperor is actually wearing no clothes.
My analysis is pretty crude but in saying that I don't have any sort of education on economics and am just putting my fears into words.

For me it is the ordinary folks who essentially drive economies with there cash flow.
I mean walk into any bank and the queues of people putting cash in be it for loans or savings are mostly ordinary workers.

I hope I have made some sort of sense in what I am saying as I really am worried about how bad this down turn will be.

 

 Are you asking what happens when people stop spending money in an economy, and instead of saving it in a bank, they chose to save it "under the pillow", as it were.

Well, to put it frankly, things would get a whole load worse than what they are now. The main problem with the crisis of today is that the banks have essentially run out of money to lend, and when they get the money, they'd rather put it towards fixing their ills, as it were.

However, if everyone was to take their money out of a bank, the bank's ability to invest will go to nill -no one would be able to get loans, mortgages, investments in firms will go down the pan (the reason why a lot of businesses have been going down recently is that they were living off of credit, and now they can't get any.

The way the banks would try to raise money would be to increase interest rates on mortgages and other withstanding loans, whilst dropping interest on what they pay out to their consumers.



reask on 31 January 2009

I was asking are savings safe more so.
I know Governments have giving guarantees for depositors.
But could they say yes your savings are OK but we are freezing all big cash withdrawls for say 24 months and then reviewing it.
I suppose really I am looking at worst case scenario.

I mean look at Iceland for instance.
I just think small economies such as mine in Ireland could be in danger of actually going bankrupt.
If so what guarantees do you have.

You know its always the ordinary Joe who suffers most when these things go bad.