savings, investment, and the financial system modules 22 & 23

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


Financing money – obtaining loans, borrowing funds Gov’t and private firms borrow

Surpluses and deficits (gov’t) Interest 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


Savings from capital inflow is not the same as national savings


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 System Markets where households can invest wealth, by

purchasing financial assets Financial assets

Paper claim that entitles buyer to future income from the seller

Bonds, stocks, and bank deposits Physical assets

Pre-existing house, equipment Can use as you wish (rent, sell, etc)

Liability A future payment (ex. Loan)


Three tasks of the financial system Reduce transaction costs

Ex – business wants a $1 billion loan Reduce risk

Most 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


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


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 currencyhttp://www.criticalcommons.org/Members/AdrianFohr/clips/the-uses-of-cigarettes-in-stalag-17/view

http://www.criticalcommons.org/Members/AdrianFohr/clips/the-uses-of-cigarettes-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


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


Measuring Money Money Aggregates

Measures the money supply M1 (“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 M1 number: $2.85 trillion

Today’s M2 number: $11.473 trillion


Time value of money and finance Borrowing, lending, and interest

Present and future value

savings, investment, and the financial system modules 22 & 23

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