Most people think “the economy” is just GDP and government stats. But what if that’s all a distraction? If you want to protect your financial future, you need to stop chasing headlines – and start focusing on your own economy…
By Peter Reagan
Here’s a question for you to consider: If you were to ask people how they would define “the economy,” what do you think that they would say?
It’s not hard to guess what the answer would be. Most people, when they think of “the economy,” think of it in terms of the numbers they hear from politicians and the mainstream media. Those are terms like gross domestic product (GDP) and the increase or decline of that number.
Politicians throw around these terms referring to “the economy,” or to some particular aspect of the economy. Then they use these terms and their definitions to pursue their political goals – or to guide the economy in a direction most beneficial to their constituents.
Generally, government as a whole work try to boost our prosperity – as measured by the GDP.
One of the difficulties with defining the economy, though, is that the term itself (along with abstractions like “gross domestic product”) aren’t useful terms.
What is “the economy,” anyway?
I thought that you’d never ask!
“The economy” is a way of describing all activities involved in the production, distribution, exchange, sale and consumption of resources. By “resources,” I specifically mean everything that’s limited in supply (crude oil, concert tickets, coconuts, cocktails and currency).
So when we talk about the economy, what we’re really talking about is the sum of all transactional activities – working, spending, creating and manufacturing. Some of those things are difficult to measure, so we usually assess the financial value of the transaction. When lots of people create and buy and sell things, “the economy” is strong – and vice versa.
But – and here’s the important part – “the economy” isn’t really one thing! It’s like when we talk about “traffic” (and we do that a lot in the Los Angeles area). “Traffic” is made up of tens of thousands of individual trips to the grocery store or the beach. The sum of all those individual errands is “traffic.” When it’s bad, we’re more likely to stay home – and vice versa.
You already realize you can’t control traffic or the economy. But some people disagree…
The problem with talking about “the economy”
Frank Shostak, an associate scholar with the Mises Institute, writing for The Epoch Times, puts it this way:
Once expressed in terms of various economic indicators, such as the GDP statistic, the “economy” is expected to follow the path of growth outlined by government planners. Thus, whenever the growth rate slips below the outlined path, government and central bank policymakers are expected to give the “economy” a suitable push via fiscal and monetary policies. Occasionally though, government officials also warn citizens that the “economy” has become overheated (i.e., it is “growing” too fast). In this case, government and central bank officials declare that it is their duty to prevent “overheating.”
And here’s where it gets ugly.
Naming and measuring something, even something as huge and abstract as “the economy” or “traffic,” provides an illusion of control.
Again from Shostak:
It must be realized that, at no stage, does the so-called “economy” have a life of its own, independent from individuals and their choices.
“The economy” is a useful abstraction – but it is an abstraction. Creating a label for a thing that doesn’t have a life of its own creates the risk of forgetting what the thing really is. When you do that, it’s easy to make mistakes.
And one of the biggest mistakes that is made, at least when it comes to the economy, is thinking it’s something that you can control.
Thinking they can guide and influence “the economy” is one of the primary reasons that governments and central banks make so many mistakes. Steve Forbes, writing for Forbes, writes,
The world’s most important central bank is afflicted with what the late, great Nobel-winning economist Friedrich Hayek called “the fatal conceit,” the idea that government planners can run the economy better than the free market.
They never have, no matter how brilliant the planners were. Markets are people, and around the world each day they make billions of decisions to buy, sell, invest, start a business, close a business and whatever. People aren’t machines. Intrusive governments distort economies.
By thinking of a massive number of individual actions as a “thing,” they make the mistake of thinking that they can manipulate and control it. That there’s some dial, maybe a dial called “interest rates” that you can turn up for a good economy, or turn down to cool off the economy.
But have you ever tried to control traffic during a drive home from the office? You can’t! You can choose your route, you can choose your speed – but you’re at the mercy of everyone else’s drive home from the office.
You can control your steering, your accelerating and braking, your speed on the road. That’s it.
So what does that mean? And why are we discussing it?
How you should be thinking of the economy
How should you think about the economy?
Answer: Don’t.
Don’t think about the overall economy. Now, I’m not saying you should ignore it completely, but understand that it’s not helpful to worry about it. Just like traffic – the economy is a force that’s just too huge and too unpredictable to concern yourself with.
What you can control, though, is your personal economy. You can control your actions, what you buy and sell and when the time is right for those choices. Exactly the same way you can control your own drive despite the prevailing traffic.
I understand that’s not a good feeling. Sometimes, when you’re in a hurry, traffic is bad. As unpleasant as that is, it’s reality. Fretting over it isn’t helpful.
In exactly the same way, our finances are at the mercy of “the economy.” Once we accept this fact, we can do something useful about it. That’s why I’m such a big believer in creating a solid foundation for your savings. To put your financial house in order so that it can endure the bad times (and profit during the good times).
Because, let’s face it, when governments and central banks keep trying to control the economy, they make mistakes. Sometimes inflation soars, sometimes the nation falls into recession. It’s extremely wise to diversify your savings with inflation-resistant assets that governments and central banks can’t manipulate. They make a firm foundation for your savings.
You can’t control traffic, but you can control your route. You can’t control the economy, but you can control your savings. Learn more about the benefits of diversifying your savings with physical precious metals.
