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Transcript
00:00The reality is that most of what people call money is actually credit.
00:05The total amount of credit in the United States is about $50 trillion,
00:09and the total amount of money is only about $3 trillion.
00:13Remember, in an economy without credit,
00:16the only way to increase your spending is to produce more.
00:19But in an economy with credit, you can also increase your spending by borrowing.
00:25As a result, an economy with credit has more spending
00:28and allows incomes to rise faster than productivity over the short run,
00:32but not over the long run.
00:34Now, don't get me wrong.
00:36Credit isn't necessarily something bad that just causes cycles.
00:39It's bad when it finances overconsumption that can't be paid back.
00:45However, it's good when it efficiently allocates resources
00:48and produces income so you can pay back the debt.
00:51For example, if you borrow money to buy a big TV,
00:55it doesn't generate income for you to pay back the debt.
00:58But if you borrow money to, say, buy a tractor,
01:02and that tractor lets you harvest more crops and earn more money,
01:05then you can pay back your debt and improve your living standards.
01:10In an economy with credit, we can follow the transactions
01:13and see how credit creates growth.
01:16Let me give you an example.
01:18Suppose you earn $100,000 a year and have no debt.
01:22You are creditworthy enough to borrow $10,000, say, on a credit card.
01:26So you can spend $110,000 even though you only earn $100,000.
01:32Since your spending is another person's income,
01:36someone is earning $110,000.
01:38The person earning $110,000 with no debt can borrow $11,000.
01:44So he can spend $121,000 even though he has only earned $110,000.
01:52His spending is another person's income,
01:55and by following the transactions,
01:57we can begin to see how this process works in a self-reinforcing pattern.
02:02But remember, borrowing creates cycles.
02:05And if the cycle goes up, it eventually needs to come down.
02:09This leads us into the short-term debt cycle.
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