PART1: ECONOMY
Although the economy looks complex, yet it works in a simple and mechanical way. It is partly made up of "TRANSACTIONS". These transactions are above all driven by the social nature of humans. So the economy simply is the sum of the transactions defining human society.
For example, each time you buy something, you create a transaction. Each transaction consists of a buyer exchanging currency or credit with a seller for goods and services or even financial assets. Credit runs like money so by adding the currency spent and the amount of credit spent, you can find out the total amount spent. The total amount of spending keeps the economy going.
It is the building block of the economic machine. All cycles and forces in the economy are determined by transactions. So if we can understand transactions, we can understand the whole economy.
A market is made up of all buyers and all sellers transacting for the same thing. For example, there is a wheat market, an automobile market, a stock market ...in short, markets for millions of things. The economy is made up of all the transactions in all these markets. If you add up the total spend and the total quantity sold in all markets, you have everything you need to know to understand the economy.
So, Individuals, Companies, Banks and Governments all transact in the manner just described. They exchange currency and credit for goods, services and financial assets. The biggest buyers and sellers are governments. Central Governments which collect taxes and spend money and Central Banks which are different from other buyers and sellers because on their part they control money and credit in the economy. They do this by influencing interest rates and printing cash.
For these reasons, as we will see, the central bank is an important player in this economic system. Central banks are important players in the flow of credit.
We are particularly interested in the "credit" component. Credit is the most important part of the economy but probably the least understood. It's the most important part because it's the biggest. just as buyers and sellers come to the market to transact, so to be economic actors, not to say lenders and borrowers.
Lenders usually want to turn their money into extra money better multiplied, and borrowers usually want to buy something they couldn't afford: assets like a house, cars ...or invest in something like creating of business.
Credit can then help lenders and borrowers to carry out their projects. Borrowers promise to repay their amount they borrowed called "main figure" plus a small additional amount called "interest". When central banks, through their policy of reducing inflation, increase interest rates, borrowing decreases because it is costly for households (which often leads to layoffs of staff by companies, reduces global GDP which in turn gives way to unemployment and leads to recession or even depression. When these rates are low, borrowing increases because it is cheaper and favorable to businesses (global economic growth)
