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Old 10th November 2014, 11:40   #91
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Default Re: Understanding Economics

Welcome to 1929 again
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Old 14th January 2015, 13:49   #92
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Default Re: The Official Fuel Prices Thread

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Originally Posted by Samurai View Post
My 2 cents:

Your view limits to the 'medium of exchange' aspect of currency and ignores the 'store of wealth' aspect of currency. With the USD( or more relevantly 'Petrodollar'), the Nixon 1971 announcement also was an attempt to remove the 'store of wealth' aspect of USD. thereby, leaving the Fed responsibility only on maintaining the ' medium of exchange'( or liquidity aspect) impact of USD - which effectively means the US can print as many dollars as they will, till such time that the USD is the de-factor reserve currency for the world, no?

An academic point, really!
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Old 14th January 2015, 14:01   #93
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Default Re: The Official Fuel Prices Thread

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It won't devaluate dollar, because it hasn't yet done so.
I'm surprised by that statement, lurker. As the Americans would say, The (US) $ ain't nothing special! It's just another fiat currency, without any intrinsic value of its own. Being the (primary) global reserve currency and the currency in which oil transactions are done sure does give it a huge advantage over other fiat currencies in the world, and Uncle Sam does perform all kinds of tricks to ensure the dollar doesn't devaluate dangerously. Despite all this, the USD is not completely immune to devaluation because of all the money printing.

The real value of the USD has been on a continuous decline for over half a century. It was a stable currency when it was backed by gold and silver (i.e. the horizontal portions on the following chart). But ever since it became just another man-made fiat currency (without being backed by a true God-made currency such as gold, silver etc.), it has been on a continuous decline.

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Of course, the simultaneous decline of most other man-made currencies may present the illusion that the dollar is maintaining its value (the theory of relativity), but there is hardly any doubt that all the money printing by Uncle Sam does devaluate the USD.

I don't know if there is any fiat currency backed by gold or silver now. The Swiss franc may come the closest to being one.

Surprisingly and shockingly, the murderous mediŠval hordes terrorising certain parts of the Middle-East (& running their own de-facto country at the moment) are planning to introduce gold, silver and copper coins as currency.

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Just heard on Zee Business of the massive "Rs 1" cut being expected!

Prices have dropped by more than 50$ and in India prices have not even reduced by Rs15!

Surprising yet true!!!
I bet the powers that be are waiting for the end of the month price revision date to effect a proportionate cut in fuel prices, with an eye on the Delhi Assembly election.

Fuel price de-regulation is turning out to be a gigantic farce!

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Old 14th January 2015, 14:20   #94
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Default Re: The Official Fuel Prices Thread

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Originally Posted by jagan0677 View Post
My 2 cents:

Your view limits to the 'medium of exchange' aspect of currency and ignores the 'store of wealth' aspect of currency. With the USD( or more relevantly 'Petrodollar'), the Nixon 1971 announcement also was an attempt to remove the 'store of wealth' aspect of USD. thereby, leaving the Fed responsibility only on maintaining the ' medium of exchange'( or liquidity aspect) impact of USD - which effectively means the US can print as many dollars as they will, till such time that the USD is the de-factor reserve currency for the world, no?

An academic point, really!
What he is saying is how things ought to be, in theory. What I am saying is how things work out in real world. We all know there is a difference between how the world ought to be and how it turns out to be in real life.

With dollar as a reserve currency (which is kind of undemocratic because no one voted them in for reserve currency status). Nobody asked us if we would like to have the dollar as reserve currency. It was basically imposed on the world during the bretton-woods mela that happened towards the end of european war 1939-1945 but which they prefer to address as 'World War'.

In short what happened was that the victors of the world war, the anglo-saxons and their allies imposed a global monetary system on the rest of the world. The World Bank (formerly IBRD) and the IMF were created during this summit for supporting those nations with a trade deficit. And Bank of International Settlements which would act as a clearing house for international fund transfer between govt.

All fine and dandy and good on paper, but what really happened out of it. That is the difference between theory and reality. IMF was abused by USA to put countries in the debt trap. World Bank encouraged corruption and perpetual debtedness rather than development. And the dollar as reserve currency was abused to print currency beyond all limits and then fiddle with the price of oil and commodities speculation to prevent it's free fall. The dollar was used to perpetuate a certain global hegemony and a military industrial complex that was unparalleled yet and which was used to blackmail the world into compliance with USA policies and military expeditions.

Considering the amount of debt USA has mounted up, and the amount of money they owe to creditors, it should have gone down under long ago. But it hasn't, so that's the difference between theory and reality.

Last edited by lurker : 14th January 2015 at 14:22.
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Old 14th January 2015, 14:40   #95
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.........Considering the amount of debt USA has mounted up, and the amount of money they owe to creditors, it should have gone down under long ago. But it hasn't, so that's the difference between theory and reality.
A small debtor is at the system's mercy, a large one has the system at his. No prizes for guessing which bucket the US falls into.
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Old 14th January 2015, 16:52   #96
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It's just another fiat currency, without any intrinsic value of its own.

The real value of the USD has been on a continuous decline for over half a century. It was a stable currency when it was backed by gold and silver (i.e. the horizontal portions on the following chart).
To be honest the whole concept of currency being backed by gold/silver reserves itself is farce and fiat.

The only reason why we all feel gold is a good reserve is because no one can produce more at will. And thus the Govt has no play in the supply side economics of such a currency. However, the intrinsic value of gold is only because of universal desirability. Tomorrow if the desirability wanes, so will the value.

Till today since the supply side of gold has been limited, and the demand increases with population - it's value has gone up during the history of mankind. But of it's own - it has zilch usage value.

Removing the fiat from currency will make govt dependent on prevailing economic conditions, thus it will have not much power to turn the tides of cyclical recession that happens in alaissez-faire economy.

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Old 15th January 2015, 01:20   #97
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Default Re: Understanding Economics

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Your view limits to the 'medium of exchange' aspect of currency and ignores the 'store of wealth' aspect of currency.
In that post I was explaining by first principle how currencies work, and how it doesn't have to be backed by gold. Once that foundation is understood, one can build on that. Gold is controlled naturally due to limited availability. Once central banks are around underwriting every currency, the need for gold standard goes away.

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To be honest the whole concept of currency being backed by gold/silver reserves itself is farce and fiat.
Exactly. In the last US election when Ron Paul was ranting about gold standard repeatedly, I was wondering who was advising him.

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What he is saying is how things ought to be, in theory. What I am saying is how things work out in real world. We all know there is a difference between how the world ought to be and how it turns out to be in real life.
I know it is considered conventional wisdom to say theory is different from real world. What does it really mean?

Theory is the explanation to how things work in the real world. If you take any scientific theory, it was derived from observing how real world works. Nobody makes a theory and expect the world to work according to that. If the real world doesn't work according to the proposed theory, then that theory is wrong. Even theoretical physicists need to show mathematical proof if not physical, and even they are in the danger of being proven wrong if the real world turns out to be different.

Same goes for economics, the principles of economics are derived from observing how local/national/world economies work. Anybody who wants to understand how world economy works, first needs to study both micro economics and macro economics. Follow that up with study of finance. This gives you the proper tools to analyse any given economic situation.

Now coming to the alleged phenomena of theory is different from real world. Economics is not a physical law, rather it is a collection of observations and best practices of how goods and services are exchanged between people or nations. Which means people are free to deviate from the best practices to suit their goals. When they do that, there are pros and cons that can be easily deduced by knowing those observations and best practices.

If a seller is selling below cost, it doesn't mean he is disproving economic theory. It can just mean the seller is hoping to gain market share by absorbing the losses, or he is getting rid of inventory to make space for new goods. If your investment banker is selling you toxic assets rated AAA, they are not disproving any economic theory, it is just an example of principal-agent problem.

Ultimately, every economic situation, whether it is good or bad, after it happens once, gets added to the ever growing repository of economic theory. Real world does not stand apart from it.
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Old 15th January 2015, 15:44   #98
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Originally Posted by Samurai View Post
In that post I was explaining by first principle how currencies work, and how it doesn't have to be backed by gold. Once that foundation is understood, one can build on that. Gold is controlled naturally due to limited availability. Once central banks are around underwriting every currency, the need for gold standard goes away.
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, and how it doesn't have to be backed by gold.
And my contention is precisely on this aspect of currency. Currency by definition, form and function will need to fulfill both 'liquidity' and 'store of wealth'. Very shortly and crudely put - fiat/central bank/fractional reserve currency is strong on liquidity and gold is strong on 'store of wealth' - kind of explains why through centuries confidence has oscillated from back and forth.

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Once that foundation is understood, one can build on that.
To me, it appears that this premise has been taken for granted, without the needed supporting for the conclusion, in your post. An oversight which forces governments/central banks to go back to basics, every few decades. if you have made any points leading to the conclusion above, I am eager to see it.

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Once central banks are around underwriting every currency, the need for gold standard goes away.
In a lighter vein, last time I checked most countries are today underwriting their currencies - either directly by government or through a central bank. that being that - I wonder why would so many central banks have increased their gold reserves in the past couple of years. Quite counterproductive, would you not say? - going by your above statement. ( Of course, the exception of the US Fed could be brought up here - but thats a seperate discussion. ) And with each passing day, only the criticism grows around the 1999-2000 Brown's Bottom, not the appreciation, apparently, no?

I will have to admit, while I believe, personally, some of the events in this whole FRB / fiat currency story are quite complex to discuss across a couple of posts, at the same time, i believe its important to be clear on the basic concept. Hence, my this response. A good discussion.
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Old 15th January 2015, 16:45   #99
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What he is saying is how things ought to be, in theory. What I am saying is how things work out in real world. We all know there is a difference between how the world ought to be and how it turns out to be in real life.

With dollar as a reserve currency (which is kind of undemocratic because no one voted them in for reserve currency status). Nobody asked us if we would like to have the dollar as reserve currency. It was basically imposed on the world during the bretton-woods mela that happened towards the end of european war 1939-1945 but which they prefer to address as 'World War'.

In short what happened was that the victors of the world war, the anglo-saxons and their allies imposed a global monetary system on the rest of the world. The World Bank (formerly IBRD) and the IMF were created during this summit for supporting those nations with a trade deficit. And Bank of International Settlements which would act as a clearing house for international fund transfer between govt.

All fine and dandy and good on paper, but what really happened out of it. That is the difference between theory and reality. IMF was abused by USA to put countries in the debt trap. World Bank encouraged corruption and perpetual debtedness rather than development. And the dollar as reserve currency was abused to print currency beyond all limits and then fiddle with the price of oil and commodities speculation to prevent it's free fall. The dollar was used to perpetuate a certain global hegemony and a military industrial complex that was unparalleled yet and which was used to blackmail the world into compliance with USA policies and military expeditions.

Considering the amount of debt USA has mounted up, and the amount of money they owe to creditors, it should have gone down under long ago. But it hasn't, so that's the difference between theory and reality.
I will risk a counterpoint to your perspective here.
I do not fully buy the theory-different-from-reality point. At best this can be the explanation in very, marginal cases.
In this context, there are certain components of the theory that have been sidelined/suppressed/ignored/manipulated( call it what you will) - this is my view.

( For all those hard-core economists out there, in the interest of simplification below, quite possible I could have got a few of the points wrong. But I believe, all the points below together summarise very crudely the theory behind it, even if not exhaustively)
1. Largely, 'accounted-for' capital is fixed( kind of zero sum).
2. Loosely speaking, productivity(or technology) can increase the quantum of capital, or put in a different way, can improve the way it benefits way of life.
3. Money in fractional reserve banking can be created based on the underlying capital available. M1, M2...combined with SLR,CRR, reverse repo etc...
4. Capital seeks to invest in the entity that maximises return. The risk of failure, not achieving the return on investment or the return of investment could be termed as the cost of capital.
5. Typically businesses/people/countries that are able to take the capital and exploit productivity/technology to improve net quantum of capital or the way it benefits way of life - will attract best the capital that seeking returns.
6. It is also this cost of capital ( or in a sense, interest) which punishes those business that fail to effectively transform productivity( or technology) to capital addition.
7. In the above, the role played by productivity( technology) could also be played by other economic factors like land/resources, etc.
8. Coming back to the 'capital' perspective, from the above points one could see how productivity enhances capital. Hence the general linkage between asset prices and labour prices. ( Please pardon me for bringing in the term price into this summary - but just to illustrate this point)
8. How capital is used for transactions, both small-and-daily as well as large-and-infrequent, decides the form of currency. But it would be really difficult to delink currency from the available capital, methinks.( Over a short period, it could be made to appear delinked, but over a sustainable period, the two cannot be delinked is what I believe.)
9.In a lighter vein, from an accounting perspective, the 'balance sheet'(summary of capital) needs to tally and any inflows/outflows thereof, except from the 'profit and loss' statement(capital enhancements by way of productivity) will stand out. And the currency( to take this metaphor precariously forward ) like the stock price reflects the strength of 'balance sheet'.)

As I said earlier, I could have erred in some individual points, but in summary I believe this could be seen as the crude theory underlying macroeconomics. If I have got it wrong in summary, please help me learn by specifically pointing out.

now coming back to lurker's comment on theory-different-from-reality:
In the above, if you see that if you sideline / suppress certain factors - like the interest rates / asset prices, for example - Voila! you have a perpetual capital-pumping machine.( or I daresay a Bubble machine running around markets creating and bursting bubbles) Instead, if you analyse all the above factors, you will see the event that you are analysing/studying does validate the theory.

To repeat, for emphasis, reality is made to appear different from theory, by the interests that benefit thereby. Is what I would believe, rather.

Behavioral economics / Free-markets-vs-oligopoly etc can appear to distort the above theory - but I am guessing if you sufficiently account for them or discount them out, you should see the validity of the above outline. (Mine is an engineer's perspective, hence the LHS=RHS, hence QED approach.)

I hope my description above makes sense, for I have tried to keep it exceedingly brief.

Last edited by jagan0677 : 15th January 2015 at 16:47. Reason: to cut down on smileys!
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Old 15th January 2015, 19:12   #100
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I find all attempts to understand economics pointless once you understand the true purpose of economics, to explain to the man on the street why does oil rising lead to misery and oil falling also lead to misery. Why does a growing economy lead to misery, why does a falling economy lead to misery. Why does inflation lead to misery, why does deflation lead to misery.

Now of the statements and causes given make any sense or have any value. If I roll a loaded dice, and then try to explain by laws of fluid dynamics with dice model being a non loaded dice, will it make sense?

That's what economics is. you all are wrong. The dice is loaded, and you assume the standard 1/6 probability rises.
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Old 16th January 2015, 11:40   #101
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to explain to the man on the street why does oil rising lead to misery and oil falling also lead to misery.
Then it is wrong to use economics to try to explain why something lead to misery.

There is only one reason for everyone's misery: expectations far greater than results. No study of economics needed for this.

Economics can perhaps explain why the results are not as great as you expected them to be. But no one can explain why a miserable person (rich or poor) actually harbors such high expectations!
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Old 17th January 2015, 21:24   #102
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I find all attempts to understand economics pointless once you understand the true purpose of economics, to explain to the man on the street why does oil rising lead to misery and oil falling also lead to misery. Why does a growing economy lead to misery, why does a falling economy lead to misery. Why does inflation lead to misery, why does deflation lead to misery.

Now of the statements and causes given make any sense or have any value. If I roll a loaded dice, and then try to explain by laws of fluid dynamics with dice model being a non loaded dice, will it make sense?

That's what economics is. you all are wrong. The dice is loaded, and you assume the standard 1/6 probability rises.
The whole point of studying economics, or any other science or topic
- to expect how a not-loaded dice should act.
- to try and get a sense of identifying a loaded dice.
- to know what probability a not-loaded dice will have 1/6 or 1/4th or whatever...

Thats a bit like saying, since you cannot exactly attribute the cause and reasons for cancer, medical science is futile?
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Old 17th January 2015, 23:33   #103
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I find all attempts to understand economics pointless once you understand the true purpose of economics...
....That's what economics is. you all are wrong. The dice is loaded, and you assume the standard 1/6 probability rises.
I stand by what I said in post#30 and post#47.

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And my contention is precisely on this aspect of currency. Currency by definition, form and function will need to fulfill both 'liquidity' and 'store of wealth'.
This used to be static when gold standard existed. Now it is dynamic. Can't expect static liquidity/store-of-wealth with the current situation.

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To me, it appears that this premise has been taken for granted, without the needed supporting for the conclusion, in your post. An oversight which forces governments/central banks to go back to basics, every few decades. if you have made any points leading to the conclusion above, I am eager to see it.
Gold standard doesn't address the modern ways of wealth generation.

Let's consider a country with a million dollar worth of gold in their treasury. Going by gold standard, that means they can only print a million dollar worth of currency.

Now let's consider a company that is worth 10000 dollars going IPO. They have 10000 shares worth one dollar each. But they release only 10% or 1000 shares to the public. Say the company is doing very well and share price sky rockets due to huge demand. Let's say it goes from 1 dollar to 1000 dollars in matter of months. Keep in mind only the 1000 shares that are being traded, yet the entire 10000 shares are now worth 10 million dollars.

Now a foreign investor wants to buy 20% of the company by purchasing 2 million dollars worth of shares. But the country as a whole has only million dollar in cash. In other words, the country doesn't have the currency to transact business.

That is why these days currency printing is based on the wealth generation happening within in the country. Wealth generation can happen via stock market, by creating Intellectual property, or by providing products and services.
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Old 18th January 2015, 16:11   #104
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....

This used to be static when gold standard existed. Now it is dynamic. Can't expect static liquidity/store-of-wealth with the current situation.
....
What used to be static. What is dynamic. A kg of weight still measures the same, right? A km of length is still the same length, right? Any different here?

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...
Gold standard doesn't address the modern ways of wealth generation.

Let's consider a country with a million dollar worth of gold in their treasury. Going by gold standard, that means they can only print a million dollar worth of currency.

Now let's consider a company that is worth 10000 dollars going IPO. They have 10000 shares worth one dollar each. But they release only 10% or 1000 shares to the public. Say the company is doing very well and share price sky rockets due to huge demand. Let's say it goes from 1 dollar to 1000 dollars in matter of months. Keep in mind only the 1000 shares that are being traded, yet the entire 10000 shares are now worth 10 million dollars.

Now a foreign investor wants to buy 20% of the company by purchasing 2 million dollars worth of shares. But the country as a whole has only million dollar in cash. In other words, the country doesn't have the currency to transact business.....
Aren't you using the liquidity argument to invalidate the store-of-wealth argument, again?
The challenges in your example are addressed by fractional reserve banking. Somehow, it appears you think fractional reserve banking(liquidity) and a gold-standard(store of wealth) are exclusive.

I will try and explain with your example.

1. That country has a million dollars worth of gold, right?
2. Now, let's assume there is a central bank which manages the currency - their dollar.
3. The central bank, if it decides to adopt a fractional reserve banking and a gold-standard, needs to commit and adhere to a certain amount of fractional reserve for every dollar in circulation and simultaneously needs to continue to make good any claims that are made by anyone holding their dollar - (4) and (5) below simultaneously.
4. The fractional reserve part - The central bank, in an attempt to facilitate trade, can decide to issue additional dollars - to enable liquidity of currency for transactions. In such an attempt, a prudent central bank will stick to certain norms. For example SLR( statutory liquidity reserve) - to determine how many dollars can remain in circulation - that is, the central bank can take a call that it will hold reserves to the tune of, say, 8% of total dollars in circulation. Thereby, the central bank takes a stand that, it is sufficient to hold an actual gold reserve equivalent to 8% of the dollars in circulation - because it believes as an ongoing economy, practically all dollars will not be surrendered to the central bank in return for gold at the same time, and even if there is a run on the central bank, the time that that 8% buys will be sufficient to the central bank to restore public confidence and/or give the central bank opportunities to buy the needed additional gold from open market. Based on this level of SLR, the bank can decide various levels of money supply - M0, M1, M2,etc.
5. The gold-standard part - While doing (4) above, the central bank commits to delivering the committed equivalent amount of gold to anyone surrendering the dollars. Any change in the equivalent indicates that the central bank is adjusting its gold-standard - effectively strengthening or devaluing its currency, as the case maybe. If I am not wrong, we could also call this solvency? ( In a way, it is this implicit commitment of the central bank, that ensures underlying trust/confidence to every dollar note paper in circulation, no matter how much the amount in circulation. Without this underlying confidence, that dollar would be mere paper.)
6. In your example, the total amount of circulation dollars can increase in two ways - either the central bank has bought or got by way of deposits, additional amount of gold or the central bank decides to change the gold-dollar peg. As long as it does the former, the quantum of available dollars increases because of net increase in capital available in the economy. In case of the latter, the gold-dollar peg has been readjusted - in this case, a devaluation of the currency, since the same amount of dollars buys lesser gold, than prior to the re-adjustment/devaluation. ( Of course, there is the possibility that the central bank may want to create additional dollars without adding gold reserve to the tune of SLR and not readjusting the gold-dollar peg - but lets come to that in a moment, since therein is a violation of the central bank's stated twin commitments.)
7. Now, the part in your example about how the foreign investor gains access to needed dollars to buy 20% stake - Assuming the foreign investor has 0 dollars to start with - the most simplistic way to get dollars would be for that potential investor to sell equivalent amount of the gold-dollar peg( not the SLR!) to the central bank and buy needed dollars. In reality, the investor could go to any market where this dollar is traded and buy the needed amount by selling any asset the investor owns, as long as that asset and the dollar are traded in that market.
8. In the above, one point to be noted is, as long as the dollar and gold are traded actively and freely in markets, the buyers and sellers will facilitate the continuous and efficient price discovery of dollar and gold - based on the various information available - the central bank's commitment, indicators of the central bank balance sheet like SLR/total assets/liabilities, quantum of dollars in circulation, both available capital and the rate of change in capital in the total economy, etc.
9. One other point in your example, the fact that the value of your company's share price has increased multi-fold in few months. Assuming efficient markets, that is possible as long as that company is able to continuously produce, on a net of cost basis, some commodity/product/service that in quantities that priced to the dollar, is enabling addition of incremental capital.
Thereby attracting those dollars from circulation to the balance sheet of the company. Remember, in this example, as with all central banks in reality, no one but the central bank can create additional dollars. ( lets ignore counterfeit currency here.)

Which is why, I wonder at your choice of example, as this is a predominantly liquidity example and not a store of wealth example.

I do not understand what is this modern way of wealth generation. One would need to produce some commodity/product/service, which at the given supply and demand levels, commands a price, thereby revenue. This revenue, net of input operating cost, and net of cost of capital, leaves some residual capital which accrue to the balance sheet, thereby adding capital. When traded in efficient markets, the shares of this balance sheet undergo price discovery to determine market price of the equity. Unless you manipulate P/L statements or balance sheet entries or rig markets, this is pretty much it - as it has always been. I would rather believe markets and price discovery have evolved, rather than believe that this fundamental process of capital addition/wealth generation.

In a way, your line of argument is representative. The over-emphasis on liquidity aspect has, often, caused oversight of the store of wealth aspect of currency. And the problems that follow.

(If you are trying to lead me, in a discussion, to a point where I see for myself the flaws in my current understanding, I willingly follow.)


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...
That is why these days currency printing is based on the wealth generation happening within in the country. Wealth generation can happen via stock market, by creating Intellectual property, or by providing products and services.
Stock Markets enable liquidity, price discovery and transfer of capital, among other things - I would not call it wealth generation. The wealth is generated by the participants of those markets, on their respective balance sheets. Then, traded in those markets.
Intellectual property, if it leads to a revenue, can be considered along with revenue from other products and services. Otherwise, it is more a perception of value than real value - most accounting practices will discount, in the interest of good reporting. On the other hand, the cost incurred in gaining IP is usually accounted as cost - expense or investment, invariably.
Products and services - i have already considered above.

Just one additional point - In above, gold is just used as an example. In reality it can be anything that can hold its value over time. Historically, gold has performed that function well. Hence, it is easier in an example. Of course, pegging a fiat currency to another fiat currency will obviously be counter-productive as evident with the latest SNB move around the Euro-Swiss Franc peg.

Last edited by jagan0677 : 18th January 2015 at 16:20. Reason: Italics
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Old 18th January 2015, 18:23   #105
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Hi Guys,

Interesting discussion on currency going on here. If I may, I have a small question. I would like to give a brief background to my question. Recently there was a lot of headlines about Nigeria (a country in Africa) devaluing their currency. The currency of Nigeria is known as Naira (like how we have Indian Rupees for India. Now when someone asks you the value of INR, you will say it is 63 or 62 against the dollar. Similarly for Naira the rate was 162/163 against the dollar in the beginning of 2014.

Now what happened was oil prices started falling and Nigeria is an economy dependent on oil. Basically it means that Nigeria earns most of its revenue through sale of oil and when the price of oil declines, it means Nigeria will get lower revenues. Also the Central Bank of Nigeria has stated previously that one of their targets in to maintain the value of Naira in a particular range (say 155-160 for our example). So when the price of oil was in a free fall, investors started losing their confidence in the Naira currency and the value of Naira fell to 170-180 range. Now when the market rate of Naira was say 180, Central Bank came out with a statement that now they will be targeting to keep the Naira between 165-170 (from 155-160 earlier) . Post this announcement, we all started getting headlines that Nigeria has devalued its currency.

Now here is my question: The market rate of Naira was already at 180 (even before the official announcement from the Central Bank of Nigeria). It means that people had already lost some confidence and had already devalued Naira. So what is the point of the Central Bank officially coming out with a statement? Should we view the statement from the Central Bank to mean that “Ok, so we are in trouble. Get used to Naira being 180”. What is the point of giving a range of 165-170 when the market rate is already at 180?

Can someone please tell me what happens when a country devalues its currency? Also, what do we mean by a country devaluing its own currency? The market rate already reflects the devaluation so why the statement “Nigeria has devalued its currency”. It is not that Nigeria is doing it – it is just that market dynamics are such that the currency is trading in that range.

Last edited by Saanil : 18th January 2015 at 18:25.
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