Paper Money or Tissue Paper

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This article has been authored by CA Prashant Singh This article on Paper Money or Tissue Paper has been compiled by CA Prashant Singh.

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What if the currency you hold is just a colored paper with numbers? Does magical words of Jerry Maguire excites you? SHOW ME THE MOOOONEY!! SHOW ME THE MOOOONEY!! What the F* is this M word? For an economist it is an accepted form of money, includes coins and paper notes, which is issued by a government and circulated within an economy. For you it is a medium of exchange for goods and services, currency is the basis for trade. Under this definition, British pounds, U.S. dollars, and European euros are different types of currency, or currencies. It is stores of value subject to trading between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in the sense used by foreign exchange markets are defined by governments, and each type has limited boundaries of acceptance.

Wealth and Happ”y”ness

In pursuit of Happ”y”ness we accumulate wealth. In layman’s terms currency is the most desirable wealth. The value of currency is directly proportionate to its buying power or exchange acceptance for commodity. In popular terms wealth can be described as an abundance of items of economic value, or the state of controlling or possessing such items, usually in the form of money or (real estate and personal property having monetary value). An individual who is considered wealthy, affluent, or rich is someone who has accumulated substantial wealth relative to others in their society or reference group. Money money money always honey, it’s a rich man’s world. One morning you get newspaper and it says; Central Government stopped recognizing the current monetary system? NOW WHAT? Is it printed paper with numbers or money?

Era of Negative Wealth/ Consumerism – GFC

The modern economic wealth is directly proportionate to accumulation of currency and its buying power in international market. We can call it an era of self-destruction. Countries growth is directly proportionate of its power to consume natural resources. More and faster you consume higher GDP growth rate.

In hoard of becoming global powers; economies like United States of America has accumulated debt of 16 Trillion US dollar as compared to its annual GDP of 15 trillion (Goods and services produced together).  Eurozone countries following the same suite, has accumulated debt in multiple proportion to their GDP.

Greece, which in 2009 became the first euro country to suffer a loss of investor confidence over the state of its public finances, has the highest debt burden in the Eurozone of 160.5 per cent in Q2 2013. That’s up from the previous quarter’s 156.9 per cent.

The second highest debt-to-GDP ratio in the Eurozone is Italy’s 130.3 per cent. Though Italy has not needed a financial rescue like Greece, Ireland, Portugal, Spain and Cyprus, its government has pursued a raft of measures to make sure its investors are happy to keep on lending money so it can service its 2 trillion euros debt on its own.

Across the Eurozone, total debt stood at 8.75 trillion ($11.4 trillion) at the end of the first quarter 2013, up from 8.6 trillion the previous quarter and 8.34 trillion the year before.

It’s not just the euro countries that are suffering a debt overhang. Across what was then the 27-country EU, which includes non-euro countries such as Britain and Poland, the debt burden rose to 85.9 per cent at the end of the first quarter 2013 from 85.2 per cent the previous quarter. Total debt stood at 11.11 trillion euros.

Not only they have negative wealth, the debts are cross tangled. Italian borrowers owed French banks $366 billion (net). Should Italy be unable to finance itself, the French banking system and economy could come under significant pressure, which in turn would affect France’s creditors and so on. This is referred to as financial contagion. Italy, Greece, Ireland, Portugal, Spain, Cyprus, G Britain, Poland and other 20 European countries are in an unmanageable financial contagion.

Bail Out Packages –Printed Money

In desperation to cure GFC. US spent hundreds and billions of dollars since 2001 as Bial Out Packages to start another bubble; problem is they never actually cured the crises. They gave alcohol to the drunk. It does not sober him up. It sets him up for a bigger hangover, so at some point he can’t drink anymore; he reaches the end of his ability and you kill the patient. This is where GFC presently is “OVERDOSED”.

The Beginning 9/11 – 2001

ITS PARTY TIME Bail Out Bubble, its not only the United States, this is a global bubble they are all into it. Hey, the economy is going down recession is setting in sales don’t look good, exports soft, need more money? PRINT – How about we call it stimulus packages, from Australia to the United States, from Britain to China the respective governments is dumping funny money into the system to keep it going.

The money is spent on redoing roads, Airports, education, unemployment and other benefits. All spent on consumer spending and not to encourage build new industries to stimulate growth and build job. Hence once the stimulus alcohol is over the economy is back to its crisis position. This time with a larger debt on the government and people, the problem is now so big that government stimulus is not going to buy those five or six years of phony growth.

Here’s a look at the rescue progress:

United States Bail Out Package total 1 trillion USD— United States politicians the leader in rescue mission has now has spent close to 1 Trillion Dollars to stimulate the US economy. On October 3rd 2008, congress approves the biggest financial Bail Out in history $700 Billion US Dollars. Around the world Germany, Italy, Canada, South Korea, and Britain other politicians do the same. Billions of dollars were spent on countries refurbishment. On February 7th 2009 Obama approves a stimulus package worth $787 Billion Dollars, with the Bush Stimulus package a year before. Motto – “Spend and Consumer” = Economic Growth (Rise in GDP)

GREECE 272 billion euros — Greece has received two bailout packages from its Eurozone partners and the International Monetary Fund. Its problems began in late 2009, when the government admitted that public debt was far higher than official statistics showed. That led it to accept a bailout package of 110-billion euros. When it became clear that bailout was not enough — because the economy kept weakening — a second bailout was clinched in February 2012 for another 130-billion euros. That included a write-down on the value of Greek government bonds to lighten Athens’ debt burden. 21 Aug 2013 they are asking for 3rd bailout package from their creditors to keep it rolling.

IRELAND 67.5 billion euros — Ireland’s banks suffered from their exposure to the U.S. mortgage market meltdown as well as to a collapse in the local housing sector. The government stepped in to guarantee creditors and deposits, but the move cost it dearly. As it rescued its banks, the costs grew and soon the government’s borrowing rates on bond markets rose so high it was unable to finance itself independently. It secured a 67.5-billion euro package in November 2010.

PORTUGAL 78 billion euros — After Ireland’s rescue, investors turned their eyes to the next weakest country in the currency bloc. Portugal’s economy was weak and public finances shaky. The government’s borrowing rates in bond markets kept rising on fears it finances would prove unsustainable. By April 2011 talks on a bailout began. In May 2011, the country agreed to a package of 78-billion euros in rescue loans.

SPANISH BANKS 100 billion euros — Spain was considered the next weakest link, which fueled fear among European investors because the country’s economy is much larger than those of Greece, Ireland or Portugal. The main concern was that Spanish banks, which took huge losses on a collapsed real estate market, would force the Spanish government into rescue efforts it could not afford. The Spanish government agreed a deal in July 2012 with Eurozone officials to get up to 100-billion euros in rescue loans directly for the banks.

In order to keep the party rolling government of these countries were filling the punch bowl of central banks by miracle money.

Printing of Global US Dollar – Gold Standard

After the Second World War, a system similar to a Gold Standard and sometimes described as a “gold exchange standard” was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U.S. dollar. The U.S. promised to fix the price of gold at approximately $35 per ounce. Implicitly, then, all currencies pegged to the dollar also had a fixed value in terms of gold. Under the administration of the French President Charles de Gaulle up to 1970, France reduced its dollar reserves, trading them for gold from the U.S. government, thereby reducing U.S. economic influence abroad. This, along with the fiscal strain of federal expenditures for the Vietnam War and persistent balance of payments deficits, led President Richard Nixonto end the direct convertibility of the dollar to gold on August 15th 1971, resulting in the system’s breakdown (the “Nixon Shock“).

This means USA can print as much US dollar as they want without any base for Gold or irrelevant of its resources.

Up until recently, the United States enjoyed a strong world-wide demand for its government paper. By continuously being the consumption ground of this modern economy. Be it Overheating Chinese goods industry and Aust supplier of raw material to china or India service industry. Thus, the negative affects of government deficits have been subdued. Now, with consistently growing fear globally that U.S. deficits may have run out of control, foreign support for the U.S. bond market has faltered. In the absence of international buyers, the Fed could be forced to monetize an ever larger portions of the debt — the modern equivalent of printing money.

Printing trend is alarming. The largest annual contribution to the outstanding public debt during the Nixon years was $30.9 billion; Ford – $87.2 billion; Carter – $81.2 billion; Reagan – $302 billion; Bush(Sr.) – $432 billion; Clinton – $347 billion; GW Bush – $1,017 billion; Obama – $1,885 billion.

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The entire process is accompanied by a barrage of explanations, propaganda and new regulations which hide the true situation from the eyes of most people until they have lost all their savings. In World War I, Germany — like other governments — borrowed heavily to pay its war costs. This led to inflation, but not much more than in the U.S. during the same period. After the war there was a period of stability, but then the inflation resumed. By 1923, the wildest inflation in history was raging. Often prices doubled in a few hours. A wild stampede developed to buy goods and get rid of money. By late 1923 it took 200 billion marks buy a loaf of bread.

Why is Dollar in demand? – $ per Barrel oil

Since the agreements of 1971 and 1973, OPEC oil is exclusively quoted in US dollars. This created a permanent demand for dollars on the international exchange markets. As of 2005, OPEC continues to trade in US Dollars, but some OPEC members (such as Iran and Venezuela) have been pushing for a switch to the euro.

Since the beginning of 2003, Iran has required euro in payment of exports toward Asia and Europe, though prices are still expressed in US dollars. Iran is planning to open an International Oil Bourse(IOB, exchange), on the free trade zone on the island of Kish, for the express purpose of trading oil priced in other currencies, including euros. But Iran is almost wiped out of global map for vested reasons.

US have always used its military forces to control Middle Eastern countries. This has been to keep its monopoly on Oil pricing and keep US dollar in demand in global economy. Even though US is not the producer of Oil still it reaps the benefit of profits for per barrel sale. It needs oil industry to keep the strength of US Dollar as global currency.

What is Value of Money?

In absence of money pegged with some valuable object. Money on its own is just colored paper with numbers printed on them. They can be traded un till people have psychological worth attached to that colored paper and read numbers on them with something worth consumable. In absence of yellow gold or black gold (drivers of modern economy) pegged to US dollar “global currency” what is the worth of green bug?

Theory of Excess Printed Money

Imagine world with no natural resources left for human survival. What will be worth of printed color paper with printed numbers?

In horde of creating money to stimulate economic growth we have printed money worth many folds of available natural resources called excess money.

The various mode of convertible wealth to consume Natural resources includes not only printed colored paper but includes instruments which can be traded in known human world for buying ever exhausting natural resources.

List of alternative currencies

 

 

Calculate Excess Money

  1. Value of ever exhausting Natural Resources / Global Population till human extinction = Natural resources available per person
  2. Global progression printed money / Global progressive population = Printed money available per person for buying natural resources

B Minus A = Excess Money per person

Excess Money = Value of printed money + alternative money – Value of Global Natural resources available for consumption

How to Avoid Global Financial Crisis – Way Forward

Evaluate Available Natural Resources.

Peg Global Monetary System with Value of ever exhausting Available Natural Resources.

A Personal Finance enthusiast, Karan is the founder of charteredclub.com and loves to discuss about Money related matters.