Learn to make money even if you don't know anything | Lee Jin-woo and Economic Master Part 1 | My Second Textbook | Alogoeju

The money supply in Korea has been steadily increasing. Over the past decade, the amount of money in circulation has roughly doubled, and this trend is expected to continue. This continuous increase in the money supply means that individuals' assets need to grow at a similar pace to maintain their relative wealth. This phenomenon makes financial tech (재테크) a necessity, where wise investment becomes crucial for financial stability and progress.

The continuous growth of the money supply in Korea can be attributed to three main 'faucets.' The first and most significant is the banking system. Banks increase the money supply by issuing loans, creating new money in the form of deposits rather than lending existing funds. The second faucet is the Bank of Korea. Through mechanisms like purchasing government bonds from commercial banks, the central bank injects money into the economy, influencing the overall money supply. The third faucet is foreign capital inflow. When foreign currency enters the country through exports or investments, the central bank often converts it into Korean Won, thereby increasing the domestic money supply.

The continuous increase in the money supply is generally necessary for economic growth. If the money supply were to remain stagnant, economic activity would falter, leading to reduced production, investment, and employment. While an expanding money supply can lead to inflation and a decrease in money's value, this can be mitigated if the value of goods and services produced also increases proportionally. A growing money supply can also lead to more disposable income for citizens, stimulating consumption and creating more business opportunities, although competition in the market remains fierce.

When comparing stock and real estate investments, historical data shows varying outcomes depending on the starting point. Stocks tend to have higher volatility, meaning that the timing of purchase significantly impacts returns. Buying during a market low can lead to substantial gains, while buying during a peak can result in lower returns even over long periods. Real estate, on the other hand, tends to show more stable and gradual returns. This difference in volatility is due to the ease of trading: stock prices reflect immediate shifts in investor sentiment, whereas real estate transactions are more prolonged and less susceptible to daily fluctuations. This highlights the importance of understanding market timing, especially for highly volatile assets.

High volatility in investments can lead to lower overall returns. To mitigate this, investors should consider diversifying their portfolios by investing across various assets (stocks, bonds, real estate, gold) and employing phased investment strategies (buying in increments over time). This approach aligns with the 'law of large numbers,' where increased attempts or prolonged investment periods help results converge towards statistical averages, reducing the impact of short-term fluctuations. Similarly, long-term investing, typically five years or more, statistically increases the probability of positive returns, especially in broad market indices like the KOSPI.

Interest rates represent the exchange rate between present money and future money. If you lend someone 1 million won today, you expect to receive more than 1 million won in the future, accounting for the opportunity cost of not having that money now, the erosion of purchasing power due to inflation, and the risk of non-payment. This difference in value is quantified by the interest rate. The bond market is a prime example of where present and future money are exchanged, with bond prices directly reflecting prevailing interest rates: when interest rates rise, bond prices fall, and vice versa. Long-term bonds are generally more sensitive to interest rate changes than short-term bonds.

Interest rates serve as an important indicator of economic health and future expectations. Low interest rates suggest an economy with little immediate demand for capital or investment opportunities, indicating sluggish growth. Conversely, high interest rates reflect strong economic activity and high demand for present money. Central banks often intervene in interest rate markets (through policy rates) to manage economic cycles. By proactively raising rates during periods of overheating or lowering them during downturns, central banks aim to stabilize the economy, control inflation, and prevent extreme fluctuations, smoothing out the natural ebb and flow of economic cycles.

Exchange rates denote the conversion ratio between two different national currencies, such as the Korean Won and the US Dollar. Unlike interest rates, which primarily reflect the time value of money, exchange rates are influenced by a multitude of complex factors, making them highly volatile and difficult to predict. Key determinants include purchasing power parity (differences in inflation rates between countries), trade balances (exports and imports), capital flows (investment in foreign assets), and global economic events or even regional market sentiments. Sudden changes in exchange rates can significantly impact businesses involved in international trade, benefiting exporters when the domestic currency depreciates and importers when it appreciates.

Beyond basic economic principles, various factors can dramatically shift exchange rates. For example, a boom in domestic companies investing abroad can increase demand for foreign currency, causing the domestic currency to depreciate. Conversely, increased exports lead to greater foreign currency inflows, strengthening the domestic currency. Geopolitical events or economic shifts in neighboring countries can also ripple through global financial markets and influence local exchange rates. Governments, recognizing the profound impact of exchange rate volatility on national economies, often intervene directly in foreign exchange markets to stabilize their currency, aiming to mitigate extreme fluctuations and foster a more predictable environment for international trade and investment. These interventions aim to dampen swings, rather than alter fundamental long-term trends.