Friday, December 27, 2013

Educating my Furby

Money, money, money

The dollar in your pocket is only worth what what someone will give you for it. Our societies have developed many rules which we follow in terms of trading money for something we want, or getting it for something we have to offer. When we borrow money from a friend that friend actually has the money to lend us, but when we go to a bank the laws allow them to give us money which is created out of thin air, and when we pay it back that money disappears into thin air. If we don't pay it back the bank is on the hook for it and they have to pay it back from interest and fees and investments they earn, and then it disappears into thin air.

All countries have a currency. Canada and the USA have what we call dollars, Mexico has the peso, and so on. Individuals, corporations, and governments can trade different currencies and this gives each currency a world trading value which is constantly changing. The Canadian dollar may be worth 92 cents for an American dollar today and tomorrow it may be worth 93 cents. This is based on political stability, economic outlook, and demand. If you go to the bank and ask for American dollars for Canadian dollars, your bank will go to a large commercial bank with all its daily transactions for currency exchanges and ask for whatever they need in American or Canadian currency. These large commercial banks then bid on the interbank market for whatever they totally need for the day. They basically make a bid to a bank which has the currency they want and if it is accepted they get it, and if the bid is turned down they try again till they reach a deal.

The stock market is real simple. A corporation can sell shares of itself, for example a telecommunications company can sell a share of itself for five bucks or one hundred shares for five hundred bucks. These shares are called stocks. They can be bought and sold in the stock market. Like currencies, stock traders bid on stocks from other traders who have them available for trade, and they come up with a deal. If the telecommunications company is perceived to be doing well it's stocks may be worth more. A corporation sells shares of itself to raise money for things it wants to do. Having a share of a company gives you the right for a vote because you actually own part of that corporation.

A bond is loan which someone makes to a government or corporation. It has a maturation date of for example five years or ten years at which time it must be paid back. Bonds usually pay interest at fixed time intervals. They can be sold to someone else.

A future such as a commodity future is when two parties agree on a certain price at a future date. The seller would hope that price falls in the future while the buyer would hope the price goes up in the future. Most anything can be traded in the futures market.

Derivatives are things that come about when people start playing games with all of the above. A simple derivative would be when a bank puts a bunch of its mortgages together and sells them to another bank. Many derivatives involve consumer loans, mortgages, stocks, bonds, and commodity futures. Derivatives can also include other derivatives, sometimes many layers of them.

This article was written for my furby. When I read it to her she never said a word, she just came and rubbed against my nose. And for my 91 year old mom, see, I can write something with no cynicism, sarcasm, conspiracy theories, or religious overtones.
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