Chapter 1: Money, Banking, and Your World
The study of economics has for many years been considered boring and irrelevant, but the world financial crisis of the early twentieth century awakened many to the fact that it is a subject that should not be ignored. The author admits that one of his goals was making the subject less boring and more accessible, so a great deal of the complexity of the topic is set aside but the basic concepts have not been compromised.
It is going to be "short and snappy" and get right to the point without a lot of filigree, aside of learning aids and sidebars to help internalize the topic - as the purpose of the book is to give those without a formal background in economics an overview of the topic with an eye toward a better understanding of how it impacts the everyday life of the average person.
Dreams Dashed
The authors open with a few narratives of people whose lives are impacted by economic problems.
- A young couple who wanted a home but recognized they could not afford it, and were approached by a lender that had a solution that would enable them to buy a home with low monthly payments. They didn't understand how a "negative amortization mortgage" works and were assured by the lender that everything would be fine so long as the housing market continued to be booming. But when the bubble burst they lost the home and their credit was wrecked even though they had not missed a single payment.
- A student who saved up for a semester abroad, and was already living abroad when the US Dollar took a tumble and she no longer had enough money to cover her cost of living. She ran through her budget very quickly and had to drop out of her studies and return home.
- A man whose father had invested his inheritance in government bonds, believing them to be the safest form of investment, but the bonds were locked into a very low interest rate that lagged the inflation of consumer prices - so when it came time to cash in the "fortune" his father had amassed, it was "barely enough to buy a midsized automobile."
- A man who invested his entire pension in the stock of his own company, which was bankrupted shortly after he retired. He lost everything except his social security benefits, which provided for a much less lavish retirement than he was looking forward to. He was constantly needing financial assistance from his children, who would inherit nothing because he had no investments, no insurance, no nothing.
Don't panic
Given the recent financial disaster, most people tend to focus only on the negative cases - but very often things go along very well and people benefit from doing the right thing. But such disasters are uncommon (hence newsworthy), just as rare as the superstars of finance, who make millions (and even billions) by playing the financial markets. Most people were not left destitute by the economic crisis, just as most people did not become millionaires during the last financial "boom."
Moreover, it takes a bit of basic knowledge of money and banking to avoid making disastrous mistakes: if the young couple had known the risks in the document they were signing, if the student understood how to mitigate fluctuations in foreign exchange, if the bond investor understood the effects of interest, and if the bankrupt pensioner understood the importance of portfolio diversification, then all of these stories of doom could have come to happier endings.
In the free society, people are responsible for making their own decisions, and many of the most important decisions we make are financial ones - with this in mind it is foolish and irresponsible to completely ignore economic and financial matters. They are disasters in waiting, and easy prey for those who have a bit more knowledge. Meanwhile those who are prepared can avoid or mitigate the same disasters and otherwise manage their financial affairs in a way that puts them in firm control of their own destiny.