So far we have introduced the following entities that will form the baseline of the Economic Simulation:
The final entities to the Economic Simulation are all financial entities:
- Credit Cards
- Investments (Stocks, Bonds, etc)
Bank entities will begin as savings and loaning organizations. The other aspect of banks will be covered in the Investment entities. Banks will make loans to Individuals, Consumers, Vendors, and Producers and collect installment payments (with interest). Initially, Consumers, Vendors, and Producers will all pay some amount for loans, which, on average, most Consumers, Vendors, and Producers all have.
Credit Cards are usually backed by Banks but because they have such a significant role in the lives of Individuals and Consumers, Credit Card entities will be split out separately. Credit cards also have a much broader distribution than bank loans; approx 40% of Americans households rent instead of having a home mortgage, but approximately 70% to 80% of households have at least 1 credit card, depending on the year selected. Credit cards will be another payment that Consumers will make based on some typical amount for a quintile. However, Individuals will have to make credit card payments based on their individual profiles that will try to estimate their tendency to buy on credit and their tendency to carry a balance on their credit cards. And based on income and other factors, their “credit score” will affect the interest that they pay but typically in the 15% to 30% range.
Investment entities play a significant role in the US economy but in many ways they behave like a separate, parallel economy that is only connected to the mainstream economy at a few points. Some of those intersections are the Bank entities, consumer confidence, and Individuals.
When dealing with Consumers at the quintile level, investments look like savings accounts and 2% interest earned and 7% stock market returns just look like savings with different interest rates. On average, throughout a quintile, some Consumers will save more and some will save less, some Consumers will receive higher interest payments and others will receive less. The investment entitiy doesn’t really affect Consumers.
However, Banks are strongly associated with Investments and Prime Interest rates, etc, so their lending is affected by Investments in general. So changes in Fed policy will affect lending policies and interest payments and more.
Just as importantly, the stock market and bond markets affect (and reflect) consumer confidence. If consumers are feeling nervous, they will put more money into bonds. If consumers are feeling optimistic that everything is getting better, they will put more money into stocks, perhaps even taking out savings to invest heavily in wildly speculative stocks. When the stock market goes up consistently for a while, the “wealth effect” comes into play, making people feel more confident, reducing savings rates and increasing purchases, setting the “virtuous cycle” in motion.
Individuals are affected by their Investments more than Consumers in general. This is intentional as some people are lucky when they invest and others lose everything. Some individuals put their money is steady performers; others invest their money in stocks that might grow significantly or might fail completely. Based on the Individual’s investment profile and how “lucky” the individual is, an Individual may be helped greatly or lose greatly. On average, however, it is expected that most Individuals will have their Investments pay approx 5% year over year.
OK, that’s everything that I can think of for now. I’ll add more as I come across it.