Last month, I bought this book from Popular bookstore because I wanted to use up my cash vouchers. At first, it was its striking gold-coloured title which had caught my attention, but soon after I flipped through the first few pages, I was immediately drawn into it and finished the book in just 2 days!
It was quite a technical book, thus I’m not able to share much of its contents in brevity. But here are some of the important concepts that I had learned in the first few pages of this book:
Gresham’s Law of Money
Gresham’s Law defines good money as money that has little difference between its face value (the value nominated on the money) and its commodity value (the value of materials on which money is being made). On the other hand, bad money is money that has a commodity value with a considerably lower value than its face value.
When both good money and bad money co-exist in the market, good money which includes gold and silver is hoarded and goes into hiding, while bad money such as paper money swells in circulation. Thus, bad money usually drives good money out of circulation as people hoard good money and prefer to conduct trade using bad money.
The 8 Symptoms of Bad Money Economics
Symptom #1 – Exploding US monetary Supply
In the past, we could refer to the Federal Reserve’s M3 report to know the volume of US Dollars in circulation throughout the world. However, on March 23, 2006, the Federal Reserve decided to stop publishing the M3 report (you may be guessing why). From 1990 to 2006, the total amount of USD in circulation had risen from US$ 4,091.7 billion to US$ 10,276.1 billion. After the recent years’ series of QEs, it scares me so much to even guess how much USD is in circulation.
Symptom #2 – US Current Account Balance
From 1982 to 2010, the United States had recorded a cumulative US$ 8.2 trillion in the red in its current account balance. It is currently the world’s largest consumer.
Symptom #3 – US Budget Deficit
With out-of-control monetary supply, the US government incurred a cumulative US$ 7.74 trillion in budget deficits from 1971 to 2010. From its projection in 2011, the estimated deficit to be incurred from 2011 to 2016 is US$ 5.41 trillion (equivalent to a whopping 70% of the total budget deficits incurred in a 30-year period!).
Symptom #4 – US Public Debt
By 2005, the US government had increased its public debt to US$ 8.2 trillion, an increase of 15.6 times compared to the 1974 figure. It was reported in December 2011 that this figure had again risen to US$ 15.2 trillion.
Symptom #5 – Rapidly Increasing Commodity Prices
Millions of people throughout the world today felt the pinch of ever-rising prices of good, better known as inflation. The prices of gold, silver and oil have skyrocketed since 1971, the year the USD became a fiat currency.
Symptom #6 – Declining Interest Rates
The Fed cut rates to only 1% in 2003. With low rates, America went into shopping spree for property. And when the Fed revised interest rates from 1% to 5.25% in 2006, the economy went into a sub-prime crisis. To salvage the economy, the Fed made its final move to slash rates to only 0.25% in 2008, thus further weakening the USD.
Symptom #7 – Increasing Corporate and Government Bailouts
American International Group (AIG) bailout = US$ 85B
Lehmann Brothers = bankruptcy
US Troubled Asset Relief Program (TARP) = US$ 700B
Symptom #8 – Declining Value of the USD
The US Dollar Index has dropped from 109.28 points in 2000 to 81.39 points in 2011, down by 26%.
In Malaysia, a weaker Dollar means that our products are becoming more expensive for our customers, making our nation a more expensive place to invest in as cost of living and cost of running businesses go up, thus reducing investment capital from overseas.
As Malaysia’s economy is hugely dependent on foreign investments, we had to increase our money supply to weaken our Ringgit. In 2003, we had RM 553 billion in circulation. In July 2011, the volume of Ringgit had grown to RM 1.15 trillion. This means we had inflated our monetary supply by a compounding of 10.3% in the past 7.5 years.
After reading this book, I began to have a better understanding of what’s happening in our local economy. The bottom line is – INFLATION is here to stay for many more years to come (and probably forever until the whole currency market collapse). We definitely need to first find a whole new vehicle or a better strategy to hedge against inflation, before we could even think about prospering.
And if you still think that saving money is a good strategy for your future and retirement, you’re clearly in for a huge disappointment. Please…read more financial books!
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