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Eureka: The easy way to understand finance Eureka: The easy way to understand finance
by Akli Hadid
2017-01-08 11:24:19
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Finance is complicated. Let’s make it simple. Here’s almost every possible scenario you can have with money.

finances01_400Case 1: John owns a business and puts 200 dollars in the bank.  The banks loans 200 dollars to James so he can buy a phone so he can develop and app. James made 200 dollars from the app and repays the banks, the banks keeps the interest. And we’re all happy.

Case 2: John makes 200 dollars and puts 200 dollars in the bank. If the bank puts 200 dollars in the reserves, John’s 200 dollars are worthless. If the bank puts 199 dollars in the bank John’s 200 dollars are now worth 1 dollar. If the bank puts 100 dollars in reserve John’s 200 dollars are worth 100 dollars. If the bank prints 100 dollars out of nowhere, John’s 200 dollars are now worth 150 dollars. If the bank prints 200 dollars out of nowhere, John’s 200 are now worth 100. If the bank prints 10,000 dollars out of nowhere John’s 200 dollars are now worth 2 bucks.

Case 3: John makes 200 dollars and puts them in the bank. James applies for a 200 dollar loan to develop and app and gets it. Jack, a hedge fund owner, bets that James will pay back the loan. If James pays back 200 plus interest, Jack, the hedge fund guy, keeps a share of the interest. If James spends 200 dollars but fails to pay them back, Jack has to cover James’ ass and repay the 200 dollars instead of James, so James gets a slap on the wrist.

Case 4: John makes 200 dollars and puts them in the bank. The bank suggests that John, who puts 200 dollars in the bank every day and who never loses money, to invest in something big. The teller, who makes commissions when people take loans, sells John big dreams. John wanted to make 200 dollars the rest of his career then retire, but the teller tells him that John can think in millions of dollars. John’s company goes public with a huge loans, lots of people bet on the loan, the teller, or stock broker, tells everyone how steady John is good at making money and a ton of people invest in John’s shares. Except that John, a small grocery store owner, has trouble managing his new franchise of supermarkets. He’s not good at dealing with the leadership of 50 or 100 small supermarket owners, mismanages the fund and decides to sell the franchise. His shares, initially worth 20 dollars, now dip to a few cents. The teller and the stock broker keep their commissions. Hedge funds cover the losses. 

All you need to do is put all this at the macroeconomic level and you now understand money. There’s not a lot more to the above.


    
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