#205 If the Federal Reserve has printed over $2 trillion dollar and given it to banks to lend, why is U.S. inflation still low? More information, including show notes, can be found here. Episode Summary Many people wonder if the Federal Reserve is really printing money. Varied schools of thought exist behind the value of money, how it gets injected into a country’s economy, and how it impacts the private sector. On this episode of Money For the Rest of Us David offers insights into this complex subject, all while giving you the best information regarding the Federal Reserve, its open market operations, bank reserves, and why we aren’t experiencing hyperinflation. It’s sure to be an educational episode that you don’t want to miss. Can the Federal Reserve create money without printing it? The US Federal Reserve is not able to produce physical money in the form of coins or bills. That’s the responsibility of the US Treasury, their Bureau of Engraving and Printing, and the US Mint. The Federal Reserve, however, can “print money” when it purchases U.S. Treasury bonds with money it creates by adding to its member bank reserves. Kimberly Amadeo, a writer at The Balance, explains this buying/selling of US treasuries by saying, “One of the Fed’s tools is open market operations. The Fed buys Treasuries and other securities from banks and replaces them with credit. All central banks have this unique ability to create credit out of thin air. That’s just like printing money.” How do banks create money for individual borrowers? Contrary to what many believe may happen, banks do not transfer money from a different account or withdraw it from a central vault for loans. Rather, David explains that banks “create money out of nothing” and withdraw it when loans are repaid. Thus, excess central bank reserves are not a necessary precondition for a bank to grant credit and therefore create money. Banks typically only have to have 10% of all accounts in reserves. If a bank lacks the reserves to cover the payments, it can be borrowed from an inter-bank market or central bank system. Why haven’t we seen hyperinflation due to these processes? The United States hasn’t seen an influx of hyperinflation because the private sector hasn’t been willing to borrow enough funds to strain the current capacity of the economic machine. David further explains the lack of inflation by using the two money aggregates that exist in the US: M1 and M2. M1 is composed of currencies, paper, bills, notes, traveler’s checks, and checking accounts (demand-deposits). M2 is made up of everything in M2 plus savings accounts, CDs, retail money market funds, etc. In March 2009, at the height of the recession, M1 levels were around $1.6 trillion. As of April 2018, the M1 was at $3.7 trillion – a 130% increase! Does this mean households are wealthier? Not necessarily. The majority of them simply have more liquidity, because Treasury Bonds were sold to the Federal Reserve in exchange for checking account deposits. Episode Chronology [1:15] Is the Federal Reserve really printing money? [6:40] Two ways to address this question [11:50] So how do individual banks create money for borrowers? [21:20] Monetary aggregates in the US and how they indicate the level of wealth and liquidity [23:50] Why hasn’t this led to hyperinflation? See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

#203 How to make better investing and life decisions. More information, including show notes, can be found here. Episode Summary David asks the question, “Is investing more like poker or chess?” on this episode of Money For the Rest of Us in order to help you better understand why investing is inherently unpredictable. The book, “Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts” by Annie Duke inspired this episode. David ponders big ideas such a reflexive vs. deliberative thinking and why the differences between causation and correlation must be considered. If you’ve ever wondered about how to improve your investing decisions while combining analytical research with skilled intuition, this episode will answer many of your questions. Investing and life are like poker – not chess! Many investors approach financial decisions like a game of chess, where there are correct and incorrect moves. However investing, and real life, are more closely related to poker, a game of uncertainties. Duke explains in her book that a term known as “resulting” drives poker games. “Resulting” is the belief that the quality of a decision affects the quality of the outcome. However, David explains that a great decision is a result of a great decision-making process, regardless of the end outcome. Learn how to improve your decision-making process by listening to this episode. Don’t assume causation when there’s only correlation One of the biggest threats to a good decision making processes it the belief that there is always a direct causation linking the process and the end result. Even with the best knowledge and highest levels of skill, investing still contains an element of uncertainty. Sometimes there aren’t any connections between the decisions investors make and the end goal. For example, if you purchase a house, fix it up, and sell it 3 years later for a 50% profit, does that make you great at real estate investing? Maybe. But it could also have been a result of an overall uptick in the housing market, and any buy/sell transaction would have been profitable. David wants his listeners to know that correlation between good investing decisions and profitable outcomes do not always mean the same result will occur. How can you improve the quality of your investing decisions? Since investing is strongly related to the uncertainties and variables found in a game of poker, there are never surefire ways to ensure every decision will be profitable. But there are ways to increase your chances of succeeding. Duke explains that “The quality of our lives is the sum of our decision quality plus luck.” Investors can enhance their decision-making skills by considering market trends and understanding that no one knows for sure what market variables are going to do. David shares more tips for improving the quality of your investing decisions on this episode. Deliberative thinking vs reflexive thinking and the idea of wu-wei in investing David outlines two main patterns of thought on this episode: reflexive (fast) and deliberative (slow). Responsible investors utilize both methods on a continual basis. Always reacting to the market and going off of intuition is not a sustainable way of making investing decisions. However, utilizing only deliberative thinking could result in missed time-sensitive opportunities. That’s when the idea of wu-wei comes into play. David explains that wu-wei is “A state of perfect equanimity, flexibility, and responsiveness that is unrestrained by the conscious mind because it does not attempt to predict variables.” Essentially, it’s the idea of embracing the unknown and keeping the balance between fast and slow thinking. Episode Chronology [0:57] Is investing more like poker or chess? [7:02] Investing, and life, are like poker – not chess [12:05] Don’t assume causation when there’s only correlation [13:38] How do we improve the quality of our investing decisions? [18:45] 2 ways of thinking about investing: fast & slow [23:00] The idea of wu-wei and how it relates to investing See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.