What is DEBT? | Simple Economics

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Do you really know what debt it? Are you sure that you understand the dynamics of debt? So how is debt created? Why do you need debt? These questions are crucial if we want to understand how the economy works.

But hey, if we are just meeting: it's Dario, and this is Divity Finance, a platform where we can share our best tips and tools when it comes to trading, investing or finance in general.

How many times have we heard the word debt! But what is debt? Why do we have debts? What does it mean to be a lender or a borrower?
This is the first video of a series where we are going to discover what is and how the modern economy works, to be aware and financially independent, only this way we’ll be able to make the best decisions, because this is about your economic and financial future; so if you haven’t done it already, I would highly suggest that you subscribe to the channel so that you can be always up to date, and not miss any video.
Hey, it’s Dario, and this is Divity Finance, a platform where we can share our best tips and tools when it comes to trading, investing or finance in general; and if you love the subject please, consider subscribing.

To understand what is debt, we first need to understand what credit is, these 2 subjects are extremely connected, without one there wouldn’t be the other.
Credit is one of the most important components of our economy, it is probably the thing around which the entire economic system has been built. Just think about the fact that the amount of money in circulation is 17 times smaller than the amount of credit in circulation. But who gives this credit?

Normally when we want to ask for a loan, we call the bank, whether we are a normal person or a company.
The principal of how credit works is the same:
We ask the bank to give us a certain amount of money, and the bank, if it thinks that we are going to be able to repay the debt and thinks that our financial situation is suitable for the loan we want to ask, can decide to accept the agreement, by accepting the agreement it has been created, beside the credit, also a debt, the latter will then have to be repaid by us with a so called interest.
One of the most important sources of revenue for a bank is exactly the interest, they give credit and get paid for it, for this reason the bank is the first place where we go when we want to buy a house, or expand our company if we don’t have the necessary amount of cash to do it.
At this point the bank gave us the money, and we have a debt. But how is it possible that the bank has so much money? And also: who decides and how is it decided the interest that I will have to pay on my loan?

Private banks receive money from the Central Bank. Every country has a so-called “Central Bank” whose job is to manage the economic development of its country. But how can a private bank receive money from the Central Bank? It’s fairly easy: Even the private bank asks for credit, and it makes a debt with the Central Bank. Every morning private banks, also called commercial banks, will contact the Central Bank of its country to ask for a certain amount of money, in a very similar way of how we ask money to our bank; and same as we, the private bank will also have to pay an interest to the Central Bank on those money, and this interest is decided by various experts who analyze the market day after day and decide what interest is the best interest for that day or period.
Private banks can also lend out the money from their clients, and ask money to other banks, but nonetheless the interest rate is always dependent on the interest of Central Banks.

Important notice: I don't give trading signals. Everything in this video is a personal opinion and shouldn't be taken as advice. This content is not presented, offered or intended as professional or expert advice, and is not to be used as a basis for financial, legal, or other decisions.

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