Game of Loans Episode 1 – A Field of Interest

Hi, I'm Dan I'm an economist, and I'm here to talk about interest rates

The interest rate is determined by equilibrium in the money market Hey, Dan Hey, [INAUDIBLE] What's going on here? I'm explaining interest rates Wow, that sounds really boring

It sounds about as interesting as this rock over there Oh, that's my paperweight That's also very interesting Fine It's about as interesting as interest is, Dan

You've got to make it entertaining Like how? Like this! Eh? Eh? Winter is coming, yeah? What does winter, or that costume, have anything to do with interest rates? Game of Thrones, Dan Game of Thrones You know, Westeros, the stocks We're going to explain interest rates Game of Thrones style

OK Imagine you're a poor farmer in Westeros OK Right? You don't have much money, but you need food, you need gourds You basically have demand for money

OK, so what kind of money is this? Are they on the euro in Westeros? No, Dan They're not on the euro No, no Dragon coins, Dan Dragon coins

OK, and so where do these dragon coins come from? Well, they have this big bank, right? Like a Bank of America? No, no Not like a Bank of America No They have this Bank of Bravos OK

Bank of Bravos And they mint all these dragon coins Oh, so it's like the central bank Yeah, in a way Yeah, central bank

Ah, so you have the farmers, they have the demand for money And then you have the central bank, the Bank of Bravos? Bravos, yeah They determine the supply of money Exactly OK, so how does this work in Westeros? Well, let's find out

So let's say we know you have 300 gold coins that the Bank of Bravos has minted OK All right? And you have four farmers to begin with They all seem to have weird arms and legs, but hey, this is Westeros, right? OK, and let's say they each want, what? Maybe 100 gold coins? Yeah They each want 100 gold coins

OK, so we have four farmers They each want 100, so that's demand for 400 gold coins, but we only have 300 that's been minted by the central bank So how do we determine who actually gets the money? Trial by combat You give them all swords, right, and then let them fight it out to the death And the guy who's alive at the end gets all the money

Sounds good? Well maybe that's how it works in Westeros, but there's another way, and it's the interest rate The interest rate equates supply and demand through market equilibrium Nope That's not– Dan, you've gone full econ on me again That's not how it works

OK Let me explain it All right All right? Let's talk about these farmers, right Now, this guy here, he just needs milk

OK So he says, I'm willing to bear one extra dragon coin next year for the 100 dragon coins So an interest rate of 1% Exactly OK, and he wants the milk

Now, this other guy here, now he is a gourd farmer, right? So he needs gourds He's willing to pay two dragon coins OK, willingness to pay at two So he's willing to pay an interest rate of 2%? Exactly Now, this third guy here, he wants to build boats

OK And he's willing to pay three dragon coins OK And this fourth guy, here, he's very desperate, right? His kid is sick And he wants some voodoo medicine

OK So he's willing to pay, let's say four dragon coins Got it OK So now we have, at an interest rate of 1%, he's willing to pay? Mm-hmm

Yup He's willing to pay? Yup, yup He's willing to pay? Boats He's willing to pay Definitely

So, at an interest rate of 1%, we have demand for 400, still only 300 So then what happens? Well, trial by combat! No, no, no, no, no, no, no It's the interest rate The interest rate just wouldn't be 1% Yeah

It would adjust It might be 2% The central bank would say, who's willing to pay 2%? He's willing to pay This guy's willing He's willing to pay

Yup, yup He's willing to pay This guy's willing This guy's not willing to pay No, no

He's not going to cut it And so, I guess– So he won't get his milk No, he won't And I think this one will maybe crawl into a ditch here and die OK

That's how it works in Westeros OK, if you say so so But either way, we can see now how the interest rate has adjusted so that the people that want the money are the people that get the money Exactly So problem solved

Now, what happens though, if there's a fifth farmer And he comes along and he also wants the money OK, so let's say, this farmer comes in here, and he's an outsider, but he's also an entrepreneur OK He wants to build a tavern

OK Sell beer, you know, do the Lord's work OK And he's really confident So let's say he's willing to pay five gold coins

OK So at an interest rate of 2%, these four want it, there's only 300 What happens? Well, you know, not trial by combat, as I've learned But I guess, now the interest rate rises to 3% Oh, you're getting it

[INTERPOSING VOICES] All right Good job I'm getting on here He gets it at 3% Yeah, he get's it

He gets it at 3%, he gets it at 3% He doesn't get it Yeah, tell me what happens with this guy? Let me guess, he crawls into a ditch? Exactly All right All right

They both crawl into a ditch and die Perfect All right So now we've seen how the interest rate adjusts to equate demand for money with the supply of money Yup, problem solved

Problem solved All right Now here's a question Maybe you can answer this Why doesn't the central bank print even more and more money? It sounds like if the central bank could mint 400 gold coins, then four people would get it

If they'd mint five, everybody could get it These guys wouldn't have had to crawl into a ditch Oh, I get it So I think we're going to have to make another video about this, Dan Sounds good

All right And you're going to use Game of Thrones, right? Because that really seems to be working We'll see All right Sounds good