IS THE EVOLUTION OF MONEY HURTING US !!!

It all started with “BARTER TRADE SYSTEM”: Long time ago the first trade was conducted via Barter. All goods were directly exchanged for all other goods. But this method had its own problems. If you want to swap your chicken for a loaf of bread, but the baker happened to want firewood, you had a task to find someone with firewood who wanted to have chicken.

        Then came the medium of gold exchange, under which everyone agreed to accept gold in return for whatever they were selling. This transition allowed the swapping of chickens for gold and then gold for anything else. The thing with gold was that it was indestructible and could be stored for the future. As gold also become the “Store Of Value” – if you had lots of chickens you could swap all of chickens for gold, spend only part of the gold on bread and keep a few gold for a rainy day.

                Gold as a mode of money, created its own set of problems – Governments in financial troubles, would call back their gold coins, then melt it down and reform the same metal into more coins with lower gold content in it or mixing any other metal in it. For government, it generated a nice new stock of gold for conversion into coins. This is what called “Debasement of Currency”.

                       But debasement of currency became a huge problem and led to the development of certificates of gold deposits. Debasement & the larger monetary transaction required that the coins to be counted weighed and checked for its purity & authenticity. In addition to which there was constant problem of security, so this led to the development of the Gold Depository Banks whereby a group of merchants come together and formed Merchant Banks that would hold their gold securely at a central location. The quality of coin was checked, the depositor was issued with paper certificate of deposit. The certificate of deposit represented his holding of gold within the banks & the holder of this certificate was entitled to present the certificate back to the bank, who would on demand, exchange it for the same amount of gold coin originally deposited.

                       These banks soon realized that the owners of the gold rarely come back to collect it. As a result gold was lying idle with them most of the time. So, these bankers come up with a money making scheme of their own. These banker’s started issuing their own certificates of gold deposit and would lend those certificates to merchants. These merchants would use these new certificates to buy goods, which they would then sell on at a profit provided everything went well, the merchant could borrow the certificate, buy & sell the goods to make profit and repay the bank before anyone realized that the gold had left the vault which of course it never had.

                 Now, what this did was there were always more certificates of deposits in circulation than the gold in the vaults of banks. This in turn led to crisis situation during which individuals with these certificates landed up at the bank asking for their gold back. The trouble was that the bank did not have enough gold to make good against all the certificates it had issued. As this news spread, more people landed up leading to bank running, this soon led to a situation whereby a central bank was created which would fight financial instability. In return for the backing of the central bank, the commercial banks gave up their rights to issue their own gold depository certificates. From now on there would only be one type of depository certificates and these would be printed by the government, and be distributed through the central bank to the commercial banks. In addition, gold reserves of the commercial banks would be collected together at the central bank.

                This created the concept of Currency Notes issued by the government. But what this also did was that it gave the government a monopoly on printing money. And unlike the kings of the earlier age, who had to call their gold coin back to debase them, now government could simply print more and more paper money as & when they deemed fit. And this right as we know has more or less been responsible for the current financial crisis.

IMPACT OF THE EVOLUTION OF MONEY: Let’s say US government prints $1 trillion and keeps it in its vaults, so then what would be the impact of this printing of money will be on the Inflation? The answer would be ZERO impact? Correct, simply because all the printed money is in the vault and does not enter into the economic systems…It is when the money enters the economic system which leads to a situation wherein more money chase the same or even fewer goods leading to price rise. At same time it is important how fast does money changes hands, meaning how fast people receive and then go out and spend this money. The faster they spend this money, more velocity money has and that in turn leads to a faster increase in prices & thus an increase in inflation. 

SAFEGUARD FROM THE FINANCIAL CRISIS : When markets are erratic & at times unpredictable, then the wise thing to do is to step up exposure to an asset that would infuse a semblance of stability and strength to the portfolio. And the cleanest, simplest & most efficient way to do is to invest in GOLD ETF. Not to mention the fact that the rampant way in which countries are debasing their currencies, one cannot help feel that at the end of the day, bullion will be more valuable than billions.

                             

BUY GOLD ETF's: There are new alternatives to invest in GOLD ETF’s - CLICK HERE , ETF’s – known as Exchange traded Funds which are listed on NSE. ETF just like any other mutual funds collects money and invest into the market. GOLD ETF’s collects funds and invests in GOLD. They buy gold physically – so the units are backed by 0.995 finesse gold. When you invest in GOLD ETF you are allotted a unit same as in mutual fund, here 1 unit of GOLD ETF can be 1 gm or 1/2 gm of gold depending on the funds – So Gold ETF are affordable. GOLD ETF’s trades like normal equity share on exchanges whose prices are in tandem with domestic gold price. If you dint have Demat account you still can invest in GOLD FUNDS like SBI GOLD FUND, Quantum Gold Saving Fund. You can also invest in these ETF in a Systematic Investment way (SIP) with as low as Rs. 500. JUST call your broker to buy GOLD ETF’s (List of listed ETF are mentioned below) or just visit your nearest bank and ask for GOLD FUND (if you don’t have trading account)

Listed GOLD ETFS

AXIS GOLD SHARE

GOLD BeES 

HDFC GOLD ETF

KOTAK GOLD ETF

RELIANCE GOLD ETF

RELIGARE GOLD ETF

SBI GOLD ETF

READ MY POST ON ALWAYS BUY GOLD 

THE DOLLAR RUPEE STORY !!!

On 22nd November 2011 Rupee touched its year high of Rs. 52.73/1$, making RBI governor to give public statements. If US dollar weakens importers are benefited and exporters are at loss. Whenever Dollar weakens against Indian Re exporters blasts their feelings & so RBI have to step forward for their help. But have you ever imagine that once our 1 INR was equal to 1$ but eventually $ become strong against INR, how read on to know this -

When India got independence in the year 1947, there were no loans or external Debts on Indian government. The exchange rate as on 15 August 1947 was 1US$ equal to 1.00 INR. With the introduction of 5 year plans Indian government needed foreign borrowing and started devaluing INR. Which was further influenced by Indo- China war in 1962 and Indo- Pak war in 1965 which devalued INR more as India needed large funds for buying weapons.

In the year 1966, 6 June at the time of  Mrs. Indira Gandhi as the prime minister, inflation was increasing at a tremendous rate and also to keep on the aids given by US to India, USA government demanded and pressurised Mrs. Gandhi to devalue INR against US$. And kept the rate of 1US$= 7.50 INR. The then ministers Mr.Krismachari & Mr.Kamraj opposed these policy but it was of no use as Mrs. Gandhi was interested in getting help from US and kept INR weak against US$.

US$ grew stronger after 1971 –

After the year 1970, US$ grew stronger against INR due to incompetence of Indian politicians and bully of US. The exchange rate in 1970 was 1US$= 7.47 INR, which rise to 1US$= 8.40 INR in 1975, after the assassination of Mrs. Gandhi in the year 1984, and due to Boffors scandal tumbling Rajiv Gandhi’s government made the INR weaker and the rate was 1US$= 12.36 INR in the year 1985. In the year 1990 1US$ was equal to 17.50 INR.

Drastic drop in 1991 –

Whenever India faced economic or political problem, US made India to devalue INR against US$ by offering funds or trade benefits. In the year 1991 under the Narshima Roa government, India faced a drastic drop in INR against US$. At that time the Indian Forex reserve dropped to its bottom and there was a time where the balance of Forex reserve was such that India would be able to pay just 3months of Import bills. To fill in this gap India borrowed huge amounts from International Monetary Fund’s (IMF) with the condition that INR will be devalued against US$ and due to this 1US$ became 24.58 INR from Rs.16.31/1$. During this period exporters flourished as their exported products gained them more value in Rupee term.

History of Rates slowdowns -

In the year 1992 1US$ was equal to 28.97 INR; in 1995 1US$ was equal to 34.96 INR; in 2000 1US$ was equal to 46.78 INR; In the year 2002 June 1US$ was equal to 48.98 INR; After June 2002 INR became stronger against US$. In the year 2002 of December 1US$ was equal to 48.14 INR; in 2003 1US$ was equal to 45.57 INR; in 2004 1US$ was equal to 43.84 INR.

During the year 2004-06 RBI started buying $ and Indian Forex reserve raised to $200 cr, RBI stopped buying $ from January 2007 when 1US$ was equal to 44.25 INR; On 16^th May 2007 1US$ was equal to 40.79; on 27^th October 07 1US$ was equal to 39.21 INR it’s all time high when FII’s were flowing in tones of money in Indian capital markets; on 3^rd march 2009 1US$ was equal to 52.16 INR which was all time low of Indian Rupee. Which is now broken.

What can be the real value of US$?

Today $ is high against Re. But to determine the real value of any currency we have to see its Purchasing Power. This is known as Purchasing Power Parity (PPP).

The purchase rate of any product in US is compared with the rate to be given in Indian currency to buy that same good. For example to buy 1 dozen of fruit will costs 1$ in US, that same fruit would cost Rs.15 in India per dozen(of course inflation & other factors are not considered). This was just an example but to know real effective rate of any currency REER or Real Effective Exchange Rate index is referred to.

What Real Effective Exchange Rate (REER) index?

REER index measures a domestic currency’s competitiveness against other major currencies and is an indicator of currencies relative value versus foreign currencies. REER index is the 6 currency basket which uses 3 year moving averages for calculating weights of the index taking 2004 -05 as base year. The 6 currency REER index in India is calculated using Euro, US Dollar, Yen, Pound Sterling, Hong Kong Dollar & Renminbi. REER relates to purchasing power parity hypothesis. It's the invoicing currency that has more weightage and since 80 % of our trade is done in US$ it is assigned more weightage in REER INDEX.

It is believed that RBI intervenes currency market to suppress Rupee if REER index approaches 105 & props Rupee up if REER gets close to 95. REER above 100 indicates relative strength of the currency. REER levels as on 25 Aug 2011 was at 117.01 implies that rupee is weaker compared with the base year of 2004-05.

There is also a 36-currency REER index, which is also used to measure competiveness of currency. However, this index is not used too frequently since CPI data for many nations comes with a 3-month lag. On an average basis, the 6-currency real effective exchange rate (REER) appreciated by 12.7 per cent in 2010-11, the 30-currency REER by 4.5 per cent and the 36-currency REER by 7.7 per cent.

REER Trends:

The 6-currency REER index rose to 112.76 in the period leading up to the economic crisis in 2007-08. During the crisis, REER weakened as rupee depreciated due to fall in capital flows. In one of the sharpest fall during the period, it fell to 93 levels in March 2008. REER stood near 100 for almost two years in 2008 and 2009. As the economy gathered pace, REER started appreciating and scaled to 116 by April 2010. From April 2010, REER has stayed around 115 for 17 months. REER strength and weakness before and after the crisis have been due to demand and supply factors led by capital flows. However, recent slide in rupee has been triggered by euro-zone problems.


READ HERE FOR MORE ON US DOLLARS - CLICK HERE

Is it Time to worry about the Dollar??

The Fed’s so-called “QE2″ (Quantitative Easing/second round) which is purchasing of U.S. Treasury bonds by printing more and more currency notes to fulfill its purchases are supposed to come to an end on June 30, 2011, which would make July a crucial month – for the US economy, for the performance of the dollar and most of all for the Emerging Markets like INDIA.

For the last two years, the U.S. economy has been supported by the twin catalysts of fiscal and monetary stimuli. Fiscal stimulus seems to continue for some time as US have year’s $1.6 trillion deficit. But monetary stimulus is another matter. 

Since QE2 began in November 2010, the Fed has been buying about two-thirds of the Treasury bonds issued – or about $600 billion ($60,000 Cr) of the $900 billion ($90,000 Cr) in total bonds to be issued between November and June. Simply extending QE2 won’t solve this problem. The Fed would then be buying both too much of debt and not enough of debt at a same time.

Treasury bond purchases of $75 billion ($7,500 Cr) a month would be enough to push inflation sharply upwards. This is, after all, the very same policy that gave the German Weimar Republic its trillion-percent inflation. On the other hand, even if the Fed buys $75 billion ($7,500 Cr) of Treasuries a month, this will bring with them the need to place an additional $75 billion ($7,500 Cr) worth of bonds every month. And with inflation rapidly accelerating, the chances of a bond market and dollar crisis would still be great, which will affect the flows of foreign money (FII’s money) to the emerging markets like India. This is a concern!!!!

The one way to avoid the Death of the Dollar

With the U.S. market struggling under the burden of rising inflation and some ill-advised monetary and fiscal moves, the death of the dollar is looming as a worst-case – but still possible – scenario.

The Fed has one chance to avoid this outcome. Just to have a chance of staying level with inflation. U.S. central bank policymakers must boost short-term interest rates at least to the 3% level. That would burst the global commodities bubble like one in Sliver, and reduce inflationary pressures. With that, the Fed could then –continue with a “modified QE3.” For instance, it could buy $50 billion ($5,000 Cr) of bonds in the third quarter and $25 billion ($2,500 Cr) in the fourth quarter, thus breaking the Treasury bond market. With inflationary pressure reduced by the interest-rate increase, the chances of a Treasury-bond-market meltdown would thus be reduced to almost zero. Interest rates would rise and bond prices would decline, but it will be in an orderly manner. And inflation, if it continued, would do so at a more-moderate pace.

In fact, even inflation – should it remain stronger-than-desired – could be moderated, simply by raising rates a bit more, perhaps in several increments. And the U.S. dollar would be saved. There’s only one problem with this scenario and that won’t happen unless Bernanke won’t boost rates.

Visit my previous post on click here-  US PRINTING NOTES

US PRINTING NOTES AGAIN: DEBASEMENT OF CURRENCY

"MONEY MONEY MONEY!!!!"

On November 3, 2010. Federal Reserve chairman Ben S Bernanke decided to have a second round of Quantitative Easing (QE2). He decided to pump in $600 billion into the US economy by buying an additional Treasury Bond through June in order to reduce unemployment & avoid deflation by printing money. And printing more & more money would be more “Debasement of your Currency”. This will lead to surging commodity prices & asset bubbles not only in the US but also in Emerging Markets. The US Fed reserve calls it liquidity into the financial system by merely printing more & more dollars, which are not backed by real assets such as Gold. Technically, there is no limit to this printing, i.e. No supply restriction on paper currencies. This is what economists called “Debasement of Currency”.

Gold has a unique characteristic of a store of value which is not with paper currencies, which tend to lose value over a period of time due to inflation (loss of purchasing power) caused by an oversupply of printed money.

We will compare the Currency in Circulation issued and the underlying Gold held by concerned Central Banks in developed countries. Divide the Gold reserves (in tonnes) held by Central Banks with the currency in circulation (in billion $) of the respective countries will give us a ratio, a Gold to currency ratio.

In 1973, Gold held by the US central bank was 8,584 tonnes & the currency in circulation was $61 billion. Dividing the gold held by the currency in circulation, we get a ratio of 140.2 for that year. i.e. 140.2 tonnes of gold was held per $1 billion of currency in circulation. In the year 2007, the US central bank held 8,133 tonnes of Gold & the money in circulation was a whopping $759 billion. The ratio comes to 10.7 .i.e. only 10.7 tonnes of gold held per billion dollars in circulation.

If the US were to get back to the 1973 ratio of gold held per billion $ in circulation, it would have to increase its Gold Reserve to whopping 1,07,153 tonnes from the current 8,133 tonnes, an increase of more than 13 times in potential demand. With the financial crisis not over yet, Central Banks like FED would continue to inject more & more money into the financial system. Thus the debasement of currency will continue, making real assets like GOLD & SILVER more & more attractive as a hedge against reducing purchasing power & loss of faith & confidence in paper currencies.

We should thank GOD that the US does not have a printing press for Gold. The YELLOW metal may be the only Savior of our wealth over the longer term. That sure makes a case to buy GOLD. As far as our INDIA is a concern, India’s M3 supply in INM3MS=ECI as of July 16,2010 was Rs.57,821.41 billion from Rs.56,770.76 billion (June 18,2009) & Rs.4984.46 billion on July 3,2009. GOLD RESERVE AS ON SEPTEMBER 10, 2010 – 557.7 tonnes.

SO..GOLD IS ALWAYS A BUY EVEN AT THIS PRICE. BUY IN GRAMS IT SURELY WILL MAKE YOUR WEALTH SLOWLY BUT SURELY.....

Read my previous post on GOLD - CLICK HERE -  MORE ON GOLD

THE YUAN DE - PEGGING STORY........

                    Almost for 2 year’s Chinese government with the help of People’s Republic Bank Of China – the Chinese central bank had managed to keep the value of their currency Yuan pegged to the value of US dollar. One $ was worth around 6.82 Yuan.

                    China is an export driven economy. Their main export market is the US. So when an Chinese company exports goods to US it gets paid in US$. These $ are converted to Yuan, it means $ are sold and Yuan is bought. Over a period of times, as exports keeps going up, more $ are sold and more Yuan are bought. This of course increases demand for Yuan & it starts to appreciate or increase in value against $. And an appreciation in currency is detrimental to exporter.

                    This means, suppose say a Chinese exporter exports goods worth $100000. When he converts them at 1$=6.82 Yuan he gets 682000 Yuan ($100000x6.82) in return. Now say the Yuan appreciates and 1$=6.6 Yuan, then the exporter will get 660000 ($100000x6.6). Thus he will not make the same amount of 682000. If he wants to make the same money he will have to raise prices. It’s well known that Chinese compete on price & not quality, the exporter may not be in position to raise prices. This is were the government comes in by ensuring that the value of the Yuan stays constant around 6.82 to $, so that the exporter does not have to deal with any fluctuation in currency.

                    Government of china in order to maintain Yuan at 6.82 to $ starts selling Yuan & buys $. Because when lots of $ come into china to buy Yuan, pushes up the demand of Yuan & Central Bank of China starts selling Yuan & buys $. This ensures that there are enough Yuan in market & its value dos not appreciate.

                    Now China has suddenly decided to de-peg its currency as US feels that China is a currency manipulator, US feels that china has held the value of Yuan against the $ constant & this is what has kept their export machinery chugging along. They feel this has led to situation where Americans citizens continue to buy cheap Chinese goods instead of home grown ones.If Chinese government had not involved itself with the foreign exchange market & let it work independently then the flow of $ into china would have ensured that the Yuan would have appreciated against $.

                    Suppose if 1 $ = 6 Yuan, means exporter exporting goods worth $100000 would make 600000 Yuan. Under the pegged regime he would have earned 682000 Yuan. Now, to earn that much, he has to sell goods for $113666.7 (682000/6). This means he has to increase its price to 13.67%. This in turn would make Americans buy American goods instead of low priced Chinese goods. Nobel Prize winning economist Pual Krugman had earlier proposed to impose a 25 % surcharge on Chinese imports to US. He felt that this will make Chinese goods expensive & will result into Americans buying more US goods. Basically the allegation against china on being currency manipulator have been growing in US, and US the biggest market for china do not want US to take any strict steps that would hurt its exports. So it wants to de-peg it currency against US$.

                    Currently if something worth $1000 it will be worth 6820 Yuan in china if it is imported, if 1$ = 6 Yuan, then it would be worth 6000 Yuan which is lower. So some experts believe that this will make Chinese buy more imported goods & that in turn will help the exports across the globe. China will take time to change its spending habits. Currently china’s saving rate is 54 %.

                    And off course in order to maintain the peg, the Chinese Central Bank bought $ & sold Yuan that explains Foreign Exchange Reserve of $ 2.4 trillion. And all this money found its way back primarily into US & other western economies, helping them to finance their fiscal deficits. Now if these Chinese really let the Yuan float even partially, its rate of accumulation of Forex reserve might slow down. This means lesser $ to help finance the fiscal deficit in the US.

Cabinet Deferres the decision on Rupee Symbol

The rupee's entry into the elite club of currencies with their own symbols will take longer with the government on 24th deferring a decision on the issue. The Cabinet was to finalise the symbol on 24th June 2010, but the matter was deferred after Finance Minister Pranab Mukherjee asked for more time to go through the short-listed signs, sources said.

                   The issue was on the agenda of the Cabinet, which met under the chairmanship of Prime Minister Manmohan Singh here, but was deferred, sources said.

The government has shortlisted five designs for the rupee from among the symbols suggested to the Ministry of Finance by the public.
In the Budget this year, Finance Minister Pranab Mukherjee had said that "in the ensuing year, we intend to formalise a symbol for the Indian rupee, which reflects and captures the Indian ethos and culture."
With this, the rupee will join the select club of currencies, such as the US dollar, British pound sterling, euro and Japanese yen that have a clear distinguishing identity, he had said.
Last year, the Finance Ministry had invited design suggestions from the public for the Indian currency.
"The government of India proposes to have a symbol for the Indian rupee to be selected through public competition," the Finance Ministry had said.
The symbol, the ministry had said, should represent the historical and cultural ethos of the country as widely accepted across the country and should be applicable to the standard keyboard.

My favourite one is number- 4