It's the Economy, Stupid.

Welcome back to the second issue of the Financial Literacy Newsletter. Today, we're diving into the basics of the economy, decoding what money actually is and taking a sharp look at global economic developments.

Since the economic situation of the world is tumbling into a bottomless pit (yay?), staying calm and prepared has become a must.

So, let's start with...

The Basics

The origin of economy is production and trading. Let's assume that you're a farmer raising wheat and I'm a horse tamer. You need a horse, I need wheat. For this transaction to happen, both of us need to put a price tag on our goods. Say, one horse costs 100 kg of wheat. Okay. But what about bricks? Or what's the cost of protection?

You can immediately see the problem with barter trading, right? It becomes harder and harder as the variety of goods in the market increases.

To solve this madness, the great minds of the time found a practical solution. They designed a "good" which is worthless under normal circumstances and used it for specifying prices of everything else. A universally convertible good.

Although it seems like the perfect solution, money came with a ton of problems. Let's break them down:

The consensus:

IIn order for something you possess to have value, people should have a consensus on it. Meaning, someone else should want to have what you have, or else that thing in your possession is simply worthless. Hence, money requires a group of people who agrees that it has value. Back then (and it's still valid now), money required a state full of people in order to be worth something.

Cryptocurrencies broke that paradigm, but that's a subject for another issue. So sit tight.

Amount of money in circulation:

This should always be controlled, or else the value of money might increase or decrease drastically.

Humans have a production-based economy, naturally causing supply-demand correlation to appear. Basically, when demand for a good rises and supply can't match it, the value goes up. And vice versa. If the supply rises and demand can't match it, the value goes down.

Now you understand why making money scarce causes overvalued money and recessions, right?

Also, now you realize why flooding markets with money by overprinting causes undervalued money and inflation, right?

Uniqueness and standardization:

Money should be standardized to maintain its value. It also needs to be unique to prevent counterfeiting. Thus, states started using stuff like "gold" or "silver"—practically useless aside from being shiny and resistant to corrosion. Therefore, we met with gold, which we still love and adore. Sigh.

Among all the problems money creates, these three are still the most important ones. I had to stress them to begin with because these three issues are still causing most of the major turmoils in the world:

• Consensus makes a currency more or less powerful.

• Central banks control the economy by mainly manipulating interest rates, ergo the amount of money in the market.

• Standardization and uniqueness remain key factors behind not only all kinds of money but also investment tools.

Now you understand what money is and how the basics work. In the next issue, I'll show you the current situation of money supply in the world and make sure you understand how doomed we are... So, stay tuned.

This Week's Global Financial Updates

For now, let's take a look at recent major financial events globally. Don't worry if you don't yet understand what I'm talking about in this section—just sit back, relax, and enjoy the italic commentary I've prepared for you. Soon you'll be financially literate enough to understand it all.

Fed holds interest rates steady. 

• The Federal Reserve kept interest rates steady at 4.25%-4.5% but still expects two rate cuts later this year. They're still really scared about inflation, but they don't want to get swamped into recession either.

• The Fed downgraded its economic growth forecast to 1.7% for 2025 while slightly increasing its inflation projection to 2.8%.Keeping a tight grip on money always slows growth down. Sad thing is, even this compromise isn't enough to prevent inflation.

• Chair Jerome Powell emphasized the Fed’s flexibility, stating that rates could remain elevated if inflation stays high or be cut if the labor market weakens.Trying to look strong. Sadly, it is not working.

ECB lowers interest rates by 25 basis points.

• The ECB Governing Council has decided to lower key interest rates by 25 basis points, citing progress in the disinflation process and expectations that inflation will stabilize around its 2% medium-term target.The old continent is also failing economically. They had to act since recession was looking like an imminent threat. So they decided to increase the amount of money.

• While monetary policy is becoming less restrictive, economic growth forecasts have been revised downward due to weak investment, trade uncertainties, and subdued lending.They're still having doubts about obtaining sustainable growth. EU's powerhouse Germany is already having real trouble with its economy. Also, you know... The war... It makes people less enthusiastic about investing.

• The ECB remains committed to a data-dependent approach and will adjust policy as needed to ensure price stability and smooth monetary transmission.They're trying to look as scientific, agile, and reactive as possible. The question is: are you buying it?

Germany to spend 1 trillion Euros for defense and infrastructure.

Thanks to Mr. Trump, cracks in NATO are growing, and EU countries are starting to feel the heat. Germany wants new and shiny toys to protect the Vaterland, even if it's a really expensive endeavor. Seems like they have the excessive cash and they're eager to spend.

Trillion Euro question is: Buy from whom?

China Central Bank keeps stacking gold.

China, along with other BRICS countries, is trying to prepare the world for de-dollarization. Almost all of them keep buying gold, aiming to use it for international trade. It seems only logical to them since, you know, the U.S. controls the dollar...

Türkiye’s stock market tumbles after opposition’s presidential candidate is jailed.

Markets always hate destabilization, and Türkiye is notorious for these kinds of events. The country hosts millions of refugees and is already experiencing a severe economic crisis. If the problem gets bigger, EU countries might suffer another flood of refugees.

That’s all for this week. See you next week with some cooler, shinier and illuminating content.