Economic “Fault Lines”

Fault Lines by Raghuram G Rajan (The book’s blog and video)

This is a very good book that goes into detail about the roots of last economic crisis. He uses the metaphor of fault lines where differences come into contact and create enormous forces. His first fault line comes from different domestic stresses across the globe. His second set of fault lines comes from differences in trade imbalances globally. The final set of fault lines comes when different types of financial systems  come into contact to finance global imbalances.

One quote from page 183 to demonstrate how solutions need to look at the whole situation, not simply one side or the other: “If society believes people earn high wages as a result of their training and hard work, it is less willing to tax high earners, thereby ensuring they have strong incentives to acquire skills and exert effort. If society believes people earn high wages because of connections, chance, or crookedness, then it will tax incomes more heavily, and since few of the honest will then bother to work hard, only those with influence, the lucky, or the cheats will flourish.”

LRF: My thoughts: this equates to a self-fulfilling prophecy either way society chooses. So chose carefully with a larger perspective in mind as to how people behave and react. This is the perspective he comes from as he works the reader through his book. Economics is about the most efficient use of resources through wisely developed incentives and policies.

Closing thoughts expressed in Client Newsletter Winter 2012

Investments in Culture Wars By Meir Statman, Glenn Klimek Professor of Finance, Santa Clara University

“Whether we believe riches come from hard work or luck does not matter. What does matter is whether we can control our investing “emotions” even in times of turmoil. Don’t let volatility — or concerns about cultural conflicts — lead you to make investment decisions you’ll regret later.”

 

About Larry Frank, Sr.

Larry R Frank Sr., MBA, CFP®, is an experienced financial advisor and a published author on Retirement Planning Research. Have a financial question? Click Here to Ask Larry

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