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4.2 AVERAGE
4.2 AVERAGE
Money is the most important tool in modern world. If you don't understand and master this piece of paper, you will become a modern day slave.
This book answered all my questions about money & how money is used as a tool to manage people & the world.
This book answered all my questions about money & how money is used as a tool to manage people & the world.
Stellar explanation of central banks, inflation, why interest rates get adjusted by the Fed, and what caused the Great depression, the great financial crisis, Japan's lost decades.
- The book used an analogy of poker chips and how adding more chips will mean the same pot is split between more chips.
- The book used an analogy of poker chips and how adding more chips will mean the same pot is split between more chips.
- Another analogy is how bags of rice could be used as currency, but they are unwieldy and people would use certificates. When someone stores rice at the bank, the bank could loan out that rise to another person, which means there's more money in circulation. As long as everyone believes positively, banks have a positive effect. But if confidence falls, there can be a bank run, and banks will sharply reduce the liquidity which makes things worse during a bad time.
- Too much inflation is bad because inflation becomes its own beast and difficult to tame. Deflation is even worse because people have the same debts even though they now have less money. A bit of inflation is the best, especially considering psychologically people like to get little raises even if the small inflation erodes their spending power.
- The money supply can expand, when the velocity of people spending it and investing it and loaning it is fast. It can also contract because people want to save it, and this leads to a deflationary cycle where people spend less, businesses have less revenue so they cut jobs, that leads to even less spending, etc.
- Central banks can be the "lender of last resort" and give high-interest loans. This means banks won't run out of money. There is "moral hazard", meaning that banks can get careless if they think they'll get bailed out.
- It's good for central banks to be independent from political influence, so they can do tough things such as Volcker causing a recession in order to break the expectations of 13% inflation.
- Iran's money depreciated when the government acted erratically, because citizens swapped to USD for safety.
- Central banks raise interest rates which makes the currency go up in value, since people in other countries exchange their local money for USD to get the higher interest rates. When the interest rates are lowered, the currency goes down in value.
- Purchasing power parity is the concept that $100 in USD should buy roughly the same amount of transportable goods in America versus another country, because otherwise people would buy a ton of the cheaper good and export it to America to arbitrage.
- If Ford sells a car in Canada, and the Canadian currency becomes more valuable, they either have to raise their price or temporarily lose money (hoping the currency swings back).
- A strong dollar can be either because capital is rushing to invest in US stocks (good for the US), or because government deficits forced the US to borrow a lot from the rest of the world. A strong dollar isn't always good or bad -- it depends on the reason there's money being converted into dollars.
- If a country weakens its currency (by printing money which increases inflation and makes that currency weaker), it will make their exported products more appealing. But if every country does this, the exchange rates stay the same but with trade patterns disrupted because exchange rates shift one direction today and the opposite direction next week.
- There is a trilemma where a country can only pick two:
1. let people freely buy and sell the currency
2. set their own monetary policy to stabilize their economy
3. keep a stable currency exchange rate
- There can be a currency outflow in the same manner as a bank run. If the central bank raises interest rates, their economy worsens. If they lower interest rates, more people exchange their local currency and flee, which devalues their currency more.
- Gold does not work as the currency because
1. Discovering a new gold mine would cause inflation.
2. Gold mines are mainly in a few countries (China, South Africa) and other countries are not okay with their money supply being controlled by those countries.
3. There isn't enough gold for the existing fiat money to be tied to it.
- The book described a history of how the US tried twice to have a federal central bank before finally creating a long-lasting one. People feared there would be too much power with a central bank. But without one, there was nothing to stop crises. One bank run was only stopped by JP Morgan who told a bunch of rich men "We have to raise $25M in the next 10 to 12 minutes or else 50 trading houses will fail."
- The Federal Reserve has distributed power across many regional divisions due to fears of its power.
- Stagflation in the 1970s was unusual. Normally if an economy is growing fast, companies raise prices for their products, workers want raises, and inflation happens. If unemployment is high, and growth is low, but inflation is still high, that's unusual. Economists are arguing what went wrong in the 1970s. Some say the Fed held interest rates low for too long.
- The Great Depression started with a stock market crash but it didn't need to become so extreme. It was a man-made crisis according to the book. People had been buying stock using leverage, so they got wiped out. But this led to bank runs, and a huge number of banks failing. There was no FDIC insurance, and more & more Banks failed. The US was still on the gold standard. The economic problems only lifted when Roosevelt stopped letting individuals retrieve gold for dollars. This change let the currency depreciate.
- Some people in the Fed during the Great Sepression believed that a period of deflation was necessary to let the irresponsible borrowers fail, so they could weed out those people and start afresh. The bigger problem was that by adhering to the gold standard, they could not increase the money supply or lower the interest rate to be the lender of last resort and get more activity in the economy.
- The 2008 crisis started with irresponsible subprime mortgages. Those got sliced and diced until people barely knew who held them. Moody's and other rating agencies gave AAA because they were getting paid by the mortgage companies and had incentive to be positively biased. These lenders were using repos to store money overnight. As real estate prices fell and the mortgages became toxic, it became impossible to know which of the complicated derivatives actually held at these toxic mortgages, so repos became unwilling to accept a wide array of financial instruments. This essentially caused a bank run.
- The Fed started in December 2007 giving liquidity to repo markets, money market funds, other banks to ensure they didn't have a liquidity crisis. All the 21,000 loans were paid back and the taxpayers earned interest.
- Quantitative easing was when the Fed wanted to lower long-term interest rates (in order to speed up the economy). The Fed gave guidance that it'd keep future rates low. It also purchased long bonds, which drove down the price. This did work in stimulating the economy.
- Dodd-Frank was passed in response to the GFC. It creates numerous provisions for banks to follow. Also the FDIC was given power to liquidate "too big to fail" institutions the same way it can liquidate banks.
- There was a funny analogy of Japan experiencing deflation to a person who keeps losing weight when everyone else is struggling with not gaining weight.
- Bernanke gave an important talk in 2002 when he described how the Fed has many tools even after hitting zero interest rates. It can buy long-term bonds, lend to banks against a wider set of assets such as mortgages, commit to hold short-term rates low until a future date. These were used later to combat the GFC.
- In the late 1980s, there was a sense that Japan was on the brink of taking over the global economy. The Bank of Japan raised interest rates in 1989, and the Japanese government made regulatory changes to stop land prices from rising too much.
- When the bubble popped, growth went from 3.3% in 1991 to <1% in 1992 to 0.2% in 1993 to -2.4% in 1994. Companies went bankrupt and real estate prices dropped, which was hard for banks. The Plaza Accord bringing down the value of the dollar meant that the yen appreciated which reduced exports.
- Normally with a recession, 1. cut interest rates, 2. recapitalize the failing banks, 3. spend public money and offer tax cuts to create a fiscal stimulus. It was a huge mess and would've taken 20% of Japan's GDP to do bailouts and write down debts. Japan's government forced the banks to kept making loans to zombie firms, "evergreening" them. That let them stay around, paying employees, but preventing more innovative companies from replacing them.
- The Bank of Japan reduced interest rates from 8% in 1991 to 0% by 1999. There was deflation, and also 5.5% unemployment. It wasn't a crisis, but the economy was far below its potential. The economy limped along, and their central bank wasn't spurred by a crisis into dramatic action. In 2012, voters elected Shinzo Abe who did 3 things:
1. fiscal stimulus via government spending,
2. central bank commitment to 2% inflation, which eventually reached 57% of GDP in its holdings,
3. structural reforms (less business regulation, cutting corporate taxes).
- The hyperinflation in Japan after WW2 may have made them reluctant to print money to spur more inflation. But it was also difficult to fight deflation when they have a shrinking population, and manufacturing moving to China.
- Japan's two bubbles (stocks and real estate) were going to be difficult to clean up no matter what.
- Deflation creates enormous problems. People wait to purchase because prices will drop. Businesses are forced to drop prices to get buyers. The US aims for 2% inflation to give a buffer, because 0% means it's easy to tip into inflation. At 2% inflation, the Fed can drop interest rates to 1% and it's still actually -1% real interest rate which is a stimulus.
- It is easier to depreciate money than to re-negotiate contracts to reduce pay. But the Euro bound together many nations that are quite different in their economies. The dollar works for the US because people are willing to move around and the federal government can redistribute funds.
- Germany has a phobia of inflation after the post-WW1 Weimar inflation. Germans are also great savers and they don't buy as many products from other European countries.
- The euro tied together a bunch of countries with different economies. Iceland was able to depreciate its currency by 40% and rejuvenate their economy. Greece could not, and had to get bailed out multiple times by Germany after it imposed austerity. The austerity made Greece have higher unemployment and more difficulty restarting its economy.
- China exports products to the US and then buys a lot of US Treasuries. This allows US bonds to have a lower interest rate (since China is increasing the demand). China keeps its own currency low, which is like giving a discount for their products for the rest of the world.
Being in charge of monetary policy is a lot like using a stinky gas station bathroom. The worst part isn't trying to hold your breath whilst you take care of business and try not to touch anything. The worst part is that whoever you meet on your way out is going to blame for the foul smell in there whether you added to it or not. So it goes with monetary policy. The current Fed Director is lambasted for things done by their predecessors and so on and so forth. And of course they make mistakes but the important thing we need to remember is that we'd be a lot worse off with out them.
It took me just over a month to slog through Wheelan's treatise on money and central banking but I am really glad I did. It gave me a much better understanding of a variety of things: deflation, inflation, the gold standard (and why we don't use it anymore), the consumer price index, the euro (and why it has so much trouble and Greece's role in the 2008 crisis), and the role of central banks in general (price stability in most countries and yes they are necessary in modern economies). I also felt like many of my fears based around the rise of bitcoin were both verified and better defined in the last couple chapters.
And no, I still haven't watched It's a Wonderful Life but it's on my to do list.
So if you come across a Zimbabwe trillion dollar bill, don't feel bad using it to buy a pack of gum so you can get the restroom key. They probably have change for it. Just remember not to use said change as TP be cause it tends to clog the sewers. Just remember to set some aside to get a copy of Naked Money and after you've read it this whole review will start to make some sense.
It took me just over a month to slog through Wheelan's treatise on money and central banking but I am really glad I did. It gave me a much better understanding of a variety of things: deflation, inflation, the gold standard (and why we don't use it anymore), the consumer price index, the euro (and why it has so much trouble and Greece's role in the 2008 crisis), and the role of central banks in general (price stability in most countries and yes they are necessary in modern economies). I also felt like many of my fears based around the rise of bitcoin were both verified and better defined in the last couple chapters.
And no, I still haven't watched It's a Wonderful Life but it's on my to do list.
So if you come across a Zimbabwe trillion dollar bill, don't feel bad using it to buy a pack of gum so you can get the restroom key. They probably have change for it. Just remember not to use said change as TP be cause it tends to clog the sewers. Just remember to set some aside to get a copy of Naked Money and after you've read it this whole review will start to make some sense.
Yes, I learned some things... but why is this so tough to get through? Naked Statistics was incredible. This book, however, just felt dense. Despite not being that dense? I mean, I genuinely feel much more knowledgeable, and there's a chance I will come back to read more cos this Trump presidency is helping to test my knowledge. Ugh, I should keep reading thisssss, but I just... I can't. And it's so tough to pick back up... it's the kind of book for which you roll your eyes before reading like, "Ugh, gonna slog through another hour of this just to make it 1%".
informative
lighthearted
medium-paced
This is a worthwhile read if you've ever wanted to understand "how money works," in the sense of monetary policy and central banking, not personal finance. There are definitely denser texts you could read instead that might be preferred by folks who already have a solid grasp of economics, central banking, and monetary policy, but if you are looking for something a bit lighter - and here I think Wheelan's sense of humor really helps - this is a great place to start.
It's helpful to understand some of the social science behind money, itself, and what makes something function as money *before* digging in on how central banking and monetary policy (exchange rates, interest rates, trade, etc) work. His explanation of why there's a misguided obsession with gold--and why almost all legitimate economists think any attempt to peg a nation's currency to gold is not only wrong but likely also what caused the Great Depression--was worth reading the book for, IMO.
It's helpful to understand some of the social science behind money, itself, and what makes something function as money *before* digging in on how central banking and monetary policy (exchange rates, interest rates, trade, etc) work. His explanation of why there's a misguided obsession with gold--and why almost all legitimate economists think any attempt to peg a nation's currency to gold is not only wrong but likely also what caused the Great Depression--was worth reading the book for, IMO.
Not as good as Naked Economics, but well researched nonetheless. The first half was full of interesting examples I'd never heard of; the second a bit drier and more obvious.
Learned a lot of fun facts, including: there are people who try to measure how much better products get year over year to more accurately calculate inflation! E.g. this TV is now 4% better; its price also went up 4%. Thus there was no inflation on it.
Learned a lot of fun facts, including: there are people who try to measure how much better products get year over year to more accurately calculate inflation! E.g. this TV is now 4% better; its price also went up 4%. Thus there was no inflation on it.
The information in this book felt a little basic for me, granted it might be more useful for someone who has less understanding of the global financial system.
I really enojoyed this book, as enjoyable as a books on monetary policy can be.
I had been looking for a book on how money was being "created" and circulated. I had read a few books on macroeconomy and financial crisis to refresh the university's macroeconomy lessons. I remembered vaguely the M1, M2, M3 money supply concepts and I wanted to relearn those, but without the boredom of an academic book or the dispersive wikipedia drill-down search.
Naked Money has been perfect!
Charles Wheelan manages to explain things in a simple way, with plenty of examples, some funny stories, and random jokes (probably to make sure we have not fallen asleep).
I read it very slowly, as I usually do with economics books: sometimes I need to take a break to let concepts simmer, other times I just need a pause from all the money talk.
I feel like it gave me the tools to better understand monetary policy, leaving me with the curiosity to ask new questions and chase for my answers (downloading the Federal Reserve balance sheet historical trend is now on my to do list - I had a peek and it's thrilling - as well as learning about this bitcoin mining business - it is such a smart idea, I am still in awe! -).
I am happy to have it on my library: I will reference back to it next time I have a doubt on what's going on with Central Banking and money supply.
(I have a feeling this review might sound a bit nerdy, disqualifying the goodness of the book because of the nerdiness of the reviewer. I do think the book is accessible to everyone who has an interest in money and monetary policy, eventually just sip it like a good whisky, when you feel inspired to learn something new about money).
I had been looking for a book on how money was being "created" and circulated. I had read a few books on macroeconomy and financial crisis to refresh the university's macroeconomy lessons. I remembered vaguely the M1, M2, M3 money supply concepts and I wanted to relearn those, but without the boredom of an academic book or the dispersive wikipedia drill-down search.
Naked Money has been perfect!
Charles Wheelan manages to explain things in a simple way, with plenty of examples, some funny stories, and random jokes (probably to make sure we have not fallen asleep).
I read it very slowly, as I usually do with economics books: sometimes I need to take a break to let concepts simmer, other times I just need a pause from all the money talk.
I feel like it gave me the tools to better understand monetary policy, leaving me with the curiosity to ask new questions and chase for my answers (downloading the Federal Reserve balance sheet historical trend is now on my to do list - I had a peek and it's thrilling - as well as learning about this bitcoin mining business - it is such a smart idea, I am still in awe! -).
I am happy to have it on my library: I will reference back to it next time I have a doubt on what's going on with Central Banking and money supply.
(I have a feeling this review might sound a bit nerdy, disqualifying the goodness of the book because of the nerdiness of the reviewer. I do think the book is accessible to everyone who has an interest in money and monetary policy, eventually just sip it like a good whisky, when you feel inspired to learn something new about money).
Glad to have finally completed Charles Wheelan's trilogy of nakedness (Naked Economics, Naked Statistics, and Naked Money). As with the first two, Wheelan displays his unique ability of writing about esoteric and abstract topics in comprehensible and readable form. Naked Money explains various topics in the financial system: the nature of money, inflation and deflation, financial panics and crashes, foreign exchange rates, contemporary affairs in banking and finance, monetary policy, and cryptocurrencies. The book employs a good mix of anecdotes and dry humour making an otherwise not so enjoyable subject quite enjoyable.
I was most impressed by the book's compelling case against my libertarian predilection for a return to the gold standard. However, I give it a 4 rather than 5 because I don't agree with some other of the author's views. Wheelan comes off as a monetary dove, favouring a central banks' intervensionist approach to the economy at the expense of high inflation. Also, his approval of the Fed's response to the 2008 financial crisis is a bit too hagiographic when the ultimate effects of quantitative easing are yet to be seen. Further, he does not address the grievances that libertarians and members of the Tea Party raise about the Fed's role in the steep fall of the dollar's purchasing power since it's inception in 1913.
Well written overall. Greatly educative.
I was most impressed by the book's compelling case against my libertarian predilection for a return to the gold standard. However, I give it a 4 rather than 5 because I don't agree with some other of the author's views. Wheelan comes off as a monetary dove, favouring a central banks' intervensionist approach to the economy at the expense of high inflation. Also, his approval of the Fed's response to the 2008 financial crisis is a bit too hagiographic when the ultimate effects of quantitative easing are yet to be seen. Further, he does not address the grievances that libertarians and members of the Tea Party raise about the Fed's role in the steep fall of the dollar's purchasing power since it's inception in 1913.
Well written overall. Greatly educative.
Every one should read this book. Every single one of you. Anyone who has ever had an opinion about monetary policy; anyone who has ever worried about inflation; anyone who suffered through the financial crisis (and anyone fearing it will happen again); anyone who has ever complained that their interest rate was too high (or too low); anyone who has ever considered voting for Ron Paul.
Basically anyone who uses money.
This book will teach you more about how the financial system, both in the US and globally, than you even thought possible. Wheelan's style is easy to read and he has a wonderful ability to make complex concepts accessible. Bet you never thought you'd laugh out loud while reading an economics book. Well you will.
But most important is this: Money affects every aspect of our lives and yet most people don't have any understanding of how it works. I'm not going to tell you that this book is going to have a practical impact on your day to day life -- this isn't a book about saving or investing. This is a book about the nature of money, why we need it, how it works, and what are the consequences when it all goes wrong.
Basically anyone who uses money.
This book will teach you more about how the financial system, both in the US and globally, than you even thought possible. Wheelan's style is easy to read and he has a wonderful ability to make complex concepts accessible. Bet you never thought you'd laugh out loud while reading an economics book. Well you will.
But most important is this: Money affects every aspect of our lives and yet most people don't have any understanding of how it works. I'm not going to tell you that this book is going to have a practical impact on your day to day life -- this isn't a book about saving or investing. This is a book about the nature of money, why we need it, how it works, and what are the consequences when it all goes wrong.