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Current time:0:00Total duration:3:31

Velocity of money rather than quantity driving prices

Video transcript

it's a common misconception that price levels are dictated purely by the quantity of money out there and to see why this isn't the case let's imagine an island that has two players in it so it has a farmer who obviously will produce food and it also has a let's call them a landlord landlord / builder who will either rent out buildings or can build you more buildings or build themselves more buildings to rent rent out and we're living in a reality where all you need is food and shelter and let's imagine one reality where they've this this island or whatever this country whatever you want to call it they haven't discovered a lot of currency so they only have a little bit of gold so maybe the farmer only has a couple of gold coins to start off with and the landlord / Builder also only has a couple of gold coins to start off with they're very they're very currency poor only a little bit of gold but they're very optimistic the farmer says hey you know what things are looking good landlord I want to rent I want to rent a nice building from you for my family and for you to build more buildings so here take both of these coins and get and build me it or rent me out something nice and he gets both coins over here and then the landlord below says wow you know things are good the farmer seems pretty optimistic farmer I want you to buy me I want you to grow me a ton of really good food because things are good so here take four coins take four coins for me and and and really grow me grow me a ton of really nice food that I you know stuff that that takes a lot of that's really hard to grow so grow to grow a ton of food for me so he gets those four coins now he gets the four coins these are now gone the farmer doesn't have those anymore now the farmers feeling really great really optimistic and said and of course these are now gone now the landlord has given them to the farmer the farmers feeling really optimistic says landlord you know what I'm feeling even better than I did before why don't you build me even a few more buildings right you know I want to expand my house even more but now the lander is like man you know you already given me a lot of money and I already have a lot of work to do you got to pay me more if you want me to work overtime because that's going to take time away for my family and all the rest and the farmer says sure last time I paid you to two gold coins for some buildings I'll now pay three gold coins for the same number of buildings and so he gives he gives three gold coins for what and all he's going to get in return is what he used to get for two gold coins so if you think about it the price has gone up for whatever service or product the land the Builder is providing and then he gives those three gold coins to the landlord and the Builder and then the Builder says well you know things are really good I'm getting a lot of business phone farmer I can get even more food from the farmer and he goes to the farmer says hey give me what you just gave me that last time for two gold coins but the farmer says no you know what I'm really busy now I I'm almost tapped out if you want me to work overtime or expand my facilities you got to give me three gold coins for what I gave before and besides that the cost of buying houses has just gone up to three gold coins so you had to give me three gold coins now and so the Builder says oh sure I'll give you three gold coins so the one thing I want you to notice in this video is we only had two we only started off with two gold coins for each of these players but because they were really confident because they kept spending it with each other because there were a lot of transactions there was a high velocity of the actual money that you actually had an increase in prices