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.

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