 How's it guys? It's MJ and this is going to be another raw unedited video surrounding finance So the last video we spoke about tax What we're going to be doing in this video is looking at central banks So this is point number three on the syllabus and that is to demonstrate a knowledge of the influence from central banks over the commercial and economic environment So let's get into it. What do we mean by? Commercial banks. Oh, it's right. No commercial banks central banks What do we mean by central banks and Like I said, this is raw. This is unedited. This is heavily my opinion. This is me studying out loud So feel free to disagree with what I say in the comment section below Like I said, not everything here is going to be factual. It's me talking to myself as I try to grapple with these concepts and what I like to do when I study finance is be very skeptical and Challenge all the material that we are presented with so for instance, the first thing we're told is that central banks are Independent and I think that is absolute rubbish So we're told that central banks are independent from government And why I say that is rubbish is that when you look at who is on who's in control of the central bank You see that they're appointed by the government They meet regularly with the government and the government sets the goals for them to achieve They have independence around how they achieve that but it's almost like the government is outsourcing it But tells them what to do but says, you know what guys do it however you want and What do they do? Well, they're going to be looking off to something known as monetary policy Now monetary policy, you'll remember from your economic days is the sister policy to something known as fiscal policy now fiscal policy deals with you know tax and government spending and All those type of things Monetary policy deals primarily with the money supply and I mean, this is where you can get a lot of economic debate, which one's more important Monetary supply or fiscal policy. This is where you start entering, you know, who's a better economist Keynes or you know Milton Friedman, you know, there's a lot of Arguing and debating that you can do around these topics However for the the meaning of the actuarial exams you we need to know what is their influence over the economic environment so I'm not going to try to get too bogged down and In all this type of stuff, but rather focus more on like the theory that we need to know So one thing let me maybe find some more some more space over here is let's look at what is their goal Okay, what is the primary goal of the central bank the central bank wants a very simple aim and that is Sustainable economic growth Sustainable economic Growth that's their aim. So that's that's important. Keep that at the back of your mind. This is what the central bank wants So it's actually it's been set up for this is a good noble thing. It's good to have sustainable economic growth and How they try to achieve this or specifically the South African Reserve Bank or Central Bank is They think that they can achieve sustainable economic growth through price stability Okay, so they they kind of take the stance that if everything is stable Stability You know, if everything is stable is vote if volatility is reduced then that creates the perfect environment for economic growth And how they try to achieve price stability is they want to keep inflation under control So they believe they can achieve price stability by keeping inflation under control and It's interesting is and I mean we seeing this a little bit in Europe is Inflation was too low and that becomes a problem if inflation is too high It's also a problem if inflation fluctuates. It's also a problem. So inflation is quite a weird thing But it's saying that we want to keep under control We want the money supply to steadily increase in a very predictable manner because that creates a very nice economic growth Opportunities and it's sustainable Keyword there is sustainable. We want we'd rather have our economy grow 5% every single year Then 10% one year 3% the next year 20%, you know, we don't want that that volatility. We want stability Okay, so we want sustainable economic growth. We feel like we can achieve that by having Priced ability we achieve price stability by keeping inflation under control How do you keep inflation under control? Well, you manipulate the interest rates. I don't think I should use the word manipulate That's got a bit of negative connotations They say control the interest rate okay, so now there's other monetary policies and other instruments that the the central banks can use to Achieve, you know a sustainable economic growth But the main one that they're going to do is they're going to fluctuate the interest rates And that makes it very interesting because when you start changing interest rates You start changing the economic environment. You start changing risk appetite. You start changing investors behavior and This can cause a lot of I don't want to say chaos but it can it can change a lot of things it can shake up an economy by changing your interest rates and When an interest rate changes the price of all assets also change and they don't all change in the same Ratio, which means it introduces a lot of opportunities for asset managers to make a lot of profit or to make a lot of loss So but this is their goal. This is their goal is they want sustainable economic growth. Yes, it might have some undesired consequences when they change the interest rate because they're going to change the interest rate to target inflation but when you change interest rate it also changes a whole bunch of other things and The thing is they don't want to necessarily do that because they are accountable to government if the central bank is stuff up The government will appoint other central bankers. So that's what I like I said, they say it's independent I'm not buying into that. I think it's maybe independent by you know Just just window dressing they do want to like have the the mirage of Independence because then the central sorry, then the credit rating agencies will give them a better ranking So where's independence? We do want to pretend that we're independent for the credit rating Agencies they'll give us a better score if we're independent, but we're going to reach into these guys much later on That's another crazy story all together is the credit rating agencies because they give your country a bad rating Then you it could dry up foreign investments completely and cause your country to go into a recession So these guys have a lot of power. So it's very good to impress them by pretending to be independent Which you're not really independent when the government is appointing the directors or the majority of the directors to the central bank So yeah, it's a bit of a weird. I mean the credit ratings agencies know that but it's it's all smoke and mirrors Around that stuff. Anyway, let's get into some of the other things that the central bank is Involved in that we need to know for her actual exams Okay central banks. I mean one way I like to think about them is that they're the bank to the banks So they're dealing a lot with banking regulations All other regulations or financial regulations in South Africa are controlled by the FSB They they will go that sort of pensions insurance All those type of guys they come into the the financial service board But banking and funny enough pyramid schemes are regulated by the central bank Okay, so they do banking regulations and I mean one of the big things with regulations is they tell them, you know What what type of reserves they should hold So remember when you go and you deposit say a hundred rand into a bank the bank will Keep say ten rand as their reserve and they'll take 90 rand of your money and lend it to somebody else Okay, which in a weird way kind of means that the net total is you have a hundred rand This other person on the street has 90 rand. So there's now a hundred and ninety rand Just got created that person goes and puts it in the bank again The bank will keep nine rand and lend out 81 rand Type of vibe. So the banking regulation sets the reserve limit and they could say ten percent You know, that's the reserve you should hold when you do your fractional lending or something like that So they'd say what reserves you should hold And give a little bit on you know, what's the capital adequacy and all that stuff Which we also need to know about and we'll come back to later on in your videos way down the line So they do banking regulations. They also implement government borrowing so if the government wants to issue a bond or You know needs to raise money. They will do it through the central bank the central bank can therefore Buy and sell securities Okay, they buy and sell securities and I mean when they when they buy back securities, they pumping money into the system When they selling securities, they're absorbing money and they're controlling the money supply So this is like another technique that they can use to say control inflation Like I said interest rate control is their main one, but they can do a whole bunch of other things To control the money supply So yeah government borrowing They also want to make sure that the performance and integrity of the financial markets is in check Although that is something that in South Africa falls sometimes with the financial service board You know how stocks who can list and all that type of stuff They also do intervention in currency markets Currency markets, I mean the big central bank well that they're not called a central bank in China They're known as more as a national bank, but it gets very interesting around, you know The currency markets and how they you know do certain things in order to keep the The value of their currency quite low to encourage exports and and all that up stuff so That is one of the things central banks can do is that they can they can get involved in currency markets Also, I mean currency is linked to interest rates I mean if you have a very high interest rate Then foreign investors are going to be attracted to your currency or securities in your currencies name because You know, you're going to get quite a nice interest rate return and that's going to fuel demand for Securities in your currencies denomination. So interest rates Like I said, they impact inflation, but they can also impact currency markets, which then impacts exports and imports Which can impact unemployment and you know factories and you know different industries Like I said, it gets very complicated the central bank stuff how by changing one thing it can have these ripple effects throughout the economy Other thing that they do is they do the the minting of notes and coins Minting notes and coins So they literally make money like they go in and they take paper. They take some ink. They slap it together they've printed money and I mean, that's quite a cool quite a cool job is to literally Make money Now the extent of involvement will depend on the division of power. So depending on what country you are, you know This independence some countries are more independent than others You know, what is the power between the central bank the government and other regulatory bodies? Like I said in South Africa, we do have the FSB as well But I mean, like I said, there's a lot to be said around central banks. There's a lot of law I mean, especially in say the European Union their central bank has got quite a different role to say the South African central bank so you could almost dedicate your life to just studying central banks and Actually, I just end this video off with so while I was doing reading on this topic I came across this guy called. I don't know how to pronounce his surname. So we're gonna just call him Walter Walter, I don't know how to say that. How do you say that their name bag bag a hot? I don't know I'm terrible with pronunciation these funny English names And Walter was quite an interesting guy He married a girl whose father started the Economist magazine Which I should read and I would recommend you guys also read that that magazine You know just to keep up to date with what what's happening in the world Although it's quite a pessimistic magazine a lot of like report on a lot of bad things happening in the world anyway, he He influenced central banks in the sense that it was his idea or he gave the advice that central banks should lend To other banks to bail them out. So he came up with the whole idea of the bailout plan now, I mean this guy is he died in 1877 and They were quoting him in 2007 with the world recession and stuff So he kind of put forward the idea that the central bank should be a lender of lost resort in order to you know Keep the the economy from falling flat on its flat on its face But finally just to end off this video. I was reading through some of his quotes and he is One of them. He's got quite a lot of funny quotes Very much tongue-in-cheek But the one that he said which I thought was quite interesting coming to central banks and stuff like that and these organizations Is he says the whole history of civilization is strewn with creeds and institutions, which were invaluable at first and deadly afterwards and What I find interesting about this quote is a lot of these organizations or things that we set up We set them up with great intentions, you know central banks gonna keep the economy stable It's gonna do this is gonna do that's gonna keep unemployment down inflation in check all this type of stuff but when you start Putting in these organizations with their regulations There are some unforeseen consequences in the sense that it increases the barrier to entry and It kind of reduces the whole free market idea in the sense that Not anyone can now just start operating a bank to get a banking license is very difficult Which means people who already have banking licenses can set quite a high price for you know banking fees and You don't want that in a free market Although you don't want the alternative where you have a whole bunch of scammers running around hustling everybody and I mean So that's why there was a need for central banks Because of that, but it does have some negative consequences anyway, that's That is the central bank the big thing to realize the big thing to realize is this part over here where They can influence the interest rates and by changing the interest rates They can change the whole economic environment So if you're into you know trading and buying stocks and all that type of stuff or You're a speculator or your big asset manager What you can always do is whenever an event happens you can think to yourself. Maybe let's draw very quickly here So an event happens you can think how will the central bank react to this Okay, so a random event happens this event is random The central bank reacts, but they will be in a very predictable way Because remember they've stated what their aim is and that is to keep prices stable So they're gonna change interest rates in a certain way to combat whatever event it was Because interest rates are changing There's gonna be a change in asset prices Which you could almost predict so you can know okay this random event happens Central banks are going to increase interest rates to prevent that which is actually going to cause These various assets to also go up and these various assets to go down You short sell those assets you buy the other assets and once the central bank makes their decision Congratulations, you've actually made a lot of money Although I must say people who have implemented the strategy in the past have Miss misread how the central bank would react or central banks May only lower interest rates or change interest rates much later and then you know, there's the whole liquidity Of their position that starts taking strain and you know It gets a little bit more complicated than that But the general idea is that if you understand the central banks very very well You can make a lot of money through investments and Speculations in the stock market and the various other asset classes. So they are an important player and But job, there's a lot of rules regulations litigation and all the stuff that goes behind them But at the end of the day remember that they want to sustain economic growth They want price stability They want to keep inflation under control and their main tool is changing the interest rate Thanks guys so much for watching and yeah, hit subscribe because I will be making a whole bunch of videos like this where they rule Unedited me just talking about the various things that we need to know in the syllabus for the fellowship exams of finance Thanks guys for watching. Cheers