Game of Loans Episode 3 – A Trade of Goats

October 4, 2019

So in the last
couple of videos, we talked about what the interest
rate is, how it’s set, and why the central bank
might adjust the money supply to affect
the interest rate in order to keep the
economy at full capacity and with stable
and low inflation. Yeah. I’m pretty sure I got at
least half of all that. Come on, [INAUDIBLE]. You know I’m giving
up valuable research to make these videos with you. Well, you’ve got admit it, Dan. This is way more fun than making
us do boring econ research. Moving on. All right, so you’re right. We did look at why the bank
might change interest rates, but we didn’t talk about
how, how they might do it. OK, sure. But before we start
to talk about this, did you not get any
promotions from last time? I see no new props. Oh. Well, I’m glad you asked,
Dan, because check this out. Whoa. Aha! You like this? It’s my newest gift. What are your opinions on
knighting me for my great work? No. All right. Anyway. So we talked about how the
central bank affects the money supply. There’s demand for money. There’s an interest rate. Yeah. And we assumed that people get
the money by actually going directly to the central bank,
but the central bank actually lends it out. Yeah, but I’m assuming that’s
not how it works in real life? No. In reality, it’s not
like you’re going to write a letter to
Janet Yellen, the chair person of the Fed,
asking her for a loan. Oh. But the thing is, I did
write a letter for this loan that I wanted, and I’m just
waiting to hear back now. It should be any– No, just keep waiting. You’ll be waiting
for a little while. Or you could actually
just go to a local bank and ask for a loan
from a local bank. And that we haven’t
incorporated into our framework. Oh, OK. OK. So why don’t we do that now? Yeah, let’s do that. So if I remember correctly
in the last videos, we talked about how
these three farmers get the money they want. Yeah. And these guys
didn’t get the money. They didn’t have a high
enough willingness to pay. And if I recall, they crawled
into a ditch or something. Yeah, i know. That was great. OK. So now let’s say that
they exist again. They’re back. They’ve come back from this
ditch, come back from the dead. Come back from the dead? Like Jon Snow? Sure. Like Jon Snow. Anyway, they’re no
longer in a ditch. Yeah. They’re pretty happy
about the future. Maybe they have higher
willingness to pay. So they’ve got some
demand for money. Where do they get
that money from? Well, this is Game of
Thrones, so I’m just assuming that they’re going
to throw this big party, invite people over, and then
massacre them during dinner and then steal the money
off their still warm bodies. I guess so. That’s one way. Or they could go
to a local bank. How about that? They could also do that. Yeah, they could do that. OK, right. So where do these
local banks come from? Why do they exist? So these guys still
have demand for money. Let’s say this guy that wanted
the boat– he built his boat. He gave a bunch of
people boat rides, so he made a bunch of
money back and now he wants to save that money. OK. Right? So these guys want to borrow. This guy wants to save. How do they actually make a
loan between the two of them? Yeah it’s not easy,
right, because it’s not like they have
email or anything. Right. There’s no pigeons. Crows behave weirdly. If you say so. I knew you weren’t
going to get it. Anyway. So I guess you need like an
intermediary of some kind, right? Yeah. Let’s say that there’s a bank. All right. Let me draw this. Looks pretty good. No, looks good. I can tell it’s a bank. All right. So this guy has extra money. He deposits his
money at the bank. OK. And that’s sort of
like a central meeting place for people that
want to lend money– Right. –can exchange with people
who want to borrow money. Yeah. And then they just like take
this money that just came in and give it to these guys. Exactly. Perfect. And it’s convenient,
because you don’t need to go all the
way to Braavos now. You can just– Right. You don’t need to go
to this central bank. You just exchange
money among each other. OK. So now that’s clear. But then why do I need
this guy, central bank? Why can’t I just do all my
business with the local guy? You’re saying if
everyone that’s lending can meet up with the
people that want it, why do we even need
a central bank? Well, the central bank
still has an important role in actually effecting
the money supply. There’s a certain
amount of money that’s already out
in the economy, and the interest rate will
depend on how much money is out in the economy. Even though people are borrowing
and lending from each other, they have to get that
money from the central bank into the economy. OK. So the question is,
how do they do that? Yeah, exactly. So there are two ways
that you can do it. One is the Bank of Braavos
could just make loans directly to this bank. It could give gold
coins to the bank and then the bank
could lend it out. OK. So they just have like– they get sacks of
coins, basically. Yeah. Which they’ll have to pay back
ultimately, but in the meantime they can lend it out. OK. The other way is
that they can just exchange gold coins for assets. Assets. What do you mean? OK, how about goats? Goats. Goats. This is– right? Game of Thrones. Yeah. Are there goats in– Yeah. But this guy needs goats,
so clearly there are goats. There are goats. So let’s say that
this guy has a goat. All right. He has goats. And it’s valuable, right? It makes milk and
does other things. That’s beautiful. It looks like a tooth,
but we’ll call it a goat. Yeah. This guy has a goat. He’s not going to trade
this for beer at the tavern. It’s not very liquid. Yeah. But maybe he’ll
say, you know what? I’ll trade with
the central bank. I’ll give you this goat. You give me gold coins. And then he can
take his gold coins. He can buy his medicine or
his beer from the tavern. Oh. And then he’s all good. I get it. And then the central bank
is just now buying goats. Yeah. Now it has goats. What does it do
with these goats? Stores them in a vault,
or holds onto them. OK. Don’t worry about. OK. My point is, it took
goats, put out money. Then that money can circulate
through the economy. OK. So what have we done? We’ve seen first of all
how interest rates are set, why the central bank might
want to adjust interest rates in order to
basically either make spending greater in the
economy or to reduce spending in the economy. Now what we just showed is
how the central bank actually gets money into the economy
in a way that we think is consistent with what we
see in the real world, which is people actually
going to local banks. OK. I got all of that, and
we used Game of Thrones. Yeah, which is not bad. But so what we haven’t
talked about yet is how different
things that can happen will affect the macro economy. So for example, let’s
just say that you think that there’s going to be
a war among the seven kingdoms. How might that affect
the macro economy? Whoa. Whoa. Dan, Dan. Have been watching
Game of Thrones? No. Have you? No, no. Just I assume there
are some kingdoms and there might be a war, right? I mean, this is
medieval times, right? Right. You know what? We’re going to make another
video about the war, but also we’re going to discuss
this Game of Thrones thing. If you say so. All right. Next time. See you.

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