WEBVTT

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So in a normal economy
we know that employment

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will drive overall demand.

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If we have high employment
or low unemployment,

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then people are going
to have more jobs,

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and they're going to
have higher wages,

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and that will have
higher demand.

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Or if the other way goes
around, if they lose their jobs,

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demand is going to go down,
wages will start to go down,

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and people aren't going to
have money in their pockets.

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So employment drives demand.

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And we can view the
demand-- and I'm

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making a huge
simplification here--

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demand will drive production.

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Or maybe we could
think of it as supply.

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It'll drive supply, and it
can also be a driver of price.

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And of course, there is a little
bit of a negative feedback

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loop for both of these things.

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If the demand is high
and the price goes high,

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that might produce a little
bit of negative feedback

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on the demand.

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Instead of an arrow, this line
here means negative feedback.

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I'll put a little
negative sign here.

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And let's say the demand is high
and then the supply goes high.

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Well actually, the
supply going high

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would drive the
price going down.

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So maybe I should draw a
negative feedback like here.

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High supply would
mean lower price.

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But that's not what I want
to focus on in that video.

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And we could keep
adding more lines here.

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But this is roughly
simple take on it.

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But the general idea
is supply and price

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will then drive corporate
profits, or just profits

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in general, even for an
individual business owner.

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And then profits are
going to drive employment.

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Now, let's imagine a scenario.

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We are in a bad economy, maybe
a depression-like economy.

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So in that situation,
you could start really

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at any point in this circle.

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I'll just start at employment.

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So let's say employment
is really low.

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That's going to make
demand really low.

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And if demand is
really low, then supply

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is going to go down, and
price is going to go down.

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And then that's going
to make profits go down.

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And that's going to make
employment even lower.

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And so what we find ourselves
in this kind of recessionary

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or depression area
environment, this

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would be called a
deflationary spiral.

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And it's a spiral
because a bad economy

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is driving lower
prices, which is

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in turn driving a bad economy.

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And to make matters worse, if
this continues long enough,

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or if these price declines
are severe enough,

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you could imagine
people saying, look,

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I have this dollar in my pocket.

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I'm not going to spend
this dollar because, one, I

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might lose my job
at any moment, and I

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know that that dollar is
becoming more powerful,

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that I can buy more
every minute that I wait.

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So as the price goes down,
so as all of this scary stuff

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happens-- so the
employment is going down,

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profits are going down,
prices going down-- this

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makes people not
hoard goods the way

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that they would do in
an inflationary spiral.

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But it makes them hoard money.

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And why it's ultra scary
for central bankers

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or for governments
is they start to not

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have as much control
over the economy.

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They can't just run
the printing press

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and try to stimulate the
economy in this situation,

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because if they did people are
so conservative right now--

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You could imagine
maybe a depression

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is going on for years
and years and years.

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And let's say that they take
some type of a helicopter--

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And this isn't how you actually
distribute money to the money

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supply, but it's just to
show an extreme example.

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So they take a
helicopter, and they

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start dumping cash on people.

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They print cash, and they
start dumping it on people.

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So every man, woman, and child
in the country gets a $10 bill.

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Well, if people are really
scared and really afraid,

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they're just going
to take that $10 bill

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and stuff it into
their mattress,

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and it's not going
to change anything.

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That dollar isn't
going to actually enter

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into the money supply.

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The velocity on it will be 0.