Concerns on US debt

Discussions continue in the US between Barack Obama’s government and the Republicans over raising the debt ceiling. Obama wants to raise the debt ceiling by $US4 trillion, whereas the Republicans want it raised by $US2.4 trillion, with matched spending cuts. The US will default on its debts if the ceiling is not raised by August 2, 2011.

Last week Federal Reserve (Fed) Chairman Ben Bernanke, in his semi annual testimony before Congress, expressed his direst warning on the consequences of failure. He said that if the US defaulted on its debts, then the US Treasury notes could become illiquid.

Rating agency Moody’s has said that “an actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments and a AAA rating would no longer be appropriate”. Rival rating agency Standard and Poor’s said that it could also cut the US government’s AAA rating if it missed any debt obligations including social security payments.

Market update

Equity markets

US stocks were down last week as they experienced the sharpest one day fall in a month amid concerns that the debt crisis in Europe was spreading. Consumer sentiment was also weaker after a warning about the US’s credit rating from rating agency Moody’s. All the major global indices were down with the exception of the Shanghai index which was marginally higher at 0.8 per cent.

Commodities

Commodities were mostly up during the week, with oil (+1.1 per cent), gold (+3.1.per cent), iron ore (+2.0 per cent), nickel (+1.1 per cent), and zinc (+0.7 per cent) all up. Soft commodities such as cotton (-10.9 per cent) and sugar (-1.3 per cent) were down.

Currencies

The US dollar (USD) slid against most major currencies last week following an announcement from ratings agency Moody’s that it was placing the US government’s debt under review for a possible downgrade. The weaker USD, limited bad news from Europe and momentum from solid Chinese growth data helped the Australian dollar (AUD) to trade as high as $US1.0786 last week. It was trading at $US1.06 in early Monday trade

Ethical Investing

So you’re green? Save the Planet? Well when it comes down to ethical spending we think of the environment, but when it comes to investing, people often do not think about the impact of money they are investing on a macroeconomic scale. Why? Because we like to watch our savings grow (achieving a capital return). One of the most popular forms of investing is currency exchange futures, which bet that one currency will increase in value over another (Speculative Investing). The problem is that this can have significant impacts on a country’s economy. Figures show that about 95% of international currency conversion is for speculative purposes.

So what is the problem with making money through speculative investing? The problem is that investments are not long term focused. Investing in the construction of schools, hospitals and businesses that contribute back into the economy with jobs and services is what I classify as “Ethical” investing. When you invest in a security because you feel it may increase in value, this inflates the price of that security beyond the price it should be (from its sales, costs debt/equity measures)

So next time your investing, have a read about the company and what they do, is that extra 1% return really worth it. 

Protect your money from the erosion of Inflation

A simple explanation of one the greatest dangers to your pocket.

Inflation is basically the rising cost of goods and services which erodes the value of savings. Imagine this scenario: Penny has saved $100 and has it in the bank at an interest rate of 4%. She pats herself on the back at the end of the year because of her efforts she has managed to earn $4 in interest bringing her available money to $104. However during that year, the costs of living went up 4%. Penny has effectively made nothing. Now think of this if Penny had a lower interest rate than 4%, she would be going backwards. This is the reason why people invest their money in other ways to try and achieve a significantly higher rate of return than the inflation rate. Safe investments often referred to as inflation proof securities are things such as Gold and Silver. The regulator for inflation is usually the central bank (Reserve bank if in Australia). The RBA tries to keep inflation down around 3%.

Demand pull Inflation
Why does inflation occur, lets have a look: Fruitshop owner John sells apples, he sells all of his 110 apples each day. This is where demand pull inflation kicks in. John wants to eat 10 apples, so he does and raises his prices 10%. The apples are in such high demand, people pay the price and John sells 100 apples, eats ten and makes the same amount of money. Of course John does not even have to eat the 10 apples, he can just increase his prices 10% and though he only sells 105 apples, he is happy because on saturdays there is a huge demand for apples so he will have a stock of over 130 apples to sell on Saturday.

Cost push Inflation
Book shop owner Paul employs Sally who likes to eat apples, but she can not afford the price increase so Paul gives Sally a pay increase and raises the price of his books to cover the cost. Fruitshop owner John is sending his kids to school, and he needs to buy some books but the prices have gone up.. he will have to increase the price of his apples.

Meanwhile, Penny is putting her money in the bank so she can save up to buy her children books once they begin Uni...

An understanding of money

Current forms of money (paper money) has no actual value physically, but represents a medium of exchange that is widely accepted and can be used for trading. In the past people have used precious stones or shells as a form of currency. Many people ask what the point of money is so I’ll provide an example.
Farmer A makes apples, farmer W produces wheat… Farmer A wants some wheat to make bread to he and farmer W agree on an exchange. 1 bag of apples for 1 bag of wheat. Perfect, no money required yes?
However life is generally always more complicated than this. Farmer W may not want apples, or they may not be in season. In this case, money as a common medium of exchange enables farmer A to sell his apples at a market for “money” during their season. For the rest of the year he has something can easily be traded. Farmer W will always accept money for his wheat because he wants to be able to buy milk, tools, shoes etc. Thus the tool shop, the shoe man and the cow farmer obtain a common medium of exchange to buy apples and wheat etc.