Savings, Investment, and the Financial System
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Transcript Savings, Investment, and the Financial System
SAVINGS, INVESTMENT, AND
THE FINANCIAL SYSTEM
Modules 22 & 23
The Financial Sector
Economic Growth and Investment Spending
Two
instruments of growth:
Human
capital – public education, universities, experience
Physical capital – public, but mostly private industry
How
do we pay for this investment spending?
Savings-investment
spending identity
Savings = investment…always
Economics fact: all money saved is invested
The Financial Sector
Financing money – obtaining loans, borrowing funds
Gov’t
and private firms borrow
Surpluses
Interest
and deficits (gov’t)
rate – the price of borrowing money
Today’s
avg. home rate = 4.37% (30 yr), 3.39% (15 yr)
Today’s avg. car = 2.57%, student = 4.66%
So if you buy a house for $300,000, you’re actually paying
$313,110
The Financial Sector
Savings: Who is saving?
Households
– private savings
Gov’t
Budget
surplus –or– exceeding revenue = deficit (dissaving)
National
Savings = private savings + budget balance
Capital inflow/outflow – foreign savings, spending in the
US from people in other nations
Concept
from the formation of a truly global economy
Can be +/
2012: inflow of $800 billion
This has continued to climb
The Financial Sector
Savings from
capital inflow
is not the
same as
national
savings
The Financial Sector
Recent Numbers
Gov’t
deficit
-
$474 Billion (according to useconomy.com)
Spending: $3,999 trillion with a revenue of $3,525 trillion
Lowest deficit since the
recession
Capital
Inflow/Outflow
balance
-$110.3
B
(tradingeconomics.com)
The Financial Sector
The Financial System
Markets
where households can invest wealth, by purchasing
financial assets
Financial
Paper claim that entitles buyer to future income from the seller
Bonds, stocks, and bank deposits
Physical
assets
assets
Pre-existing house, equipment
Can use as you wish (rent, sell, etc)
Liability
A future payment (ex. Loan)
The Financial Sector
Three tasks of the financial system
Reduce
Ex
transaction costs
– business wants a $1 billion loan
Reduce
Most
risk
individuals are risk-averse
Financial systems reduce exposure to risk
Diversification – invest in multiple areas, business, limits risk
and still allows full investment of funds
Liquid assets – money is the most liquid, it’s the reason why every spy has a
crap ton of money in their go bag…
https://www.youtube.com/watch?v=txHNcE_d7ro
The Financial Sector
Provide liquidity
Cash
is the most liquid form of
exchange
Liquidity means flexibility and
speed
Liquid
Assets – can be sold quickly to
attain cash
Illiquid Assets – can not sell quickly
Financial
markets provide liquidity
for business (through loans, etc) and
cash for investors on demand,
through the sale of financial assets
The Financial Sector
Financial assets
Book
examples: loans bonds, loan-backed securities, stocks
Why
did Facebook go public?
Traded on stock market – prestige
Safer for employees – they can start to cash out their shares to cash in on
the money they wanted when they started the company
SEC rule – If you have more than 500 “shareholders of record” you have
to adhere to the same financial disclosure as public companies
All the burdens with none of the perks
Financial intermediaries
Transform
funds from many different individuals into financial
assets
Mutual
funds, pensions, life insurance, and banks
Ex: banks – deposits turned into loans
CURRENCY AND THE
CONCEPT OF MONEY
Module 23
Settlers of the classroom
In your teams, you each have a number of goods that you
produce each turn, your goal is to produce the most homes,
businesses, and markets as you can by the end of 5 rounds
of the game
Home
= 2 wood, 2 brick
Business = 2 wood, 2 brick, 1 sheep, 1 wheat, 1 fish
Market = 3 wood, 3 brick, 2 sheep OR 2 wheat OR 2 fish
For each round, your team gets more of the resources that
are on the sheets as well as additional materials and you
have to decide what you are going to build
You
may also trade for each of your turns, if you feel the need
to do so
Stalag 17 currency
http://www.criticalcommons.org/Members/AdrianFohr/clips/the-uses-ofcigarettes-in-stalag-17/view
The Financial Sector
What is Money?
An
asset that can be easily used to purchase goods (def:
liquid)
Currency in circulation, checkable bank deposits, traveler’s
checks = money
Creates gains from trade because it makes indirect exchange
possible
Roles of Money
Medium
of exchange – trade for goods and services
Store of value – holds purchase power over time
Unit of account - measurement
The Financial Sector
Types of Money
Commodity
Money
A
good used for exchange
Ex: gold and silver
Commodity
– Backed Money
No
intrinsic value for the money, BUT value was guaranteed by the
fact money could be converted into a commodity
Fiat
Money
Value
derives
The Financial Sector
Measuring Money
Money
Aggregates
Measures
M1
the money supply
(“Monetary base”) and M2
M1
– measures only money in circulation and demand deposits
(checking)
M2 – M1 + “near-moneys”
Ex: not quite liquid (savings accounts, CDs)
Today’s
$2.85
Today’s
M1 number:
trillion
M2 number:
$11.473
trillion
The Financial Sector
Time value of money and finance
Borrowing,
Present
lending, and interest
and future value