Saturday, November 19, 2011

Story of Indian Rupee in his Own words.

I was stopped by a beggar in India early this year for money. I gave him 1 rupee coin and continued walking. The bagger looked at the coin and returned back. I was surprised when heard, ‘If you want to help, give some more rupees else keep this one with you.’ I inaudibly gave him some more money and left .But, the incident triggered my thoughts. I used to get 10 paisa to buy a candy nearly 20 years back and now even a beggar is not ready to accept a rupee.

I came home worried for my one rupee coin. What happened to rupee? How it depreciated so much and why? Will it be able to gain the value back or vanish one day? I sat on the sofa looking sadly at my rupee coin. I woke up suddenly by hearing some noise. ‘Who is there’, I asked. “Hey, young man, here I am…! “ I amazingly looked at the rupee coin in my hand, “Is that you”??

“Yes, I am…! People know me as Indian Rupee…! I am the one having glorious past, doomed present and uncertain future. “

“Glorious Past?, I exclaimed. “Do you know meaning of my name? Rupee means Silver in sanskrit.”
Rupee continued, “I am almost 175 years old now. I was born in 1835. East India Company created me to have a single currency across the country. I witnessed 1857 revolt, British Raj, Famine states, Indo Bhutan, Indo Afghan War and many more. I had family members like Damdi, kani, paraka, aana, beda, pavala, artharupee etc. Each one had its own purchasing power. My purchasing power was more than a today’s five hundred rupee note. If you don’t believe do some calculations and verify”

“Then how you depreciated?” I asked.

“That’s a long story.. Since inception my value was rock-solid for almost 40 years. I was like  King. Then somewhere in 1875 silver prices dropped significantly worldwide in. Most of the Industrial Nations like Germany,US,Uk adopted Classic Gold Standard. Although, my intrinsic value (amount of silver content) remained same, relative value went down. I thought if my country was independent it would have also joined Industrial Revolution as well.

“Ok. It happened in 1875.But now silver value is high, then why you not appreciated?” I asked.

“True. Silver Price shot up in 1939 during World War II and British Raj devaluated me by almost half of my value. My silver content was reduced by 50%. British started making me of 50% silver, 40% copper, 5% nickel & zinc each. Real twist came in 1947 when British Raj removed silver content completely. Nickel made Coin was named as Rupee! However my sorrow vanished same year as my own country became independent. I was fully confident that my own country will bring my King Status back and thereby will become a developed nation.”

“Unfortunately, instead of getting appreciated, I got devaluated every decade against most other currencies. And because other currencies also depreciated against their original value, today even beggars are not ready to accept me. British Raj devaluated me by half in 110 years and my own people devaluated me around 1/250 times compared to my original value in hardly 60 years…!”
“Do you know what is responsible for this, Budget deficit (Spending more earnings and printing Notes for "Deficit Amount”), Trade Deficit (More Import than export),  War expenditure, Balance of Payment problems (No Money to pay for Obligation). Bad Debt, Protectionism, lack of visionary leadership, asset bubbles & many more."

"Today looking at anti-corruption movement I feel someone is at least having courage to fight against bad. But do you know why corruption is at first place? Nobody wants to be corrupt; they opt to be corrupt due to my fading future. It’s my uncertain or rather certainly diminishing value that leads to corruption. In fact people of your generation think that my lower value is better as they make more profit from outsourced jobs. I feel like value, self-esteem and confidence of my people is also de - valuated 250 times. Countries with weak currency never prosper. India would shine only if I my value is restored or appreciated considerably. “

Rupee was silent and I felt ashamed. 

Below are eye opening facts that I found after some maths.

Indian Rupee Subdivisions.

INR vs Original value, INR vs USD, Value loss in USD terms.

Comparison of INR with it's Original Value, Value against USD and depreciation against USD.

“In the End, we will remember not the words of our enemies, but the silence of our friends.”...............Martin Luther King Jr.

Ref URL:
Special thanks to my wife for reviewing and editing.

comments thought welcome.. 

Sunday, October 16, 2011

Why is Alexander The Great's Greece "not allowed to Default"

           Before Entering to topic of why "not allowed to default" let's touch base on why it is defaulting. In one sentence answer is "There is no Alexander the great left in Greece". Countries who have trade / budget deficit, have been going bankrupt for a while. India went bankrupt in 1991. Indian Rupee was devaluated.Russia went bankrupt in 1998. This is no new thing. Over the time great nations adjust themselves and again thrive form it.
           Now is "Greece too big to fail"? Looking into numbers, GDP of Greece $318.1 billion (2010 est.) is smaller than revenue of Exxon Mobil  US$ 383.221 billion (2010) That does not mean it's small number but if you look at world GDP 74.54 Trillion it's hardly 0.4 % of it so it does not sound like too big to fail. Then why there is so much hue and cry on Greece. I think there are multiple reasons behind this complex issue. 

# First of all Greece is not issuing it's own currency ECB (European Central bank) issues it. Hence the standard solution of de-valuating currency and get rid of debt won't work. (One that India and Russia Used during their balance of payment issue)
# Secondly Greece is just tip of an iceberg. What happens with Greece may happen with all (PIIGS) Portugal, Ireland, Italy, Spain and even Finland. If they all default, the viability of Euro as Single currency will almost come to an end.
# Therefore Germany the main force behind Euro is not allowing any sudden default / uncontrolled action from anyone.

European Debt Crisis
On the top of all this the very less discussed but very very crucial reason behind "not allowing" must be CDS (Credit Default Swap). This is how CDS work..

1) Let's say Deutsche Bank  buy  10 Yr bonds form Greece government or any corporate. In order to "mitigate Risk of  bond default" they also buy CDS (kind of Insurance) form other bank. Say JPMC; based on risk involved in Bond JPMC charges "CDS fee" to Deutsche Bank.
2) If Greece pay back as agreed; JPMC gets fees and Deutsche Bank get principal and interest form Greece Government.
3) If Greece can not pay. Deutsche bank claim all their losses to JPMC and JPMC has to pay to Deutsche Bank. 

Now understanding credit default swaps, let's imagine on one fine day PIIGS and Finland default. Immediately creditors like Deutsche Bank / BNP Paribas will run to their CDS issuers (Who knows who they are but surely they are form Financial Big Bank community). We all know how healthy our banks are. Hence we will surely end up in situation where PIIGS country and "CDS issuer" both default. This Situation is called as "Double Default".

So summing up we are in situation where if We put governments as one community and Big Banks as other community. Big Banks are both Creditor and Insurance Provider to Governments. In this game with 1 default of country One bank will fail as CDS issuer and other as creditor (All 3 party lose). Remember in 2008 we learned that "Big Banks can not be allowed to fail" and that's exactly reason why "Greece is not allowed to fail" 

How long this "Not allowed" will be tolerated by Germany and other solvent nations is a million dollar question whose answer is tough. Irony of story again is money that government has is of common man's tax money and money that bank has is common man's saving. so in both cases common man is to lose either way. 

Comments / thoughts welcome.. 

P.S. : Ref : 
" The market size for Credit Default Swaps more than doubled in size each year from $3.7 trillion in 2003. By the end of 2007, the CDS market had a notional value of $62.2 trillion. But notional amount fell during 2008 as a result of dealer "portfolio compression" efforts (replacing offsetting redundant contracts), and by the end of 2008 notional amount outstanding had fallen 38 percent to $38.6 trillion" 

Friday, July 29, 2011

Can US Default on it's Debt. ??

No way ..are you kidding..?? In Paper currency it can never happen unless you do not control your paper currency. e.g. in case of PIIGS Portugal, Italy, Ireland, Greece and Spain currency is printed by ECB (European Central Bank) and hence technically they can default. No other country that control it's own currency can default in today's world.

However in long term if Hyperinflation becomes reality then probably countries have to default as they won't be able to do both i.e.
# Money supply shrinking via increasing interest rate.
#Increased payment on Interest.

but that's still 5 - 10 years away till then let's enjoy ..

Friday, July 15, 2011

Joseph Stiglitz - Problems with GDP as an Economic Barometer

While we all measure "success of country in GDP growth",Truth about GDP number is very nicely explained here by Nobel Prize Winning Economist Joseph Stiglitz. After hearing this and  similar comment by Peter Schiff in which he said if you have Hurricane Katrina, GDP Grows :)  To me now "GDP" sounds like "economic chaos" done by country in year. It's nothing to do with productivity of nation / real growth of people's quality of life. Basically it's nothing to be proud about for any nation.

Wednesday, July 13, 2011

Is Ben Bernanke's position at Risk?

After a very long time Ben Bernanke did both true and right statement. In his previous press conference he made it clear that "Fed has done enough. Fed will complete our existing Program (QEII) and there won't be any stimulus further." His clear remarks have made no dent in commodities in fact they have gone up! So Ben's troubles are increasing. Since he has agreed that he has no tools anymore. Probably he has put himself at risk of losing his Position. Another Possibility is Euro Zone mess can become scapegoat for all problems and his position may persist but in my opinion his position is at  risk for Sure !!

Tuesday, July 5, 2011

Question to RBI (Indian Central bank)

Since there is a right of Information act in India I hope I have full right to ask this question.

Currently India is fighting between 2 tough choices i.e. inflation vs growth. And everyone knows RBI  has given more weight to growth than inflation.

Now my question is, who gave this right to RBI i.e. to decide "for growth of some sectors of economy, everyone must pay more for food, cloths and in fact everything" ?? I think it's a huge decision taken on behalf of everyone without asking anyone............. 

India's Inflation and RBI's response is very symbolic as in Post Stimulus world, India is first country to have 16% Inflation in Feb - Mar 2010. And so far has failed 9 times to curb that inflation. ....

Sadly enough key decision makes are ready to ignore reality that "Nearly 80 percent of India lives less than dollar (50 Rs) a day and persistent inflation mean probably less food to eat than required". They still think that  saving "Realty" sector is more important than this Reality...

Tuesday, June 7, 2011

The 2nd Biggest Government Help ever?

No Government and politician intent to do bad for their country. In our "Modern Society" we expect help from Governments in anything and everything... and hence they do their best to please us and of course to remain popular. They talk very positive, take initiatives to help people. Here is the case study of one such "Big Initiative" from government that's not the biggest but perhaps 2nd biggest help ever.

Back in 2002, redefining American Dream, Then President George Bush declared an initiative that will help Americans become Homeowner. He bought Real Estate Industry, Mortgage Lender, Insurance Companies together and very openly encouraged home ownership.

1) He removed down payment "barrier" by "American dream down payment fund". 
2) Provided Tax Credit for single family home for 1st time buyer.
3) Simplified process that had complex "rules and regulations".
4) Made it feasible for people with poor credit rating to buy home.

He called it America's Home ownership challenge and Funded this help by hefty 440 Billion USD. In 2002 Goal was to make 5.5 Million People Homeowner. Here it is in his own words.

It was a great initiative it became key catalyst for Major economic boom form 2002 - 2007. Most importantly it helped driving home ownership as well. If you see in graph below, Home ownership grew by almost 1.5 % ~ 4.6 Million which was in direction to Target President had set i.e. 5.5 Million that too in matter of 2 years.

US Housing Graph Home ownership back at 1998 Level and continues...

Now, everyone know it didn't last long......... and how it became the "root cause" of 2008 Economic collapse, Lehman Brother, AIG episode, etc..etc....etc..........

Irony of the story however is despite creating "new 5.5 Million" Homeowners, this "help" resulted in "total 8.6 Million" people to lose make it worse 4 Million people had homes in 2002 before this speech and initiative. . 

On a different thought.. probably Government had a chance to increase home ownership by considerable percentage if they would have allowed real estate balloon to freely burst. It would have been an economic catastrophe however once it would have reached bottom, home prices would have reached so dirt cheap level that probably everyone would have been homeowner without much  debt at all. 

Anyways.. before closing I think let's speak about biggest help ever. While Bush's help started with 450 Billion USD in 2002. this started with 1 Trillion in 2008 and has already reached 2 Trillion (officially). Some argue that it's actually 9 Trillion. For common man like me both figures are beyond comprehension.  But it's definitely much higher than 2002 help. So let's see what results we get down the road of this "help". Let's hope it goes right this time; as that's what we will like to hope in 2011.

Monday, June 6, 2011

Significant economic events 2011

It was a simply crazy time since 2011 started. Huge workload at workplace and can clearly "feel" increase in business activity. Not sure if we all are getting same feel but at least I felt so. Lots of things were happening in parallel that could have been written about..... anyways just trying to write about key news and happenings that have "significance" long term impact..

Product of Past
In Jan 2011 visit Hu Jintao called current dollar based system as “Product of the Past”. This was a very significant statement. He even did not bothered to say it's today's system while fact is it is. USD is a very crucial factor to macroeconomic stability.

The Revolution.
In a very very significant series of events in Middle east, "Common Man" shown his strength in unthinkable series of events. We have been discussing about civil unrest, revolutions for a while in this blog. Although I anticipated this as aftermath of inflationary era in which we are now in; for some countries probably it was already enough to revolt against powers.

Towards Country net?
One of the key catalyst to middle east revolution was Internet, Social networking tools and Blogging. It was so crucial that at one stage in Egypt they actually closed Internet. As aftermath of all this I suspect more and more monitoring of internet and restrictions that may not keep internet as Open Society any more.

Japan in Distress
Japan's earthquake and followed nuclear disaster was another shock to world. We saw in front of our eyes how fragile life is..

Dr. Ben Bernanke thinking good Name for QE3 ?
Dr. Ben Bernanke Chairman of Fed is in bit trouble. So far Fed was able to pass QE1 QE2. In simple terms Money supply increase by 1.8 Trillion as can be seen on Graph Here Before Housing crisis Money Supply was ~800 Billion USD i.e. from (1913 - 2008) and it became ~ 2 Trillion post QE I and 2.6 post QE 3.

In 2002 Dr Bernanke Said.

"The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation."

Following his Philosophy he increased Money supply like this (Printing money and buying Houses, Student Loans, and what not). Now despite expanding money supply by this much %, Data is talking about Double Dip and QE2 is about to be completed in June 2011. So Dr. Bernanke (Who I think represent our generation )  must be thinking of finding good terminology for QE3.He will face more criticism for QE3 than QE 2, but when I read above statement I have no doubt he will do it. However it may be interesting to see what name he gives to this additional Money Printing.

In General I think year started well with very high economic activity. On Negative side there were revolutions, natural disasters, Now economy is cooling a bit (Although Revolutions are still on in Middle East)