[MUSIC] >> Welcome to The Power of Macroeconomics. Lecture One. An Overview of Modern Macroeconomics. >> Hi I'm Peter Navarro and I'm here to introduce you to the power of macroeconomics, one of the most interesting, challenging and useful subjects that you can learn. At a personal level macro economics can answer questions like should I switch jobs or ask for a raise? Should I buy house now or wait until next year? Should I get a variable or fixed rate mortgage? A business and professional level, macroeconomics can also help answer questions like how much should I manufacture this month and how much inventory should I maintain? Should I invest in new plant and equipment, expand into foreign markets, or downsize my firm? Macroeconomics can help answer these questions because it arms us with a new way of thinking about the world we live and work in. Indeed this is the real power of macroeconomics. It helps us filter and sort and process all of the information we are bombarded with every day in the media. An interest rate hike here, a fallen consumer confidence there. Coffee shortage in Brazil or a drop in the Japanese yen. From the macroeconomic perspective, all of these seemingly unrelated bits of information revealed to us first patterns and trends, and ultimately courses of action which we might fruitfully follow. Or ignore at our own peril. Let me show you what I mean with a couple of stories about two fictional people in very real situations. Jim Wells used to own a small, high tech manufacturing business that made precision components for computer games. Every July, Jim had to decide how many components to produce for the upcoming holiday season, and every year he had simply doubled his production. Since he never had any trouble moving the inventory, Jim decided to do the same thing again. Even though it meant taking out a big short term loan to finance the expansion. Unfortunately Jim's college studies in engineering never included a course in macroeconomics. So in making his decision, he missed some rather significant danger signs. For example, he had read in the Wall Street Journal that the Federal Reserve recently raised the bank discount rate, and sold bonds in the open market. But Jim didn't see this as contractionary monetary policy that might trigger a recession. Instead he just grumbled about the higher interest rate on his business loan. Nor did Jim see the recessionary implications of several stories on CNN reporting a fall in consumer confidence and a slight uptick in the unemployment rate. And even though Jim had noted a small blurb in Business Week about Japan's shift towards a more expansionary monetary policy, Jim didn't have a clue that this would cause the value of the yen to fall relative to the dollar. And give his Japanese competitors a big leg up. So Jim got caught with his proverbial pants down. By October, the Japanese had taken over half of a market that was already shrinking fast from the onset of a recession. By Thanksgiving, Jim found himself sitting on a huge inventory that he couldn't give away. By December, he was unable to pay a huge loan that wouldn't go away. By June, he was bankrupt. Today, Jim works as a consultant for one of his old Japanese competitors during the day, and studies macroeconomics in the evenings at a nearby college. He sits in the front row of class right next to Teresa Watson. Unlike Jim, Teresa didn't go bankrupt but she came very close. You see Teresa is a single working mother whose big dream in life is to own her own home. As the marketing director for a major corporation, Teresa earns a good salary and some years ago she had saved $25,000 for a house down payment. After months of looking, Teresa's choice had boiled down to either a modest two bedroom condo near her job in the city or her dream home, the more expensive single family house out in the valley. After talking it over with a mortgage banker, Teresa decided that the only way she could afford her dream home was to take out a variable rate mortgage. It was available at a full two percentage points below the fixed rate mortgage, and her monthly mortgage payment would be several hundred dollars less, but only if interest rate stayed low. Sure, Teresa felt a little nervous about choosing the variable rate, but the mortgage banker told her not to worry. Rates of been stable for over three years now and it shouldn't be any problem. Teresa failed to see, however, were numerous warning signs of growing inflationary pressures. On the demand-poll side the unemployment rate had just reached an eight year low. On the cost push side, the news was full of stories about a bad cotton crop in Brazil, a worldwide drought and possible food shortages, renewed violence in the Middle East and rising oil prices. And a fall in the value of the dollar. Within two years, interest rates had climbed into the double digits, and Teresa could no longer afford her skyrocketing mortgage payments. The climb in interest rates, the economy plunged into a recession taking the real estate market down with it. For six months, Teresa tried to sell her house at the original price. But finally, facing the humiliation of foreclosure, she unloaded it for $25,000 less than she bought it for, losing every cent of her equity. The tragedy is that both Jim and Teresa could've avoided their hardships if they had only been armed with the power of macroeconomics. Anticipating increased competition and recession, Jim could have halved this production rather than doubling it and he'd still be in business today. And Teresa could have either bought that less expensive condo with a fixed rate mortgage. Or better yet, waited until the real estate market went soft and bought her dream house at an affordable price. Despite the enormous impact macroeconomics has on our personal and professional lives, most of us view it as a remote, complicated and indeed dismal science. In fact, when I first studied macroeconomics I got quickly buried in a jumble of graphs and equations that seemingly had little relevance either to my own personal or professional life. It wasn't until I began to teach the subject that I saw that the best way to truly understand the power of macroeconomics is to teach it from an historical perspective. This is important for at least two reasons. First history gives us a real world context for an otherwise abstract and difficult subject. Think about it. For our grandparents the hardships, pain, and uncertainty of the Great Depression were all too real and we as a nation don't ever want to repeat them. Nor do we want to repeat the economic stagnation of the 1950s, the stagflation of the 1970s, or the so-called jobless recovery of the early 1990s. The second reason to put macroeconomics in an historical context, is to emphasize that it is very much an evolving policy science. Put simply, the Keynesian solutions which were used to lift us out of the Great Depression in the 1930s, or to wake us up from the economic doldrums of the 1960s Would be inappropriate in today's more sophisticated in global economy. In the remainder of this first lesson, we'll briefly define macroeconomics and then identify key policy issues. Once we do that, we'll move right into a short macroeconomic history by first introducing so called Classical Economics. A school of thinking that macroeconomists around the world relied heavily upon from the late 1700s, right up until the Great Depression of the 1930s. However, beginning with the Great Depression, we will see that the problems facing macroeconomists have become progressively more complex over time. From unemployment and inflation to stagflation, stagnating income, and chronic budget and trade deficits. We'll also see that new macroeconomic theories have emerged in response to this increasing complexity at key turning points in the world's economic history. Keynesianism in the 1930s, monetarism in the 1970s, supply side economics in the 1980s. And new Classical Economics in the the 1990s.
