The Concept of Global Currency

I have always been intrigued by the concept of a super-currency. What if we use a single currency – say, a piece of paper, called Worldollar or Worlduro or Worldupee. My terms are eccentric, but the idea is not.

When I was a child, I used to ask this question: why can’t our nation print rupee notes in plenty if we need the money so badly? Not only I but many would have asked this innocent, even if daft, question. Upon thinking, it is not hard to guess why this is not feasible. The total combined physical wealth of the world is constant, and our currencies are mere indicators of that wealth. We could have easily measured that wealth in rice, wheat, iron, coal, oil, colleges, institutes, houses, hospitals etc of a nation. But needless to say, a currency is the simplest index of that.

But what about the relation between the currencies of two nations? How much should an Indian rupee measure against the US Dollar? Both are evaluating the physical wealth of their respective nations. But the catch point is they are using different yardsticks and also different lengths of the yardsticks to measure that wealth. A common denominator had to be found. And the economists found this common base in Gold. The yellow metal’s reference was famously called ‘the Gold Standard’ and simply meant that the country’s currency could be converted into Gold at a fixed exchange rate. Thus, the exchange rate between two currencies could be determined by the difference in their rates to an ounce of gold. Widely operated between 1875 and 1913, this system was the first formal step towards fixing the exchange rate. Apart from providing a simple fixed conversion scenario, it also guarded against inflation as nations printed their currencies vis-à-vis their gold reserves. But the concept was not without flaws. Even a small shift in gold reserves, like discovery of new gold mines, frantic sell of gold, could send the whole exchange topsy turvy. It was especially felt during the 2nd World War when there was a massive spending of gold by the Allied Powers.

To reconstruct the economic world in the aftermath of World War II, the big minds sat in the now-famous Bretton Woods Conference in 1944. Amongst other things, they decided to fix the exchange rate of a currency to gold via the US Dollar. Thus, a new player, the US Dollar, was introduced and its conversion was fixed at $35/ounce. A national currency had to exchange with US Dollars which in turn was linked to Gold. In effect, the exchange rates were still linked to Gold. But it took a massive toll on US Dollars. Some countries, France in particular, started buying Gold from the US keeping its dollar reserves minimal. This led to a severe depletion of gold, notoriously called the ‘flight of gold’ in the US. Already under strain from the Vietnam War, President Richard Nixon decided to abrogate this system once and for all in 1971.

This led way to the ‘fiat currency’ or ‘free-floating currency’ where the currency is not linked to any physical commodity but the gauged value of the goods and services. While this system provides more flexibility to adapt to the current market situations, it also provides a basket case for illogical and manipulated rates. No wonders the market rates have seen so big fluctuations, leading to inflation, deflation, recession, economic crises, not experienced so frequently earlier.

That leads us to the question of a Universal Currency. Why can’t we then have a single currency to get around all this nonsense? It is easier thought than implemented. Each nation has its own sets of goods and services, and hence defined policies and guidelines aligned to its interests. No two countries can accept to use a single currency unless they both see their interests being served. See how long Euro has taken to be adopted. It unilaterally favoured the richer nations of EU at the expense of the newer joinees.

The closest we have managed to get as a super world-currency is the SDR (Special Drawing Right), conceived by International Monetary Fund (IMF) in 1969 and operating it since then. Not an actually practiced currency, SDR is a proportionate representation of the four major currencies : USD, Euro, Yen and GBP in the world. Each country has its quota of SDRs in the IMF fund, and these SDRs can be freely converted into usable currencies of the respective nations. Not surprisingly the richer founder nations gave themselves bigger quotas, and hence so much hype and hoopla made by the new economic giants, China and India, now to redress the balance in their favour.

It is not tough to see why this exchange between currencies will always remain a source of immense speculation and conflict. Every monetary system has/had its loopholes, and no individual or nation has left a chance to exploit that. Thus, the concept of a single currency, where the consensus of economic policies and intentions is monumental, will remain a chimera, at least in the near future where the times are even more uncertain.

Financial Statements

Financial Statements are records that outline the financial activities of a business, an individual or any other entity. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include: income statements, balance sheet, statements of retained earnings and cash flows, as well as other possible statements.

The three major Financial Statements are:-

Balance Sheet:-

A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

The balance sheet must follow the following formula:

Assets = Liabilities + Shareholders' Equity

Each of the three segments of the balance sheet will have many accounts within it that document the value of each. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates for the differences between different types of businesses.

Income Statement:-

A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.

Also known as the "profit and loss statement" or "statement of revenue and expense".

Cash Flow Statement:-

A cash flow statement or statement of cash flows shows how changes in balance sheet and income accounts affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills.

The Budget of People

There can never be a consensus on any issue; the Budget ’09 only emphasizes this point. Though I am not a Financial Expert, I am quite happy with the budget laid out by the Finance Minister, Mr Pranab Mukherjee. It is breathtaking, I would actually say.

For the first time in many recent years, it has actually tried to address the base issues, ie rural and infrastructure development, incorporating inclusive growth. Let the clamour about disinvestment of PSUs, increment of private share in various sectors, cheap credit availability to industries etc not befool us. These can’t be the spring boards for sustainable growth. We can’t have our industries, services viz IT, banking, insurance etc, grow without a concomitant growth in other sectors and areas: agriculture, rural infrastructure, education, health etc. These are mainly societal sectors, and hence tend to be neglected by the richer echelons, in order to generate quick moolah. But kudos to the government for coming to their rescue.

Just imagine if our rural sector has enough capital and spending power for Reliance Retails to be opened there; if the educational level reaches every nook and cranny for the Private Institutes to be lined up; if the Hospitals and Pharmacies make a beeline for the vast rural space. There is a whole lot market to be utilized, completely separate and in fact, dependable as opposed to the exotic foreign markets. But for that to happen, the rural sector will have to be uplifted. National Rural Employment Guarantee Scheme(NREGS), Food Security Act, Antodaya Gram Yogana, Bharat Nirman etc are not some sort of panacea, but they do aim to bridge the divide, provided they are carried out with sincerity and honesty. Let the economics percolate to every sector, and the capital will be generated. Let’s not fret over the 6.8% fiscal deficit bar set for this year.

It is not that the Budget didn’t look into the corporate sector. The unpopular Fringe Benefit Tax (FBT) is a goner. Corporate Tax is unaltered. Surcharge on Income Tax has been lifted. Basically, the Services and Industries have been asked to continue in the same ethos they have exhibited before. Now is the time for their neglected brethren to grow to their level.

I am sure in the next budgets, this so-called profligacy of money will be checked, and we can really see some money coming out of these investments. I would like to see some more schemes coming in Education, Health, Environment sectors too. That would be a perfect launch pad for the development of a just and healthy economy.

Brouhaha over AIG Bonus

Everybody is crying hoarse over the payment of $180 million as annual bonus to the AIG employees. On first reading, every aggrieved mind in this recession would. Why should the sinners be awarded?

This ‘should’ is such a big question that it can’t be answered on a single logic. I too would say that the bonus should not have been given, more as a crisis time response than as a contractual obligation. The big financial people out there are not aloof from this world, and they know the impacts of this recession. They also know that most of this is the output of their incompetent work. So, shouldn’t have they as a goodwill gesture or anything like that, refused to take it? I am talking philosophy here, and it is not what market and capitalism were/are built on. “Make money when there is blood on the street”- the saying still rules the roost.

But it becomes hyperbolical when we start faulting each and every Wall Street Financial Institutes employee for the collective mistake done. I or you too could have been one of them, and not conscientious enough to refuse these perks. The problem lies with the top officials who decided to distribute this money, knowing fully in advance that they are receiving a lot of money (famously called tax-payers money) from the government. Their argument that the bright employees will leave the company for greener pastures doesn’t seem totally convincing in this acute time of job-slinging. The fault also lies with the US Treasure Secretary Tim Geithner for not ensuring this before or after doling out the money.

In fact, the fault lies with many people. I am in full nod with this article ‘Let’s penalize all Culprits‘ by Swaminathan Aiyar. Again it is more subjective than objective, but as said above, the question ‘should’ can’t be looked through a single perspective only.

Greed and Fear - The Market Story

Market is human after all, for it won’t be market then. We might have devised quantitative and qualitative techniques to gauge, measure and predict it. But it still beats us, and it dupes us because it follows the two ever-insidious human traits: greed and fear.

Consider the market as a hill. On one side, we all are standing, looking up the ascent and wondering about its top. We all are looking at opportunities to scale the tortuous and steep path. But it takes an unfortunate incident, like 9/11, to create those opportunities by forcing the governments to act. In order to boost the sagging market in the aftermath of the incident, the government dishes out low interest rate, easy capital, higher leverage etc on everything. Every one of us joins the bandwagon. Financial institutions start doling out risky loans even to subprime candidates. To gain further, they amass liquidity by securitizing their assets. They start indulging in principal trading, putting their own money on risk. Investors on their part partake everything offered to them. New houses are bought; new stocks and bonds are secured; new investments in the fastest profit-yielding sectors are made. Prices rise, but who cares? Everyone is making money; everyone is ascending the hill to rise as high as he can. The prehensile tail of everyone has grown. Somehow one person, out of fatigue or boredom or may be anything, decides to rest, and looks back at the level field at the bottom. He starts wondering, “Is it worth it?” Some others join him, while the rest continue on their ascent. But the seed of fear is sown. Some start descending. The overproduced goods have now started producing lack of demand. Spending reduces. People start pulling out money from the market, and securing it instead for future bleak period. There is excess in every sector, but refusal to buy from the same-gracious customers. To keep themselves even, the companies start controlling their payroll, laying off people and plugging their dispensable expenses. Unemployment ensues; incomes drop; bank defaults happen. Bad debts are created in those very ambitious financial firms, and ultimately grow so big to force the firms to go bust. Every sector is affected, even if not directly or indirectly, then by the psychosis of fear. Everyone starts running down the same hill, he had once hankered to top. There is chaos; and we call this economic crisis.

Lovely story! And it has been repeated every now and then over the last century. But as said above, we all, including the market, are humans. As soon as we descend down the hill, we will be looking out for another hill and another set of opportunities. Again the same journey will take place, and there will be another writer retelling the same story.