The US dollar and It's profilgacy

Greenbroke dollar



Jug Suraiya



Like Banquo’s ghost at the banquet, several unresolved questions haunted the G-20 summit in London which pledged to pump $1.1 trillion into the critically ailing global economy. Protectionism, particularly on the part of the developed countries against the developing world, was one of these question marks. Another was that of establishing equitable norms of transparency and accountability in banking practices. But perhaps the most significant question — made all the more significant in that it wasn’t even raised — concerned the US dollar: Is it time for the world to say goodbye to the American greenback,
which increasingly better answers to the description of greenbroke?
The G-20 meet has been called Bretton Woods II, in reference to the Bretton Woods conference of 1944 which, attended by 730 delegates from 44 countries, laid down ground rules for managing the world’s monetary system. The International Monetary Fund and the International Bank for Reconstruction and Development (now part of the World Bank) were set up then. Each of the signatory countries was obliged to ensure the stability of its country against gold, with the IMF stepping in if necessary to correct temporary glitches.
This gold standard came to an end in 1971 when the US unilaterally terminated dollar-gold convertibility. After considerable upheaval, the US dollar emerged as the ‘reserve currency’ of the world. This was the beginning of the dangerous myth of the Almighty Dollar, arbiter of the world’s fortunes, both the medium and the barometer of international trade and commerce. From oil to gold, coffee to coal, the global price of all commodities is quoted in dollars, making it the most sought after currency in the world.
Like a profligate living on increasing amounts of borrowed money, America learned to live off the fat of many lands, all of which sought its dollars in exchange for goods and services. Though living in deepening debt, the US could never run out of cash: all that its Federal Reserve Bank had to do was, in effect, print more dollars in the form of treasury bonds greedily bought up by foreign investors. The US got richer and richer, on other people’s money.
Though the euro has emerged as an international alternative to the dollar (a conspiracy theory suggested that one of the reasons the US attacked Iraq was because Saddam Hussein was planning to sell his country’s oil for euros instead of dollars) an estimated two-thirds of the world’s foreign exchange reserves
crisis which sparked the global meltdown showed the dangers of global overdependence on the prodigal dollar. But though both China and Russia had, prior to the G-20 meet, suggested a search for a replacement for the dollar as an international medium of exchange (one of the proposals being that the are held in dollars. China alone has almost $2 trillion in its national coffers.
The US subprime
Special Drawing Rights of the IMF be made into a ‘supercurrency’) the issue seems to have been sidelined at the conference. Earlier, ‘supercurrencies’ like the universal Terra or the Dey (dollar, euro, yen), created and supported by a supranational banking authority, have been proposed but have found few, if any, takers.
However, with Obama pouring over $1 trillion into buttressing the crumbling US economy and buying up the ‘toxic assets’ that have poisoned its banks and financial institutions perhaps it’s high time seriously to think of developing a substitute for a currency which, more and more, is beginning to resemble Monopoly money. Running out of cash? Not to worry; we’ll just print some more. And some sucker, somewhere, will buy it off us. Perhaps it’s time for the suckers of the world to unite and wake up.

Payback

time it takes for capital budgeting projects to recover their initial costs

IRR

internal rate of return

NPV

NPV must be positive for an investment decision

Financial Services

Session with Prof Arindam Bannerjee

The financial services sector comprises of Merchant Banks, NBFCs, regulators, Asset Management Companies, Investment Banks, Wealth Managers,
Insurance companies.

How do the banks make money?

Merchant Banking or consumer banking is about accepting deposits and issuing loans. Now the idea is to give lesser rate of interests on the deposits and charge a higher rate of interest on the loan and make money in "the spread of the interest". It's called,"the spread"

Mutual Fund Companies like Fidelity are called Asset Management Companies (AMCs). In US, they are called Asset Managers. Banks can be sponsors to the mutual fund operators but they cannot operate a mutual fund. Similarly, investment banks cannot operate mutual funds. Sponsoring can be for the initial investment and protection money.

Mutual funds could be sectoral funds, diversifies funds among myriad categories.

Other financial servicec are Systematic Investment Plans, electroically traded funds etc.

Sovereign papers like kisan vikas patra and NSCs are guaranteeed by the government.

There is a category called derivatives. These are products within products. A derivative would always be linked to some product, like equity. For example, a reliance derivative product would be linked to reliance equity, debt instrument.

Derivatives can be:

Futures: You agree to buy or sell at a pre-determined price at a future date which is generally 3 months.
Options: You have the option to exercise the choice. You have oil futures and not oil options.
Swaps: 2 banks are involved in raising funds for their clients in different geographies.

There are index funds representing the entire stock index on a BSE for example and there are sectoral indexes. For example, index representing the infrastructure stocks.

Shorting strategy refers to a contrarian outlook of the market based on business fundaentals. George Soros has followed this strategy to make a lot of money. Please find out who that guy is. They have a bearish outlook to the market if the market is bullish and otherwise depending on their analysis of the situation.

Investment decisions.

Why are you investing?

Now it depends on the purpose of your investment. For example, you may need 10 lacs 10 years down the line for your son's education. You want a product that will give you return without risk. You would not want to take risks here.

Do you understand whwere you are investing? I forgot to ask the third question, he said there are 3

Okay, what do the investment banks do?

Investment banks provide advisory, underwriting services in case of IPOs, advisory of HNWIs, get banks together to fund M&As, sell securitised products. There are no investment banks recongnised in India. RBI has not even given a definition.

Lehmann Brothers, Meryll Lynch feel because of the sub prime crisis. AIG is an insurance company and not allowed to invest in mortgaged securities but they did and landed in this rut.