Friday, March 20, 2009

An invisible tax...Cash is crap!

With the yet again recent move by the US Feds to increase the money supply by buying up mortgage backed securities..we vomited when we heard that news. The US is in a big mess...it seems they are operating in an environment where every action they take is a struggle between politics and pure economics logic. Don't get us wrong...we think what the Feds are doing are logical from a public administration standpoint, but it is disastrous from an economics point. Anyway, SGDividends is ultra bearish on the US dollar and thats our personal opinion. It just makes perfect sense.

In layman speak, the above chart is basically showing how fast and furious the US Feds have been buying securities ( mortage-backed,treasuries, e.t.c). When the US Feds buy securities, they use US dollars to pay for it, therefore, effectively increasing the money supply into the system. Don't you think the spike is kinda scary?

To understand what gibberish we are talking about, one needs to understand the purchasing power of cash . It refers to the amount of real goods and services that a person can buy with say $1 fiat money. Therefore, its not correct to measure whether one has become wealtheir by looking at one's bank account, its more important to see how much goods and services one can buy. See the second chart above.

A bit on the history of money so that one can have a firmer grasp on why we say the USD dollar is crumbling and appreciate the situation better. ( Anyway, who says history is a useless subject in school...we will punch you . Its has helped many people make serious money.. )

Fiat money ( the paper money) used to be backed by Gold. So simply , USD$1 is backed by 2 pieces of Gold held in the Central Bank. By doing this, there was a system in place that imposed discipline on the government and prevented them from printing too much money. Think about it, one's money then was actually backed up by something REAL and PRECIOUS. In 1971, the US government abandoned the above system, which means money can be printed wantonly as it is no longer backed up my ANYTHING. Doesn't it make you wary of that lousy piece of "Legal Tender" paper. When the US government increases money, its actually an invisible tax on especially those people who do not receive that money. Its similar to a company stock. When the board of directors issue shares to their employees or insiders, it is dilutive and those shareholders not receiving these shares actually now owns a smaller percentage of the company.

Ok that was just some rant. Think the only money we will keep now is the money in our EZ link cards and Minimum $500 dollars in our POSB bank for daily liquidity needs. Cash is crap..buy assets. Ok so we wrote an article about 1-2 months back regarding Gold...since its a hedge against inflation...well we are still not buying into Gold though....just don't feel like it.

Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team

5 comments:

  1. Hello sieow eh,

    Replied your comments in the post. Thks for visiting :)

    I don't like gold too...no dividends/interest earned, only capital gains. As such, timing is critical and thus technical analysis comes into play, which I suck at :(

    You know what's the best place to park your money? Your career...invest in yourself to earn more :)

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  2. theoretically, increase in Money Supply should lead to depreciation of currency in the long run. however the time needed for this to happen can be quite long.

    short run exchange rate is quite volatile n usually unpredictable (esp now).

    think most economists are more bearish on the SGD w.r.t USD. if remember correctly, some recently predicted SGD/USD to be > 1.6 end 2009.

    just want to pt out there's other factors at play affecting exchange rate. i won't be too hasty in writing off USD (w.r.t. SGD).

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  3. Hi Anony,

    Actually, the USD dollar will go down if they are the only country printing dollars and the other countries printing less or none...so its a relative thing.

    USD vs SGD...short term yeah...its unpredictable..we are actually bearish on USD in the long term..we dont trade =).Yeah there are many factors involved...but its only our opinion lah..

    From our point of view..since China is making its aim to spur domestic consumption in the long run, if and when they succeed..we are of the opinion that they will graudally revalue upwards their RMB vis-a vis USD dollar.

    Right at this point in time..since China is still highly export dependent on the US. Its RMB is held down to spur exports to US or their western allies...to the anger of some western politicians.

    Hopefully then..Singapore will be more export reliant on the China economy in time to come. When this happens...SGD should also rise gradually in concert with the Chinese RMB...

    Just some opinions..when that time will come..erhem..dont know.

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  4. Think US is the country whose rate of increase in printing of money is the greatest at this point in time vis a vis to other countries...so USD should theoretically face downward pressure.

    Anyway, just read in the news that the ECB are gonna print more money..

    Drats.

    In the end..all cash in any currency is crap if they start a currency war...you print more..i print even more..haha

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