The Mathematics of Finance for Dummies

Posted: Aug 16, 2013 12:01 AM

Since the United States is currently ranked 24th in the world in mathematics, I thought it would be very important to dumb down the basic economic problems that our country is currently experiencing so that we may all have a much better grasp of the situation. 

Let’s start by considering that for many years, the general population in the U.S. would invariably live not within their money, but within their means.  Therefore, an $80,000 annual income quickly became a $100,000 lifestyle — with the extra $20,000 coming from home equity, student loans, and credit cards, etc.  This additional $20,000, multiplied by millions, created an enormous demand for extra services such as retail sales, restaurants, lavish vacations, and just about anything else that you can imagine.  Thus, businesses were developed in order to fit these newfound needs and wants, all spurred on by the Keynesian central bankers and, of course, our government’s administration.  However, now that the extra income is no longer available, there is no longer an additional need for these extra services.  Subsequently, in recent years, we have witnessed a significant number of businesses going bankrupt, combined with high rates of unemployment — the arithmetic is quite simple. 

In addition, in past years, municipalities such as Detroit have built their income estimates on a static and sometimes growing tax base — they never factored in a declining population or a nontaxable population.  Of course, as these cities have now become havens for illegal aliens and gangs, the tax coffers become less as well.  Moreover, as city workers retire, including police officers and garbage collectors, they need to be replaced.  This means an ever-increasing outflow of cash to cover both the current and former employees. 

Nevertheless, I realize that these aforementioned explanations of current U.S. economic travails might be rather difficult to comprehend.  Therefore, I will conclude with another example. 

Once a week, a young boy named Matt was given an allowance by his mother, and he dutifully put the money into his pants pocket.  The only thing that he bought with his allowance was lemonade from his friend Jimmy’s lemonade stand.  Regrettably, Jimmy’s only customer was Matt.  It worked well — the money flowed from mom to Matt, and then to Jimmy.  Yet, unbeknownst to Matt, he had a hole in his pocket.  Thus, each week that he attempted to buy his lemonade, he’d reach into his pocket and there would be no money because it had fallen through the hole in his pants.  Consequently, because Matt was unable to pay, Jimmy wouldn’t give the ice cold lemonade to Matt.  Since Jimmy no longer had any customers, he was forced to shut down his lemonade stand.  And mom, learning that Matt kept losing his money, no longer gave him his allowance. 

Regardless of whether it’s retail sales, a municipality, or a lemonade stand, there needs to money. 

Hopefully, a complete understanding of this last example should jump us all the way up to 23rd in the mathematical world rankings. 


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