Saturday, July 26, 2014

Rethinking Money-8

What is the value of excess unused cash that lies with you? You will either keep it as it is or you will invest it in some financial instruments depending upon how much you can wait for the  expected returns. In most of the cases, you will keep some amount with yourself for your regular or emergency needs and save the rest in some time-determined instruments with some returns. This means that time and cash-in-hand is a very serious factor when you decide the valuation of your future returns. What happens when you think that time is not ripe for longer duration investments? Everything now comes down to the shorter duration. That means that you will turn all your time deposits into demand deposits even if they are in banks. For you, short term is very important if your money is not in your hands. In direct contrast to it, for banks, long term is very important if the money is locked in bank reserves. Short-term is a very dangerous zone for a bank. The bank does not earn from demand deposits rather it earns only from time deposits. In short term, they only incur expenses and don't earn money. The way banks manage their call money rates for very short-term cash-needs, is a story which many people know that it is bank's nightmare many times. Let us assume that there comes a time when people are not sure of the long duration and they turn most of their deposits from time deposits into demand deposits. The moment it happens, the chain starts and runs and will keep running like anything. The bank would simply lose all cash very soon if people don't trust the nature of time. In electronic age, the transfer of wealth from time deposits to demand deposits and from demand deposits to immediate cash is very less rather almost negligible. That is what makes the value of paper currencies very unsustainable. What a government does with money, will determine the future of currency and if government keeps printing money and sustaining inflationary economy, the time factor can kill any monetary system in very short duration. That is what is possible in electronic age if currencies are not pegged with commodities like gold and silver or any other reliable commodity. The moment there is crisis, people will lose trust in the currency and there would be serious backlash in the electronically managed transactional network. The lesson obviously is that time for non-anchored money is gone and we need to get back to Bretton Woods era when dollar was pegged to gold at the rate of $35 to an ounce of gold. If US federal bank could not pay back money, it was liable to pay back in terms of gold. I know that is too difficult at present but think of the catastrophe we can witness once the currency starts collapsing in electronic age. The age of money-throwing welfare state is over.

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