Financial Services
Foundation Of Modern Economic Life

Financial Services are performed by organizations or units that deal with the management, investment, transfer, and lending of money. Some of the important ones for everyday modern economic life and business are,

  • Banking
  • Insurance
  • Investing
  • Accounting
  • Tax Services, and
  • Financial Planning

Economics is simply a social science that studies how people produce, distribute, and consume goods and services. The term economics used in the English language is derived from the Greek word, "oikonomia" which translated means "management, administration of a household," or "rules of the house(hold)."

Roughly 66% to 70% of the economic life of a nation or society is made up of private, household spending and production. And, oddly enough roughly 87% of household financial management is done by the female members of the house.

Financial services are more critical to the everyday life of people in modern society than ever before in human history. Today the means of production and distribution of goods and services is more efficient than in prior times which mean fewer people are needed to perform manual labor commonly done on farms and in manufacturing. Computer technology is playing a big role in shaping modern economic life.

In modern society throughout the world people tend to be less self reliant than in prior human history which means people tend to rely more on money transfers to obtain many of the goods and services they formally produced such as

food,

clothing, and

shelter.

Money is a key part of the foundation of modern individual and business activity. Those that have it prosper, and those that don't have it suffer.

Banks throughout the world operate on a system called, "fractional reserve banking" which means that a bank has the authority to "create" money electronically based on the amount of money it has on deposit anywhere from three (3) to 10 times the deposit amount on hand. The fractional reserve requirement is typically set by the central bank such as the Federal Reserve in the United States or the Bank of England in Great Britain.

For example, if the fractional reserve ratio is 10 to 1 for every $1 on hand the bank can create $10 electronically to loan out to bank customers at a rate of interest (whatever that is). So, in this example the bank creates $9 and additionally earns more money on that $1 deposit by charging the borrower interest on the loan.

You can see clearly that some in the modern economy can create money while others that don't have that authority must labor to get money. The trick is to be able to create money to even the economic playing field or a system of feudal slavery will exist just as it did in prior times.

One thing that people must understand is that as long as there is fractional reserve banking there will be inflation (rising prices of stable goods and services). As long as there is managed inflation which most nations try to keep at 2% to 3% inflation must be contemplated in financial planning and entrepreneurship.

You can use the "Rule of 72" to calculate how long it will take for prices of static goods or services to double by dividing 72 by the interest rate. For example, $100 worth of goods that remain the same in quality and kind (static) will double in 16 years at a 4.5% rate of inflation (72/4.5 = 16). In 16 years you will have to pay $200 for those same goods.

The inflation rate in the United States has been averaging around 4.5% over the past five (5) to 10 years. This is considered a low to moderate rate of inflation.

Inflation also means that more money is circulating in the economy while goods and services remain unchanged in quantity or quality. When the Federal Reserve in the U.S. prints money or lowers interest rates (loans easier to get) more money circulates in the economy which causes the value of the currency to lower, and prices tend to rise.

Whether you are concerned about managing your own personal finances or running a business you need to pay attention to actions of financial services firms such as the Federal Reserve in the U.S., as well as other financial services functions and how they affect economic activity.

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