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Why is a strong banking system essential to a prosperous society?. Mark 12:15-17.

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mark 12 15 17
Mark 12:15-17

“…he said to them, “Why put me to the test? Bring me a denarius and let me look at it.” 16 And they brought one. And he said to them, “Whose likeness and inscription is this?” They said to him, “Caesar's.” 17 Jesus said to them, “Render to Caesar the things that are Caesar's, and to God the things that are God's.” And they marveled at him.

is money wealth2
Is money wealth??

No

Money is just a way to transfer wealth or to give people incentives to produce wealth

is money wealth3
Is money wealth??

No

Money is just a way to transfer wealth or to give people incentives to produce wealth

All people have to do is agree on something as an intermediary means of exchange and bingo, money!

money money money
Money, money, money

Money only works because other individuals will supply real goods and services in exchange for that money

money money money1
Money, money, money

Money only works because other individuals will supply real goods and services in exchange for that money

History of money?

money money money2
Money, money, money

Money only works because other individuals will supply real goods and services in exchange for that money

History of money?

So... The definition of Money: Something generally accepted as a medium of exchange

alternate money1
Alternate money

Credit cards, debit cards, checks, IOUs, gold

alternate money2
Alternate money

Credit cards, debit cards, checks, IOUs, gold

Barter: lots of this going on at Craigslist

alternate money3
Alternate money

Credit cards, debit cards, checks, IOUs, gold

Barter: lots of this going on at Craigslist

“2006 Fender Telecaster Deluxe FMT HH, will trade for clean Lamborghini or Ferrari.”

alternate money4
Alternate money

Credit cards, debit cards, checks, IOUs, gold

Barter: lots of this going on at Craigslist

“2006 Fender Telecaster Deluxe FMT HH, will trade for clean Lamborghini or Ferrari.”

Bitcoin

inflation1
Inflation

Inflation is a general rise in prices

inflation2
Inflation

Inflation is a general rise in prices

Prices rise when there is more demanded than supplied at a given price

inflation3
Inflation

Inflation is a general rise in prices

Prices rise when there is more demanded than supplied at a given price

So when there is more money, people tend to spend more. Without increase in output, prices simply rise

inflation4
Inflation

Inflation can be viewed as general decline in the real value of money, loss of purchasing power

inflation5
Inflation

Inflation can be viewed as general decline in the real value of money, loss of purchasing power

Rule: more money in society means higher prices

inflation6
Inflation

“The big problem with money created by the government is that those who run the government face the temptation to create more money and spend it”

inflation at work
Inflation at work

What was inflation for the last 10 years?

inflation at work1
Inflation at work

What was inflation for the last 10 years? 24.3%

inflation at work2
Inflation at work

What was inflation for the last 10 years? 24.3%

What was inflation for the last 20 years?

inflation at work3
Inflation at work

What was inflation for the last 10 years? 24.3%

What was inflation for the last 20 years?

58.4%

inflation in real life
Inflation in real life

Inflation over last 50 years (1964-2014): 657%

I.e., if I bought an item for $10,000 in 1964 it would cost $75,735 today

now that s inflation
Now that’s inflation

Inflation in Zimbabwe in 2008: 79 million%

now that s inflation1
Now that’s inflation

Inflation in Zimbabwe in 2008: 79 million% per month!

now that s inflation2
Now that’s inflation

Inflation in Zimbabwe in 2008: 79 million% per month!

Annual rate in 2008….. 89,700,000,000,000,000,000,000%

how do politicians use inflation1
How do politicians use inflation?

Because raising taxes can be political danger, politicians print more money

how do politicians use inflation2
How do politicians use inflation?

Because raising taxes can be political danger, politicians print more money

Result: prices rise, eroding purchasing power

how do politicians use inflation3
How do politicians use inflation?

Because raising taxes can be political danger, politicians print more money

Result: prices rise, eroding purchasing power

Inflation is in effect a hidden tax… the money that people saved is robbed of purchasing power which is transferred to the government issuing the money

slide47
“Our economic problems worry me much less than our political solutions, which have a far worse track record.” Dr. Sowell
deflation1
Deflation

Persistent decrease in the general prices of goods and services

deflation2
Deflation

Persistent decrease in the general prices of goods and services

Can be disastrous: people hold onto money, creating less demand, prices continue to drop

deflation3
Deflation

Persistent decrease in the general prices of goods and services

Can be disastrous: people hold onto money, creating less demand, prices continue to drop

Raises fears of the Great Depression

why have banks at all1
Why have banks at all?

Safety… economies of scale in guarding money

why have banks at all2
Why have banks at all?

Safety… economies of scale in guarding money

Enable business to achieve economy of scale by financing much more than individual businesses could on their own

why have banks at all3
Why have banks at all?

Safety… economies of scale in guarding money

Enable business to achieve economy of scale by financing much more than individual businesses could on their own

And you can make money from a bank: people acting in their own self interest lead to a more prosperous society

what is the u s banking system1
What is the U.S. banking system??

A group of private institutions that transfer savings from people to others who want to borrow

what is the u s banking system2
What is the U.S. banking system??

A group of private institutions that transfer savings from people to others who want to borrow

There are about 7,042 FDIC-insured banks and S&Ls in the U.S.

what is the u s banking system3
What is the U.S. banking system??

A group of private institutions that transfer savings from people to others who want to borrow

There are about 7,042 FDIC-insured banks and S&Ls in the U.S.

That’s down from about 8,430 in ‘08

top u s banks
Top U.S. banks

JP Morgan Chase

Bank of America

Citi Group

Wells Fargo

Goldman Sachs

Honest George’s Bank, Used Car Parts and Pet Boutique

what is the u s banking system4
What is the U.S. banking system??

Banking system enables millions of people to spend money belonging to millions of other people for purchases and investments

what is the u s banking system5
What is the U.S. banking system??

Banking system enables millions of people to spend money belonging to millions of other people for purchases and investments

Banking system affects total demand in the economy as a whole by adding to the money supply through “fractional reserve banking”

fractional reserve banking
Fractional Reserve Banking

A system that enables banks to only have on hand a fraction of the total reserves needed to cover all deposits

fractional reserve banking1
Fractional Reserve Banking

A system that enables banks to only have on hand a fraction of the total reserves needed to cover all deposits

Since all depositors won’t demand their money at once, banks lend out the rest and earn interest and fees

fractional reserve banking2
Fractional Reserve Banking

A system that enables banks to only have on hand a fraction of the total reserves needed to cover all deposits

Since all depositors won’t demand their money at once, banks lend out the rest and earn interest and fees

Fractional reserve banking creates “new” money to create wealth

fractional reserve banking3
Fractional Reserve Banking

U.S. Required Reserve Ratio is 10% on demand deposits (all deposits except savings accounts and CDs), above $79.5 million

Down from 12.3% in 1968

fractional reserve banking4
Fractional Reserve Banking

U.S. Required Reserve Ratio is 10% on demand deposits (all deposits except savings accounts and CDs), above $79.5 million

Down from 12.3% in 1968

So if a bank has $500 million in deposits, it must maintain $50 million in cash in its vaults or in a Federal Reserve Bank

what economics looks like in college
What economics looks like in college

M1= Mb*mm

mm= (1+c)/c+R

M1 is money supply; Mb is monetary base; mm is money multiplier; c is currency ratio; R is reserve ratio

fractional reserve banking5
Fractional reserve banking

Ratio varies by country

fractional reserve banking6
Fractional reserve banking

Ratio varies by country

0% in Australia, Canada, Mexico to 19.5% in China, to 30% in Lebanon

fractional reserve banking7
Fractional reserve banking

Ratio varies by country

0% in Australia, Canada, Mexico to 19.5% in China, to 30% in Lebanon

Enough!!! How exactly does fractional reserve banking create wealth???????

federal reserve system
Federal Reserve System

A central bank created in 1913 by Congress to control all private banks

federal reserve system1
Federal Reserve System

A central bank created in 1913 by Congress to control all private banks

Role is to prevent banking panics… runs on the bank

federal reserve system2
Federal Reserve System

A central bank created in 1913 by Congress to control all private banks

Role is to prevent banking panics… runs on the bank

Tells banks what reserves they can hold

federal reserve system3
Federal Reserve System

A central bank created in 1913 by Congress to control all private banks

Role is to prevent banking panics… runs on the bank

Tells banks what reserves they can hold

Insure deposits through the FDIC (Federal Deposit Insurance Corp.)... thus prevent “runs” on banks

the fed
The Fed

Sets interest rates on loans to banks, thus indirectly controlling interest rates throughout the banking system

the fed1
The Fed

Sets interest rates on loans to banks, thus indirectly controlling interest rates throughout the banking system

Operates 12 Federal Reserve Banks throughout the country that work with private banks to distribute funds, extend credit, process U.S. money, etc.

assignment for april 1
Assignment for April 1

Read and study Chapter 17 of Basic Economics: “Government Functions”