Learn about Banking 12: Treasuries - government debt Video

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Learn about Banking 12: Treasuries - government debt

Learn about Banking 12: Treasuries - government debt Let’s review a little bit what we’ve learned about reserve banking and then we’ll extend this to the notion of an elastic money supplier or a money supplier that can grow or contract as people need money or hopefully grows in contract as people need money. So, let me create a couple of normal commercial banks. Maybe I'll call this National Banks. They have a national charter. So let’s say I have some equity. And part of that equity most of it is some gold that I initially capitalize the bank with and then some of it is a building— I'm trying to draw this as neat as possible but you understand my situation. And then I'll take some gold deposits from whoever the farmers after the crop has been harvested and then off-setting that, I have all of the farmer’s deposits. I'll do that in a blue color so that's one farmer’s deposit, that's another farmer so there is like two farmers. And then we learned the fractional reserve banking that I can leverage up this amount of capital I had. There’s a certain ratio between the amounts of capital. In this case gold that all the reserves I have and the amount of demand deposits I can have. So let’s say my reserve requirement in this world is let it— just because I want this bank to become too tall. Let’s say it’s 50%. We know in reality reserve requirements are more like 10%. Let me write that down. Reserve requirement is 50%. So that means that my ratio of gold to demand deposit accounts cannot be any less than 50%. So whatever this amount is I can double it in terms of demand deposit accounts and the way I do that says this amount let’s say this is collectively a hundred so I can have up to a 100 let’s say this is right here this is 50. So I can have up to 200 in demand deposit account so I can essentially lend out money and create demand deposit accounts. This is our review for you hopefully so I could lend out a 150 and we draw all that. I can lend out a 150 and I want to make this neat looking and those are my liabilities and then these are my loans and my so that’s one loan I make out and I just create someone’s checking account that’s the load asset and I created a demand deposit account for them that’s the liability it’s here to be a big loan etcetera. And then I’m not the only bank in this universe so let me copy and paste this and we’ll see control v there my other bank and I just want to show you that they are multiple banks then we said there were a couple of issues with this and you have 50% reserve requirement which is very high but what if there is a situation where for whatever reason your reserve is temporarily dot below that 50%. How do you get that extra gold? You don’t want to go to people and say can I have some a little more gold then they’re going to get scared and I’ll put out of your system but if you’re a little bit below 50% but if the other bank is a little bit above 50% it would be a convenient way if you could borrow from that other bank or even better if there was a central depository where all of these gold reserves were then you could borrow directly from that central depository if there were no other banks to borrow from so you could kind of view this a lender of last sort and we’ll go into more of the technicalities of that when we in particular talk about our current system. Well that said we created a reserve bank where we put these deposits so let’s see there is 200 of deposits in this world let me see if I can just copy and paste that. So that’s one of the reserves and then they’re the same so then that’s the other reserve and doesn’t look that neat and all the banks got together and create this. It’s a private bank but what we’re going to more details of how the actual Federal Reserve works so those are the actual gold reserves, those are the assets of that bank and I should move it over some because that’s an asset of this new bank and let me fill that part in a black. And the liabilities for this Central Reserve Bank, .let me draw the liabilities, these are the demand deposit accounts for this nationally chartered banks. So this, he took all of his gold put it here and so now he has the simplified he has a demand deposit account but I’ll assume that he just got reserve notes to show that he had access to this gold. So, let’s say that this is 100 notes outstanding this part corresponding to a hundred gold pieces and this is another hundred. Although notes outstanding it’s fungible you could mix them up because you don’t know where they came from or whatever that’s what different about those relative to a checking account. Hundred notes outstanding and so essentially this guy gives his gold here and in exchange he gets this Federal Reserve notes which look like green pieces of paper. And now these are actually his reserve, his reserves are no longer gold, his reserves are how much of these Federal Reserve notes he has and we learned them last we do that only the Federal Reserve or the Reserve Bank I haven’t called that the Federal Reserve yet but I think you see where this is going. Only they can issue this notes and these notes are these rectangular green pieces of paper with faces of Presidents on them etcetera. Let’s say in the government we live in they kind of sanction even though this is officially a private bank this Reserve Bank it’s set up in such a way that even though all of the original banks might have originally capitalize it some equity that they really don’t get any of the profits of this banks and I’ll go into detail on how the actual Federal Reserve works but let’s just say any surplus profits of these bank actually just go back to the Federal government. So the Federal government doesn’t this banks don’t make any money half of this and actually let’s say that the board of directors of this bank is actually pointed by the government etcetera, etcetera so and it’s the key to the financial system. So what the government says you know these notes sure it’s issued by this Reserve Bank but we want people to have a lot of faith in this currency because this is the currency that we use in our world and in our nation so in order for people to have unlimited faith in this currency we are going to make an obligation of the government so it’s issued by the bank, let me write that down, this used to confuse me to know end, issued by the Reserve Bank but it’s an obligation of the government. Now what does that mean, well that means that if for whatever reason even if this Reserve Bank were to somehow not have the gold to back it up, it would go bankrupt, but even in that situation the government would still be obligated to give you the gold equivalent of these notes whatever we decide is maybe it’s in 35 of this dollars per ounce of gold or whatever but that’s what that means so that gives a lot of people confidence that these things are you can almost say as good as gold. And why does it matter that the government how can you trust the government well the government can just tax people whether they were going to tax them in terms in dollars whether they can tax them in terms of gold, whether they can tax them in terms in goods and services. So as along as you think that that economy and whatever the economy is that this government is governing over as long as you thing that that economy can somehow support the gold to back this up you said oh this is as good as gold or at least support the goods and services. Well that’s set let’s introduce the notion of an elastic currency. Actually before I do that let’s go back to one thing this government does. So we said it’s an obligation of the government which means if all else fails the government is going to give you the value behind this notes. I will introduce you to another concept which is actually very similar to this notes and that is a government debt or government borrowing so let me draw that down here. I think I’m going to run out of time but I’ll continue in the next video. So I’m the government right, so I mean you could almost view the governments assets and this is its ability to de tax but if I’m the government and I issue this government IOU’s and we’ll call them treasury bonds and bills, government IOU’s. Let’s call them treasuries generally. Treasury bills are short term treasuries where the government bars for sure the amount of time bounds are longer terms. I think I’ve gone over that in the yield curve video but other than that there are more detail but they’re just IOU’s from the government. Now, these are going to be considered as risk free. Why are they considered risk free? It is because they are denominated in the same currency that the economy that this government governs over operates in. So, if this government and I think you can understand that this is essentially the US government, if it borrows money from you so it gives you an IOU so this is me, this is government. If it gives me this IOU and I give it a $100.00 and that’s these things why do I know that this IOU is risk free? Well, because unless he starts the government I’m making him masculine but unless they start issuing on an unusual number of IOU’s and just have so much interest that they can sustain, you know that they can always tax more people to get you back your $100.00 bills so you view this things right here as risk-free. So, whenever the government goes out there and says, “Hey everyone, we have a new war we want to fight or some new type of scheme, new bureaucracy we would like to create, are we going to money from you?” Someone is going to give them their currency, their Federal Reserve notes. And in exchange, the government is going to give them this risk free IOU and then the government can use these Reserve notes to go buy goods and services or pay soldiers or pay the bureaucrats. Now, we’re going to use that idea in the next video to learn how this Federal Reserve Bank or this reserve bank can buy and sell these government securities in order to change the money supply. See you in the next video.

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Learn about Banking 12: Treasuries - government debt

Let’s review a little bit what we’ve learned about reserve banking and then we’ll extend this to the notion of an elastic money supplier or a money supplier that can grow or contract as people need money or hopefully grows in contract as people need money.

So, let me create a couple of normal commercial banks. Maybe I'll call this National Banks. They have a national charter. So let’s say I have some equity. And part of that equity most of it is some gold that I initially capitalize the bank with and then some of it is a building— I'm trying to draw this as neat as possible but you understand my situation. And then I'll take some gold deposits from whoever the farmers after the crop has been harvested and then off-setting that, I have all of the farmer’s deposits. I'll do that in a blue color so that's one farmer’s deposit, that's another farmer so there is like two farmers.

And then we learned the fractional reserve banking that I can leverage up this amount of capital I had. There’s a certain ratio between the amounts of capital. In this case gold that all the reserves I have and the amount of demand deposits I can have. So let’s say my reserve requirement in this world is let it— just because I want this bank to become too tall. Let’s say it’s 50%. We know in reality reserve requirements are more like 10%. Let me write that down.

Reserve requirement is 50%. So that means that my ratio of gold to demand deposit accounts cannot be any less than 50%. So whatever this amount is I can double it in terms of demand deposit accounts and the way I do that says this amount let’s say this is collectively a hundred so I can have up to a 100 let’s say this is right here this is 50. So I can have up to 200 in demand deposit account so I can essentially lend out money and create demand deposit accounts.

This is our review for you hopefully so I could lend out a 150 and we draw all that. I can lend out a 150 and I want to make this neat looking and those are my liabilities and then these are my loans and my so that’s one loan I make out and I just create someone’s checking account that’s the load asset and I created a demand deposit account for them that’s the liability it’s here to be a big loan etcetera.

And then I’m not the only bank in this universe so let me copy and paste this and we’ll see control v there my other bank and I just want to show you that they are multiple banks then we said there were a couple of issues with this and you have 50% reserve requirement which is very high but what if there is a situation where for whatever reason your reserve is temporarily dot below that 50%. How do you get that extra gold?

You don’t want to go to people and say can I have some a little more gold then they’re going to get scared and I’ll put out of your system but if you’re a little bit below 50% but if the other bank is a little bit above 50% it would be a convenient way if you could borrow from that other bank or even better if there was a central depository where all of these gold reserves were then you could borrow directly from that central depository if there were no other banks to borrow from so you could kind of view this a lender of last sort and we’ll go into more of the technicalities of that when we in particular talk about our current system.

Well that said we created a reserve bank where we put these deposits so let’s see there is 200 of deposits in this world let me see if I can just copy and paste that. So that’s one of the reserves and then they’re the same so then that’s the other reserve and doesn’t look that neat and all the banks got together and create this. It’s a private bank but what we’re going to more details of how the actual Federal Reserve works so those are the actual gold reserves, those are the assets of that bank and I should move it over some because that’s an asset of this new bank and let me fill that part in a black.

And the liabilities for this Central Reserve Bank, .let me draw the liabilities, these are the demand deposit accounts for this nationally chartered banks. So this, he took all of his gold put it here and so now he has the simplified he has a demand deposit account but I’ll assume that he just got reserve notes to show that he had access to this gold.

So, let’s say that this is 100 notes outstanding this part corresponding to a hundred gold pieces and this is another hundred. Although notes outstanding it’s fungible you could mix them up because you don’t know where they came from or whatever that’s what different about those relative to a checking account. Hundred notes outstanding and so essentially this guy gives his gold here and in exchange he gets this Federal Reserve notes which look like green pieces of paper.

And now these are actually his reserve, his reserves are no longer gold, his reserves are how much of these Federal Reserve notes he has and we learned them last we do that only the Federal Reserve or the Reserve Bank I haven’t called that the Federal Reserve yet but I think you see where this is going. Only they can issue this notes and these notes are these rectangular green pieces of paper with faces of Presidents on them etcetera.

Let’s say in the government we live in they kind of sanction even though this is officially a private bank this Reserve Bank it’s set up in such a way that even though all of the original banks might have originally capitalize it some equity that they really don’t get any of the profits of this banks and I’ll go into detail on how the actual Federal Reserve works but let’s just say any surplus profits of these bank actually just go back to the Federal government.

So the Federal government doesn’t this banks don’t make any money half of this and actually let’s say that the board of directors of this bank is actually pointed by the government etcetera, etcetera so and it’s the key to the financial system. So what the government says you know these notes sure it’s issued by this Reserve Bank but we want people to have a lot of faith in this currency because this is the currency that we use in our world and in our nation so in order for people to have unlimited faith in this currency we are going to make an obligation of the government so it’s issued by the bank, let me write that down, this used to confuse me to know end, issued by the Reserve Bank but it’s an obligation of the government. Now what does that mean, well that means that if for whatever reason even if this Reserve Bank were to somehow not have the gold to back it up, it would go bankrupt, but even in that situation the government would still be obligated to give you the gold equivalent of these notes whatever we decide is maybe it’s in 35 of this dollars per ounce of gold or whatever but that’s what that means so that gives a lot of people confidence that these things are you can almost say as good as gold.

And why does it matter that the government how can you trust the government well the government can just tax people whether they were going to tax them in terms in dollars whether they can tax them in terms of gold, whether they can tax them in terms in goods and services. So as along as you think that that economy and whatever the economy is that this government is governing over as long as you thing that that economy can somehow support the gold to back this up you said oh this is as good as gold or at least support the goods and services.

Well that’s set let’s introduce the notion of an elastic currency. Actually before I do that let’s go back to one thing this government does. So we said it’s an obligation of the government which means if all else fails the government is going to give you the value behind this notes. I will introduce you to another concept which is actually very similar to this notes and that is a government debt or government borrowing so let me draw that down here. I think I’m going to run out of time but I’ll continue in the next video.

So I’m the government right, so I mean you could almost view the governments assets and this is its ability to de tax but if I’m the government and I issue this government IOU’s and we’ll call them treasury bonds and bills, government IOU’s. Let’s call them treasuries generally. Treasury bills are short term treasuries where the government bars for sure the amount of time bounds are longer terms. I think I’ve gone over that in the yield curve video but other than that there are more detail but they’re just IOU’s from the government.

Now, these are going to be considered as risk free. Why are they considered risk free? It is because they are denominated in the same currency that the economy that this government governs over operates in. So, if this government and I think you can understand that this is essentially the US government, if it borrows money from you so it gives you an IOU so this is me, this is government.

If it gives me this IOU and I give it a $100.00 and that’s these things why do I know that this IOU is risk free? Well, because unless he starts the government I’m making him masculine but unless they start issuing on an unusual number of IOU’s and just have so much interest that they can sustain, you know that they can always tax more people to get you back your $100.00 bills so you view this things right here as risk-free.

So, whenever the government goes out there and says, “Hey everyone, we have a new war we want to fight or some new type of scheme, new bureaucracy we would like to create, are we going to money from you?” Someone is going to give them their currency, their Federal Reserve notes. And in exchange, the government is going to give them this risk free IOU and then the government can use these Reserve notes to go buy goods and services or pay soldiers or pay the bureaucrats.

Now, we’re going to use that idea in the next video to learn how this Federal Reserve Bank or this reserve bank can buy and sell these government securities in order to change the money supply. See you in the next video.

Transcription by: Scribe4you Transcription Services