What is the difference between economics and finance and what do they study respectively?
What are the differences between two seemingly similar subjects?
Let's play a small game with you first, but don't underestimate this game. It is no exaggeration to say that if you understand the connotation behind this game, you have already understood half of the essence of world finance.
The game is this:
Suppose there are three people: A grows apples, B makes clothes, and C fishes, and they don't have a penny on them.
One day, A wanted to ask old B to make a dress, and B offered 2 dollars, but because A had no money, A said that he owed the 2 dollars first, and B agreed and made a dress for A;
B wants to buy a basket of fish from C. C offers 2 dollars, but because B has no money, he asks C to owe the 2 dollars first. C agrees and goes to sea
Catch a basket of fish for B;
C wants A to buy a box of apples, and A offers $2, but because C has no money, he asks A to owe the $2 first, and A agrees.
A box of apples for C.
At this point, A owes B $2, B owes C $2, and C owes A $2, and the three of them have a total debt of $6.
Now let me ask you a question: How much money in circulation is needed to make this $6 debt disappear?
The answer is: not even a penny.
Next came a young man who wanted to buy an apple from A and paid a deposit of $1 in advance.
Next, something magical happened, watch it:
A took this 1 yuan to repay B (note that the debt is only half paid at this time, because it is 2 dollars owed);
Because B still owes C money, he took the $1 he just got and returned it to C;
Because C still owes old money, he takes the $1 he just got and returns it to A.
The 1 yuan is back in A's hands. Remember that A still owes B 1 dollar? So A gives the $1 to B, and the debt is paid off; the same B
Give the $1 back to C, who finally gives the $1 back to A.
In the end, the $1 was returned to A's hand.
And the young man suddenly said that he didn't want to buy apples, and asked A to get the 1 yuan back, so A returned the 1 dollar to the young man.
This round came down and nothing seemed to happen, but all the debt was gone.
You see, it only takes $1 of currency in circulation to pay off the three people's $6 total debt in two turns.
In fact, it doesn't need as much as 1 dollar, even 1 cent is fine, just turn 600 circles in the same way as above, and the debt will disappear.
Why is this happening?
In fact, the smart friends have discovered that even if there is no foreign money, these three people actually don't owe each other. If it is replaced by two people, I believe it will be better understood. You owe me and I owe you. In fact, the debts have already offset each other at this time. And the 1 yuan that this young man came from was just going off the scene.
But the point is, because of the debt behavior of these three people, the society has an extra piece of clothing, a basket of fish, and a box of fruit, with a total GDP of 6 US dollars. The currency in circulation during this period was only $1.
We might as well be a little bolder, how about getting it to $600 million in GDP? A asks B to make 100 million clothes, B asks C to catch 100 million baskets of fish, C asks
A 100 million boxes of fruit - a total debt of $600 million.
Likewise, the market only needs $1, turn it around 200 million times, and the total debt will disappear. However, the market has increased material wealth worth 600 million US dollars.
That's the magic of debt, and the point is, how do we make this happen?
Welcome to the era of great finance.
What is the purpose of economic development? Some people intuitively think that making everyone rich.
In fact, making everyone rich is just a means, not an end. One of the most important goals of economic development is to enrich the material wealth of society.
In fact, the word "economy" can be replaced by another word, that is "exchange". Although we now have money as a medium, the essence
In the end, the currency is to become a barter.
For example, after you work part-time, you are paid a salary, and you use this salary to buy a few pieces of clothes. In essence, this process is that you use the labor you paid for the society during your work period in exchange for a few pieces of clothing.
The essence of economic development is to expand the scale of such "barter", release production capacity, and enrich social material wealth.
From the above mini-games, we can see that what drives the birth of material wealth is not currency itself, but debt.
In the modern economic system, "currency circulation" is only an appearance, and what is really circulating is "debt".
A two-part summary:
1 The essence of "economic development" is to allow everyone to get what they need, but in return, everyone needs to produce what everyone else needs. The essence of economic development is to make such things repeat themselves. Scale up. And "debt" is such a tool. When debt is born, someone needs to borrow to buy what they want, and in order to pay off the debt, that person has to work to survive and produce what the society needs - so, expanding debt To scale is to expand the scale of the economy.
2. All currencies in modern times are lent from the central bank. If there is no debt, there will be no currency, and there will be no market economy. When people work and survive in order to pay off their debts, the currency returns to the central bank, and it is this closed loop that makes the economy work.
1. Let us turn the time back to the primitive society, when the first class was just born
How did the first class come into being? According to Marx, before the birth of the socialist state, the state was the tool of the bourgeoisie's rule over the proletariat. In layman's terms, it is an organization that collects protection fees from the people, but it does provide protection - the key is how to make people willing to pay this protection fee?
According to Max Weber (not Marx), class and power exist because of the popular desire for order. That is to say, people hope that the return they can get for their efforts is determinable, and they hope that the life they are used to will continue, then there must be a rule, and the premise of a rule being able to be implemented is that it must be given to an individual or an individual. The group gives it the right to manage and interpret the rules, and the ruling class comes into being.
Let's turn the time back to primitive society, who will direct the hunt, distribute the work, and distribute the harvest? Everyone speaks public justice, so everyone must choose a person with high morals and respect as the authoritative finalizer, so that the tribe can run stably, otherwise it will end in division. This invisibly formed a consensus in the group, so they had to support the leaders of the tribe, and the ruling class was born.
Then a more efficient social form was developed, that is, a slave society, which extremely oppressed certain groups, so that the ruling class obtained a good life, and at the same time, it was able to strengthen its armed forces, which could not only consolidate its rule but also invade and expand abroad—— However, excessive exploitation may eventually lead to mass revolt.
Then came the feudal society, where the ruling class possessed land, and the proletariat had to hand over a portion of the harvest to the ruling class in order to obtain land for farming. This method will be more docile and more "justifiable" than slavery.
Stable social relations and social rules are the prerequisites for the birth of an economy. Later, the ruling class thought of a more efficient way to collect agricultural taxes than the feudal society, which was to collect a transaction tax, and the birth of each transaction was accompanied by an increase in tax revenue - this is the prototype of the value-added tax.
At this point, the way the ruling class wants to expand its fiscal revenue becomes simple and clear, that is, to expand the scale of the economy and increase the number of transactions.
2. An economy freed from the shackles of precious metals
However, in the era of precious metal currency and gold standard currency in the past, the scale of the social economy was directly limited by the total amount of precious metals mined. Imagine that originally a place had abundant resources for development, but because there were no precious metals, it could only be left there.
Therefore, human society desperately needs a medium of exchange that can replace precious metals. Is there something that everyone is after? And its birth itself does not need to consume resources, it does not consume a lot of manpower and material resources like mining precious metals, and its birth itself indicates an increase in future output value?
Yes, that is "debt".
Imagine that when a debt is born, an "IOU" will be born, and the debtor must want to redeem the IOU, which means that the IOU will be pursued by the debtor, and as long as this part of people pursues this thing, Then it has a logical basis for circulation. At the same time, the birth of debt means that the debtor has to work and produce in order to pay off the debt, so the social output value will increase in the future. In the whole process, there is no need to generate additional costs.
This is the magic of "debt", using debt and credit to drive the economy, so the scale of the market economy is liberated from the shackles of being limited by the total amount of precious metals - this is also the secret of the rise of Western powers in modern times.
In order to help you understand the power of debt, let me give you an example that you are familiar with in your daily life:
Now there is a vegetable farmer and an architect. The vegetable farmer wants to hire an architect to build a house and needs US$1 million, but the vegetable farmer does not have that much money, so he asks a bank to apply for a loan, and the loan is 1 million US dollars to the architect through electronic transfer. At this time, the bank does not need to use the cash of 1 million US dollars, but only needs to operate on the account. At this time, the architect's electronic account instantly increased by 1 million, so he built a house for the vegetable farmers, and the vegetable farmers received For the next 30 years, in order to repay the loan, he kept growing vegetables and selling vegetables, and the architect, because he had an income of 1 million, went to the vegetable farmers to buy vegetables every day (also through electronic transfer). After 30 years, the debt was paid off. .
In the process from the occurrence of this debt to its demise, the society has an additional house worth 1 million yuan, and vegetables worth 1 million yuan, with a total output value of 2 million yuan (GDP), which is several times the output value of the debt itself.
In fact, think about it carefully, in fact, the bank does not really need 1 million cash, and we can even say that the extra 1 million income of the architect was born out of thin air, but at the same time, the architect also created a society for the society. House, on the other hand, debt can be seen as a promise made by the debtor in the future labor production, and vegetable farmers continue to grow vegetables. So a debt of 1 million is converted into a material wealth of 2 million.
And this 1 million born out of thin air, we call it credit currency, it does not need precious metals as a guarantee for its issuance, and its issuance guarantee asset is the creditor's rights, or the credit of the residents. And it must be able to circulate, why?
Because it is born out of debt, as long as someone needs to pursue it to repay the debt, it has a logical basis for circulation.
3. Credit expansion with precious metal currency and gold and silver standard currency as base currency.
Of course, there was no electronic account transfer payment in the past. I just took an example that is closer to life to make it easier for everyone to understand. Although there was no electronic account in the past, commercial drafts, checks, bonds, etc. were used to transfer the accounting books. Payment, and the object is generally large-scale transactions between large developers in different fields, it was not until later that the use of electronic accounts was popularized in daily transactions.
In simple terms, in modern times, precious metal currency and gold and silver standard currency are used as the base currency, and then the base currency is used as the anchor to realize the derivation of deposits by means of transfer payment of commercial paper, bond monetization, etc., thereby expanding the scale of debt (or credit). scale), thereby driving the output value of the entire society. Rail bonds at that time were even hard currency and could be used directly as a medium of payment.
The British Empire in modern history, as well as several other powers, used this method to drive debt to boost the overall output value. Credit and debt are the core secrets of the rapid development of the modern economy. This way, there is basically no need to worry about the indiscriminate issuance of currency causing prices to rise (temporarily This), because as explained above, how much debt means there will be several times the output value of the debt itself, and the increase in social products will be several times the debt itself, which also achieves the purpose of economic development - enriching social material wealth.
First try to let the local area join the credit system dominated by foreign powers and accept corporate bonds such as railway bonds, logistics port bonds, factory bonds and other corporate bonds as their means of payment. Of course, this is not forced, but uses its own domestic or has established with other foreign countries. A good trade market ensures the liquidity of these bonds, and at the same time, because of the quality of their market products, these bonds can obtain stable exchange rates on the international precious metal trading platform.
Then the next thing is very simple. If a capitalist likes a piece of land, then ask the landlord to make an offer, and then directly issue a bond, directly use the bond issued by him to buy the land, build a factory, hire employees, and then start producing things, And because the local people have more income from these bonds, their consumption power will increase, so the things they produce will not be sold, the bonds will flow back to the capitalists, and the debt will disappear.
What if I don't have the qualifications to issue bonds, or what if a British guy with nothing wants to go there to buy land and start a business? You can go directly to the bank loan channel. The bank issued a bond in sterling, because the bank has a high credit rating, so this bond can also be circulated, so I used this bond to buy the land and build a factory, then the same, because This series of operations made the local income increase, and the products produced did not have to worry about selling, so the bonds flowed back to the British guy, the British guy then repaid the loan, and at the same time he got an extra piece of land and a factory.
The whole process of debt monetization above can be regarded as the process of the expansion of the total amount of broad money. In the total amount of broad money, the base currency accounts for a very small proportion. The so-called base currency in modern times is actually printed paper money. In modern times, it is the gold and silver standard currency. The base currency is the basic asset for credit expansion. It is essentially linked to gold, and based on this, the output value is increased through the release and collection of debt.
If you understand the above process, you will find that gold no longer has to exist. Even if there is no gold as a security asset, such a system can still operate. Circulation is because it is lent by the bank itself, so people need it to repay debts, then it has a logical basis for circulation. In fact, such a circulation basis is thicker than gold and silver in the past. Think about it, gold Why does silver circulate? In fact, it is based on a certain kind of "confidence", and this kind of currency born from debt does not need confidence. As long as someone in the society needs to pursue it to repay the debt, it must be able to circulate.
The above is the credit and currency system before World War II. Today after World War II, we rarely use checks or bonds as payment methods, because we have found stronger alternatives - bank electronic accounts and electronic transfers. Widely used, it makes deposit derivation involved in all aspects of society, making the above-mentioned debt-driven economic model more extensive.
The article is here first. What this article describes is the basic form of the modern market economy with debt and credit as the core. In this series of columns, I will take you to a more comprehensive and detailed understanding of the overall picture of the financial and market economy.
You will understand how the Federal Reserve operates and how its monetary policy affects the world;
You will understand how the Marshall Plan and the Bretton Woods system constructed the post-World War II world economic system;
You will understand how large-scale hot money such as the Soros Quantum Fund uses financial derivatives and market rules to harvest the wool of small countries;
You will understand the whole picture of the Plaza Accord and the bubble economy between Japan and the United States;
You will understand why boom and bust cycles are bound to operate in an economy, and how we can take advantage of this.
In the process, we will see the unimaginable rationality and greatness of the modern financial system, and then in the middle we will find out its deep unreasonableness and loopholes, how this loophole can cause unimaginable harm to our economy .
Before trying to find out the unreasonableness of a system, we must thoroughly understand its rationality, and then talk about unreasonableness; before talking about conspiracy theories,
We must first clear the conceptual understanding of the obvious, and then talk about conspiracy.