Book Outline
Part I: The Economy without Finance
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Chapter 1: An Overview
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This chapter summarizes how most aspects of an economy connect and work. Producing goods and services has two inputs, labor and natural resources, and two outputs, income and goods and services. Our income relative to others largely determines the distribution of the goods and services that everyone in society produces. Debt changes relative income and enables individuals to buy products before they spend time earning income. Debt-fueled, Federal Reserve-supported government deficit spending stimulates the economy in the short term but can have many consequences.
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Chapter 2: Production
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We work to transform natural resources into capital, such as hammers, tractors, machines, and buildings, and use that capital to transform additional natural resources into the goods and services we consume for survival, essential comfort, and leisure enhancement.
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Economic output equals the time we spend on production multiplied by the productivity of that time. Economic growth occurs when we spend more time on production or improve productivity (labor productivity). Our productivity increases when we produce more widgets without changing how many hours we work. We can spend our time at leisure, producing goods and services, manufacturing capital, or making improvements. Productivity and our average living standards improve when we spend enough time producing capital and making improvements.
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Increasing productivity is the only way to improve our opportunity to pursue happiness (OPH). When we transform natural resources into goods or services in less time, we can spend the time saved on leisure or producing more goods. For example, suppose the pizza production time declines from two to one hour. In that case, we can spend the hour of saved time at leisure, producing an additional pizza, providing other goods and services, or a combination thereof. Our fantastic standard of living is due to productivity increases.
Innovation increases productivity and enables us to transform an increasing quantity and variety of natural resources into more goods and services. As a result, our wants and consumption opportunities expand. Businesses strive to meet or exceed our wants and improve productivity, increasing our living standards.
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The structure of society changes with productivity improvement, and change requires sacrifice. Businesses that improve their product or production systems more successfully grow, and competitors downsize or close. Individuals lose their jobs and need to learn new skills in the process, and this requires sacrifice. Many farmers lost their livelihoods with the modernization of agriculture. Brick-and-mortar retail businesses lost market share to online companies, causing society's structure to change.
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Chapter 3: The Distribution of Goods and Services
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Individuals throughout society earn income producing roads and other infrastructure; capital such as trucks, buildings, machines, and tools; and goods and services. Time spent producing infrastructure and capital contributes to future production. Relative income enhanced by borrowing less debt payments and reduced by savings largely determines the distribution of the goods and services we produce. Our income relative to others is what truly matters. When our income increases faster than the average, we can buy a more significant share of our nation's goods and services. Our purchasing power or capacity to purchase goods and services increases with productivity and relative income.
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Household consumption capacity decreases relative to the societal average when income does not expand at the productivity improvement plus inflation rate.
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Our nation's economic output is limited by the number of hours individuals throughout society are willing to work and productivity. What we produce depends on what we buy. When government spending (including transfer payments) increases relative to household non-transfer payment-funded expenditures, more of our nation’s productive resources are dedicated to producing goods and services funded by government expenditures. That causes a relative decline in the proportion of our nation's economic output that households can purchase using non-transfer payment earned income. When employed individuals throughout society spend more time providing government-bought services like national defense, health, Medicare, income security, social security, veterans benefits, education, and veterans benefits and services, less time must be spent providing other goods and services like homes, RV’s, computers, hamburgers, and yard maintenance.
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Chapter 4: Natural Resources
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Production, consumption, ecosystem health, the World’s water cycles, agriculture productivity, natural resource extraction, and our living standards are all fundamentally connected.
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All production uses or depends on natural resources. Unless we make improvements, the time it takes to locate and extract natural resources increases with consumption, which decreases our opportunity to pursue happiness (OPH). Throughout history, people have more than offset the adverse effects of growing natural resource scarcity by improving the location, extraction, and transformation of natural resources into goods and services.
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Increasing natural resource scarcity has two sources: consumption and hoarding. Relative income changes when individuals, businesses, and governments control and charge a fee to extract natural resources. For example, if landowners double the cost of using natural resources, income transfers to landowners.
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Chapter 5: Production Equals Consumption
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We spend time producing goods and services and additional time consuming them. We make what we buy, and consumption equals production. Production involves locating, extracting, and transforming natural resources into goods and services.
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Consumption includes determining what to buy, driving to and from stores, purchasing a product online or at retail stores, learning how to use a product, maintenance, and disposal. Production time multiplied by the productivity of that time equals consumption time multiplied by the productivity of that time. When online shopping reduces the time it takes to research and determine what product to buy, purchase, and transport to the point of use, consumption time declines.
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On average, our living standards improve with production and consumption productivity. The Bureau of Labor Statistics measures production but not consumption productivity.
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Service societies develop when production productivity increases faster than consumption productivity. When production productivity rises faster than consumption productivity, we must increase the relative time we spend on consumption. We can personally consume or hire others. For example, we can buy the materials, prep our homes for painting, and paint our homes, or we can hire a painting contractor. Service societies develop when productivity improvement enables us to hire others to consume on our behalf by providing services.
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Work in our homes and businesses is intertwined and symbiotic. Arguably, the most important work occurs in the unmeasured sector, where we recover from and prepare for paid work, enjoy life, volunteer, vote, and transmit values to our children.
Chapter 6: Culture, Values, Human Capital, Social Capital, and Economic Output:
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Our belief systems, which drive our propensity and ability to produce and improve, underpin per capita growth and OPH. Ability refers to competence, skill, and knowledge. Collective desire, passion, and commitment to improvement relate to propensity.
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Character, honesty, integrity, cooperation, individual responsibility, empathy, and sacrifice for the common good are personal traits that promote economic vitality.
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Our living standards depend on productivity, which improves with trust. Trust depends on honesty and integrity. Changes in trust and attitude towards work are summarized and have a powerful economic effect.
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The choices we make depend on our values and circumstances. Governments tremendously affect circumstances through social programs, law and order, policy implementation, and other factors.
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Part II: For Economists and Those Who Want a More In-Depth Understanding
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Chapter 7: The Production Equation
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We all only have 24 hours per day. That time is divided between sleep, leisure, and work. Work time is subdivided between improvement, capital production, and goods and service provision. Economic output is equal to production time multiplied by the productivity of that time. Productivity increases because of improvement and capital production time. We spend time improving (innovating) capital and production processes and additional time producing new capital and implementing better production systems. Our living standards increase when sufficient time is spent on production, improvement, and capital production. The production equation formalizes the relationship between how we spend our time and economic growth.
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Chapter 8: The Purchasing Power Equation
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The Purchasing Power Equation formalizes the relationship between productivity, relative income, and purchasing power, or our capacity to buy goods and services. The derivation uses corporate income statements and affirms that all economic output has only two inputs: labor and natural resources.
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Part III: The Economy with Finance
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Chapter 9: Financial Sector Overview
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In modern societies, virtually all transactions have a financial component. We buy products, invest, get paid for work, purchase insurance, and borrow money. Banks create the money we borrow. Non-bank financial institutions do not print the money we borrow and loan more than banks. Large businesses and government entities borrow money by selling bonds. Investors buy bonds and other securities like stocks, mutual funds, ETFs, and derivatives in markets like the Dow Jones Industrial Average. This chapter introduces many additional topics.
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Fiscal, monetary, and US Treasury policies are integrally connected and affect economic output.
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Chapter 10: Debt
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Debt moves spending forward and stimulates the economy, while debt payments harm the economy. We can work, save, and eventually purchase items with the savings, or borrow and purchase immediately and then work to make the debt payments. Debt enables households, businesses, and government entities to pay for products before they earn money or receive tax payments.
Rising debt is sustainable when used to increase income sufficiently. For example, debt used to buy a 100,000-dollar excavator or RV stimulates the economy by the same amount in the short term. When successful, the excavator increases income, which offsets the adverse effect of debt payments.
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Nations repeatedly fall into the trap of growing the economy through increases in debt-fueled government spending. Only increases in debt-fueled expenditures stimulate the economy in the short term. The continuous use of debt-fueled spending increases cause debt payments to become unsustainable. The related consequences of buying government debt with money that central banks create are described in Chapter 12.
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Chapter 11: The Federal Reserve and Financial System Plumbing
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The Federal Reserve is the center of our financial system. Banks and the United States Treasury have accounts at the Federal Reserve. Government payments and receipts, as well as most non-cash personal and private financial transactions, are settled using the Federal Reserve System.
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The US uses a two-tiered financial system: Transactions between entities with Federal Reserve System accounts use reserves and the money transactions we are familiar with. The Federal Reserve creates reserves, and banks create money. One way the Federal Reserve stimulates the economy is by exchanging reserves it creates for assets that banks buy with the money they create. When the Federal Reserve states that it will increase its balance sheet by sixty billion dollars a month, banks buy sixty billion in assets like US Treasurys with money they create and exchange the assets for reserves the Federal Reserve creates. This process stimulates and distorts the economy. Banks need reserves for payment settlement and other purposes.
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The Federal Reserve purchased unprecedented assets during and after the Great Recession, resulting in excess bank reserves. Before the Great Recession, banks paid interest to borrow reserves; now, the Federal Reserve pays banks interest on reserves (IOR) to control interest rates. The result is a massive transfer of income to the financial sector.
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Chapter 12: Federal Reserve-Monetary Policy
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When the Federal Reserve states that it will raise or lower interest rates, it refers to the Federal Funds Rate. The Federal Funds Rate is the rate at which banks lend reserves to one another overnight. It affects the economy through credit cards and other interest rates.
It is relatively easy to achieve short-term growth through deficit spending and expansionary Federal Reserve monetary policy. Expansionary monetary policy promotes demand-driven short-term growth through private sector debt-fueled spending, rising asset prices, financialization, currency manipulation, and sentiment changes. The Federal Reserve's purchase of assets like government bonds promotes higher stock, home, and other asset prices. Households increase spending when interest rates decline, and asset prices rise. Businesses hire and purchase capital to meet the increase in demand, and economic output expands over the short term.
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When tax increases fund rising government spending, the associated reduction in private-sector spending is apparent. The continuous use of Federal Reserve-supported increases in government deficit spending to stimulate the economy over the short term harms the American dream through the equivalent of a tax on all income, a transfer of wealth from Mainstreet to Wallstreet, financialization of the economy, greater economic instability through asset and debt bubble formation, decreased upward mobility, and moral hazard. The resulting economic insecurity and income disparity critically contribute to American discontent and the divide between left and right.
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