Running the Economy -II
From the previous episode, we surely would have known about the simple process, Transaction. Let's move further, and don't leave any of the learned concepts behind, because when gathers intense it would be difficult to recall every concept we passed. I will make it easy for you by adding hyperlinks and teleport you to the elder contents.
 |
| Genhq |
People, businesses, banks,
and governments all engage in transactions the way I just described: exchanging
money and credit for goods, services, and financial assets.
The biggest buyer and seller
is the government, which consists of two important parts:
- Central Government that collects taxes and spends money...and
- Central Bank, which is different from other buyers and sellers because it controls the amount of money and credit in the economy.
It does this by influencing interest rates and printing new money. For these reasons, as we'll see, the Central Bank is an important player in the flow of Credit. Credit is the most important part of the economy, and probably the least understood. It is the most important part because it is the biggest and most volatile part. Just like buyers and sellers go to the market to make transactions, so do lenders and borrowers.
Lenders usually want to make
their money into more money, and borrowers usually want to buy something they
can't afford like a house or car or they want to invest in something like
starting a business. Credit can help both lenders and borrowers get what they
want. Borrowers promise to repay the amount they borrow, called the principal,
plus an additional amount, called interest.
When interest rates are high,
there is less borrowing because it's expensive. When interest rates are low,
borrowing increases because it's cheaper. When borrowers promise to repay, and
lenders believe them, credit is created.
Any two people can agree to
create credit out of thin air! That seems simple enough but credit is tricky
because it has different names. As soon as credit is created, it immediately
turns into debt.
Debt is both an asset to the
lender, and a liability to the borrower. In the future, when the borrower
repays the loan, plus interest, the asset and liability disappear, and the
transaction is settled. So, why is credit so important?
Because when a borrower
receives credit, he can increase his spending. And remember, spending drives
the economy. This is because one person's spending is another person's income.
Think about it, every penny you spend, someone else earns, and every penny you
earn, someone else has spent.
So, when you spend more, someone else earns more. When someone's income rises it makes lenders more willing to lend him money because now he's more worthy of credit.
A creditworthy borrower has two things:
- Ability to repay
- Collateral
Having a lot of income concerning his debt gives him the ability to repay. If he can't repay, he has valuable assets to use as collateral that can be sold. This makes lenders feel comfortable lending him money.
So increased income allows increased borrowing which allows increased spending. And since one person's spending is another person's income, this leads to more increased borrowing and so on. This self-reinforcing pattern leads to economic growth and is why we have Cycled.
In a transaction, you have to give something to get something and
how much you get depends on how much you produce over time we learned, and that
accumulated knowledge raises are living standards we call this productivity
growth those who were invented and hard-working raise their productivity and
their living standards faster than those who are complacent and lazy, but that
isn't necessarily true over the short run.
Until next share this with your friends on - Facebook Instagram WhatsApp.
We make your 2 minutes cherishable- Finbolts
Finnomy
Useful content 👌
ReplyDelete