With the banking sector rocked to its core by the collapse of Silicon Valley Bank and Credit Sussie, we figured it was time for a lesson in economics.
These things are either unknown to Wall St. experts, bankers, and politicians, or are willfully neglected.
Politicians, Fortune 500 companies, international banking institutions, and news media are so rife with economics experts that it's a wonder the world is in the state it's in today. Surely the joint intellectual horsepower of these big-brained professionals - these authorities in their field - could be leveraged to prevent economic disaster?
Sadly, no. Economics today is so much smoke and mirrors. It's become the social science equivalent of the Wizard of Oz.
But economics is completely accessible to anyone's understanding. The truth is you cannot live without it.
Like any subject worth knowing, economics has its basic principles, its fundamentals, and its laws. Violating these, you get the disasters that face our nation today, and those that await our future.
The truth is, economics is so stupidly simple that it's almost as if it has been purposefully mangled by the powers that be to bring about a quasi-slave condition in the average citizen.
But knowledge is power. And if we want to put the average citizen into better control over this aspect of his life, we're going to have to educate him. So let's get to it.
Economics is best understood, just like anything, by starting from the ground up. Most texts and schools start with "money". Money - especially as it's known today - is very late in the development process. Unfortunately, understanding money doesn't yield an understanding of economics.
Jumping North from money, economics can feel a lot like trying to make sense of brown pine needles without ever realizing they were connected to branches which were in turn connected to a trunk that itself has roots.
So, let's start from the roots.
The Fundamentals of Economics
What is economics? It's a subject that covers about 90% of your life. It is not a science. Every civilization on Earth has developed a working system of economics. Children - whether siblings in the house or mates on the playground - will create a working system of economics.
So what is it? It comes from Greek and its original meaning was household management. That is still the bulk of economics as it is practiced today. And economics is for the everyday man, it's not for the bankers.
Economics is, fundamentally, the exchange, or trade, of commodities, goods, and services. This of course includes the production of those commodities, ownership and transfers thereof, and behaviors.
The key element is interchange, exchange, or the concept of trading.
You need to keep that in mind. When parts of that definition go missing, and where no actual exchange is taking place, we are no longer dealing with economics but a twisted bastard tool of governments and evil men.
Where economics comes from
Two conditions must exist for economics to come about:
- A person has to need something he can't make for himself, and
- He has to produce something he will not, himself, consume.
Once you satisfy these conditions, you have given birth to economics.
Of course, one can go and live off the land in some mountain somewhere. He can grow his own food and hunt his own meals. But unless he built his own shelter from his bare hands, made his own tools to do so, and was living on otherwise unclaimed land, only then would he have no game to play or use for in this subject called "economics".
Most of us don't live like that.
Examples of these two conditions are self-evident. You see them everywhere you look. A farmer needs electricity and he can't eat all his corn by himself. An e-thot needs Starbucks because she can't make coffee and she can't look at herself.
Everything about economics proceeds from this starting point.
Barter
The obvious answer to the above conditions is barter. This is your typical playground concept of trading. Most people have experience in this as kids. They bartered Pokémon cards or baseball cards, toys they didn't like, etc.
Many people - either the uneducated or the evil-intentioned - like to point to fair exchange, trade, and barter and nod sagely and say, "Ah! Isn't Capitalism great?"
Barter has nothing to do with capitalism. Barter has nothing to do with any extant economic, or political-economic, theory.
I give you a loaf of bread, you give me some eggs. I fix your car, you do my grocery shopping. Simple. Clean. The exchange here is obvious.
This is where we start into the most confounding sector (but simplest in concept) of economics...
Money
Ah, money. What is money?
Ask that question and you are off to the races.
Many explanations exist about what money is, how it's used, and the various conditions that need to be present for "money" to be "actual money", and the functions of money, and honest to God, it really isn't that complicated. It isn't complicated at all.
But "what is money" has two answers: the abstract, and the form.
But it can only be uncomplicated by understanding it from the roots up.
Why do we have money?
Barter as described above has many shortcomings. For example, walking around town with a wheelbarrow full of bread is pretty tough. And maybe the egg guy found out he has a gluten allergy and will no longer accept my bread for his eggs.
The e-thot can't just walk into Starbucks and flash her goods for a free coffee.....well, I guess it would depend on who is working the counter that day.
So maybe the egg guy needs beef jerky and the bread maker can't provide that. The coffee shop needs plastic straws and the e-thot can't make those.
Goods and services are no longer being exchanged and the entire concept of trade dies right there, along with one bread maker and one e-thot who could no longer obtain what they needed to live for they had nothing immediately desirable to exchange.
So what is money?
Money is the idea that solves this problem, and that is all that it is: an idea.
The idea is that instead of carrying my eggs around, I have some coins or slips of paper or whatever. And really - it could be whatever. Money could be pine needles, jacks, popcorn kernels - whatever! And I can take these and I can give them to the egg guy and get some eggs.
Well, that seems pretty flimsy, so let's analyze this further. The egg guy and I would have to agree that the money had some value.
How do we do that?
Well, the egg guy would need to be certain he could take that money and know he could give it to the e-thot for a show.
And the e-thot would need to be certain she could in turn take that same money and go get a venti pumpkin spice latte.
So money is an idea plus the trust that whatever is being used as money has an established value, and the confidence that it will be accepted by all others they need to trade with.
That is the abstract of what money is.
To go North from here and understand the form of money, we have to enter into a subject called...
Banks
Now let me just stop you there. Most people don't know what a bank is.
"Of course I know what a bank is! It's where I keep my money."
Okay - see? You don't know what you're talking about.
To understand this we're going to have to go roots up again.
Super brief history of banks
So, in the 17th century, there were goldsmiths in London. Now what these goldsmiths did was they took people's gold and stored it in vaults and charged a fee for storing the gold. The depositor got a receipt saying "you have x gold in the vault" and could bring this receipt back to claim his gold.
That had been a fine business model for centuries, but that's not what a modern bank is.
The goldsmiths noticed that they had all this gold sitting around and it was a rare occasion that anyone actually showed up to take all of their gold deposit out to ogle, turn it into jewelry, or eat - or whatever it is people do with gold.
People just took to trading the receipts themselves instead of running back to the vaults for gold all the time - and why not? The receipts were, literally, good as gold. Whoever had the receipt could get the gold.
So now what do those receipts seem an awful lot like? Did you say money? That's right! Money backed by gold.
Okay, this still isn't what the business of banking is.
The next step here is the goldsmiths realizing all this unused potential.
The business of banking
There was a vast amount of wealth sitting in these vaults, but that wealth wasn't doing anything. It was just sitting there. Only the receipts were moving around.
So they started to issue additional receipts against that same gold and gave those new receipts out as loans.
Okay! Now it's a bank.
An early definition of banking is: lending money against a common fund. That is the business of banks. Banks don't "store" - they lend. (They do both, but it's the lending, specifically, that makes a bank a BANK.)
Just get the idea that depositors put 100 gold units into the bank and got receipts so they could claim those 100 gold units in the future.
Now get the idea the bank created two additional receipts for those same gold units and gave those to two other people.
Now the total receipts are for 300 gold units, but only 100 units exist in the bank.
Those two other people are supposed to pay actual gold back on those receipts, plus interest.
Those two other people never take out the gold either, they just use the receipts to get what they need.
Where the initial depositors once paid the bank to store the gold? Now the storage is free and they earn interest on their gold! This incentivizes keeping the gold on deposit and allows this whole system to function.
How it falls apart
Everything is hunky dory with this arrangement just so long as not everyone wants their gold back all at once.
See? If everyone wanted their gold back all at once, those receipts above are suddenly - in a snap - worth only 1/3rd their earlier value.
Let's say the goldsmith said some bad words about the king's mistress and everyone knew he was due to be beheaded or something. Why then everyone literally RUNS to the bank and tries to get their gold out all at once! A run on the bank. Of course, there isn't enough gold to cover all the receipts.
The above example isn't too bad. But these days, instead of lending on the basis of something sensible like 3-to-1 against a stored commodity of known value, banks are not restricted at all by deposits in their lending.
If you get the idea that people nowadays can deposit the receipts themselves and the bank can go and create more receipts based on those receipts that already just represent a fraction of the earlier gold... Well - we're off to the races.
And then just go and remove gold from the equation entirely and realize we're only dealing in these receipts. Now you are closer to understanding how it's done today.
What you've learned
In this first installment, you've learned more about economics than most college grads, and you learned them better than most economists bloviating on national television:
You learned that economics is not an exact science, but more of a skill or an art.
You also learned the essence of economics is exchanging what you produce to get what you need.
Further, you learned that money is simply the idea that evolved to facilitate these exchanges.
You learned that the form of modern money is that of a receipt of a deposit (banknote) that you can transfer to another person.
You saw how the business of banking is lending against a common fund.
When someone goes on and on about "fractional reserve banking" you can say, "Ohh! You mean just usual, regular old banking."
And you learned the entire mechanism behind how and why banks crash - even today.
