How an Economy Grows and Why It Crashes

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E C O N O M I C   E X P A N S I O N
S
avings are not just a means to increase one’s ability 
to spend. They are an essential buffer that shields 
economies from the unexpected.
Suppose a monsoon came through the island and wiped 
out both mega fi sh catchers? Although many economists 
today view natural disasters as stimulative to an economy, 
the truth is fl oods, fi res, hurricanes, and earthquakes 
destroy wealth and diminish living standards. If the fi sh 
catchers were wiped out, the island’s fi sh production 
would drop, and Able, Baker, and Charlie would have 
to underconsume again in order to generate savings to 
rebuild their capital. 
But, remember, a pool of spare savings prevents 
disruption and allows for immediate reconstruction of 
damaged capital. That is why it is essential that Able, 
Baker, and Charlie continue to underconsume and save for 
a rainy day.
REALITY CHECK

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