What is the difference between finance and economics?

4800 words, about 16 minutes to read

Dry logic​

Let me play a small game with you first, but don’t underestimate this game. It is no exaggeration to say that if you understand the connotation behind this game, you have already understood half of the nature of world finance.

This game is like this:

Suppose there are three people now: Old A is an apple farmer, Old B is a clothes maker, and Old C is a fisherman, and they don't have a penny on their bodies now.

One day, Old A wanted to ask Old B to make a dress. Old B quoted 2 yuan, but because Old A had no money, Old A said he owed the 2 yuan first. Old B agreed and made a dress for Old A. A;

Old B wanted to buy a basket of fish from Old C. Old C quoted 2 yuan, but because Old B had no money, he asked Old C to pay the 2 yuan first. Old C agreed and went out to sea to catch a basket of fish for Old B. B;

Old C wanted Old A to buy a box of apples, and Old A quoted 2 yuan. However, because Old C had no money, he asked Old A to pay the 2 yuan first. Old A agreed and planted a box of apples for Old C.

Here, you see, Old A owes Old B 2 yuan, Old B owes Old C 2 yuan, Old C owes Old A 2 yuan, and the total debt of the three of them is 6 yuan.

Now let me ask you a question: How much currency circulation is needed to make this 6 yuan debt disappear?

The answer is: not even a penny is needed.

Why?

Next came a young man who wanted to buy apples from Old A and paid a deposit of 1 yuan in advance.

Next, something magical happened, watch out:

Old A took the 1 yuan and paid it back to old B (note that only half of the debt was paid off at this time, because he owed 2 yuan);

Because Old B still owed Old C money, he took the 1 yuan he just received and paid it back to Old C;

Because Old C still owed Old A money, he took the newly acquired 1 yuan and returned it to Old A.

This 1 yuan is back in the hands of old A. Do you still remember that old A still owes 1 yuan to old B? So Old A gave the 1 yuan to Old B, and the debt was paid off; similarly, Old B returned the 1 yuan to Old C, and Old C finally returned the 1 yuan to Old A.

In the end, the 1 yuan returned to Old A's hands.

The young man suddenly said that he no longer wanted to buy apples and asked Old A to get back the 1 yuan, so Old A returned the 1 yuan to the young man.

After this round, it seemed like nothing happened, but all the debts disappeared.

You see, it only takes 1 yuan of currency circulation to pay off the total debt of 6 yuan for three people in two turns.

In fact, it doesn’t need to be as much as 1 yuan, even 1 cent is fine. You only need to rotate it 600 times in the same way as above, and the debt will disappear.

Why is this happening?

In fact, the smart friends have discovered that even without the external money, these three people actually do not owe each other anything. If it were two people, I believe it would be better to understand. You owe me and I owe you. In fact, the debts have canceled each other out at this time. And the 1 yuan this young man got was just a formality.

But the point is, because of the debt behavior of these three people, society has an extra piece of clothing, a basket of fish, and a box of fruit, with a total value of 6 yuan of GDP. During this period, the currency circulation was only 1 yuan.

We might as well be bolder and get it to a GDP of 600 million yuan? Old A asked Old B to make 100 million pieces of clothes, Old B asked Old C to catch 100 million baskets of fish, and Old C asked Old A to grow 100 million boxes of fruit—a total debt of 600 million.

Similarly, the market only needs 1 yuan, and if it rotates 200 million times, the total debt will disappear. As a result, material wealth worth a total of 600 million has been added to the market.

That’s the magic of debt, the key is, how do we make this happen?

Welcome to the era of big finance.

What is the purpose of economic development? Some people intuitively think that it can make everyone rich.

In fact, making everyone rich is just a means, not an end. One of the most important purposes of economic development is to enrich society's material wealth.

In fact, the word "economy" can be replaced by another word, that is "exchange". Although we now have currency as a medium, in essence, currency is ultimately intended to facilitate barter exchange.

For example, after you go to work and get paid, you use the salary to buy a few pieces of clothes. This process is essentially that you use the labor you paid to society during work to exchange for a few pieces of clothes.

The essence of economic development is actually to expand the scale of such "barter exchange", release production capacity, and enrich social material wealth.

From the mini-game above, we can see that what drives the birth of material wealth is actually not currency itself, but debt.

In the modern economic system, "currency circulation" is just an appearance, and what is really circulating is "debt".

In response to the questions in the comment area, let me briefly summarize them in two paragraphs:

1 The essence of "economic development" is to allow everyone to obtain what they need, but in return, everyone needs to produce what others need. The essence of economic development is to allow such things to continue to repeat, Scale up. And "debt" is such a tool. When debt is born, someone must borrow money to buy what they want, and in order to pay off the debt, that person has to work to survive to produce what society needs - so, expand debt Scale is about expanding the economic scale.

2. All modern currencies are borrowed from the central bank. Without debt, there would be no currency and no market economy. When people work to survive in order to pay off debts, money returns to the hands of the central bank. It is this closed loop that keeps the economy running.

1. Let us turn the time back to primitive society, when the first class was born

How were the first classes born? According to Marx, before the birth of the socialist country, the state was the tool of rule by the bourgeoisie over the proletariat. In layman's terms, it is an organization that collects protection fees from the people, but it does provide protection - the key is how to make people pay the protection fees willingly?

According to Max Weber (not Marx), class and power exist because of the people’s desire for order. That is to say, people hope that the rewards they can get for their efforts are determinable, and they hope that the life they are accustomed to will continue. Then there must be a rule, and the prerequisite for a rule to be implemented is that it must be given to an individual or individual. The group gives it the right to manage and interpret the rules, and the ruling class emerges.

Let us turn the time back to primitive society. Who will direct everyone to hunt, distribute work, and distribute harvest? Everyone is fair and honest, so everyone must choose a highly respected person as the authoritative decision maker, so that the tribe can run stably, otherwise it will end in division. This implicitly formed a consensus among the group, so they must support the leader of the tribe, and the ruling class was born.

Then a more efficient social form was developed, that is, a slave society, which extremely oppressed certain groups. As a result, the ruling class gained a comfortable life and at the same time, it was able to strengthen its armed forces, which could not only consolidate its rule but also invade and expand foreign countries—— However, excessive oppression may eventually lead to large-scale resistance.

Then there is the feudal society. The ruling class owns land, and the proletariat has to hand over part of the harvest to the ruling class in order to obtain land. This method will be gentler and more "justifiable" than slavery.

Stable social relations and social rules are the prerequisite for the birth of the economy. Later, the ruling class thought of a more efficient way to collect agricultural taxes than in feudal society, which was to collect transaction taxes. The birth of each transaction would be accompanied by an increase in tax revenue - this was the prototype of the value-added tax.

At this time, the way for the ruling class to expand fiscal revenue becomes simple and clear, that is, to expand the scale of the economy and increase the number of transactions.

2. An economy liberated from the shackles of precious metals

However, in the past, it was still the era of precious metal currency and gold standard currency, and the scale of social economy was directly limited by the total amount of precious metals mined. Imagine that there were originally rich resources in a place that could be developed, but because there were no precious metals, they could only sit there.

Therefore, human society desperately needs a trading medium that can replace precious metals. Is there something that everyone is pursuing? And its birth itself does not require the consumption of resources, unlike mining precious metals, which consumes a lot of manpower and material resources, and its birth itself heralds an increase in future output value?

Yes, that is "debt".

Imagine that when a debt is born, an "IOU" will be born, and the debtor will definitely want to redeem the IOU, which means that the IOU will be pursued by the debtor, and as long as these people pursue this thing, Then it has a logical basis for circulation. At the same time, the birth of debt means that debtors have to work and produce in order to pay off the debt, so the value of social output will increase in the future. The entire process does not require any additional costs.

This is the magic of "debt". Using debt and credit to drive the economy, the scale of the market economy is liberated from the shackles of the total amount of precious metals. This is also the secret to the rise of modern Western powers.

In order to help you understand the power of debt, I will give you an example that everyone is familiar with in daily life:

Now there is a vegetable farmer and an architect. The vegetable farmer wants to hire an architect to build a house, which requires 1 million yuan. However, the vegetable farmer does not have that much money, so he goes to the bank to apply for a loan. He borrows 1 million yuan and transfers it to the architect electronically. At that time, the bank did not really need to use 1 million in cash, it only needed to operate on the account. At this time, the architect's electronic account instantly increased by 1 million, so he built a house for the vegetable farmer, and the vegetable farmer next In order to repay the debt, he kept growing and selling vegetables for 30 years. Since the architect had an income of 1 million, he went to the vegetable farmer to buy vegetables every day (also through electronic transfer). After 30 years, the debt was paid off.

And in the process from the debt's inception to its demise, society has gained a house worth 1 million, and vegetables worth 1 million, with a total output value (GDP) of 2 million, which is several times the output value of the debt itself.

In fact, if you think about it carefully, the bank does not actually need to have 1 million in cash. We can even say that the architect’s initial extra income of 1 million was born out of thin air, but at the same time, the architect also created a new world for the society. A house, on the other hand, and debt can be seen as a promise of future labor production by the debtor, so the vegetable farmer keeps growing vegetables. So you see, 1 million in debt is converted into 2 million in material wealth.

And this 1 million born out of thin air is what we call credit currency. It does not require precious metals as a guarantee for its issuance. Its issuance guarantee asset is debt, or residents' credit. And it must be able to circulate, why?

Because it was born out of debt, as long as someone needs to pursue it to repay the debt, it has a logical basis for circulation.

3. Credit expansion using precious metal currency and gold and silver standard currency as base currency.

Of course, there was no electronic account transfer payment in the past. I just want to make it easier for everyone to understand, so I will take an example that is closer to life. Although there were no electronic accounts in the past, commercial bills, checks, bonds, etc. were used to transfer accounting books. Payment was generally targeted at large-scale transactions between large developers in different fields. It was not until later that the use of electronic accounts became popular in daily transactions.

To put it simply, in modern times, precious metal currency and gold and silver standard currency were used as the base currency, and then the base currency was used as the anchor to realize deposit derivation through transfer payments of commercial bills, bond monetization, etc., thereby expanding the scale of debt (or credit scale), thereby boosting the output value of the entire society. Railway bonds at that time were even hard currency and could be used directly as a medium of payment.

In modern history, the British Empire and several other major powers used debt to boost overall output. Credit and debt are the core secrets of the rapid development of the modern economy. In this way, there is basically no need to worry about rising prices caused by excessive currency (for the time being). Such), because as explained above, how much debt there is means that the output value will be several times that of the debt itself, and the increment of social products will be several times that of the debt itself, which also achieves the purpose of economic development - enrichment social material wealth.

First, try to get the local area to join the credit system dominated by the great powers and accept corporate bonds such as railway bonds, logistics port bonds, factory bonds, etc. as its means of payment. Of course, this is not forced, but it uses the domestic resources it has or has established with other foreign countries. A good trading market ensures the liquidity of these bonds, and at the same time, because of the quality of its market products, these bonds obtain stable exchange rates on the international precious metals trading platform.

Then the next thing is very simple. If a capitalist takes a fancy to a piece of land, then asks the landowner to ask for a price, and then directly issues bonds, directly uses the bonds issued by it to buy the land and build a factory, hire employees, and then start producing things. And because the local people have more income from these bonds, their consumption power increases, so the things they produce do not have to be sold, the bonds flow back to the hands of the capitalists, and the debt disappears.

What if you are not qualified to issue bonds, or if a British guy with nothing wants to buy land and start a business there, how should he do it? You can directly go through the bank loan channel. The bank issues bonds denominated in pounds. Because the bank has high creditworthiness, this kind of bond can also be circulated, so you use this bond to buy land and build a factory. Then the same, because This series of operations increased local income, and the products produced could be sold, so the bonds flowed back to the British guy. The British guy paid off the loan, and at the same time he had an extra piece of land and a factory in his hands.

Such wealth creation myths were numerous at the time, and using debt monetization to boost the economy was the secret to the rise of Western powers. Regarding the failure of the Qing government in modern times, my country's education will be attributed to the system or national conditions. However, Western scholars believe that although the Qing government learned from Western advanced industrial technology and even the Western political system (the Three People's Principles Movement), these They can only be regarded as branches, but the real heart-that is, the credit expansion system led by the banking industry has not been learned. This is what Western scholars believe is the fundamental reason for our country's modern failure.

The entire process of debt monetization above can be seen as a process of expansion of the total amount of broad money. In the total amount of broad money, base currency accounts for a very small proportion. The so-called base currency in modern times is actually printed banknotes. , and in modern times it was the gold and silver standard currency. The base currency is the basic asset for credit expansion. It is essentially linked to gold. On this basis, the output value can be increased through the release and collection of debt.

If you understand the above process, you will find that gold is no longer necessary. Even without gold as a collateral asset, such a system can still operate. The reason why those monetized bills derived from the base currency as an anchor can Circulation is because it is lent by the bank, so people need it to repay debts, then it has a logical basis for circulation. In fact, such a circulation basis is thicker than gold and silver in the past. Think about it, gold Why can silver circulate? In fact, it is based on a certain kind of "confidence", and this kind of currency born out of debt does not require confidence. As long as someone in society needs to pursue it to repay the debt, then it will definitely be able to circulate.

The above is the credit and currency system before World War II. Today after World War II, we rarely use checks or bonds as means of payment because we have found more powerful alternatives-bank electronic accounts and electronic transfers. Widely used, it makes deposit derivatives involved in all aspects of society, making the above-mentioned debt-driven economic model more extensive and massive.

The article ends here first. What this article describes is the basic form of the modern market economy with debt and credit as the core. In this series of columns, I will take you to a more comprehensive and detailed understanding of the whole picture of finance and market economy.

You will understand how the Federal Reserve operates and how its monetary policies affect the world;

You will understand how the Marshall Plan and the Bretton Woods System built the world economic system after World War II;

You will understand how large hot money companies such as Soros Quantum Fund use financial derivatives and market rules to harvest the wool of small countries;

You will understand the full picture of the Plaza Accord and bubble economy between Japan and the United States;

You'll understand why economies have boom and bust cycles, and how we can take advantage of them.

In this process, we will see the unimaginable rationality and greatness of the modern financial system, and then in the middle of the period we will find out its deep-seated irrationality and loopholes, and how these loopholes have caused unimaginable harm to our economy. .

Before trying to find out the irrationality of a system, we must thoroughly understand its rationality, and then talk about the irrationality; before talking about conspiracy theories, we must first fully understand the plan, and then talk about the conspiracy.