Economics is Easy
Economics is not as complicated as it sounds. The people that call themselves economists use some very big words. Most of these words, however, are simply the fancy versions of words like, value, profit, loss, cost, debt, gambling, agreement, growth, etc.
Economics is a very specific type of Anthropology that studies the way humans exchange things of value. If you really want to understand economics all you really have to do is study what you value and what you agree to give in exchange for it.
Everybody values food. Not everybody values quality in their food but everybody needs to eat. That is why the kitchen is the perfect place to study.
The first thing to note is that given the right appliances, ingredients and recipes our creations in the kitchen are limited only by our imaginations and taste buds.
The economy works the same way. Given the right infrastructure, raw materials, business plans and ingenuity humans can accomplish a lot. In fact, this is the world that most of today's economists live in which is proving to be a mistake.
The second thing that makes itself immediately obvious is the fact that we don't generally have access to the right appliances and ingredients to make every meal we desire.
There are limits to the size and extravagance of the meals we can make. Some ingredients are simply unavailable. Some are available but out of our price range. Most of us can't eat steak every night and can't afford saffron flavored buffalo wings.
The same can be said of the economy. There aren't enough resources for everybody to have an iPhone 5 or a house with a yard. We would need three Earth's to provide everybody alive today with a standard of living similar to that which is enjoyed by the US middle class.
In the kitchen some of the ingredients are more important than others. These ingredients are used in almost every recipe and without them almost nothing gets made. They might not be the biggest part of most recipes but they are vitally important to the resulting dish.
Flour in a bakery is the best example.
The economy works the exact same way. There are some commodities, some raw materials that are so vitally important that without them almost all economic activity would stop.
The best and scariest example is oil. Oil and other fossil fuels don't make up a large part of US GDP but their existence is necessary for almost every kind of economic activity.
If oil is in limited supply (if it is expensive) then that limits all sorts of economic activity. The fancy word for that is recession which is the opposite of economic growth.
The economists are always expecting something called economic growth. In fact growth is what makes all of the debt we create possible. Without growth there is no way to pay back the principal of the loans plus interest.
The equivalent in the bakery is to expect it to produce slightly more cookies today than it did yesterday.
The first thing we'll note is that the process is going to require more flour every single day. As soon as the bakery looses access to increasing amounts of flour the growth in cookie production will stop.
The economy works the same way. Growth requires ever increasing amounts of resources. The most important resource to the industrial, financial and service industries in the US economy is oil.
Given that information we can then conclude that economic growth will stop the day we can no longer get more oil than we got yesterday.
The End of Economic Growth
That day happened in 2005. Global oil production stopped going up. No matter how much money or effort the oil companies threw at the problem they could not reliably pull more oil out of the ground.
This was the catalyst that set off a short chain of events that popped the housing bubble in 2007.
To read more about the limits to growth I highly recommend reading Gail Tverberg from OurFiniteWorld.com.
She is where I got this idea...
All you really need to know about the economy can be learned in the kitchen.