Money ! that’s on everyone’s mind but very few of us actually understand how it works . how those on wall street engineer and manipulate it , why cant u just keep printing currencies and make everyone rich One may also ask that why I need to know all this when I am good with my transistors and programming . The fact is if something goes wrong with this what I call a Money matrix all innovations or scifi technologies mentioned in this magazine or else where will remain a dream ! let me show u in brief what this money matrix is and the present economic typhoon which is coming towards us .
Hers a fast recap . man first started with barter and as trade flourished moved on to currencies primarily Gold and silver , they call it precious metals (PM’s) . As time went we switched over to fiat currencies which were still tied to precious metals . institutions like reserve banks and the Federal reserve’ s (fed’s) were setup in order to look after the credit and monetary conditions and also influence banking activities . everything was going smoothly until we became more greedy and started playing this game with our rules .
One of the major factors that govern the money matrix are intrest rates . I learnt about their significance when I started with Forex market which is the is the largest financial market in the world . Interest rates control the flow of money in the economy. High interest rates curb inflation, but also slow down the economy. Low interest rates stimulate the economy, but could lead to inflation.
Country | Present Interest rate |
India | 8 % |
USA | 0.25 % |
UK | 0.5 % |
Japan | 0.1 % |
Low interest rates means Cheap credit and loans ! This makes borrowing money easier. When fed’s had reduced there interest rates to as low as 1 % , banks at wall street went crazy with LEVERAGE . Leverage means borrowing money to amplify outcome of a deal . let me show u how it works. Suppose u have 100 Rs and with that you can buy one share of a company . the next day you sell it for 110 Rs . You make 10 bucks ! now if u use leverage from your broker and ask him to give you 10,000 Rs ie x100 leverage. You would buy stocks worth Rs 10,000 i.e 100 shares and when u sell them for 110 Rs per share you get 11,000 Rs subtract 10,000 Rs which you borrowed , you are still left with whooping 1000 Rs much better than your initial 10 bucks ! Leverage turns good deals into great deals . Wall street made millions of such great deals using cheap credit .
But hers comes the ugly part .you like stories, don’t you ! meet uncle america . he has lot of bill’s to pay . Almost 4 trillion dollars every year and his income is around 2 trillion dollars. To meet this gap he does what most Americans do, he borrows money . when he takes a loan he calls it Bonds. Bonds can be held by investors , banks or even foreign governments. He promises to pay intrets on these bonds just as u do . Now something interesting happens when uncle America borrows money , it make his country look richer and other countries look poorer .when that happen 1 USD buys a lot of their money . now foreign countries can pay their labors only few pennies and with such cheap labor costs they can sell their products to Americans cheaper than any other American manufacturer . the only way for American manufacturers to compete is to move their factories to foreign countries and use cheap manpower . this means less jobs in their own country and gives rise to recession .
Remember the interests which he had to pay ! to pay his interests he borrows even more money And now that borrowing has reached a mind bobbling 14trillion dollars ! that’s a big amount . But he can do one thing to make money . its to just make it ! He gives a phone call to feds and money starts printing like magic and gets deposited in banks . But the more of something is ,the less its worth ! That’s why commodities like Gold, oil, food, metals become costlier when uncle America does his money making magic. That’s called Inflation!
Now this is where Uncle America is in catch 22 ! With Recession in place he cant increase taxes to increase his earnings nor he cant print more money without making inflation worst! Recession + Inflation, that’s called Stagflation.
For now all he can do is keep borrowing even more money . but the confidence of investors and bankers in him is going down. Recently he lost his AAA credit ratting and now running out of people to borrow money from. Sooner or latter a time will come when he can no longer pay his bills. That will be biggest economic crisis world has witneesed and no one knows what happens next . for now we can educate ourselves and prepare for what maybe extraordinary circumstances !
References :
Ø Book : A Beginner's Guide to the World Economy Randy Charles Epping
By - Mihir.P.Thakkar
TE – EXTC .
