Our top 10 export Our top 10 export destinationsdestinations

Our top 10 export Our top 10 export destinationsdestinations CanadaCanada

Our top 10 export Our top 10 export destinationsdestinations CanadaCanada MexicoMexico

Our top 10 export Our top 10 export destinationsdestinations CanadaCanada MexicoMexico ChinaChina

Our top 10 export Our top 10 export destinationsdestinations CanadaCanada MexicoMexico ChinaChina JapanJapan

Our top 10 export Our top 10 export destinationsdestinations CanadaCanada MexicoMexico ChinaChina JapanJapan U.K.U.K.

Our top 10 export Our top 10 export destinationsdestinations CanadaCanada MexicoMexico ChinaChina JapanJapan U.K.U.K. Germany, S. Korea, Brazil, Germany, S. Korea, Brazil,

Netherlands, SingaporeNetherlands, Singapore

Total U.S. exports in Total U.S. exports in ‘10‘10 $1.8 trillion$1.8 trillion

Our top 10 import Our top 10 import nationsnations

Our top 10 import Our top 10 import nationsnations ChinaChina

Our top 10 import Our top 10 import nationsnations ChinaChina CanadaCanada

Our top 10 import Our top 10 import nationsnations ChinaChina CanadaCanada MexicoMexico

Our top 10 import Our top 10 import nationsnations ChinaChina CanadaCanada MexicoMexico JapanJapan

Our top 10 import Our top 10 import nationsnations ChinaChina CanadaCanada MexicoMexico JapanJapan GermanyGermany

Our top 10 import Our top 10 import nationsnations ChinaChina CanadaCanada MexicoMexico JapanJapan GermanyGermany S. Korea, Brazil, France, Taiwan, S. Korea, Brazil, France, Taiwan,

IrelandIreland

Total U.S. imports in Total U.S. imports in ‘10‘10 $2.298 trillion$2.298 trillion

Money and the Money and the

Banking Banking SystemSystem

Is Money wealth??Is Money wealth??

Is Money wealth??Is Money wealth??

NoNo

Is Money wealth??Is Money wealth??

NoNo Money is just a way to transfer Money is just a way to transfer

wealth or to give people wealth or to give people incentives to produce wealthincentives to produce wealth

Is Money wealth??Is Money wealth??

NoNo Money is just a way to transfer Money is just a way to transfer

wealth or to give people wealth or to give people incentives to produce wealthincentives to produce wealth

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

Money, money, moneyMoney, money, money

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

Money, money, moneyMoney, money, money

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

History of money?History of money?

Money, money, moneyMoney, money, money

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

History of money?History of money? So... Money = something So... Money = something

generally accepted as a medium generally accepted as a medium of exchangeof exchange

When money goes badWhen money goes bad

InflationInflation

InflationInflation

Inflation is a general rise in pricesInflation is a general rise in prices

InflationInflation

Inflation is a general rise in pricesInflation is a general rise in prices Prices rise when there is more Prices rise when there is more

demanded than supplied at a demanded than supplied at a given pricegiven price

InflationInflation

Inflation is a general rise in pricesInflation is a general rise in prices Prices rise when there is more Prices rise when there is more

demanded than supplied at a demanded than supplied at a given pricegiven price

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

InflationInflation

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

InflationInflation

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

Rule: more money in society Rule: more money in society means higher pricesmeans higher prices

InflationInflation

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

$787,000,000,000 $787,000,000,000 “porkulus” bill signed by “porkulus” bill signed by POTUS on 2/17/09POTUS on 2/17/09

Inflation at workInflation at work

What was inflation for the last 10 What was inflation for the last 10 years?years?

Inflation at workInflation at work

What was inflation for the last 10 What was inflation for the last 10 years? 23.75%years? 23.75%

Inflation at workInflation at work

What was inflation for the last 10 What was inflation for the last 10 years? 23.75%years? 23.75%

What was inflation for the last 20 What was inflation for the last 20 years? 60.99%years? 60.99%

Inflation at workInflation at work

What was inflation for the last 10 What was inflation for the last 10 years? 23.75%years? 23.75%

What was inflation for the last 20 What was inflation for the last 20 years? 60.99%years? 60.99%

What was inflation for the last 30 What was inflation for the last 30 years? 149.7%years? 149.7%

Now that’s inflationNow that’s inflation

Zimbabwean inflation in 2008 was Zimbabwean inflation in 2008 was 231,000,000%!!!!!!!!!!!!!!!!!231,000,000%!!!!!!!!!!!!!!!!!

Now that’s inflationNow that’s inflation

Zimbabwean inflation in 2008 was Zimbabwean inflation in 2008 was 231,000,000%!!!!!!!!!!!!!!!!!231,000,000%!!!!!!!!!!!!!!!!!

A $100 billion bill could buy three A $100 billion bill could buy three eggseggs

How do politicians use How do politicians use inflation?inflation?

How do politicians use How do politicians use inflation?inflation? Because raising taxes can be Because raising taxes can be

political danger, politicians print political danger, politicians print more moneymore money

How do politicians use How do politicians use inflation?inflation? Because raising taxes can be Because raising taxes can be

political danger, politicians print political danger, politicians print more moneymore money

Result: prices rise, eroding Result: prices rise, eroding purchasing powerpurchasing power

How do politicians use How do politicians use inflation?inflation? Because raising taxes can be political Because raising taxes can be political

danger, politicians print more moneydanger, politicians print more money Result: prices rise, eroding Result: prices rise, eroding

purchasing powerpurchasing power Inflation is in effect a hidden tax… Inflation is in effect a hidden tax…

the money that people saved is the money that people saved is robbed of purchasing power which is robbed of purchasing power which is transferred to the government transferred to the government issuing the moneyissuing the money

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

DeflationDeflation

DeflationDeflation

Persistent decrease in the general Persistent decrease in the general price level of goods and servicesprice level of goods and services

DeflationDeflation

Persistent decrease in the general Persistent decrease in the general price level of goods and servicesprice level of goods and services

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

DeflationDeflation

Persistent decrease in the general Persistent decrease in the general price level of goods and servicesprice level of goods and services

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

Raises fears of the Great Raises fears of the Great DepressionDepression

The Banking SystemThe Banking System

What is the U.S. What is the U.S. banking system??banking system??

What is the U.S. What is the U.S. banking system??banking system?? A group of private institutions A group of private institutions

that transfer savings from people that transfer savings from people to others who want to borrowto others who want to borrow

What is the U.S. What is the U.S. banking system??banking system?? A group of private institutions A group of private institutions

that transfer savings from people that transfer savings from people to others who want to borrowto others who want to borrow

As of last year, there were about As of last year, there were about 7,760 FDIC-insured banks and 7,760 FDIC-insured banks and S&Ls in the U.S.S&Ls in the U.S.

What is the U.S. What is the U.S. banking system??banking system?? A group of private institutions A group of private institutions

that transfer savings from people that transfer savings from people to others who want to borrowto others who want to borrow

As of last year, there were about As of last year, there were about 7,760 FDIC-insured banks and 7,760 FDIC-insured banks and S&Ls in the U.S.S&Ls in the U.S.

That’s down from about 8,430 in That’s down from about 8,430 in ‘08‘08

What is the U.S. What is the U.S. banking system??banking system?? Banking system enables millions Banking system enables millions

of people to spend money of people to spend money belonging to millions of other belonging to millions of other people for purchases and people for purchases and investmentsinvestments

What is the U.S. What is the U.S. banking system??banking system?? Banking system enables millions of Banking system enables millions of

people to spend money belonging to people to spend money belonging to millions of other people for millions of other people for purchases and investmentspurchases and investments

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

Fractional Reserve Fractional Reserve BankingBanking A system that enables banks to A system that enables banks to

only have on hand a fraction of only have on hand a fraction of the total reserves needed to the total reserves needed to cover all depositscover all deposits

Fractional Reserve Fractional Reserve BankingBanking A system that enables banks to A system that enables banks to

only have on hand a fraction of only have on hand a fraction of the total reserves needed to the total reserves needed to cover all depositscover all deposits

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

Fractional Reserve Fractional Reserve BankingBanking A system that enables banks to only A system that enables banks to only

have on hand a fraction of the total have on hand a fraction of the total reserves needed to cover all depositsreserves needed to cover all deposits

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

Fractional reserve banking creates Fractional reserve banking creates “new” money to create wealth. How?“new” money to create wealth. How?

Fractional Reserve Fractional Reserve BankingBanking U.S. Required Reserve Ratio is U.S. Required Reserve Ratio is

10% on demand deposits (all 10% on demand deposits (all deposits except savings accounts deposits except savings accounts and CDs), above $49 million and CDs), above $49 million

Down from 12.3% in 1968Down from 12.3% in 1968

Fractional Reserve Fractional Reserve BankingBanking U.S. Required Reserve Ratio is U.S. Required Reserve Ratio is

10% on demand deposits (all 10% on demand deposits (all deposits except savings accounts deposits except savings accounts and CDs), above $49 million and CDs), above $49 million

Down from 12.3% in 1968Down from 12.3% in 1968 A*(1-r)A*(1-r)nn

Fractional Reserve Fractional Reserve BankingBanking U.S. Required Reserve Ratio is U.S. Required Reserve Ratio is

10% on demand deposits (all 10% on demand deposits (all deposits except savings accounts deposits except savings accounts and CDs), above $49 million and CDs), above $49 million

Down from 12.3% in 1968Down from 12.3% in 1968 A*(1-r)A*(1-r)n n

D = A + A*(1/r - 1) = A*(1/r)D = A + A*(1/r - 1) = A*(1/r)

Fractional reserve Fractional reserve bankingbanking Ratio varies by countryRatio varies by country

Fractional reserve Fractional reserve bankingbanking Ratio varies by countryRatio varies by country 0% in Australia, Canada, Mexico 0% in Australia, Canada, Mexico

to 19.5% in China, to 30% in to 19.5% in China, to 30% in LebanonLebanon

Federal Reserve Federal Reserve SystemSystem A central bank created in 1913 by A central bank created in 1913 by

Congress to control all private Congress to control all private banksbanks

Federal Reserve Federal Reserve SystemSystem A central bank created in 1913 by A central bank created in 1913 by

Congress to control all private Congress to control all private banksbanks

Role is to prevent banking Role is to prevent banking panics… runs on the bankpanics… runs on the bank

Federal Reserve Federal Reserve SystemSystem A central bank created in 1913 by A central bank created in 1913 by

Congress to control all private Congress to control all private banksbanks

Role is to prevent banking Role is to prevent banking panics… runs on the bankpanics… runs on the bank

Tells banks what reserves they Tells banks what reserves they can holdcan hold

Federal Reserve Federal Reserve SystemSystem A central bank created in 1913 by A central bank created in 1913 by

Congress to control all private banksCongress to control all private banks Role is to prevent banking panics… Role is to prevent banking panics…

runs on the bankruns on the bank Tells banks what reserves they can Tells banks what reserves they can

holdhold Insure deposits through the FDIC Insure deposits through the FDIC

(Federal Deposit Insurance Corp.)... (Federal Deposit Insurance Corp.)... thus prevent “runs” on banksthus prevent “runs” on banks

The FedThe Fed

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

The FedThe Fed

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

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

Assignment for Assignment for 02/22/1102/22/11 Read and study Chapter 17 of Read and study Chapter 17 of

Basic EconomicsBasic Economics: “Government : “Government Functions”Functions”

Assignment for Assignment for 02/22/1102/22/11 Read and study Chapter 17 of Read and study Chapter 17 of

Basic EconomicsBasic Economics: “Government : “Government Functions”Functions”

Assignment for Assignment for 02/22/1102/22/11 AND: AND: Write a Write a 500-word essay500-word essay: Mr. G : Mr. G

has given you $1 million to start the Bank has given you $1 million to start the Bank of (Your Name). Discuss how you would of (Your Name). Discuss how you would lend, to whom, your reserves (10%), and lend, to whom, your reserves (10%), and how your bank would create wealth in this how your bank would create wealth in this area. Who are your customers? What is area. Who are your customers? What is your marketing slogan? What interest are your marketing slogan? What interest are you charging? Demonstrate your you charging? Demonstrate your knowledge of money, fractional reserve knowledge of money, fractional reserve banking and vetting risk for making loans.banking and vetting risk for making loans.