💰 How is Wealth Created | Savings and Investments

Summary

This narrative explores the economic principles of wealth creation through the tale of a fisherman who, in a tool-less world, innovates to improve his catch. It contrasts his foresight with the reckless spending of 'Prodigal Pete' versus the savings and investments of 'Thrifty Tom,' illustrating the importance of capital goods and self-sacrifice in economic growth. The story concludes with Pete's downfall and Tom's success, emphasizing the value of prudent financial management.

Takeaways

• 🌊 The story begins with a hypothetical scenario where all tools vanish, illustrating the importance of tools in our economy and daily life.
• 🎣 The fisherman's struggle represents the human condition when forced to rely solely on physical labor for survival.
• 💡 Innovation is sparked by necessity; the fisherman's idea to create a spear signifies the human drive to improve living conditions.
• 🛠️ The creation of the spear represents the first step towards productivity enhancement and economic growth in the story.
• 📈 The fisherman's economic growth, albeit small, demonstrates the principle that wealth can be created even with minimal resources.
• 🔄 The concept of saving is introduced as a form of self-sacrifice, where the fisherman chooses to forgo immediate consumption for future gain.
• 🏢 The real-world analogy compares the fisherman's story to the financial decisions of two individuals, highlighting the impact of saving and investing.
• 💸 Prodigal Pete's lifestyle choices lead to financial instability, emphasizing the risks of living beyond one's means.
• 🏦 Thrifty Tom's prudent spending and saving habits result in financial security and the ability to invest and grow wealth.
• 📉 The economic downturn serves as a test of resilience for both characters, with different outcomes based on their financial strategies.
• 🏡 In the end, Pete's financial crisis and Tom's offer of employment underscore the importance of adaptability and the value of saving.
• 📚 The script encourages readers to explore economic principles further through recommended literature and resources.

Q & A

What is the main premise of the story in the transcript?

The story is set in a world where all tools have disappeared, and it revolves around a fisherman on a remote island who devises a way to improve his life by creating a spear to catch more fish.

How does the fisherman's life change after creating the spear?

The fisherman's life changes significantly as he is able to catch more fish, doubling his daily catch and opening up new possibilities for saving, investing, and increasing his productivity.

What economic principle is illustrated by the fisherman's story?

The story illustrates the principle that wealth is created through self-sacrifice and taking risks, as the fisherman underconsumes and invests his time and resources into creating a tool that increases his productivity.

How does the story of the fisherman relate to the real-life example of Prodigal Pete and Thrifty Tom?

The story of the fisherman is used as a metaphor to compare the financial decisions and outcomes of Prodigal Pete, who lives beyond his means, and Thrifty Tom, who saves and invests wisely, leading to different outcomes when economic hardship strikes.

What financial advice does the story of Thrifty Tom offer?

The story of Thrifty Tom advises the importance of living within one's means, saving, and investing wisely to create a stable financial future and a buffer against economic downturns.

What happens to Pete and Tom when Corporation X faces financial difficulties?

When Corporation X faces financial difficulties due to bad choices and a global recession, both Pete and Tom are fired. However, Tom's previous savings and investments allow him to weather the storm, while Pete faces financial ruin.

How does Pete's lifestyle and financial decisions differ from Tom's?

Pete spends his entire income on a luxurious lifestyle, living beyond his means and incurring debt, while Tom lives frugally, saves a significant portion of his income, and invests in various projects.

What is the role of capital goods in the story of the fisherman?

In the story, the spear is considered a capital good because it is an investment of the fisherman's saved resources that helps him to increase his productivity and catch more fish.

What is the significance of the fisherman's decision to not eat on the day he creates the spear?

The fisherman's decision to not eat on the day he creates the spear represents the concept of saving and self-sacrifice, as he foregoes immediate consumption for the potential of future gains.

What is the source material for the story of the fisherman?

The story of the fisherman is based on the book by Peter and Andrew Schiff titled 'How an Economy Grows and Why it Crashes?'.

How can readers learn more about the conclusions of the second story?

Readers can learn more about the conclusions of the second story by visiting the website Econclips.com, subscribing to the related YouTube channel, or liking the Facebook page, with links provided in the description below.

Outlines

00:00

😖 The Struggle and Innovation of a Tool-less World

This paragraph introduces a hypothetical scenario where all tools and machinery vanish, forcing people to rely solely on their hands for survival. It tells the story of a fisherman on a remote island who, in the absence of tools, catches fish by diving into the sea. His life is hard, and he only manages to secure one fish a day. One night, he contemplates his situation and devises a plan to extend his reach by creating a spear. He spends a day crafting this tool, foregoing food in the process. The next day, his innovation pays off, as he catches two fish, effectively doubling his productivity and opening up new possibilities for survival and growth.

05:01

💼 Financial Prudence and the Consequences of Economic Downturn

The second paragraph presents a contrast between two individuals, Prodigal Pete and Thrifty Tom, who both earn a substantial income from a job at Corporation X. Pete lives extravagantly, spending his entire salary on a luxurious lifestyle and ending the month with no savings. In contrast, Tom lives modestly, saving a significant portion of his income. Over time, Tom invests his savings in various ventures, which eventually provide him with a passive income of $15,000 per month. When Corporation X faces financial hardship and layoffs, Pete, who has no savings, is left in a dire situation, while Tom's diversified investments and savings cushion him from the impact. Pete is forced to sell his assets at a loss, and Tom, now considering early retirement, offers Pete a job managing his business, illustrating the importance of financial prudence and the ability to adapt to economic changes.

Keywords

💡Economy

Economy refers to the system of production, distribution, and consumption of goods and services in a particular region. In the video, the economy is depicted as being significantly affected by the disappearance of tools and machinery, illustrating the importance of technology in economic activity. The fisherman's innovation of the spear and the subsequent growth in his 'island economy' by 100% exemplify the role of innovation in economic development.

💡Survival

Survival in this context is the state of continuing to live or exist, especially in spite of difficult conditions. The fisherman's struggle to catch fish by hand in a tool-less world represents the basic human drive to survive. His daily catch of one fish is just enough to sustain his life, highlighting the concept of subsistence living.

💡Innovation

Innovation is the process of translating an idea or invention into a good or service that creates value or for which customers will pay. The fisherman's idea to create a spear to extend his reach and improve his fishing efficiency is a clear example of innovation. It led to a doubling of his productivity, demonstrating how innovation can drive economic growth.

💡Self-sacrifice

Self-sacrifice is the act of giving up something valuable for oneself for the sake of others or a larger goal. In the video, the fisherman's decision to forgo a day's food to create his spear is an act of self-sacrifice. This concept is central to the video's theme, showing that wealth creation often requires personal sacrifice and delayed gratification.

💡Risk

Risk is the possibility of something bad happening. The fisherman took a risk by spending a day creating his spear instead of fishing, with no guarantee of success. This risk-taking is a key component of economic growth, as it can lead to new opportunities and increased productivity.

💡Savings

Savings refer to the portion of income that is not consumed, set aside for future use or investment. In the script, the fisherman's decision to save a fish by not eating it and using it to create a spear is an example of savings. This act of saving is what allowed him to invest in a capital good, leading to increased productivity.

💡Capital Goods

Capital goods are items used in the production of other goods or services. In the video, the spear is considered a capital good because it is used by the fisherman to produce fish more efficiently. It is a tangible asset that contributes to the creation of wealth.

💡Productivity

Productivity is a measure of the efficiency of production, indicating how much output can be produced with a given input. The fisherman's spear increased his productivity by allowing him to catch more fish with less effort, which is a fundamental concept in economic growth.

💡Investment

Investment refers to the commitment of money or capital to an endeavor expected to generate profit or income. Thrifty Tom's actions in the script, such as opening a shop and investing in real estate, are examples of investment. These investments eventually provide him with a diversified and stable income stream.

💡Recession

A recession is a period of temporary economic decline during which trade and industrial activity are reduced. In the video, the global recession leads to Corporation X laying off employees, including Pete and Tom, illustrating the impact of economic downturns on employment and personal finances.

💡Financial Crisis

A financial crisis is a situation where financial assets rapidly lose value. Pete's financial crisis is exemplified by his inability to make loan payments and the devaluation of his house and car. This part of the script highlights the importance of financial planning and the risks of over-leveraging.

💡Wealth Creation

Wealth creation is the process by which the value of assets is increased, often through investment and wise financial management. The video illustrates wealth creation through the stories of the fisherman and Thrifty Tom, who both use savings and investments to grow their wealth and secure their futures.

Highlights

A world where all tools and machinery suddenly disappear, forcing people to work with their bare hands.

The story of a fisherman on a remote island who struggles to survive without tools.

The fisherman's daily struggle to catch just one fish by jumping into the sea and using his bare hands.

The fisherman's innovative idea to extend the reach of his hand to catch more fish.

The fisherman's decision to forgo fishing for a day to create his invention, a spear.

The spear's creation using a strong branch and a sharpened shell, despite hunger and exhaustion.

The spear's effectiveness in catching fish, doubling the fisherman's daily catch.

The concept of saving as a form of underconsumption, allowing for investment in productivity-enhancing tools.

The economic principle that wealth is created through self-sacrifice and taking risks.

The story of Prodigal Pete and Thrifty Tom, illustrating different approaches to spending and saving.

Prodigal Pete's extravagant lifestyle leading to financial instability.

Thrifty Tom's prudent spending and saving, allowing him to invest and build wealth.

Tom's diversification of investments, including a small shop, restaurant, and real estate.

The economic downturn affecting Corporation X and leading to layoffs, including Pete and Tom.

Pete's financial crisis and the loss of his house and car due to inability to make loan payments.

Tom's offer to Pete for employment, helping him recover from financial ruin.

The moral of the story emphasizing the importance of saving, investing, and financial prudence.

Recommendation to read the book 'How an Economy Grows and Why it Crashes?' by Peter and Andrew Schiff for deeper insights.

Invitation to subscribe to the YouTube channel and like the Facebook page for more economic insights.

Transcripts

Imagine a world in which suddenly all the tools disappear.

All buildings, cars and machinery, or even basic tools such as knives, hammers and shovels vanish.

What would the economy look like if we had to do all the work with our bare hands?

This is the situation in which the hero of this story used to live

On the remote island there was a fisherman.

Maybe fisherman is too generous, because in a world without tools his fight for survival was to jump into the sea

and make desperate attempts to catch fish with his bare hands.

It was not an easy life.

All this effort resulted in catching just one fish per day, which is just as much as he needed to survive.

One night, totally wet with his eyes sore from the saltwater, he was lying on the beach staring at the stars,

thinking about how he could improve his life.

Then he came up with a brilliant idea.

If I could just extend the reach of my hand I might be able to watch the fish from above the water and

probably catch more.

He decided that in the morning he was not going to catch fish.

Instead he would devote this day to implement his plan.

He searched the woods looking for a strong, straight branch, which with great effort he managed to break off.

Then with a sharp shell found on the beach he tried to sharpen the tip of the stick which took him many hours.

Finally that evening he fell on the sand exhausted from hunger.

He didn't eat that day, so he could build his invention, but he was happy because in his imagination

he was already sitting on a heap of fish caught with the help of it.

Falling asleep he decided to call his invention spear.

In the morning, motivated, he grabbed the spear and began to work.

Because the salty water did not flood his eyes and a pointed end of the spear was more effective than his hands,

he was able to catch two fish that day!

Well, it was not a heap of fish yet, but the economy of the island did grow by 100%.

More importantly it opened up for him many more possibilities.

You can now fish every second day consuming his catch from the previous day.

He could also go fishing every day as before and dry the excess fish and store it for worse times.

Another option was to use free time to implement new ideas, to increase his productive capacity.

This would result in increasing his wealth and expanding the size of the islands economy.

In this story we come to a simple economic principle. Wealth is created through self-sacrifice and taking risks.

The fisherman underconsumed and took the risk that his plan might not work.

That he would go hungry all day producing the spear needlessly. The fisherman's underconsumption can be simply called saving.

In this case the saving was a fish, which he would surely have caught, if he had gone fishing.

He used his saving to make a spear. The spear is a capital good

because it is part of his saving which is no value in itself for the fisherman

but it serves him to get what he really wants.

After all the fisherman does not want to have a spear he wants to have the fish!

Capital is therefore a part of his saving which he spent on increasing his own productivity.

Let's fast forward to our world to illustrate this example in real life.

Two friends got a very well-paying job in a company called Corporation X. The employer offered each of them $10,000 a month.

Not believing his luck, one of them, let's call him Prodigal Pete,

immediately bought a big house with a garden, on credit.

The monthly rent amounted to $3,000.

He bought a luxury car - also on credit - for which he paid $2,000 a month.

Bills for the apartment, the cost of the car use, hiring a gardener and a cleaning lady amounted to another $2,000.

Prodigal Pete spent the rest when eating in fancy restaurants and hanging out with friends,

who - surprisingly - became more numerous after he got the new work.

At the end of the month he had no money in his account left over.

Meanwhile his colleague Thrifty Tom knew the story of the fisherman, that was told in his family for generations.

After getting a job he rented a medium sized apartment, for which he paid $1,500,

because he thought that currently the apartments were too expensive to buy, so he decided to wait for a better opportunity.

His monthly ticket for the Subway cost $100. The other bills for the apartment amounted to $400.

Thrifty Tom also liked to dine in restaurants and meet his friends, but he decided that for his entertainment

he would spend no more than $500 a month.

Most days he ate meals at home trying not to waste food which cost him another $500.

This way Thrifty Tom could save $7,000 dollars every month.

Years passed and Pete was laughing at Tom. He used to say to him: "Get a life man. Stop being a scrooge" or

"How's your car? Oh, sorry. I forgot you're still using the subway".

Tom felt upset because he dreamed of a big house with the garden and a luxurious car.

The common sense took precedence over whims.

He invested his savings in various projects. He opened a small shop in the area where he hired one employee.

After paying for all the costs his profit amounted to $1,000.

Still however, he did not increase his spending.

After some time, he opened a restaurant from which he drew profit of $2,000.

Later he bought a bit of real estate,

partly on loan, and he rented it to various companies as office space.

His gains after his loan payments amounted to $4,000.

Tom kept acting after a while gains from all of his projects were already $15,000.

Suddenly hard times fell upon Corporation X.

Because of some bad choices and a global recession it had to fire 2,000 employees.

Among them were Pete and Tom.

Tom suffered a slight scratch on his honor, because no one likes to be fired,

but other than that he didn't care too much about the situation. He had an income of the amount of

$15,000 per month from his investments and a large amounts of savings

Pete, in turn, panicked.

The bank demanded payments on a loan which Pete managed to pay only half.

Friends invited him out for the first week, but when they saw that Pete had financial problems the invites began to fade quickly.

Pete borrowed money from family to survive, but during the economic crisis no one wanted to accept him.

And certainly not for the high salary he earned before.

Finally Pete decided to sell the house and car because he was not able to make the minimum payments

The value of the car, although it was in perfect condition,

fell dramatically, because it was a few years old and no one wanted to buy it because people kept their money, uncertain of their future.

The house lost its value because Pete bought it at a time of great prosperity

and high availability of cheap credit, which pumped up the prices of the property.

As a result it turned out that the market price of his home and the car were as much as the value of the loans,

which Pete still had to pay.

He was really hurt by the fact that for so many years he was paying the loans and now he was left with nothing.

He still had to sell because he needed the cash right away.

After a few days Tom called him so that he would buy both the car and the house.

During the transaction they talked for a while as old friends.

Pete told him about his situation, and Tom as man full of empathy said: "Listen my friend,

I was just going for an early retirement. I need someone capable to take care of my business

I know you were a good specialist. How about I hire you for $3,000 a month?"

Pete felt relieved.

Finally someone wanted to hire him. He was no longer burdened with loans.

He accepted the job from Tom rented a small apartment and began to save.

The story of the fisherman was based on the excellent book by Peter and Andrew Schiff

"How an economy grows and why it crashes?"

We encourage you to read it. If you are interested in the conclusions of the second story you can read them on our website

Econclips.com

I Encourage you to subscribe to our YouTube channel and like our Facebook page. You can find the links in the description below.