Naked Economics Chapter 7: Financial Markets

Ryan Duong

Anderson

3/27/14

Economics

In America, there are hundreds and thousands of eager, hungry investors ready to find ways to make easy and quick money, but some don’t understand the philosophy behind investing. A rapid growing economy with everyone buying, investors make the mistake of being persuaded to follow the pack and also buy which causes a high amount of speculation;outweighing opportunity costs. Like a child in a candy shop, investors are anxious to buy overpriced stocks, properties, etc.. Though the main problem is an investment that has already maxed out in future earnings has a considerably low chance of increasing in price and investment benefits compared to an investment that is hit the rock bottom of the economy. A famous quote by Warren Buffett says “buy when people are scared”. Thinking more into depth, I think this quote has a considerable amount of meaning in it. When a market is low and has hit rock bottom what is there to lose? Some people are thinking there is a high amount of risk, it’s actually the opposite because there is nothing to lose. Other than foreclosure or bankruptcy--highly rare for a strong companies like Wells Fargo-- the stock will most likely increase in the future. Another guideline of investment is to diversify investments. Investing in various stocks and other forms of investment will decrease risk. In the future, I plan to follow the instructions of Warren Buffett and incorporate his ideas with my dads venture in investing in residential properties, in order to avoid risky decisions.

Wheelan, C. (2010). Naked economics-undressing the dismal science. W. W. Norton & Company.

Naked Economics Chapter 9: Keeping Score - Is my economy bigger than your economy?

To whom it may concern,

In today's economic society our government can be extremely supportive upon its citizens based on their financial standpoint. Citizens below the poverty line receive tremendous benefits such as free reduced lunch, food stamps, and college tuition. On the other hand,  the upper class receives nothing, but still gets by and as time moves on our Gini index or distribution of wealth rises causing the rich seem richer compared to the poor. This can be tremendously beneficial for the GED and the poor certainly will receive more benefits while still having the American dream to work hard and achieve a good paying job, but what happens to the middle class? The middle class consist of citizens that have put hard work and effort towards acquiring their job, and something small such as paying for their child's college tuition will offset their income and result in them making the same as the poverty line after college expenses. It’s not just college tuitions-- paying off student loans or debt put them significantly disadvantaged and ignored by the government. It’s an exponentially unfair situation and it’s creating a negative impact towards our economy. Every since the recession in 2007 our economy has been slowly increasing. Being in the economics class, we are always taught that the philosophy behind it is to use as much resource as possible to create the best future benefits. The main question is is the government using all its resources for the best economic growth results? In my opinion the answer is no. Middle class citizens contribute a large portion towards the positivity of our economy, and the government isn't recognizing how much an influence the middle class would have. Of course methods such as the fiscal policy should never be overlooked, but the policy can only do so much because not many middle class workers will not be willing to do construction or hard labor. That's why we aren't using all resources (middle class) for full potential results. The middle class roughly averages 50% of the nation and creating a policy that promotes consumer spending within the middle class will definitely create a spark for our economy. Policies such as cutting tax specifically for middle class citizens or supplying more financial aid for middle class students will create a cause and effect by encouraging more consumer buying resulting in a faster recovery rate. Following this economic path will not only ensure a faster recovery rate, but it will provide a better future and a better life for middle class citizens.

Thanks,
Ryan Duong

Wheelan, C. (2010). Naked economics-undressing the dismal science. W. W. Norton & Company.

Naked Economics Chapter 1: The Power of Markets

A nation’s wealth and well being is directly related to its economic stand point. America for example,-- with our vast amounts of resources from wealth-- we are capable of maximizing our utility towards benefiting disadvantaged American citizens through actions such as government funds. Considering a less wealthy country such as Zimbabwe they are tremendously disadvantaged in providing for their people because they lack in resources due to a fragile economy. National situations like Zimbabwe's represent the importance of a having a strong economy, but containing the right market is the first critical step towards an economically successful nation.

It's obvious that having successful economy is highly beneficial for a nation because it helps the country provide for its citizens, but what makes an economy successful? In chapter one of Naked Economics, Wheelan emphasizes the importance of having a free market or a market economy; basically a market that is not restricted and allowed to expand, grow, and adapt to its environment/supply and demand. Markets play a big role in benefiting a nation because it provides constant supply of products for consumers. Not only do buyers and sellers win, but it supplies a boost for the economy and citizens. Every sale is taxed and as sales rise inflation occurs which benefits the government more, and gives them incentive to invest for the better of the nation towards education and improvement of people’s lives. Markets create a never ending cycle that gives opportunity for even a nation in poverty to grow and expand. It gives motivation to individual workers and firms to work arduously and reach their full potential. Markets might seem like a simple concept, but it’s a universal business idea that gives a nation’s economy the potential to smoothly grow without being controlled by the government.

Communist central planning on the other hand is market economy’s evil twin. To simplify, it is a handicapped economy. The economy has no upside potential of growing or expanding due to it’s the dictating government controlling it. Wheelan brings up Russia’s failing economy because they are not maximizing utility. Products that are being demanded more are not being produced more or raised in price. Everything is stagnant and there is no focus to make more money. The only people benefiting are citizens that work for the government while famine for the rest of the population is increased and motivation to work is decreased due to no future in a better paying job. Wheelan emphasizing the negativity of communist central planning gives insight that a market economy should not be criticized because it gives a nation so much freedom to improve and reach its full potential. A market is so powerful because it’s the definition of the people. Every person in this world wants to be able to do something meaningful and be remembered before they die, and as a result the market is designed to be able give people the flexibility to build a better life and go beyond it.

Wheelan, C. (2010). Naked economics-undressing the dismal science. W. W. Norton & Company.

Naked Economics Chapter 2: Incentives Matter

In today's business world, there is an immense amount of greed occurring. Incentives daunt CEO's and managers to commence actions for themselves; causing the workers to be financially disadvantaged and the company to head towards future failure. These drastic chain effects can occur in multiple ways, but a main approach is managers hiring workers and offering stock options. These options can seem extremely beneficial and cheap such as a ten dollar stock being sold for only five dollars--making the purchasers think that they have gotten maximized utility--, but in the long run the outcome won't be so pretty. Workers purchasing stocks cause the company to raise in per share price while outside investors are persuaded to buy into the company due to its rising prices. The sum adds to a magnificent golden river for the big share holders of the company. While share owners have dollar signs in their eyes, they don't even bother stressing about the company's future such as doing creative destruction. Not wanting to fund money to improve products makes other companies have an advantage in the same field to take over the business and sell better products. As the big shareholders of the company recognize the diminishing income of their company they recognize the incentive: leave the business and take the other shareholders' money. This action would greatly benefit them, but on the other hand workers would lose tons of money and be jobless. Of course, these types of actions are illegal to commit and are called accounting fraud. The policy of accounting fraud penalties can lead to many years in prison with a bonus of a certain amount of money owed back to the government, but some CEO's and business owners look at the trade-offs and consider it worth the risk. Though in my opinion, I think that it is an idiotic and unethical risk. A company that has gone IPO and has the capability to give stock options is surely making a fair amount of money; why not focus on improving the company while benefiting the workers? In business my philosophy is to always be ethical no matter what. In order to prevent accounting fraud, the government should require companies to submit data on reasons why their stock is increasing in price in order to avoid stolen money. This technique will ensure security for the workers and investors. Overall, I think that companies that have been successful in accounting fraud are geniuses because they are successfully able to persuade investors from all over the nation and the world to invest, but analyzing the trade offs make me come to conclusion that it's not worth going to jail and being in debt for the rest of your life.