Economics 101: Forget about the economy
The economy doesn’t exist.
I mean, have you ever seen one?
I’m feeling like I want to give a few blogs to something of an economics primer – Dymphna’s Economics 101 – something to help people get a basic sense of how the economy hangs together.
This stuff is important. Obviously not as important as understanding the mechanics of a deal, and understanding where to find a deal or how to calculate if a deal stacks up or not.
(If you’re starting anywhere, it needs to be there.)
But if you get a working sense of how the economy works – how interest rates affect the outlook for GDP and that sort of thing – then you’re able to invest with more confidence. You have a better lay of the land.
And it’s not that hard. I reckon in a handful of blogs I can give you a working understanding of the economy – something of a framework that you can tack stuff on to as your journey as an investor unfolds.
But the first question is what are we actually talking about? What is the ‘economy’?
And this is the funny thing. There’s no clear definition. What people mean by ‘the economy’ differs depending on what we’re talking about.
And when you’re looking at the data, when someone says its ‘good data’ or ‘bad data’, there’s an assumption there about what our reference point is.
So we could say that the economy is everything that’s bought and sold at any point in time. That’s sorta true. Or we could say that it’s all the infrastructure that goes into producing the goods and services that are bought and sold. That’s true too. Or we could say that its everything we do, whether it happens in the market or not, that helps us to live, thrive and survive.
It’s all sorta true. But it doesn’t really matter.
Because we’re not actually interested in ‘the economy’. The ‘economy’ is just an analytical tool that gives us insight into the things we care about.
And what do we care about?
Well that depends on your perspective.
If you’re talking from the average Australian’s perspective, then economy is a window into whether the quality of our lives is improving and whether we’re going to have jobs or not next year.
From a share-market investors perspective, the economy is a window into whether company revenues, profits and share prices are increasing or not.
And from a property investors perspective, it’s a window into whether rents and prices are going up and down.
When we’re talking about the economy – when you hear it in the media or whatever – there’s an assumption about what perspective we’re coming from, and what we’re actually interested in.
Because no one, not even the economists, are interested in the economy per se.
We’re interested in what the economy gives us a window into.
So this is my first lesson in economics. Don’t worry about ‘the economy’. It’s not a thing and it doesn’t matter.
Remember to stay focused on the things that matter to you.
And what are they?
Well, next week I’ll show you what data I’ve got on my economic dash-board, and how they fit together.