Understanding Finance from scratch

Chapter 11 Once you see through the essence of money, you will understand the true meaning of finance——learn some currency knowledge every day (3)
Assuming that after one year, we continue to deposit the 1 yuan obtained in the bank at the same interest rate, then after another year, you will get 105 yuan.The interest in the second year is 1 yuan more than the first year, which is the interest created by the 110.25 yuan interest in the first year.This is commonly known as compound interest or rolling interest.If you deposit in this way year after year, the original 0.25 yuan will continue to increase. If the period is long enough, it may be several times or dozens of times the original amount.Through scientific calculation, if you deposit 5 yuan in the bank for 100 consecutive years, assuming that the annual interest rate is maintained at 100%, you will have 50 yuan after 5 years!
Go back to the previous example of God and believers.Suppose you invest 1 yuan in the stock market, and reinvest every dividend you receive. If you can get a 15% return on investment every year, according to scientific calculations, the income after 1 years of continuous investment of 100 yuan is nearly 120 million Yuan, so God's statement may not be an exaggeration, is it? !
time is money.The important enlightenment of the time value of money on personal financial management is: financial management should be planned and acted as early as possible, so as to make your wealth continuously increase in value.

The Mysterious M0/M1/M2 in Money Supply
Veteran stockholder Lao Li is currently studying hard with a book on finance, and his friends are very strange: Why don’t you study financial data and study finance instead? !It’s good to have a wider knowledge, but wouldn’t this be too far from the topic!Lao Li dismissed this question: "What do you know?! I am learning some currency knowledge. Do you know that the rise and fall of the stock market has a lot to do with the growth rate of M1 and M2? Seeing six ways and listening to all directions, This has to be figured out in order to be successful in the stock market!"

In daily life, most people only have a half-knowledge about M0, M1, and M2. We usually hear reports that when M1 is greater than M2, how will the national economy be affected, and when M2 is greater than M1, what will be the impact on the stock market? So what do the three mysterious numbers M0, M1, and M2 represent?

M0, M1, and M2 are the categories of money supply.People generally divide the money supply into different levels to measure, analyze and regulate according to the size of liquidity.In practice, countries have different definitions of M0, M1, and M2, but they are all divided according to the degree of liquidity. M0 has the strongest liquidity, followed by M1, and M2 has the worst liquidity.

In a modern economy, there is only one bank that can print money in each country, and that is the central bank.The central bank is one of the most important institutions of the government.The central bank lends the printed money to commercial banks, and the commercial banks then lend the money to companies or individuals to charge interest.The central bank then withdraws money from commercial banks, burns part of the cash, and prints some new money to maintain the ideal total amount of cash in mind, that is, the amount of M0.Most of the loans are transferred in large amounts in bills or electronically, and there is no corresponding cash. The total amount will be much higher than the amount of M0, that is, the narrow money M1 and the broad money M2.For example, checks and demand deposits count as M1. M2 includes M1, and there are more big ones such as institutional deposits.

Let's explain in detail below:
在萨缪尔森的《宏观经济学》中M1=现钞+支票，M2=M1+储蓄存款。而在英国的银行体系中还有M0、M3等项目。根据国家统计局的公开资料，我国是以M0、M1、M2为框架体系。其中货币总量为M0、M1、M2。

M0=cash in circulation
M1=money supply in the narrow sense M0+demand deposits of non-financial companies
M2 = broad money supply M1 + time deposits of non-financial companies + savings deposits + others
deposit.

In daily life, M0 is closely related to consumption. Its high value proves that the people are well-off, rich, and the possibility of this is higher when they have no worries about food and clothing; M1 reflects changes in the tightness of funds of residents and enterprises, and is a leading indicator of economic cycle fluctuations. ; while M2 liquidity is weak, but it reflects changes in social aggregate demand and future inflationary pressures.The money supply usually referred to mainly refers to M2.There are two channels for currency distribution, one is to distribute foreign exchange funds, and the other is to distribute through bank credit.The faster their investment growth, the greater the growth rate of M2.

So what is the relationship between M1 and M2 and the rise and fall of the stock market?

The empirical relationship between money supply and the stock market shows that the difference between M1 growth rate and M2 growth rate has an obvious positive relationship with the Shanghai Composite Index, and the correlation with the trend of the Shanghai Composite Index is the highest. When the difference between the two growth rates reaches a high point (2000, 2007), the Shanghai Composite Index reached a phased high.When the difference in growth rate reached a low point (1999, 2005), the index was also at a stage low point.

Specifically, there are the following points:
(1) In all levels of money supply, the narrow money supply M1 refers to the cash in circulation plus the current deposits of each unit in the bank; the broad money supply M2 refers to M1 plus the time deposits of each unit in the bank. Deposits, savings deposits of residents in banks, security deposits of securities customers.

(2) Under normal circumstances, the growth rate of M1 and M2 should be balanced, that is, in the environment of increasing income and expanding money supply, the demand deposits and time deposits of enterprises will increase simultaneously, which is also in line with Keynes' liquidity preference The explanation of the three motivations in the theory.The historical law shows that whenever M1 rises sharply, it will promote the economy to heat up, or lead to overheated investment, or inflation, or the stock market will rise.From this, we can see that the growth rate of M1 exceeding the growth rate of M2 is one of the reasons for the excess liquidity in the financial system.

(3) If the growth rate of M1 is greater than M2, it means that the growth rate of demand deposits of enterprises is greater than that of time deposits, the transactions between enterprises and residents are active, the profitability of micro-entities is strong, and the economic prosperity is rising; if the growth rate of M1 is lower than M2, it means that Enterprises and residents choose to deposit funds in banks on a regular basis, micro-level individual profitability declines, and future investment opportunities are limited. Excess funds begin to accumulate from the real economy, and economic operation declines.

(4) M2 includes M1 and time deposits and savings deposits other than M1. Therefore, if the growth rate of M1 is faster than the growth rate of M2, it indicates that time deposits become demand deposits, and a large amount of funds are transferred to M1, which is actively traded. form a more positive impact.

(5) The M1 growth rate is generally ahead of the stock market, and the stock market is ahead of the CPI.From the fluctuation characteristics of CPI and stock market, we can roughly see that the trend of CPI has a strong correlation with the Shanghai Composite Index, and the stock market generally reflects the inflection point of CPI in advance, and CPI also has a cycle of 3 to 4 years.

Are we out of Bretton Woods?

With the arrival of the first oil crisis, the fixed exchange rate system backed by gold collapsed, or the Bretton Woods system collapsed.

In the 20s, the Organization of the Petroleum Exporting Countries was formed and decided to raise the price of oil from $70 to $2.Although Western countries pressed with force, in the end OPEC won.The U.S. economy was hit hard by the sudden surge in the prices of basic raw materials.In addition, the United States was also burdened with the burden of the Vietnam War, and the trust of various countries in the United States was greatly reduced, and they exchanged the U.S. dollars in their reserves for gold.President Nixon decided on August 12, 1971, to hell with fixed exchange rates.The U.S. doesn’t want to lose all its gold reserves (so far the U.S.’s gold reserves are far higher than any other country’s, and it’s a fairly confidential figure. No one knows how much U.S. gold is worth).Although there is no gold-based fixed exchange rate system, international trade still exists, and the exchange rate of one country is still based on the exchange rate of another country.But the Americans reserved the most critical hand at this time, namely: forcing the Gulf countries and other resource-intensive countries to agree to denominate commodities, energy, and food in U.S. dollars.After the demise of the Bretton Woods system, the U.S. dollar is still the world’s primary trade currency. Therefore, the currencies of most countries can only float freely using the U.S. dollar as the benchmark, and there is no free floating international financial system in which different countries use different benchmark currencies.

How was the Bretton Woods system established?Why did it collapse in just a few decades?
We have said before: gold is a natural currency.In fact, in the history of human civilization, no matter what changes have taken place in countries, beliefs, and races, gold has always been recognized as a form of wealth by the world.Although this kind of trust once fluctuated with the discovery of gold mines. For example, the great geographical discovery in the 15th century brought a large amount of gold and silver into Western Europe, causing prices to skyrocket. But then economists discovered that the increase in gold and silver only caused prices to skyrocket. , People's living standards have not improved.In order to get rid of the fluctuations brought about by the quantity of gold, economist William Fisher even put forward a radical plan: if the price of gold falls relative to other commodity prices, then the gold content in the dollar should be increased, so that the price of gold relative to other commodity prices will decrease. In other words, the U.S. dollar remains relatively stable. If the price of gold rises, the ratio of gold should be reduced accordingly.Of course, such a plan is only an ideal state, because changes in gold content cannot be changed at will, but major currency reforms are not far away.

In the 20 years between the two world wars before the Bretton Woods system, the international monetary system at that time was divided into several competing currency blocs, and the national currencies were devalued and turbulent, because each economic bloc wanted to sacrifice the others. Solving its own balance of payments and employment problems at the expense of its own interests presents a state of anarchy.However, after World War II, major changes took place in the economic and political strength of various countries. The United States ascended to the status of the leader of the capitalist world, and the international status of the US dollar was unprecedentedly stable due to its huge international gold reserves.This makes it possible to establish an international currency system based on the US dollar that is conducive to the expansion of the US foreign economy.One issue that must be addressed is that what really needs to be maintained is the purchasing power of the dollar relative to goods and services as a whole, not gold specifically.However, the quantity of gold is also unstable, so pegging the dollar to gold and silver does not ensure the stability of delivery.

There is a place called Brayton in New Hampshire, USA, where a meeting that really changed the fate of gold was held at the Mount Washington Hotel.At that time, representatives from 44 countries signed the Bretton Woods monetary system.It is centered on the U.S. dollar, and it stipulates that the U.S. dollar is pegged to gold, and the currencies of other countries are pegged to the U.S. dollar.That is, 1 ounce of gold corresponds to $35.All other currencies have a fixed exchange rate against the US dollar.This system allows the United States to determine monetary and economic policies, and other countries must conform to the policies of the United States, but it also benefits from fixed exchange rates and the stability of the international financial system.This system puts the US dollar at the center of the post-war international monetary system, and the US dollar has become the "equivalent" of gold. Only through the US dollar can the currencies of various countries have a relationship with gold.Since then, the US dollar has become the means of payment for international settlements and the main reserve currency of various countries.

The establishment of the Bretton Woods system, for a considerable period of time after the war, indeed brought about an era of unprecedented development of international trade and an era of increasing interdependence of the global economy.But the Bretton Woods system had various flaws.On the one hand, as the means of international payment and international reserve, the US dollar requires a stable currency value before it can be generally accepted by other countries in international payments.The stable value of the U.S. dollar not only requires the United States to have sufficient gold reserves, but also requires the United States to maintain a surplus in its balance of payments, so that gold will continue to flow into the United States to increase its gold reserves.Otherwise, people would be reluctant to accept dollars in international payments.But on the other hand, the long-term trade deficit will inevitably affect people's confidence in the dollar, which will cause a dollar crisis. If the United States maintains a balance of international payments, it will cut off the supply of international reserves and cause insufficient international solvency.

This contradiction finally broke out slowly.Since the late 20s, as the competitiveness of the U.S. economy gradually weakened, its balance of payments began to deteriorate, and a global "dollar surplus" emerged. Countries sold U.S. dollars for gold one after another, and U.S. gold began to flow out in large quantities.

On August 1971, 8, gold withdrew from the stage of history forever. At this time, the gold reserves of the United States could no longer support the increasingly flooded U.S. dollars. The Nixon government was forced to announce that it would abandon the exchange of U.S. dollars for gold at the official price of $15 an ounce. The "gold standard system" implements the free floating of the price of gold and the U.S. dollar.The U.S. dollar is no longer the center of the world's currencies, which indicates that the foundation of the Bretton Woods system has been completely lost, and the system has finally completely collapsed, which means that a completely credit-based currency has replaced gold as the standard currency.That is to say, since 35, human beings have given up their trust in gold, and this trust has been completely borne by the country.

How much does society need to run
There are three people living on a small island, a farmer, a blacksmith, and a cattle breeder. The currency circulating on the island is a rare seashell.Now assume that each person has 2 sea shells in order to buy other people's products and use them.Assume that the farmer produces 3 grains in the first year, the blacksmith produces 3 iron tools, and the cattle breeder sells 3 cattle.In this way, this society is economically balanced: farmers sell 2 shares of grain to blacksmiths and cattle breeders, and keep one portion for their own use, and the same is true for blacksmiths and cattle breeders.Then after this year, the farmers themselves enjoyed a share of grain, a share of iron tools, a cow, and still had 2 seashells, as did the blacksmith and the cattle breeder.In this way, the currency circulation is only once.In the second year, they expanded production at the same time, doubling the quantity of products before, but the production cost also increased. For example, a farmer used to use only one iron tool to complete 2 grain production, but he needed to consume 3 more iron. The target of 2 productions can be achieved only with tools, and the rest can be deduced by analogy.Because he only has 6 seashells, he cannot buy 2 iron tools and 2 cows at the same time, he needs 2 seashells, so what can he do?The first situation: He buys each one first, arranges production, waits for the product to be produced, and then buys the second one after selling it, and arranges the next production.The same is true for blacksmiths and cattle breeders.At this time, the velocity of circulation of money is 4 times.If agricultural production is planted in spring and harvested in autumn, which cannot be counted as half a season, then if the farmer wants to increase production, he must buy 2 sets of iron implements and 2 cows at once.So there is the second situation: he can only borrow one iron tool and one cow first.This then creates the demand for money.The third case: we give each of them 2 seashells to each of the 3 people, then the money demand is balanced.

This involves a question of the demand for money.So, how much money is needed to maintain the healthy functioning of a civilized society?What does the demand for money have to do with it?

Money demand is actually a stock concept.It examines the amount or share that various sectors of society are willing to hold in the form of money among all the assets they own at a specific point in time and within a certain space.To put it more simply, it is the amount of currency held by various sectors of society in a country at a certain point in time.

In fact, economists have been concerned with the quantity of money long before they have been concerned with the problem of money supply, which has baffled economists for a long time.For example, the early economists naively believed that enough money for a country is enough to pay half a year's rent and a quarter's rent for all England's land, a week's expenses for everyone, and about the value of all exported goods. 1/1 of.

The calculation of the demand for the quantity of money is complicated. Fortunately, Irving Fisher rearranged the transaction relationship between commodities and money, and gave us a concise money equation: MV=PQ.

Among them: M = money supply; V = velocity of money circulation; P = price of goods and services; Q = quantity of goods and services.

The quantity theory of money expresses such content: when other conditions remain unchanged, the price level and the value of money are determined by the amount of money in a country.As the quantity of money increases, prices rise proportionally, while the value of money decreases inversely.The opposite is the opposite.That is to say, there is a causal relationship between changes in the quantity of money and changes in prices and currency values. Assuming other factors remain unchanged, the fluctuation of commodity prices is directly proportional to the quantity of money, and the value of money is proportional to the quantity of money. Inversely.

The Quantity Theory of Money formulation was heavily contested, but nonetheless it was the first time that a monetary phenomenon was explicitly linked to the price level.

With the development of economics, Keynes proposed a famous effective demand theory.His point of view is clear: the supply and demand of money determine the level of interest rates, and the level of interest rates also dominates investment demand.The higher the interest rate, the greater the price people pay for holding money in their hands, and the lower the interest rate, the more money people hold.

Keynes advocated that the government should make up for the lack of effective demand by substantially increasing public expenditure. At the same time, in order to stimulate investment and reduce the amount of money held by people, the reserve system should increase the money supply to lower interest rates.After the Second World War, Western countries have practiced Keynesianism for a long time. Unfortunately, this kind of monetary policy has caused serious economic consequences, and a situation of "stagflation" has appeared.

(End of this chapter)