exchange

Understanding foreign currency exchange markets

alright John here welcome back to the

channel today we're gonna talk about

understanding foreign currency exchange

markets so somehow I've been running

this channel for like a over a year now

I've got 50 some videos and we've never

actually talked about what foreign

currency exchange is precisely and I

know that this is going to be repeat

knowledge or something that a lot of you

already understand but I thought it

would just take a second to really dive

into a little bit like what we're doing

here

why we trade currency how the markets

potentially work I'm not an economics

professor or anything so I'll just

explain it to you the way that I

understand it so let's start with a very

simple and basic idea of exchanging

currency so for example the currency

that is used in the u.s. is the US

dollar and I could take my US dollar say

I have 10 US Dollars and I could get on

a flight and go to Japan but in Japan I

would need the N and so I might get off

of my flight and go to the kiosk in the

airport or a bank somewhere in the city

and say I would like to exchange my 10

US dollars for yen and let's just say

for you know to keep the math simple

they give me a hundred yen as in

exchange for my 10 u.s. dollars I don't

think that's anything close to what the

actual exchange rate actually is now

let's just say for the to kind of make

this a good thought experiment that I

then actually don't spend any of my yen

maybe I'm just using my debit card the

whole time and I don't actually use any

of that cash I have 100 yen in my pocket

and I go back to the airport let's say

two weeks later after my trip is over

and I hand them my hundred yen and let's

say that the exchange rate has changed

as they tend to do and maybe I get $11

back or twelve dollars back well I've

essentially just made one to two dollars

and I didn't actually do anything except

hold a currency for a little while and

that's really the basics of what

currency trading is is just holding on

to something and speculating that the

value is going to change or that the

exchange rate is going to change so

something I want to talk about a little

bit today is

to that I never really hear anyone

discuss and that is why does this exist

in the first place why can you trade

currency why do we even have currency

and why does that rate between two

currencies shift why can I get more of

one currency or less of one currency

depending on where I go and when I go

there to actually make the exchange even

though this is what makes you know

foreign currency exchange possible we

all kind of just take for granted that

it exists and and a lot of times we

don't take the time to kind of think

about like what really sits at the what

really explains the system so there's a

great book on basically money called

debt by a guy named I think David

Graeber I think I got his name right and

basically a huge part of this book is

about basically explaining why currency

came to exist in the first place so I

want to talk a little bit about that now

so a very long time ago it's sort of

assumed that people exchanged value with

each other with a bartering system in

other words maybe I'm like a chicken

farmer and I have a friend who was a

blacksmith and so I would say hey Steve

I need a hammer I'll give you 10

chickens it turns out this never really

happened in all of human history because

if you think about it it's immensely

impractical what if my friend Steve who

makes hammers and swords doesn't need

any chickens well then now I have to go

find someone who needs chickens I mean I

can get something that he needs and the

practicality of trading like that to try

and get what you need in society doesn't

really make any sense and so it really

happened that way what happened instead

is people would basically work with each

other based on credit so you would say

okay I need a hammer he would say no

problem and he'd write down in a book

somewhere

I gave John a hammer and then maybe

three or four months later Steve might

come to me and say hey remember that

hammer that I that I gave you well I

could use a couple of chickens maybe you

could help me out and then I would I

wouldn't go and do that and so the

entire economic systems of villages and

sometimes even larger societies would

function more or less based on credit

but that sort of ask the fundamental

question like what is it that we're

actually trading then what is

that what is currency right in the

beginning it was sort of social credit

but what is it now because we don't have

these specific relationships with

everyone right we just have a

relationship with the currency and we

assume that wherever we go our currency

will be accepted and if we travel to a

new country we can trade that currency

for the local currency and and it will

deed it will help us buy things well

what the whole system comes down to in

fact in my opinion is trust and so just

like when you are dealing with one other

person where I needed a hammer and I had

chickens right we trust each other

that over time we'll be able to help

each other and all our debts and credits

will be equalized right but now that

trust has been abstracted to a currency

and so what happens is the trust in that

currency varies over time if you watch

any currency market you will watch the

exchange rates vary sometimes

drastically and sometimes very quickly

and in my opinion the reason that that

can happen is because the trust in that

currency changes based on the demand for

it how banks are dealing with that

currency what the future outlook for the

economy may be looks like all of these

different factors news events things

that basically change how much value

think we think we'll be able to get for

that currency in the future and that's

fundamentally what foreign currency

exchange markets do and that's why you

can trade them and because they're all

they're moving and they're volatile and

they're changing you have the

opportunity to make or lose a large

amount of money while you trade them so

that's basically what I wanted to talk

about today not really that complicated

when you think about it but I never

bothered to actually unpack that story

or sort of make sure that everyone

understood how this works so there you

go I hope you enjoyed this video and we

will talk to you soon