Monetarism or house of cards

History shows fall of monetary systems due to one or the other crisis. First monetary system called the Gold Standard fell during World War I. Second monetary system called Bretton Wood fell about 38 years ago.

During World War I, UK suspended convertibility of its paper notes against gold to fund military operation during World War I. If they hadn’t, all of its gold reserves would have been depleted. However, after World War I UK hesitated to return to Gold Standard because it had lost most of its gold reserve.

After the fall of Gold Standard, a new system was formed and implemented. It was called Bretton Woods. It took all the advantages of Gold Standard and removed its disadvantages. It had inherent mechanism to tackle inflation-deflation problems and also to minimize boom-bust effect. The growth of other countries leads depletion in US’ gold reserve. This caused due to several reasons one of them being people were converting their dollar in gold to invest in emerging countries as they promised more profits. Second being US’ balance of trade was deteriorating. All in all dollar’s value was declining so was its influence. US suspended its dollar convertibility and thus the fall of the Bretton Wood system.

Current monetary system is very intricate. It consists of Gold, Dollar reserve, Debt tools, foreign exchange, equity, foreign direct investment, etc. This system however has huge flaw, this system is unable to avoid boom-bust cycle. The cycle is caused by creation of large amount of credit and liquidity. Consider a simple scenario, assume US has to pay India for some of its imports say $1 million. What US does is, it issues bonds of $1 mil. This helps in two ways, by issued bonds of $1mil US increases its liquidity in the market. Secondly, when India received those bonds, it issues $1mil in INR in Indian market. So US is in debt of $1mil dollar. Here by using debt instruments US and India both has increased their liquidity, this increase in liquidity promotes faster development of the country. But it has a flip side; increase in huge amount of liquidity causes rapid increase in inflation and boom-bust cycle. Increase in liquidity usually finds its way through banking systems to investments, properties, stock markets, etc. Prices of the equities, lands, house/flat increase rapidly until consumer is no longer able to afford it. This causes rapid deterioration equity and property prices, which in term causes reduction in liquidity. Government seeing this reduces interest rates to inject more funds but fails to do so as there are no good investment opportunities for consumer to lend and invest in. This situation can be very closely related to current situation in India. India had increased it foreign exchange reserves by 65% in 2007. Most of the countries in the world increase their dollar reserves by exporting more to US than importing from it.

Devaluation of currency makes goods cheaper to US consumer in comparison to same US manufactured products at same quality. This is the main reason why US corporations are relocating their industries to such countries where currency of that country is devalued against dollar. It can be explained very simply with an example. Suppose an item costs $10 to a consumer and its being manufactured for say $8. The profit is of $2. Assume that item is manufactured in India when the conversion rate is say 20 INR ($1 = 20 INR). It would cost 160 INR to manufacture. Now say INR is devalued to say $1 = 40INR, the item would still cost 160 INR to manufacture (assuming raw material is not imported). While exporting, manufacturer can export it to US at as low as $4. Even if he exports it at $6,he is still making more profit from it and destroying the competition in process. Now if India starts converting all its dollar reserve to INR, INR will appreciate reducing exporters profit. If it appreciates too much, they might be in loss too. So governments normally take measures to avoid their currency appreciation against dollar. They do this by investing dollar in dollar dominated assets in US. This in term increases dollar liquidity in US which causes inflation. The current mortgage bubble is caused by such huge liquidity in the banking system of US.

US’ debt is increasing at mindboggling rate. Many economists believe that dollar would lose its credibility and starts depreciating. This would put whole world into recession including US. US when it gets into recession, in an attempt to increase liquidity, will start reducing interest rates. But due to unavailability of any profit making investment, this increased cash flow stays in bank’s account and never reaches consumer.

It has been foretold by many economist that this condition would arise but their warnings were discarded by monetarist. Monetarists are the economists who believe that every economic condition can be handled by increasing or decreasing liquidity. But what happens when interest rate becomes zero. It cannot be decreased further as it can never be less than zero. Answer to that is government can buy and sell bonds to increase or decrease liquidity. This can cause rapid increase in inflation rate.

Few other solutions provided by many economists. One of them being gradual increase in minimum wages of the workers in export based countries like China, Mexico, etc so that US debt reduces gradually in addition to development of the particular country. Currently wages in these countries are about $4-$5 per day which is very less as compared to US workers. Secondly, countries should shift their export led development to something other domain. They can also try to introduce new monetary system. This step towards new monetary system has already begun. The new monetary system is currently called Bretton Woods II. In November 2008, during G20 summit this system was discussed. Few also believe that if world operates on single currency this can be completely avoided.

All in all current system is too volatile and dangerous. The effects of this system can be watched in current market situation. Current monetary system can be closely related to house of cards its base being US. Unless drastic steps to improve current system are taken this house of cards is bound to fall.

My new bike... i'll post its review after it completes its first 500Kms.

"F R U S T R A T I O N " of a SE

Recently I have been seeing and thinking why are software engineers so frustrated. I have seen people getting frustrated when they are on bench which is understandable. But the same people gets frustrated when they are assigned projects. They get frustrated when get into testing project because they wanted development project.
After getting into development project they get frustrated because development project requires them to work long hours. They get frustrated when they don't get promoted, also they get frustrated when are promoted because they have to handle managerial work along with normal work. They get frustrated when they don't get onsite opportunity, they also get frustrated when they get it. Because once he is onsite, he cannot take leaves, has to available most of the time in day, no home food, etc. I have seen some who visit their parents every weekend still crib that they don't get to go home because they don't have enough leaves. I have seen them even complaining that why don't company open its branch in their home town. They crib when they get 5% increment, they even crib when they get 13% increment. The list goes on and on and on.... They question is why. Why are they so frustrated? Why are they always cribbing and cursing?

What I found was very simple. They don't have any hobbies or extra activites to do. Most of the people just work their sorry asses in office and then return home. They will have dinner and sleep. At the most watch that stupid entertainment box call TV, which shows destruction of earth every other year, which shows alien invasion and they are stealing farmer's cow. They don't read, they don't watch good movies, they don't have interest in anything. They are frustrated because they are not content with themselves.

I am no big philosopher to answer all the questions but this seem so obvious. People who are frustrated with not getting development projects are most likely who are not good at it. This causes them double frustration as they are not getting what they want also they don't know to it if they get it. What I feel is every person should have some hobby. Let it be watching stupid saas-bahu serials, but they should have some. I personally have few hobbies. As relevant from my previous blog I am learning chess, I am also learning guitar. I also like to read novels. After coming home from office any two of these hobbies takes away my rest of the time and I sleep happily thinking I have done something productive or learnt something which I didn't know.

I certainly feel and believe that if these people get on with some hobbies their frustration levels will certainly decrease making their work place happier.

Learning to play chess.....

I am a big fan of Japanese Anime and mangas. Few months back I watched a anime called Naruto/Naruto Shippuden. One of the characters named Shikamaru caught my attention. He was show as a lazy bum but extremely intelligent. His intelligence was displayed by showing him playing shogi(a Japanese version of chess). I don't know why, but this character inspired me to learn chess. It was because i was lazy or as intelligent as he was shown. But just because I spend most of my day's time sitting around in a cubicle with computer in front of me( I am a software engg btw). Because of this reason mainly, I wanted to learn and play chess. So this was why I started playing chess.

Even though it may seem,after reading this that I am a very good player, well I am sorry to disappoint you, I am not. I am no where close to be decent player. This is why I want to write this so as to show myself and other my journey in chess. Shortly after getting inspired, I started playing chess online where I was brutally defeated and humiliating told that I cannot play chess and have to improve. This was when I started to search for e-books on chess or any kind of tutorial. I found ample of e-books but I was amazed that none of the books I found were remotely teaching how to play chess. They were just some strategies used by players when they advance in the game. Shortly after getting disappointed I found a game called ChessMaster Grandmaster edition. This was exactly what I needed. This game has everything what a beginner wants to learn in order to play a chess game. It teaches;

• The basic rules for each piece.
• The way to develop a piece.
• Using a team work of various pieces to attack opponent.
• The openings of the games.
• Has various levels of oppnents to train with so as to gain confidence.
• Saved games of various great players and grandmaster.

I started with from the basics, learning the basic rules. The rules from pawns to queens and concepts like forks and en-passant. As I can make out is that I am improving steadily. Few days back I was easily beaten by a player of rating 600 now I am giving hard time for players of rating 800 and above. I am still learning and improving.
I will keep posting my improvements and journey in the world of chess.