Brothers, let’s continue learning together (Wealth Starting Point · Investing Cognition Course), Lesson 2.
For this series, I want to go back to the very basics and relearn everything in a systematic way with everyone.
Not chasing every trending topic every day, and not predicting whether the stock market will go up or down tomorrow.
Instead, step by step, truly figure out things like the economy, businesses, valuation, and investment psychology.
I’ll be learning and thinking along the way, and sharing the learning process with everyone.
If you also want to learn systematically with me, you can follow this series.
Also, I’ve compiled some methods and tools I commonly use in my investment research, into a free (Wealth Starting Point · Beginner’s Investment Research Toolkit for Ordinary People).
You can get it for free and practice along with me while watching the video.
You’ll find instructions on how to get it at the end of the video.
All right, let’s begin Lesson Two.
In the previous lesson, we covered a question that seems very simple but is actually very important:
How exactly does a country’s economy work?
In the end, we arrive at a very important logical chain:
Household consumption.
Businesses produce.
Businesses invest.
Households earn income.
Then keep consuming.
The entire economy keeps cycling in this way.
But this immediately raises a question:
What drives this cycle?
Why can an ordinary household with only 500,000 yuan buy a house worth 5 million yuan?
Why can a business with only 100 million yuan in cash invest 1 billion yuan to build a factory?
Why does an interest rate adjustment by a central bank cause stocks, bonds, gold, and even Bitcoin around the world to react?
This time, let’s get to grips with three things no investor can avoid:
Money, credit, and interest rates.
Let’s start with the simplest question.
What exactly is money?
We use money every day.
Buy a cup of coffee for 20 yuan.
Go out for a meal that costs 100 yuan.
Buy a phone for 5,000 yuan.
But if you think about it carefully:
Why can this 100-yuan note buy things?
Because does this piece of paper itself have any special value?
Actually, it doesn’t.
What really matters is:
Everyone believes it can be used to exchange goods and services.
Today, you’re willing to use a 100-yuan note to buy something because you believe someone else will also accept that 100-yuan note tomorrow.
So one of the most basic functions of money is to:
As a medium of exchange.
At the same time, it also serves as a unit of account and a store of value.
For example, a phone costs 8,000 yuan.
A car costs 200,000 yuan.
A house worth 5 million yuan.
We can measure all of them using the common unit of the renminbi.
So money may look like just a piece of paper or a string of numbers in a bank card account.
But behind it is the shared trust of society in this system of exchange.
But things get more interesting in a modern economy.
Because the money we use every day is no longer just cash.
For example, you have 100,000 yuan in your bank account.
You go to buy a car.
You wouldn’t carry 100,000 yuan in cash into a car dealership.
You just need to swipe your card or make a transfer.
Your bank account:
Decrease by 100,000 yuan.
The car company’s bank account:
Increase by 100,000 yuan.
The transaction is completed.
So in the modern economy, much of the money we use every day is actually:
Bank deposits.
So here’s the question.
Where does the money in bank accounts actually come from?
Many people understood it this way as children:
The bank first takes in depositors’ money.
Then lend that money to someone else.
This understanding isn’t entirely wrong.
But the modern banking system is actually much more complex than that.
For example:
You apply for a 1-million-yuan bank loan.
After reviewing your application, the bank agrees to lend you the money.
The bank will typically add a 1-million-yuan deposit to your account.
At the same time, the bank’s balance sheet gains a 1-million-yuan loan asset.
In other words:
When banks issue loans, they can create corresponding bank deposits at the same time.
This is what we often call:
Credit creation.
Of course, that doesn’t mean banks can create as much money as they want.
Banks face constraints from capital requirements, liquidity, regulation, risk management, and borrowers’ actual demand for loans, among other factors.
But this mechanism is very important.
Because it means:
The modern economy doesn’t just rely on money that already exists—it also depends heavily on credit.
So what exactly is credit?
Let’s use the simplest example.
Suppose you only have 500,000 yuan right now.
But you want to buy a house worth 5 million yuan.
What do you do?
If the bank is willing to lend 4.5 million yuan.
So:
500,000 yuan of your own money.
Plus 4.5 million yuan in bank credit.
You now have 5 million yuan in purchasing power.
So credit has one very important role:
Bring future purchasing power forward and use it today.
Today, you borrow money to consume or invest.
It means using your income over the next few years—or even decades—to repay this debt.
That’s credit.
The same goes for businesses.
A business currently has only 100 million yuan in cash.
But it spots an opportunity in the market:
Build a new factory costing 1 billion yuan.
What do you do?
A business can use its own funds and raise more through bank loans, bond financing, or other forms of financing.
Then:
Get the money.
Build a factory.
Buy equipment.
Hire employees.
Purchase raw materials.
Start production.
Finally, sell the products.
And so:
Credit
Turns into
Investment.
Investment then turns into:
Productive capacity.
Ultimately, productive capacity becomes:
Business revenue and profits.
So you should now begin to understand:
Why is the economy often more active when credit expands?
Because credit can bring future purchasing power forward.
But there’s another side to this.
Credit doesn’t just amplify economic growth.
It can also magnify risk.
For example, you have 500,000 yuan and borrow 4.5 million yuan to buy a house worth 5 million yuan.
If the house rises to 6 million yuan.
You might think:
Great.
But what if the house falls to 4 million yuan?
Your house is now worth only 4 million yuan.
But you still have a 4.5-million-yuan loan.
Then the original 500,000 yuan in equity may have disappeared completely.
You could even end up with negative equity.
So:
Leverage can magnify gains, but it can magnify losses too.
This is also why real estate, corporate debt, and financial crises ultimately tend to come back to one thing:
Credit.
Now here’s another question.
Why are banks willing to lend you money?
Because you have to pay interest.
Suppose you borrow 1 million yuan.
An annual interest rate of 5%.
You’ll pay about 50,000 yuan in interest over a year.
If interest rates fall to 3%.
The annual interest would fall to 30,000 yuan.
So we can think of interest rates simply as:
The price of using funds and credit.
When money is expensive:
Businesses become more cautious about investing.
Households become more cautious about borrowing.
When money is cheap:
Borrowing to invest and consume may become more attractive.
So interest rates are actually the link between:
Money, credit, the economy, and asset prices
A very important thread.
But I want to warn you about a particularly easy trap to fall into here.
When you see a news story saying:
The central bank cuts interest rates.
Don’t jump to a conclusion right away:
The stock market is about to rise.
Why?
Because the actual transmission process isn’t that simple.
For example:
The central bank lowers its policy rate.
↓
Banks’ funding costs may fall.
↓
Loan rates may be affected.
↓
The financing costs of businesses and households may fall.
↓
But here’s the problem:
Are businesses willing to borrow?
Are households willing to borrow?
Are banks willing to lend?
If the economy is doing very badly.
Businesses are afraid to invest.
Households are afraid to spend.
Banks become more cautious, too.
So even if interest rates fall, credit may not expand quickly.
So:
An interest rate cut is only a starting point, not the final conclusion.
This is also one of the ways of thinking that this series aims to help you develop.
When you see any macroeconomic news in the future, don’t rush to ask:
Is it good news or bad news?
First, ask:
What happened?
Why did it happen?
Who is affected?
Through what mechanisms does it get transmitted?
Finally, what happens to business profits?
And what happens to asset prices?
Actually, as I do more investment research, I increasingly feel that:
What really matters isn’t guessing every day whether the market will go up or down tomorrow.
Instead, build your own research framework.
So I’m also gradually putting together some of the research methods and tools I use in my own learning into a free:
(Starting Point for Wealth · An Introductory Investment Research Toolkit for Everyday Investors).
For example, when you start researching a company, you can use the (One-Page Company Research Template) to work through its business model, revenue, profits, competitive advantages, and other key information, step by step.
If you’re interested in this approach, you can get it for free first.
Don’t just watch my videos.
It’s best to get the tools and do the research yourself.
Because knowledge that really sticks isn’t just “understanding” something—it’s being able to:
You’ve done it yourself.
You’ll find instructions on how to get it below the video and in the pinned comment.
All right, let’s connect everything we covered today.
In Lesson One, we learned:
How the economy works.
In Lesson Two, we discovered something further:
Credit is an important force driving the modern economy.
Credit expansion:
Business loans.
Investment rises.
Production increases.
Hiring increases.
Household incomes rise.
Consumption increases.
Business revenue rises.
The economy expands further.
But what if the opposite happens?
Credit contraction.
Lending falls.
Investment falls.
Consumption falls.
Business revenue falls.
Profits fall.
Employment is affected.
The economy slows further.
So behind economic growth, there’s a very important chain:
The credit cycle.
And interest rates are one of the important tools that affect the credit cycle.
High interest rates:
Borrowing becomes more expensive.
Investment and consumption may be held back.
Low interest rates:
Borrowing becomes cheaper.
Investment and consumption may be stimulated.
And this, in turn, affects:
Business profits.
Stock valuations.
Real estate.
Bonds.
Gold.
U.S. dollars.
Even:
Bitcoin.
You should now be seeing a very important chain:
Money
↓
Credit
↓
Interest rates
↓
Consumption and investment
↓
Business profits
↓
Economic cycles
↓
Asset prices
We’ll keep coming back to this chain in the future.
Today, I especially want everyone to remember five things.
First:
Money in the modern economy isn’t just cash. Bank deposits are also a very important form of money.
Second:
When banks issue loans, they can create corresponding bank deposits, but this creation of credit is subject to many constraints.
Third:
Credit can bring future purchasing power forward into the present.
Fourth:
Interest rates can be understood as the price of funds and credit. They affect consumption, investment, business profits, and asset valuations.
Fifth:
Credit expansion can amplify economic growth, while credit contraction can amplify an economic downturn.
Finally, I’ll leave myself with a question, too.
Suppose you see a news story tomorrow:
Banks begin sharply tightening real estate lending.
At this point, I won’t just look at:
Will house prices fall?
I’ll keep asking:
Why do banks start tightening lending?
Can households still access enough credit?
Will real estate transactions decline?
Will real estate companies’ cash flow be affected?
Will businesses reduce their land purchases and investment?
Will this spill over into industries such as construction, home furnishings, and renovation?
If credit keeps contracting, what happens to the balance sheets of households and businesses?
Finally, will these changes spread throughout the economy?
You’ll find that:
What’s truly worth studying is never a news story by itself, but the “changes in credit” behind it.
And this is what I most want us to understand in today’s lesson:
How money flows, how credit expands and contracts, and why interest rates are an important factor affecting the economy and asset prices.
In the next lesson, we’ll keep exploring.
Let’s start exploring a term investors hear almost every day:
Inflation.
Why does money keep losing value?
Why do prices sometimes keep rising even when the economy is weak?
What exactly is the relationship between inflation and interest rates?
We’ll continue figuring these questions out together in the next lesson.
This is Starting Point for Wealth.
Understanding shapes wealth; cycles create opportunities.