We live in a world based on money.
But why do we need it and where does it come from?
In part 1 of this therapy session,
we talked about value creation and trade.
If you haven’t seen it, watch it first.
The story could have ended right there
with all of us creating our pots and spears
and trading them for each other.
Such trade which doesn’t involve any money is called barter.
The problem with barter economy such as the one of Ancient Greece
is that they rely on the coincidence of wants.
Someone with a surplus of spears and a lack of ports
has to find this exact counterpart to enter a trade.
Having to wait for such coincidences results in an illiquid market,
meaning not a lot of trades are happening.
The problem of the coincidence of wants can be solved
with a universal dividable storage of value,
also known as Opportunity.
In a situation when a coincidence of wants doesn’t work
because no two parties can agree on a trade,
give everyone a coin and they can resolve their conundrum.
Value can be stored, trade becomes flexible,
and everybody gets what he wants.
Wherever trade was common, there was some widely accepted form of money.
In 17th century, Japan, for example,
such a unit was Koku, an amount of the rice.
The empire even tried to measure its total wealth in Kokus
and arrived at around 28 million,
which using the current stock market price of rice would be
around one and a half billion US dollars in today’s money.
Does this conversion make sense? I don’t know.
But it’s less than one Evan Spiegel.
“Money Money Money”
“钱 钱 钱”
So how much money does an economy need to run?
That depends on the amount of value creation and trade that are happening.
If you live in a Bronze Age village with an economy
thousands of units will do the trick.
Scale it up to a larger city, and you will need millions.
For wealthy nation, billions or even trillions.
Today, the worldwide amount of money is categorized into the 4 Ms.
M0 is the cash in circulation.
Worldwide, that’s currently around 6 trillion US dollars.
If you are saving all your money to piggy bank,
then that’s the glass ceiling you’re eventually going to hit.
Now if you save your money in a bank account, you can go places.
Because then it becomes part of M1,
which is the amount of money that exists in cash plus the one which exists in demand deposits.
The amount of M1 is currently around 30 trillion US dollars worldwide.
Now you take those 30 trillion Washingtons and
add them to saving accounts and time deposits.
Now you will have the amount of money that we refer to as M2,
which is currently around 70 trillion US dollars.
Finally add to that large liquid assets like the institutional money market funds
at a whole lot of other company, you arrived at M3.
In other words, M3 is the total amount of value
which we are actively representing in some currency.
It’s currently around 80 trillion US dollars.
This is, not coincidentally, about the same as the world GDP.
As remember, money started out as a trade enabler.
These numbers are just the current snapshot of where we are at.
Where will they be in a few years? Well, I don’t know.
But probably higher than they are today,
as the worldwide amount of money supply is steadily increasing. How so?
“Money Creation ＆ Debt”
There are two ways in which money is created.
One is through the central bank, a public institution with special powers,
usually granted by the parliament.
Among other things, it has the power to literally print money.
What created in the form of credit,
which then gets to commercial banks or states
by buying assets or government debt from them
These dollars can then be spent and or lent out
which is how they end up in circulation.
However, in most nations, the central bank makes up for less than 10 percent of money creation.
然而 大多数国家的中央银行所占货币创造份额 不足百分之十
Most of it is created by commercial banks
or, as most people refer to them, just banks.
They use a method called fractional reserve banking,
which brings those back to you.
So you save your piggy bank money of a hundred dollars in an actual bank.
The bank can safely assume that you won’t run in tomorrow and claim back your entire money.
In fact, they play a statistical game.
They assume that of all their clients’ deposits
they won’t have to pay out more than 10 percent at any point in time.
So they can lend out the rest, right?
Even better. They say the entire deposits are their 10 percent
and they can create and lend out 9 times that amount of money.
So for a hundred dollars that they got from your piggy bank,
they can now lend out another 900 dollars
in money that didn’t exist before .
Like a magician, they can just make it appear.
But since they can’t literally print money,
they create it in the form of credit,
meaning they say it’s it’s there, just believe us,
就像是 他们说“钱在那 相信我们就好
but just don’t try ever to spend it all at once.
Because if everyone tried to do that,
We’d have what is called the bank run.
Everyone would realize that in fact only 10 percent of it was ever really there.
And because banks don’t like to be GG by their clients,
they will, in such situations, impose a daily drawdown limit.
Praying to their god, Monetus,
that the system stabilizes and the bank run stops before
the bank runs out of money.
The extent which the central bank can control this creation of money
is only by changing those 10 percent,
the so-called reserve ratio.
If they increase it, it means that the banks need to keep a higher relative reserve,
which means that they can lend out less, thus create less new money.
也就是 可借出的钱变少 从而减少新创造的资金
That level of control assigned money creation is largely privatized,
and follows the rules of supply and demand.
If money supply goes up, the price of a currency should drop
and we should expect inflation.
If money supply goes down, we should expect the opposite.
Money supply. Check! What about money demand?
货币供应量 搞定 那货币需求呢
Money Demand & Debt
Did you notice how every dollar of money is connected to a dollar of debt? Whichever way money is created,
the institution which gave it away wants it or something else and return at some point.
While this has been the origin of many conspiracy TVs,
it’s actually just a reflection of the fact
that money has no inherent value,
but it’s just a representational value.
If a dollar bill won’t ultimately be the claim on a dollar of debt,
or, in other words, a dollar of value created by someone somewhere else,
then all it will be is just a piece of paper, with a nice drawing on it.
So does that mean that we can never get rid of our debt
as long as there are dollars in circulation and nobody can ever really get ahead?
No! Example time.
Let’s say you go to the bank, borrow money,
meaning you take on debt to use that money to build a house.
So at the end of the day you took money that didn’t exist before
to create value that didn’t exist before and
exchange for debt that didn’t exist before.
Cool. The money now entered the system through construction firms and whatever,
which means that the money supply has increased
with the exception of M0, because commercial banks don’t print money, remember?
Now you go to work every day,
meaning you trade your skill and time for other people’s dollars,
some of which might as well be the dollars which your bank created for you to build your house in the first place.
And eventually pay back the money,
meaning you cancel out your debt,
which means that you owns zero dollars and has zero debt.
What you keep at the end of all this rigmarole is the value of your house.
The flow of money occurs hand in hand with the value creation process
where underlying value is being built up.
And the more things we create each year,
the more money we need to represent this value we created that year.
While the amount of broad money supply M3/GDP is currently around 80 trillion dollars,
而广义货币供应M3 / GDP总额
the total amount of built up value or global assets
is currently around 260 trillion dollars.
So next time you were broke and believed the big bank conspiracy has screwed you.
Money has no inherent value. It’s basically just a trade enabler.
The Japanese used to have rice money. LOL.
Most money creation is privatized.
Bank runs are bad.
Go build a house.
We live in a world based on money.