[RSR]

Originally Posted by alpha1

To be honest the whole concept of currency being backed by gold/silver reserves itself is farce and fiat.

A gold or silver backed currency is partly a fiat currency, no doubt. A completely non-fiat currency would be something like the currency in Harry Potter's wizarding world - consisting solely of gold galleons, silver sickles and copper knuts!

But a farce? I don't know what to say or how to react to this.

If gold or silver backed currency is a farce, then what would one call currency backed by thin air? Funny money? Monopoly money? Such backed-by-nothing currencies have the potential to quickly become completely worthless, not worth the paper they are printed on! Just ask the poor Zimbabweans who were reduced to misery by that vicious tyrant called Robert Mugabe. Ironically, he turned every Zimbabwean citizen into a trillionaire or a quadrillionaire or a pentillionaire with his voodoo economics and funny money printing:





It's not just the Zimbabweans who went through this in recent times. Ask the poor ex-Yugoslavians who were completely ruined by typical commie economics. Thankfully, the ex-Yugoslavian people did get something positive out of that economic collapse - for it was soon followed by the well-deserved and long overdue collapse of commie Yugoslavia itself:





Ah! The virtues of funny, fake man-made monopoly money (as opposed to God-made precious metal or true money) can make one roll and roll with laughter.



And what happens when fake man-made funny money turns into something less useful than toilet paper? People immediately turn to the true God-made currencies such as gold, silver etc:

http://youtu.be/St8lGulMsns

[jagan0677]

Originally Posted by Saanil

Hi Guys,
....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.

I am not aware of the developments around Nigeria's currency, that you refer to. I quickly tried to refer to some news article. It appears there is quite a gap between the Naira-USD peg set by the central bank of Nigeria. the reason for the gap could be lack of efficient markets / blackmarketeering of Naira-USD,etc - someone with better understanding of Nigeria's economy would have insights. But the 'devaluation' refers to the fact that the central bank of Nigeria's official Naira-USD peg has been re-adjusted( I understand earlier it was arounf 153 Naira to 1 USD with a +/- 3% cushion. Post the announcement, I guess this is around 160 Naira to 1 USD with a +/- 5% cushion.) One way of looking at this is - prior to the announcement, it would have been theoretically possible to exchange Naira/USD's at the old rate., although practically more Naira's would have been needed to get a USD. And, post the announcement, theoretically it is possible to exchange Naira's for USD's at the latest rate set by central bank of Nigeria, but practically that may not happen for various reasons. This kind of a blackmarket for currency is usually prevalent during any instability /strife - internal or external/ loss of faith in the government of the day.

In a way, Nigeria's economy being heavily dependent on oil exports, this can be, in a way, seen as a side-effect of the imposed petro-dollar denominated trade in crude oil.

Originally Posted by Saanil

Hi Guys,
.......

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 citizens holding those devalued currency see a noticeable erosion in purchasing power, to put it lightly.You could refer to Weimar hyperinflation - 1920's / devaluation of INR during 1991 / the recent Zimbabwe hyperinflation for the details. Amongst others, I believe Argentina / Sweden also have gone through periods of noticeable devaluation in the past 2-3 decades. Although a slightly more complex situation, I believe Japan's currency since the mid-1980s also is a good case of currency devaluation( but in this case, I guess some years in between, there were 1-2 years of deflation - the opposite of inflation, which makes this example a bit more complicated. I could be a bit wrong here). Russia too has seen some devaluation relative to the USD last couple of months. I think the EUR too is seeing some devaluation with respect to the USD, markedly more since last week's SNB tsunami on the financial markets. Quite interestingly, the USD has seen some devaluation with respect to the Swiss franc since last week!

In reality, as long as a government is able to devalue its currency in a controlled fashion, it is not necessarily a bad thing for that country. If not controlled, it can very quickly spiral into hyperinflation, which can have relatively disastrous consequences.

On a lighter sense, in the case of a significant devaluation of a major currency, you could probably expect a 99%+ possibility of war!



( Hope that helped up clear more points, than it helped to further complicate!)

[RSR]

Loads and loads of articles have been written in the silly mainstream media (generally by fierce advocates of voodoo economics and massive monopoly money printing) about the recent removal of the Swiss franc (CHF) - Euro (EUR) currency peg by the Swiss National Bank (SNB) and the tremors it has caused in the financial world.

As expected, the funny money advocates in the mainstream media never explain the whole truth behind the SNB's action. It was all about the how the SNB would not be able to maintain the artificial peg in the face of upcoming Eurozone "Quantitative Easing" (read as even more monopoly money printing) and stuff like that. This is indeed true, but it's not quite complete.

What the mainstream media's monopoly money advocates always fail to mention is that the CHF is unlike other man-made currencies in the world. While not being a true gold backed currency, the CHF has got the reassuring presence of God-made yellow metal solidly behind it! This fact is never mentioned in the silly mainstream media.

This is because of the Swiss Federal Constitution firmly stating that the SNB's reserves must always have a specified gold component. Unlike other democracies in the world, Switzerland is perhaps the only country that has a truly participative democracy or direct democracy. So even if voodoo economists get elected to the Swiss parliament en masse, they cannot tinker with the constitution or even the country's laws as they please. Only the Swiss people can achieve that in a countrywide referendum. Switzerland is one fabulous little country backed by a superb constitution and truly people friendly laws!

This kind of solid economics "constraining" (ahem!) a country's central bank is always going to have an effect on that country's exchange rate. The SNB can try all it wants, but it would find it extremely difficult to maintain any artificial peg forever against a currency being churned out of the printing presses at an alarming rate. It's a surprise that the SNB was even able to maintain the CHF-EUR peg for this long. This is possibly because the European Central Bank (ECB), being in charge of a multinational currency, was restrained in its Euro-printing antics to a large extent.

This is not going to be the case going forward. The ECB is going to run its printing presses in turbo-charged mode in the near future in an attempt to bail out the weaker Eurozone economies like Greece etc. The wise folks at the SNB saw this coming (in fact, they were likely informed in advance by the ECB), got alarmed by the amount of monopoly money that is going to be pumped into Switzerland's largest trading partner (i.e. the EU's Eurozone) and were forced to do the inevitable - remove the artificial CHF-EUR peg.

Here is a comparison of per capita gold reserves and total assets of central banks around the world, courtesy BullionVault. It's a no contest here - the SNB has a staggering amount of gold reserves per capita when compared to even advanced economies that believe in the laughable "virtues" of man-made monopoly money over God-made true money:

As it is, the Swiss National Bank still has plenty of gold. Its 1,040 tonnes work out to a huge 129 grams for every man, woman and child in the country. That's a heavier gold-weighting than any other nation on earth according to our maths here at BullionVault today.

Worth fully $62,800 per head of population, the SNB's per capita assets, as our new chart shows, are more than 15 times what China's People Bank holds per head...eight times what the Eurozone central banks hold...and over 3 times more than even the Bank of Japan's QE-crazed balancesheet.

[drsingh]

All the discussion in this thread.

Isn't American dollar backed by the largest mercenary force on earth with 25 times larger defence budget than the number 2 impressive.?

They can enforce their will and protect dollar interests all over the world. Doesn't that count for something?

Switzerland probably maintains that much gold cause it can not/will not maintain an impressive force to counter America?

Gold bullion is the 'gold standard' but it does decentralise power. Modern Nation states will not allow this. Gold is also difficult to move around in the era of digital currency.

Gold has been an inflation hedge/ insurance /savings instrument for centuries in India. But even our government wants to bring everyone to give their money to banks instead of keeping it in gold, hence the 'Jan dhan yojana'

[Samurai]

Lots of interesting arguments, but I am unable to reply due to lack of time. Hopefully this weekend I should make some time.

[alpha1]

Originally Posted by RSR

A gold or silver backed currency is partly a fiat currency, no doubt. A completely non-fiat currency would be something like the currency in Harry Potter's wizarding world - consisting solely of gold galleons, silver sickles and copper knuts!

But a farce? I don't know what to say or how to react to this.

Well what is a currency?
A mutually/socially acceptable commodity which can also be used to measure the worth (of goods and effort), and thereby allow transfer also. So anything will do - there is nothing magical about gold. I can use the cowrie shells too for same purpose.

Incidentally the bank notes are nothing but IOU/promissory note issued by the bank.

My question is that let's say you have 1 IOU note, in your case the bank can give you some piece of gold in return. And perhaps you would feel secure by this knowledge. But even if the currency is not backed by any 'reserve of wealth' - the point is that no entity ever goes to the bank and ask for its pound of flesh. The currency whether fiat or whether backed always holds value because in modern times no one else in the country has a right to issue currency!

The issue that you have, which I also agree with is that when Central Bank issues currency, what is it issuing based on? If we take cowrie example, lets say Organization A has monopoly over mining and circulating cowries, then it can play around with the 'value' or worth attached to it. This Organization A in today's time is the Central Bank, and you are perhaps miffed by the fact that for the same 1 gram of gold, or same 1 kg of wheat, or same 1 ton of iron you have to exchange more rupees with each passing year. (The currency does not retain its value).

/*The only security you have with gold is the knowledge that there are limited reserves of gold which are nearly 100% mined till this date. So since the tonnes of gold will remain fixed, but the population will always increase, the goods exchanged will always increase and the services employed will always increase, the value of gold will increase with respect to goods and services in circulation. Oh but this exactly what will cause deflation in the long term leading to recession
*/

BUT then that is the exact design! That is exactly what the Govt want to do for socio-economic benefits. It always wants to devalue its currency with passing time so that:
1. it can finance its jobs today
2. it can fuel development and growth because the people will no longer brood and sit over the buried currency in their backyards (incidentally this brood/hatch is what is happening in the real estate market today - because it is becoming increasingly overvalued)
3. it can turn the tide of recession and unemployment by creating increased demand against the excess supply side

[Samurai]

Iceland threw their tainted bankers into prison and didn't bother bailing out their banks.

This is the result: http://theantimedia.org/iceland-reco...iling-bankers/

[alpha1]

Originally Posted by Samurai

Iceland threw their tainted bankers into prison and didn't bother bailing out their banks.

This is the result: http://theantimedia.org/iceland-reco...iling-bankers/

Well you know some folks believe (perhaps I included), booms and busts are natural way of achieving long term equilibrium. In fact there may never be a point when you freeze the frame and say "hey everything is in static equilibrium!".

What fails in a bust/crash is deadwood and needs to be eliminated. Govt funding programs try to save those affected by the downturn but they are basically saving the unfit.

However, the counter point is that in today's financial system, everyone is so tightly intertwined that you can never know that if a large enough bank fails - how many others get pulled along. And all along in the chain, there may be people who never had the knowledge and the decision power to discriminate and thus it would be unfair if they also become a part of this deadwood.


Perhaps I would choose to sit on the fence for now ...

[Samurai]

Originally Posted by alpha1

Well you know some folks believe (perhaps I included), booms and busts are natural way of achieving long term equilibrium. In fact there may never be a point when you freeze the frame and say "hey everything is in static equilibrium!".

This argument was answered long back by Elizabeth Warren long back...

https://www.youtube.com/watch?v=M6rnsLNvXzM

[Samurai]

And here is why scams will continue to happen in the US financial market. The regulators are not interested in regulating, instead they are in bed with the banks.

In the following video Senator Elizabeth Warren very clearly lays out a regulation which the Federal Reserve needs to enforce. When the Fed chairwoman repeats it, she completely obfuscate the regulation beyond belief. Enforcing becomes mere feedback...

It has to be seen to be believed...

https://www.youtube.com/watch?v=XYtSMLgaW6U

[ramzsys]

The Wholesale inflation is negative(WPI, -2.xx%).
The Consumer inflation is positive(CPI, 5%).

Does this mean our retailers are greedy?

[alpha1]

@Samurai, cant check the vids now, will have to check them from home/weekend :(
Anyway, I couldn't wait so I opened up some articles and perhaps transcripts (and let me play the devil's advocate):

But what about the families who lost their homes or their jobs or their retirement savings the last time Citi bet big on derivatives and lost? What about the families who are living paycheck to paycheck and saw their tax dollars go to bail Citi out just six years ago?

Even if we were to break up large banks into smaller ones, how would the breaking up prevent the now smaller banks (say Citi1, Citi2,Citi3, Citi4 etc) to bet on derivatives?

It is not that only large banks were betting on the Subprime CDOs (when they got bust last decade). In fact what might happen with the small banks going bankrupt is that the Fed or the Govt may not provide any help. That means all the folks who parked their money with such a small bank stand to lose. And all the folks working in those banks also stand to lose. And so do people who live off these folk's money - like the gardener, the tailor, the barber, the restaurant, the IT companies (and their employees) etc.

Not a very different scenario compared to letting the large banks be insolvent, and not bail them out. As I had mentioned earlier, we faced a problem that: should we cast aside the deadwood which includes "innocent taxpayers and pensioners" in various countries (not just US), or should we salvage the devil (large banks) so that these innocent folks don't lose their money.

The only thing different by breaking them down will be cutting down their political powers.

Originally Posted by ramzsys

The Wholesale inflation is negative(WPI, -2.xx%).
The Consumer inflation is positive(CPI, 5%).

Does this mean our retailers are greedy?

No, it means our public has growing income far beyond expectations and this is driving the retail prices of most commodities up.

Let us, for a moment, believe in your hypothesis. If you (as a non retailer) see this, won't you want to jump into this lucrative business where you can manifest your greed and rake in banknotes?

Only those people who are in govt protected monopoly (via IP laws, Govt regulations, minimum qualification criteria, etc) can ever think of achieving their greedy goals. Or perhaps socially protected, based on customs and unwritten word, if not govt protected.

[Samurai]

Originally Posted by alpha1

Anyway, I couldn't wait so I opened up some articles and perhaps transcripts (and let me play the devil's advocate):
Even if we were to break up large banks into smaller ones, how would the breaking up prevent the now smaller banks (say Citi1, Citi2,Citi3, Citi4 etc) to bet on derivatives?

Oh, you are going off the tangent. She wants to bring Glass-Steagall Act back, which doesn't allow savings banks to speculate using customers money. When she says breakup, she wants separation of investment banks from savings banks.

I lived in US when there were 100s of small banks in any state. Every street had a different bank, lots of competition, services were good, Glass-Steagall Act was in effect, and nobody had to fear their pension vanishing. FDIC insurance meant something.

[alpha1]

Originally Posted by Samurai

Oh, you are going off the tangent. She wants to bring Glass-Steagall Act back, which doesn't allow savings banks to speculate using customers money. When she says breakup, she wants separation of investment banks from savings banks.

I lived in US when there were 100s of small banks in any state. Every street had a different bank, lots of competition, services were good, Glass-Steagall Act was in effect, and nobody had to fear their pension vanishing. FDIC insurance meant something.

Hmmm, the Glass Steagall act separated commercial banking from investment.
{Based on Wikipedia}
prevented commercial Federal Reserve member banks from:

• dealing in non-governmental securities for customers
• investing in non-investment grade securities for themselves
• underwriting or distributing non-governmental securities
• affiliating (or sharing employees) with companies involved in such activities

How would you label loans under this scheme?

Tomorrow people may start asking for a similar regulation that spells out exactly where all a commercial bank can lend money (eg no loan to homes in XYZ area, or to ABC people, or to xxx industry because they are risky? - but then that due diligence the bank anyway does on its own and accordingly approve the loan and associated interest rates based on the risks).
{Still playing devil's advocate}

But I do agree that having more number of banks does increase competition and may lead to a better service for the customers.

[Samurai]

Originally Posted by alpha1

How would you label loans under this scheme?

Tomorrow people may start asking for a similar regulation that spells out exactly where all a commercial bank can lend money (eg no loan to homes in XYZ area, or to ABC people, or to xxx industry because they are risky?

No, this is what commercial banks supposed to do. It is their USP. My dad was a bank manager, and lots of my relatives worked or still work for nationalized banks. I have often discussed the US financial scam with them. When I explained the 2008 scam to my 82 year old dad, he was flabbergasted. My dad has given 1000s of loans in his career and he says loans given after his own risk evaluation rarely went NPA or defaulted. But he bitterly remembers the notorious "loan mela"s of the 80s, where he was asked to give loans for 100s of people with no risk evaluation at all. The union minister who launched the scheme used to tell the people not to bother returning loans.

That aside, he says commercial bank officers generally have a good record in loan recovery unless it was approved via influence from higher bosses or politicians. It is much safer to give loans to individuals after thorough risk evaluation. Unlike now they didn't even have CIBIL scores. There is no chance of whole bunch of separate individuals defaulting, not after separate risk evaluation. This is sooooo different from a toxic sub-prime derivative wrongly rated AAA by S&P. That is truly clueless lending, here banks are blinded by so many layers hiding the real character of the risk.