Money Basics

Money Basics

http://www.youtube.com/watch?v=GXE_n2q08Yw

Microeconomics/Macroeconomics

These are the two basic divisions of the study of economics.

Micro studies the individual parts of the economy one product, one industry, individual demand, etc.

Macro studies the entire economy at one time unemployment rates, inflation and prices, economic growth and international topics.

Money and BankingMoney and Banking studies are included in Macroeconomics.

Before there was moneyPeople traded goods and services to get what they needed or wanted.

Money replaced the ancient system of

Barter

Barter is the system where people trade one thing for another without the use of money.Barter still works fine, but had limitations:Problems:

For one thing, you cant always find the person who wants what you have and has what you want. Coincidence of Wants

Problems of BarterFor another, you cant know what things, or commodities are worth in exchange. Valuation problem

Problems of BarterAnd, Commodities are often perishable, so saving is an issue. Savings problem

Problems of BarterAlso, Credit can be difficult or impossible.Money solves those problemsMoneys USES are:Medium of Exchange : It works as a go-between to make trades possible.

Measure of Value- Money allows items to be evaluated in terms of money.Store of Value: It allows saving for the future.

Basis for Credit: It allows a payments and credit system to be established in money units.

Commodity MoneyOften a particular item or items evolves into being used as moneyCommodity MoneyWheat, cattle, certain metals, shellsAll these have been money in the past.

Commodity MoneyToday, Commodity Money springs up whenever there is a problem with the basic money supply.Cigarettes, alcoholic beverages, precious metals might become money.Elementary school cafeterias have commodity money spring uppudding, cookies, candy, salt?To be a moneySomething must beDivisiblePortableAcceptableGoldU.S. Money is NOT backed by Gold.It is backed by the credit of the U.S. Government.

Gold backed our money until 1971 when Nixon took us off the gold standard for international trade because we were losing gold to other countries through import payments. It once was backed by gold

Assorted gold coins.

Americans have not had gold currency since before 1933 when Franklin Roosevelt called in the gold and changed the international value of the dollar.)So why does the U.S. own gold still?

It is officially part of the treasure of the U.S.

FORMS of MONEY Coins,Currency, and Checkbook Money (Demand Deposits). http://www.bankofcanada.ca/banknotes/bank-note-series/polymer/Forms of MoneyOf these three, Checkbook money is by far most important. about 70% of the money supply, but the number of checks used is dwindling fast. Instead, demand deposit accounts are accessed electronically.Debit cards, electronic payments, smart cards, plastic money, etc are based mainly on bank deposits.

Plastic?No- Plastic is technically not money, as it either postpones payment in one of the 3 forms (credit card), or accesses your checkbook money (debit card)

Even use of cash has declined since electronic payment methods have expanded.Payments by smart phoneshttp://www.google.com/wallet/

https://www.youtube.com/watch?v=jke7c1B5QEM

Are these forms of money? Not really because the money comes out of your bank or online account.Smartphone paymentshttp://www.hongkiat.com/blog/smartphones-into-creditcard-readers/Bitcoin a decentralized currencyBitcoin iBitcoinis apeer-to-peerpayment systemanddigital currencyintroduced asopen source software. It is acryptocurrency, so-called because it usescryptographyto control the creation and transfer of money.[5]http://en.wikipedia.org/wiki/Bitcoin

http://vimeo.com/63502573

http://www.bostonmagazine.com/news/blog/2014/02/20/liberty-teller-bitcoin-atm-boston/

SoHow does a bank work?Banks are profit-making businesses that take in depositors money and give out loans based on the same deposits. When a banks give a loan, they create money because the depositor can withdraw their deposits at most any time, and the loan recipient can also withdraw the loan, thus creating money. How a bank works

Fractional Reserve BankingSothe bank holds back a fraction of their deposits on reserve to handle day to day needs of the business.The Federal Reserve sets the reserve requirement percentage to help control the size of the money supply. Two events can threaten a bank1. A Bank Run- depositors ask to have their account turned to cash or close their accounts too quickly, often in response to rumors or panics. This is happening in Greece and possibly Spain as we speak (2012)2. The loans can go bad and not be repaid. This is more disastrous for a bank, as the basis for the loans is lost. This is where the FDIC will step in.Its a Wonderful LifeThe film, Its a Wonderful Life, from 1946, showed a bank run in it. http://www.youtube.com/watch?v=lbwjS9iJ2SwHow did George get the run stopped?

Loans going badHard times are the worst- borrowers lose jobs or cannot raise payment money. The bank must foreclose on any asset given as collateral.