Rainer's Blog

Peter D. Schiff explains the economy based on the growth of an Island.

It feels at the beginning like the start with Adam and Eve in the bible. 3 Fishermen on an Island are fishing – one fish per day with their hands, which is enough for everyone to survive each day. Through the risk taking of one of the three, the economy was born: he starved one day and created a net to fish. This brought him two fish/day – so he could fish one day and look for other opportunities the other day without starving and started a net-business. Guess what happened: he build two additional nets and rented them two his two friends – for an interest of 1 fish.

That’s the start – Peter D. Schiff moves on explaining the economy building on the story of the Island – with increasing productivity, specialization (surfboard builder), founding of a bank (for saving fish), engaging with other Islands and finally electing the senate for the founded republic. This was necessary for protection of theft (as the productivity increased, there were lots of fish, which could be saved) and against foreign aggressive countries

With the start of the republic he describes in great pictures the dilemma of power, elections and spending for the wealth of everyone, where soon the budget exceeded the taxes and productivity was not the major driver of wealth anymore.

To finance this gap, the finance department found a way to make 10 fish out of 9, then 5 out of 4, 2 out of 1 until they were down to the bones. And people had to eat more than one fish a day not to starve — an excellent description, how inflation works

But soon there was nothing left from the fish, so they replaced the fish with paper, which could be easily printed, distributed etc. — backed up by the fish (which nobody knew, that there were only some left)

But due to the fact, that other Islands saw the benefit of the paper based currency, they began to export fish in exchange for the paper and the banks were filling up again

You can read Schiff’s book in one or two days – and if you had no clue, how economy is working in our days, you at least got a glimpse. The most important take away: Economy is easy – and it’s made complicated and difficult by the governments. Don’t let yourself blend by promises and quick wins, like the house crises in US. Everyone could have seen, that this cant work for a long time.

The end of the book is foreseeable and I would agree it will be a matter of time, until we see an inflation in the foreseeable future – it will be only a matter of how big and if it becomes a hyperinflation over the next decades in certain countries (e.g. US).