How an Economy Grows and Why It Crashes

by Peter D. Schiff

Wealth is always a relative term. In a primitive society where little is produced, even the richest can’t match the material well-being available to the poor of an industrialized economy. In the Middle Ages, even the mightiest kings lacked the basic amenities that nearly everyone in the United States now takes for granted…

In modern economics, some have even labeled this idea “the labor theory of value,” which states that profit is created by paying workers less than they are worth.

loans to consumers that do not fundamentally improve productive capacity are a burden to both the lenders and the borrowers.

in recent years, economists have severely downgraded savings on the economic value chain. In fact, as far as many economists are concerned, savings are a drag. Keynesians view savings as detrimental to growth because the act removes money from circulation and decreases spending (which they assume is the crucial element in creating economic growth). Policy makers, influenced by these ideas, have made rules that reward spenders and penalize savers.

Saving creates the capital that allows for the expansion of production. As a result, a dollar saved makes more of a positive economic impact than a dollar spent. Just don’t try to explain this to an economist or a politician.

Trade on a national level is no different than labor specialization on a personal level. Each individual, or country, trades what it has in abundance, or what it does best, for the things that it doesn’t have or can’t easily make.

basic economic principles do not change with the size of the economy. They’re just harder to see because of the many layers that exist between savers and borrowers.

What is far more certain is that the government’s monopoly control of public projects and services almost always leads to inefficiency, corruption, graft, and decay.

For instance, if a foreign manufacturer can deliver T-shirts to the United States that sell for less than domestically produced alternatives, then Americans can spend less on T-shirts. The money saved would be available to be spent on other things….skateboards perhaps.

Society as a whole is not helped by perpetuating inefficient use of labor and capital. If the United States no longer has a competitive advantage in T-shirts, it must find something else in which it does. If trade barriers were erected to protect those jobs, the cost of T-shirts would stay high. People would have less money to spend on skateboards (for instance),

while it’s easy to put your finger on the job that is saved, it’s impossible to see the job that was not created.

Take away the freedom to fail and you have obliterated the freedom to succeed.

rising prices are merely the results of inflation! The inflation is the expansion of the money supply.

During a recession people wisely stop spending. When they do, demand drops and prices should fall. But sometimes these forces are counterbalanced by an expanding money supply that diminishes the value of currency.

Many of these dollars held by foreigners are typically deposited in American banks, where they can be borrowed by Americans. That way we can spend even if we don’t save.

Normally, trade deficits tend to be self-correcting. A country with a trade surplus, in that it sells more abroad than it buys, will create an international demand for its currency. If you want its stuff, you need its currency. As a result, strong trading positions tend to strengthen a country’s currency. The opposite is true with countries with weak trading positions.

But when a country’s currency rises, its products become more expensive. This gives a competitive opportunity to countries with weak currencies to start selling some of their products into that market. When they sell more, demand for their currencies rises. This currency counterweight should keep runaway trade imbalances in check.

an economy can’t grow because people spend;

tax increases are problematic. Higher rates always discourage productivity and deflate economic vitality. There is a limit to how high taxes can go. Raise them enough, and people stop working. Raise them higher, and they may even start rioting.

Inflation is simply a means to transfer wealth from anyone who has savings in a particular currency to anyone who has debt in the same currency. With hyperinflation, the value of savings gets completely wiped out and the burden of debt is removed.