Economics · Reviews

How an Economy Grows and Why It Crashes (2010) by Peter and Andrew Schiff

Basic economic understanding is sorely lacking in the general population. Seeing that a significant number of people have a very lackadaisical attitude towards money, which causes them to drastically overspend, it is little surprise that the disastrous monetary policies of much of the world’s countries are similarly misguided. The underlying theme seems to be that money you do not own but frivolously spend in the present leads to much greater fulfillment than saving up and spending only money that you have earned. It is bizarre on an individual level. The same is happening on the governmental level.

Irresponsibility, lack of accountability, and cronyism are to blame for harebrained financial decisions. You can find many technical analyses for why the fiscal policy of, for instance, the United States, or the European Union are disastrous. What is not so easily available are books that convey in simple terms why the singularly misguided economic theories of John Maynard Keynes are so disastrous. In that regard, the short and entertaining book How an Economy Grows and Why It Crashes by Peter and Andrew Schiff comes in handy. It appeals to common sense by describing a simple economy and how it functions.

Their allegory of a small island state serves to illustrate why the common distinction between microeconomics and macroeconomics obfuscates more than it illuminates. In fact, obfuscation is arguably the main but unstated aim of academic economics. While reality is not quite as simple as this books portrays it, the main message is clear: you cannot negate basic economic reality via economic trickery.

A core theme of this book centers around the temptations of inflationary monetary policy, and their subsequent disasters. Two such examples are the dot-com bubble as well as the subsequent housing bubble. The book also draws attention to the educational bubble. It ends with a dark prophecy of that island state going bankrupt, drawing parallels between the United States and China, which holds the bulk of US treasury notes.

The key message is that the crash is inevitable. One omission of How an Economy Grows and Why It Crashes is that the government has more tools at its disposal to temporarily stave off the inevitable collapse. For instance, while pension obligations and Medicare expenses are mentioned as examples of costs that the government will not be able to meet, which is a conclusion you can arrive at with only a rudimentary grasp on statistics, it is not the case that those obligations are fixed. You could just do what countries like Germany do: increase the retirement age. When a state pension was first introduced, in Prussia in the 19th century, if I recall correctly, the age at which you were eligible was so high that only a small percentage of the population would ever reach it. Thus, this solves the problem, albeit it is not much of a solution as it simply reveals that social security is a ginormous scam.

I warmly recommend How an Economy Grows and Why It Crashes to anybody who wants to improve his financial literacy. If you have been trained in economics and believe that Keynes is the way to go, you are probably a lost case, but maybe this book helps you to understand why Keynes is a quack. He reminds me of Karl Marx and socialism: his theories have never worked in practice, yet that only seems to make his followers defend him ever more feverishly.

7 thoughts on “How an Economy Grows and Why It Crashes (2010) by Peter and Andrew Schiff

  1. Aaron,

    The Keynesian economics was widely taught in American universities in Mico and Macro Economics when I went to college. I’m not sure if universities still teach Keynesian economics currently. However, while I don’t have the strong background in economics like yourself, I am aware of what’s going on right now with China, Russia, India, Brazil, Saudi Arabia, Kenya and so forth. I’m not quite sure how this will affect the US economy. While these countries are going to use one currency, it reminds me of the Europe Union when it decided to go on the Euro. It was quite disastrous for Greece. So, I wonder what the implications are going to be for these countries. For one, all these countries are afar part from each other unlike Europe where all the countries are neighboring each other.

    1. As far as I know, Keynesian economics is still the mainstream. This reminds me of a fringe view I came across, according to which economists are merely used to provide intellectual justification for the government’s actions. Fringe as this thought may be, you can read economic history this way and it seems to make a lot of sense. Keynes was just the man to justify deficit spending. This works great in the short term, which is what politicians are interested in, and the long-term consequences are considered irrelevant.

      The US economy will take a severe beating as we are in the process of global de-dollarization. Since the 1970s, the US dollar was used for international trade, which allowed the US to offshore its inflation. With more and more countries trading in CNY or RUB, this will lead to severe problems. This may indeed be one reason for the US’s attempts to kick off WWIII in the Ukraine and, now that these efforts are faltering, in Taiwan.

      The EUR is a systemically unsound currency as it takes away the possibility to devalue one’s currency. Thus, as long as there is economic inequality between countries there will be these problems. Greece simply had the misfortune of folding first. It could just as well have happened to Spain or Italy. By the way, one of the goals of the EU is to “homogenize standards of living”, which means that everybody has to be equally poor. I think that the underlying assumption is that this will lead to less friction, economic and otherwise, but I have my doubts about this.

      1. Aaron,

        Do you foresee an economic depression in the US by the end of 2023 or in the midst of 2024 like Venezuela? This will definitely affect the democratic party who wants to seize power. As now, I’ve been stockpiling on water, can food, plenty of meats, ammunition, I’ve started to grow vegetables.

        In my district where I live I’m allowed to have roosters and hens, but I still have to read what the legal requirements are. I recall that my neighbor who came from south of the border (Mexico) who moved next door to me had roosters. I couldn’t tolerate them having a roosters as it kept waking me up and the neighbors between 3am and 6am. I filed complaints against my neighbor with the county and animal control. Eventually, the county seized his roosters and hens. Apparently, he didn’t have the proper permits, his roosters were causing so much noise pollution/nuisance that it was “legally” considered disturbing the peace in my neighborhood. Having rooster presents a challenging problem because in my neighborhood we all like peace and quiet.

      2. Venezuela did not go through a depression but economic collapse, which takes quite some effort given how rich in natural resources this country is. For the US, I see some troubled times ahead now that the world is de-dollarizing. This process is already underway but it will take some time until its effects will be felt, so your estimate of late 2023 to mid-2024 seems plausible. I would lean towards the former, though.

        You don’t necessarily need a rooster for a chicken coop, albeit there will be issues such as hierarchy problems. Also, rooster do a pretty good job at defending hens — a mad rooster is not what you want to run into. Depending on the animal life in your part of the country, predatory animals may be an issue. I would focus on growing vegetables first as it less effort than taking care of a chicken coop.

      3. Aaron,
        “This works great in the short term, which is what politicians are interested in, and the long-term consequences are considered irrelevant.”

        This is one of the biggest problems and issues in US politics. They are very indifferent to long-term consequences as their main focus is always short-term solutions and problems.

  2. Econ is very simple. How rich is a society to begin with? How smart and hard working is the population? Does the population have the opportunity to work smart and hard? These factors explain (rough guess) 90% of economic standards and economic growth. (The remaining (rough guess) 10% we do not know and never will find out because Economics is a social science).

    politicians and economists do not want to hear this simple explanation because there would be nothing left for them to do.

  3. I can understand that the US can offshore its inflation to other countries. What I don’t understand is why the pandemic is created if it is an attempt of the elites, including the Jews, as this blog suggests, to depopulate the world. I mean why create a manmade genocide to print off more dollars so that the world turns against the US dollar and accelerate the process of de-dolarisation? What does the elite gain in this process? They are drowning themselves as well because the Yuan would overcome an obstacle they have been trying get over.

    1)Depopulate the world and create a “lebenstraum” for the elite.
    2)Massive unemployment compensation which increase the need to print more money
    3)Causing a war in Ukraine which pushes inflation even further.

    What’s the point of triggering a process of dismantling your economy?

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