Fiat Money

I got into a deep discussion today about currency. The US dollar is based off of a fiat system. Fiat money means that our currency is soley what we perceive it to be and not backed by anything (ex. gold). That means, we perceive a $10 bill to be worth $10 because everyone else around us sees it that way. It also means that I can go into a store and make a transaction with that $10 bill to buy $10 worth of goods. However, if I were to begin believing that $10 bill was not worth as much, I would not be willing to give you $10 worth of goods for it. This means that if perception of the US dollar crashes, the dollar would worth the paper it is printed on, and that's it. A good example of this is the reason how Hitler came to power. After WWI, Germany became so far in debt from having to rebuild everything, their currency dropped to absolutely nothing. That is why if you research it, you will see Germans burning there money to stay warm. This idea that the value of a currency would drop so quickly and drastically is called hyperinflation.

I find fiat money to be a very interesting topic because we can print as much money as we want and it will not change the value of a dollar if no one perceives it to be any less. Also, this is interesting because of the computer generation that we are getting into. So much business is done electronically, we do not even see the actual money flowing but a number on the computer screen. Will it be that someday, money will not even be tangible????

Luck of the Irish??? or pressure from global markets?

How is it that one of the strongest countries in the EU suddenly drops into financial distress? Ireland is waiting to hear how they will be spending their money in 2011. The budget for 2011 will be voted on which consists of tax hikes and spending cuts after accepting a $113 billion bailout (85 billion euros) from the European Union.

Was Ireland over-levered like Greece? Well, Ireland's banks were way toooo big! Ireland's banks are about 9 times as big as the country's GDP (bank's assets are 872% as large as GDP). What does that say in poor financial times? Well, when looking at a bank's balance sheet, assets are made up of investments. If banks are not properly hedged or are performing in unfavorable investment decisions, that can mean big losses in bad financial times. And, who is to say they were not participating in Credit Default Swaps.

The important thing to take away from Ireland's financial distress is how their banks are soo large that bailout would not be possible without the EU. Small countries like Greece, Portugal, Iceland all need to learn, but more importantly the other small countries with bank assets much larger than GDP need to begin realizing that being levered could strongly put the country in financial suicide. Sure, every investor wants high returns so some investments may look better than others but these governments need to continue bank stress tests so that the occurences will stop happening.

Morning Wake-Up With Ethics

The other day I watched a documentary on PharMor, a Youngstown, Ohio retailer who even once scared the Great Walton of WalMart. They praised themselves on having full shelves and cheap prices. They had so much purchasing power they made manufacturers pay exclusivity fees. However, when PharMor looked like the new upcoming retailer to take on WalMart, they were ing the process of a very large fraud, hence the name of the documentary: "How to Steal $500 Million".

Mickey Monus, the founder, began the fraud when he noticed profits so quickly disappearing with the substantial growth of the company. He thought that with the exclusivity fees that he was having companies pay to have their product sold in his store would cover the new losses that were developing. Therefore, he cooked the books, having two sets, one real and one sent to the original venture capitalist, David Shapira. The young CFO, Patrick Finn, backed Monus and did nothing to prevent the fraud but continued with it. Before you know it, these guys became so tricky that they were shipping inventory between stores to cover their fraudulent inventroy accounts. How is this possible? Their auding firm, Coopers & Lybrand, told management months in advance what 4 PharMor stores were being physically touched. Yes, 4 out of hundreds!

I guess you might be wondering what's my point? Well, how is it that a company responsible with more than 300 stores and 25,000 employess can so easily get away with such large fraudulent acts. Yes, this was the late 80's and early 90's but isn't it still so frequent today (ENRON & Adelphia)? It is said that total loss to all investors exceeded $1 billion. If you were to tell me our world is not driven by greed I would have to laugh right at you! As the famous quote from the movie "Wall Street" goes, "greed is good!" Well, as much as I would love to agree with that, where is the cutoff where greed becomes hazardous?

Great Explanation of Credit Default Swaps!

http://www.youtube.com/watch?v=eb_R1-PqRrw&feature=channel

This guy knows what he is talking about! It is crazy how credit rating houses like Fitch, S&P, and Moody's can get away with something as detrimental as the recent credit default swaps.

Our web-page lacked diversity

Since we focused our page on the Barro-Ricardian Equilibrium, we wanted to add room for other finance topics since Finance is FUN. We also want to hear others opinions if there are any.

We will update the blog when time is available to do so or if we want to discuss a particular topic.

Thanks,
Management