Banking 18: Big picture discussion발음듣기
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Banking 18: Big picture discussion
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In this playlist, we've been constructing a monetary or banking system that reasonably - in the simplified form, approximates the system we're in.발음듣기
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So we have to keep some fraction aside as reserves and that way we can use that money to lend more, but in the process, we create a multiplier effect and create money.발음듣기
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And then we eventually showed that in a fractional reserve system when you have this multiplier effect and you become kind of an advanced Western industrial economy, to some degree the gold might just sit in the central bank vaults and just kind of provide this kind of confidence in the system, but really, it does nothing there.발음듣기
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And at some point we show - I think it was in the last video - that you can actually just go off the gold standard and you could go onto a non-hard currency - or not-backed by gold.발음듣기
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And the point of that is really to get to where we are today and to show that it isn't crazy.발음듣기
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There's a lot of - I guess you could call them conspiracy theorists who think that there was kind of a negative intent behind going off of the gold standard and that it was somehow stealing money.발음듣기
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I'm not 100% sure that they're not wrong, but I'm just saying since then, it's not like we've had wealth destruction and that we've turned into some type of post-apocalyptic society.발음듣기
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So at least as far as I can tell, it seems like you can have a reasonable economic system that's not backed by gold, that's actually backed by the actual wealth, where the wealth is the productive capacity of a country.발음듣기
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I think I struck a nerve a little bit because the gold really isn't fundamentally doing something and it really is just a medium of exchange.발음듣기
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So it it's good to, I think, one, think about what other routes we could've taken down this banking system evolution tree.발음듣기
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So if we just think about - let's revisit gold first because I think that's what a lot of people care about.발음듣기
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So there's money and then there's wealth - and this is tricky because at the end, these are just definitions and definitions take on different meanings as time goes on.발음듣기
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I looked up wealth in Wikipedia and it gave the Adam Smith definition - from The Wealth of Nations - and he talks about wealth as the land and - I think it was the land and labor that produce utility for humans or something of that sort.발음듣기
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So essentially his definition is, wealth would be things like land, it would be food, it would be shelter, it'd be transportation, it would be, I don't know, it would be entertainment to some degree, right?발음듣기
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Or it could be things that help produce these things like factories or - who knows what else - computers, things that help us produce all of these things more efficiently.발음듣기
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If I was a a home builder and I wanted to get bread, I would have to exchange a house for, I don't know, 10,000 loaves of bread, which just is not practical.발음듣기
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And then there's a fundamental question: Is gold fundamentally, intrinsically, worth more than paper money?발음듣기
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I mean, the benefit or the negative of gold or a lot of hard currencies is that it's scarce.발음듣기
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And by it being scarce, it's not like you can just print this stuff and there's always going to be a set supply of it.발음듣기
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And so I'm not saying that gold will one day lose its ability to control some of these things or be exchanged for some of these things.발음듣기
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I'm just saying that money or the unit of exchange is fundamentally different than these things that actually provide utility.발음듣기
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It can be used as fillings or in some industrial or electronic applications, but primarily it's a unit of exchange.발음듣기
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And as a unit of exchange, it helps just facilitate the transactions amongst wealth and helps the economy allocate resources efficiently.발음듣기
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And there are times in history where many governments, just kind of push for populist agendas or to somehow try to defer problems maybe until the next guy shows up, they did manipulate currencies.발음듣기
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And that did lead to hyperinflation and eventually the paper money becomes worthless, but then there's other examples where the paper money, for the most part, really does retain its value.발음듣기
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And so just going back to the question of whether gold will or will not lose its value, that's just really - I mean, what is it going to lose its value relative to and what would be the catalyst for it?발음듣기
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So a lot of people right now, they'll say, the dollar - there's going to be hyperinflation because the Fed is being so proactive, so I'm going to buy gold.발음듣기
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But the main thing in any type of investment is to realize that you're making a bet on what human beings will do, what the Federal government will do.발음듣기
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And just as an example, in real terms, if you adjust it for today's dollars, gold in 1980 was - this is in inflation adjusted dollars - I think it was on the order of $2,400, right?발음듣기
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So even today, even with all of this talk - I guess it's 2009 now - even with all this talk about hyperinflation, the Fed being overly aggressive and us pumping up the money supply and the Fed's balance sheet expanding - even today, gold - in today's terms - this is $2,400 in today's terms.발음듣기
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And back in 1980, a very reasonable person could have said, my God, we have hyperinflation, we just got through these oil shocks, inflation is going through the roof - inflation was already much more rampant than it has been in recent memory - and you're like, boy, the dollar's going to be worthless before we know it.발음듣기
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So someone could've made a very reasonable argument back then that they should get out of their bank accounts and convert it all to gold and they wouldn't have been able to predict that Paul Volcker would show up in the early '80s and increase interest rates despite all of the political pressure to maybe do the opposite and he got inflation under control.발음듣기
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By the late '90s, in today's terms, gold was - I think in the $200 range or it might've been even lower.발음듣기
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And even if that person said, even in the late '90s, I'm going to hold to my bet and keep holding gold, it would've taken - if they'd had it all the way to today, they still would have been better off in 1980 keeping their money in a bank account that gets more interest than inflation.발음듣기
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So if you just got 3% or 4% on your bank account starting in 1980, you still would have been better off than holding gold - even though there was a very credible argument for inflation at that time.발음듣기
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And with any of these things where you're really just betting on the medium of exchange, it's very hard to price it.발음듣기
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It's based on a lot of people thinking that the dollar's going to lose its value, et cetera.발음듣기
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Inflation looks like it's under control right now, but who knows what happens in a year or two?발음듣기
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Maybe all this liquidity starts to get a multiplier effect and the dollar gets debased and gold jumps up to $8,000.발음듣기
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Maybe a Paul Volcker-like character shows up and tackles inflation and then gold goes back to $200.발음듣기
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But the bottom line here is that it's really hard to predict because it's actually not generating utility itself, it's a measure of utility.발음듣기
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But anyway, just going back to the original thing, there's other ways that we could have gone down the evolutionary path of banking systems.발음듣기
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That's - instead of me taking a deposit and saying that you can demand the deposit at any given point, but still lending 90% of it out - that's what I do in the fractional reserve - I would tell you, 90% of your money, you can't take it out tomorrow.발음듣기
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It'd be like a CD and the money that you want to have tomorrow, I'm just going to put it aside, you're not going to get any interest on it, and you might have to even pay me a little bit of money to keep it safe and to be able to access it from an ATM.발음듣기
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The most restrictive system would be a full reserve system based on some type of hard currency that can't be printed or can't be controlled by humans to some degree.발음듣기
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Or you could have something that is printed and then to some degree this could be manipulated a little bit.발음듣기
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And just like on the fractional reserve - fractional reserve backed by gold - little less flexible, but maybe that's good.발음듣기
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I didn't want to in any way insult gold and I don't think that tomorrow gold will be worthless.발음듣기
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I just wanted to make it very clear that from a philosophical point of view, there's a difference between gold and the things that it can be exchanged for, just as there is a difference between money or - any kind of money - paper money and the things that it can be exchanged for.발음듣기
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And in general, I think gold does have a special place relative to any other hard currencies.발음듣기
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Relative to diamonds, or nanotubes, or anything else - and that's just because it has a history, right?발음듣기
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From the beginning of recorded history, people used gold as a medium of exchange, so it's almost ingrained in our cultural DNA and that's what gives it its robustness as a unit of exchange, but other than that, it's really no different than diamonds, or carbon nanotubes, or moon rocks.발음듣기
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