Hey everybody, it's Alex Merced again and it is another economic discussion and I want to talk to you about the ideas behind economics and understanding the economic landscape. But today I want to talk about Monetary policy. So to recap the last two video, we have discussed that the market is a battlefield between supply and demand and the price are dictated by natural human behavior as long as there is no outside manipulation. The main level of manipulation of this free market that I am discussing is government manipulation.
Since it is the most underestimated manipulation since most people will dictate that the government should get involved in the market, they usually realize that the problems that they want addressed by the government is usually caused by the government in the first place which we will uncover piece by piece. But first let's discuss these two methods that the government can affect economic policy. One is Monetary Policy and the other one is Fiscal Policy. Today I want to discuss Monetary Policy.
As far as the US goes, the Monetary Policy is the ground of the Federal Reserve Board. Now what can the Federal Reserve Board do to dictate the value of currency? They can do a few things. Again we have a fiat money supply and it's actually been made illegal in order to issuing other currencies which is a manipulation of the market. When you cut out a product out of the market you affect the supply and demand. So, now the supply of other currencies has been diminished, there is only a demand for the US dollar.
The pros and cons of that is a whole other debate. But here is what they can do. The Federal Reserve Board sets many different things. They can set the margin requirement. If you ever deal with securities or buying and selling of securities, the margin requirement is an extension of credit that a broker dealer can extend to a customer to buy or sell securities, such as stocks, bonds etceteras. And for more credit that can be issued of course the more money that is being leveraged. So essentially when you borrow somebody's money that money is still there, now you spent it, this is kind of your money. So it is kind of like that money exist twice.
And anyone who knows about the financial field, money can be loaned out three or four times through derivatives and different equity trades and also through different ways, where you are essentially seeing the same money getting used four or five times. And essentially this creates sort of imaginary money floating around which creates dilution of the currency.
So, the more credit that can be issued, the more dilution you can see in a currency. So that creates credit issue, while the reason people want more credit in the economy is because they want liquidity. I mean they want money to flow freely to the economy, but again as with all credit there is a wall before the debt gets - where everything is said paying back.
And this is kind of how the business cycle is created, but we are not going to go there. Basically there are few things we want to understand is one, the Federal Reserve can set the margin requirement dictating how much credit can be issued by broker dealers. Another thing that the Federal Reserve Board can do is one they can print more money. So, well that is pretty explanatory. You print more dollars, you increase the supply of the US currency, you are going to dilute the value of it. So, whether you extend credit or print out more dollars you are diluting the currency.
In the same note they can use open market operations to dilute and strengthen the dollar. They could do this in two ways, one if they want to increase the amount of money circulating they buy bonds. They will buy bonds from many primary dealers. These are the big banks. And they will buy them and so that way the cash is with these primary dealers and then vice versa they will sell bonds in order to get primary dealers to put cash into the Federal Reserve in order to reduce the cash that is floating around in the market.
So, there are many ways that the Federal Reserve Board dictates Monetary Policy and the amount of money. But the point is, how comfortable do you feel with someone being able to dictate the value of your hard earned income. And then here comes a question between again a Fiat Money System and a Commodity based System where the value of the commodity cannot be dictated by government because it is a function of supply and demand. Thus the value of your currency is only dictated by again natural human behavior.
Well I trust nature a little bit more than I trust, the B-side is government. I think you got an idea of where I am going with this. But there is something for you to evaluate and debate on and maybe we need some more on. Well that is Monetary Policy. Next time I will talk about Fiscal Policy which is taxes and government spending and we will talk more about that later. But thank you this is Alex and this is the third economic discussion on Monetary Policy. Thank you.
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