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How An Economy Grows and Why it Crashes (2) - Coggle Diagram
How An Economy Grows and Why it Crashes (2)
The Fiat System
Fiat Currency is anything that the government says legally holds value as currency.
The US dollar is fiat currency. It replaced gold.
The danger of the fiat system is it gives governments the ability to create money without anything to actually back it.
Inflation and Deflation
Inflation is when currency loses its value compared to the goods and services available.
Inflation is caused when the money supply grows larger than the supply of available products. This results in rising costs of goods and services.
Deflation is when prices drop in relation to the goods and services available.
Deflation is a natural result of a decrease in the money supply or a recession.
Inflation and recession can coexist when governments enact policies that attempt to prevent deflation as a response to a recession. This can stem from injecting money into the economy through stimuli, bailouts, adjusting interest rates or price floor regulations.
Recession
Recessions are universally feared drops in economic growth.
Recessions typically occur due to the free market getting out of equilibrium although they can also occur due to natural disasters.
Governments have increasingly attempted to right recessions before the market has a change to fix itself. This has resulted in the appearance of a stronger economy without treating the original cause.
Government response to recessions has resulted in an increasingly unstable economy.
Persuading the nation to spend is the primary means by which governments try to "fix recessions".
The World Reserve Currency
The World Reserve Currency is the fiat currency that is accepted throughout the world as a viable method of payment.
The US dollar is the current reserve currency.
Possessing the reserve currency has given the US the unique position of being able to produce "currency" without actually producing tangible goods and services.
Since the dollar is the WRC the US has been able to borrow at an alarming rate. We constantly live outside our means and have been able to dramatically reduce production in favor of spending as a job.
Economic Collapse
By borrowing more than we actually make, the US has forced itself to either declare bankruptcy, dramatically increase inflation or completely overhaul the way we live and work.
The US debt has risen to unprecedented levels, virtually guaranteeing that the dollar will eventually collapse.
Once China and other lenders realize we will never be able to repay them, our economy will collapse.
The ideal choice is to declare bankruptcy but that is political suicide. Therefore, it's highly unlikely to happen unless it's forced upon us.
Economic collapse would force the US to return to exporting more than we import. Eventually, our economy would recover.