Open blog #8 Bank Run from “It’s a Wonderful Life”

        Today I want to share a small cut from a very funny and classical old film “It’s a Wonderful Life”. Here is the link for the short cut:

https://www.youtube.com/watch?v=iPkJH6BT7dM

         I think it was funny is saver cannot understand that how the bank arrange the money. They afraid they will lose their money so that all of them want to withdraw all of the money which they saved in the bank. This situation is called “Bank Run”

About Bank Run. As we have discussed, banks are financial intermediaries. They give consumers a place to save and earn some interest. And then they lend those savings out, at interest, to those who want to borrow. So this is mean bank don’t have enough currency for the saver to withdraw all their deposit. That is mean if everyone tried to withdraw at once, the bank could not pay everyone. Usually this doesn’t happen—on a typical day deposits are about as big as withdrawals—but it can happen. If it happened this will cause a “bank run” which could be self-reinforcing.

         To prevent this happened. Every time if bank don’t have enough sum of the currency, they can borrow the money from a central bank. It is a place that banks can borrow from, which could help keep a bank panic from getting started. This is really helpful, because bank run can cause a bank panic.

 

Citation:

Mankiw, Brief Principles of Macroeconomics, 7th edition

Promt blog #8 Hands-on experience

One of the basic skill in my field is to observe a group of number and make conclusion about it. To practice this skill, I keep selecting two date from the beginning of the first year in my university – daily consumption and the price of plane ticket.

The purpose for me to do those is to increase my sensitive to the number. Actually, to be honest, I want to find the best chance to buy the cheapest ticket and always know the amount of money I spend so that prevent me to max out my credit card.

Before I began to check the flight ticket, I searched some analogous research result about this topic which is “the lowest price is always appeared three month before the day you booked”. I felt a little bit disappointed after I searched this result because it is so easy to find out the result! I mean I didn’t do any research and just type some sample words on the google and search it then the result came out. Is this a professional answer? Is this can be believed? So I decided to test this result by selecting data all by myself.

So I choose some famous airline company and verify the date which I would come back to China. Then I keep collecting ticket price every day. After 5 month which is one month before I come back to China, some preliminary results was came out. Because I still did finish all the research, I am not planning to share a lot about is. But one of the result I can share is it is true that the cheapest ticket would appear three month before the day you set off.

About my university bill, I know that where I spend most of my money and which part is waste of money and which part is necessarily so that I know how to separate my money and spend with plan.

Those hands-out experiences teach me how to make a plan to do a “research”, more detail about the fluency of the price of the ticket even in the different airline company. I know how to manage my money and have more answer with detail when my parents where I spend the money. The most important is I gain the sense of achievement about the result I got. I cannot gain those knowledge from the book or from professor’s lecture!

Prompt blog #7 We should return to the gold standard

If the US replaced its discretionary monetary policy regime with a gold standard, defining a “dollar” as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American. In such a system, the dollar would be directly backed by a commodity, most likely gold, and could be freely traded in to the government for the precious metal.

The idea of returning to the gold standard is incredibly controversial. First, let’s have a look at what the gold standard means -- and how it would affect you.

To understand what returning to the gold standard would mean, it's first necessary to understand our current "fiat" currency. Under a fiat system, the actions of the government largely determine the value of the currency, and good stewards can and do act to keep their economy stable. These currencies aren't backed by commodities, but rather by the reputations of their governments. The fiat system allows a government to control the flow of money into the economy. When prices are dropping too fast, the government can "print" more money, slightly inflating the currency and steadying prices. Conversely, when prices are rising too rapidly, the government can decrease the flow of money, making the currency slightly more valuable and steadying prices again. (Bruce Watson, What a Return to the Gold Standard Would Mean for You, Para. 4)

In the U.S., the Federal Reserve controls this flow by regulating banks, adjusting the flow of money into the economy, and lending capital to banks when necessary.

For the pros side, they claim the fiat method actually destabilizes the economy and hurts consumers. According to Paul, when more dollars go into circulation, our currency becomes diluted and the value of each dollar drops. Prices go up, because it takes more of these devalued dollars to buy the same amount of gas, or eggs, or anything.

Paul argues that, by reducing the value of the money in your pocket, the government is taking money away from you -- effectively "taxing" you without your consent. According to him, a fixed-value currency would make this sort of inflation impossible:

If our money were backed by gold and silver, people couldn't just sit in some fancy building and push a button to create new money. They would have to engage in honest trade with another party that already has some gold in their possession. Alternatively, they would have to risk their lives and assets to find a suitable spot to build a gold mine, then get dirty and sweaty and actually dig up the gold. Not something I can imagine our "money elves" at the Fed getting down to whenever they feel like playing God with the economy.

In speeches, Paul has argued that the fiat-based currency system keeps Americans from saving money because it causes them to fear that their money will decrease in value. Worse yet, he says, it conceals the actual workings of the monetary system, enabling the government to hide its social welfare expenditures and funnel money to special interests.

(Bruce Watson, What a Return to the Gold Standard Would Mean for You, Para. 7-8)
 

For the con side, they think the result to under the gold standard would be terrified. If under the gold standard, government must have enough gold on hand to redeem every single dollar in circulation which is nearly 2.6 trillion dollars in US. However, right now we don’t have enough gold. This made government have to buy some of estimate 10 trillion worth of gold in the world. At the same time, the more gold U.S. bought, the higher the price of gold would go.

The other option would be to raise the price of gold in dollars by legal legerdemain from today's level of about $1,660 per ounce to $10,000 per ounce, which would allow the existing gold reserves to cover the existing monetary base. Unfortunately, doing that would seriously destabilize the economy, overwhelming the alleged benefits of the switch to a gold-based currency.

(Bruce Watson, What a Return to the Gold Standard Would Mean for You, Para. 10)

Citation:

http://www.dailyfinance.com/2012/08/30/gold-standard-return-how-it-affects-you/

Open blog #7:History of money

This week the most interesting knowledge I gained from my EC 202 and want to share is the history of money. During the class I knew that there are mainly two type of money in the past, “Commodity Money”, “Fiat Money”.

Commodity Money

         This is the first forms of money. Typically, it is something that has value in itself other than its use as money. Here are some interesting example. The money for the first governor of Tennessee was deerskins. Early settlers in Virginia used tobacco as money. Cigarettes as money in P.O.W. camps and prisons.

But commodity money has its own drawbacks. It may not has some desirable properties like standardized quality (easy to see that two units are the same), durable (little or no loss of value due to spoilage), valuable relative to its weight (easy to carry around), and divisible (so that many different prices are possible). For example we cannot let bread be commodity money, because it will be spoiling if we don’t keep in it in a dry and cold place.

Just like deerskins are cumbersome to carry around. Also precious metal shave often served as money, but there is an incentive to try to pass off impure as pure. For example, gold’s value is different by its purity. Another big problem with commodity money is controlling the supply. We cannot imagine what will happened if a new gold field is found by a private person.

Fiat Money

         This is sometimes in the past banks or governments have issued paper currency with a promise that it could be redeemed for gold or silver. So the main difference between the money in nowadays is no government promises to redeem paper money for gold. Compare with commodity money, fiat money is easier to carry around and protect from theft and has no intrinsic value. It can still work as money, very well, as long as people have faith in its value.

         Today, paper currency is “fiat money”, “by decree”. For example US dollars are “Federal Reserve Notes”.

More information to click here:

https://en.wikipedia.org/wiki/History_of_money#Emergence_of_money

Citation:

Mankiw, Brief Principles of Macroeconomics, 7th edition