It's the Economy! (Stupid)

"A universally helpful and insightful book. I particularly liked the straightforward charts and summary points. It should be a reference manual for everyone interested in the US economy."

David Gamble
Former Chief Executive
British Airways Pension
Investment Management Ltd

(excerpt from the book...)

The financial markets--and especially the banking industry--of any economy, and especially the USA, hold a privileged position. And for good reason. In this chapter you will learn why this must be so and how these markets work. This will be accompanied with a statistical analysis of the various parts to provide a factual basis for understanding this point.

"Money makes the world go around" as the song from the show Cabaret states so eloquently, and it is certainly true. Another word for money in economic terms is "liquidity". Liquidity is to the body of an economy what blood is to your own body. Maintaining your body's blood pressure and preventing any blockages is as vital to your personal health as ensuring the circulation of money/liquidity is to our economy. The reason why I use the term "liquidity" instead of simply money is that "money" denotes a "thing", in this case the currency we hold that hopefully retains its value and is used as a means for exchange. "Liquidity", however, denotes the "dynamic process" whereby money flows throughout the entire body of the economy. To continue the blood analogy, while the blood itself is what maintains healthy cells in the body, it is meaningless without the constant flow to-and-from the heart to constantly replenish the cells. This is why maintaining a well-regulated blood pressure is so important to maintaining a healthy body, in the same way as the importance of liquidity is to the economy. Hence the process is vitally more important than the thing itself, though the two are invariably connected.

This is a "dynamic process" because the US economy is constantly changing--expanding and contracting--and therefore the need for liquidity management for the economy is like maintaining blood pressure to your own body.

The Federal Reserve system is virtually the heart of the economy in almost the same way as the heart is to the body. That's why our current crisis in the financial markets is so critical: It is similar to a heart attack and the Fed is trying to prevent the economy from going into cardiac arrest or developing a stroke. This is just as important to the economy as if you were going through something with your own heart.

In this chapter you'll learn how liquidity/money is added to the economy, how it is distributed, how it is managed, how it is lent out, how it is invested, how the pension fund and money managers affect the investments, as well as putting our stock markets into perspective, both relative to our own economy and to other stock markets around the world. This is an essential part of understanding the role of money/liquidity in our society that affects all of us. Clearly, the objective here is not to cover all of the bases in depth, but to provide you with a basic but understandable panorama of the US financial markets.

(...more in the book)