Saturday, October 23, 2010

Who decides and how does it work?

Either in the form of notes, coins or credit we use money daily for one or the other purpose. I always used to wonder how people came up with this currency model and where does it start and how does it flow. The answer for this question may be as simple as we need something to value each and every item, so that a transaction takes place smoothly.

Every country prints its own currency, then why can't it print more rupees/dollars and give it to people. One obvious answer will be if we print more currency people will start having more dollars/rupees and hence the price of commodities will go up and the value of the currency will go down. This is a single line answer, but there lot to it.

Who decides how much currency to print, how do they decide and how does it flow?

I tried to find out answer for these questions and this is what I understood.

Government is the head of the family:

Let’s think government like a family, we get money from salary, interests, rents, profit from business etc. Similarly government gets it from taxes, investments, selling lands etc. But when we need more money like when we have to buy home start a business etc we borrow from bank. That’s what governments also do they borrow from their federal or reserve banks.

Government’s banker:

Within almost all modern nations, special institutions such as the Federal Reserve System in the United States, Reserve Bank in India etc, exist, which are called central banks. They have the responsibility of executing the monetary policy and often have other responsibilities such as supervising the smooth operation of the financial system.

Best safety measure [ :) ]

Countries mostly separate the Reserve Bank from the rest of the government to prevent politicians from just trying to solve economic problems by printing money, which really can mess up an economy.

This is how it works in worlds oldest democracy [USA] and worlds largest democracy [India]:

United States:

It's entirely up to the country to decide how much currency to print. Most currencies today are called 'fiat money'. That is, it's not backed by anything of value such as gold or silver. It's simply worth whatever we say it's worth it. In the United States, the US Dept. of Printing and Engraving prints the money. It seems like it costs about $.03 to print a single bill, no matter what number is on the bill. So, a $1 bill costs just as much to print as a $100 bill.

Federal Reserve takes those bills and then “loans” these dollars back to the U.S government at the face value and the government puts the bills into circulation. That's why every bill you have in your wallet says that it's a "note". It literally represents a debt that the U.S. government owes the Federal Reserve.

The interesting thing is that the Federal Reserve charges interest on the loans. Think about that one for a while. If all the money were paid back to the Fed....what would be left over to pay the interest?. Interesting topic. 

India:

I found this in Reserve Bank of India’s website, they did a pretty good job at explaining how they works.

A) What and who decides the money (currency) in circulation in Indian money market ?

a) The Reserve Bank of India (RBI) manages currency in India. The Government, on the advice of the Reserve Bank, decides on the various denominations. The Reserve Bank also co-ordinates with the Government in the designing of bank notes, including the security features. The notes received from the presses are issued and a reserve stock maintained.

b) To facilitate the distribution of notes and rupee coins, the Reserve Bank has authorized selected branches of banks to establish currency chests. These are actually storehouses where bank notes and rupee coins are stocked on behalf of the Reserve Bank. At present, there are over 4368 currency chests. The currency chest branches are expected to distribute notes and rupee coins to other bank branches in their area of operation.

B) Can reserve bank of India or Indian government bodies decide to print additional currencies to meet public expenditure?

a) The Reserve Bank estimates the demand for bank notes on the basis of the growth rate of the economy, the replacement demand and reserve requirements by using statistical models. The Reserve Bank decides upon the volume and value of bank notes to be printed. The quantum of bank notes that needs to be printed broadly depends on the annual increase in bank notes required for circulation purposes, replacement of soiled notes and reserve requirements.

b) The Government of India decides upon the quantity of coins to be minted. The designing and minting of coins in various denominations is also attended to by the Government of India

c) Only external control on the value of Indian money in the international circulation is the “Exchange rate”, with reference to various other national currencies. Indian money is tied to Euro. The exchange rate parity of rupee fluctuates based on the Indian balance of payment to the world, exports/imports and the parity of Euro in the international market.

Gold Standard:

The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold and all currency issuance is to one degree or another regulated by the gold supply. To protect the public and guarantee the nation against any bankruptcy, the RBI keeps a certain percentage of gold in their own safe deposit vault, in proportion to the additional currency minted and directed into the circulation. The quantum percentage of gold kept in the deposit is not exposed in any documents or in the Websites of RBI or the Government of India. 

Today gold standard is considered undesirable because it is associated with the collapse of the world economy in the late 1920's. 

References: RBI, Wikipedia and yahoo answers websites. Images from Businesscafeonline.

Wednesday, October 6, 2010

The circle of lawsuits

These days along with innovating, mobile technology companies are busy doing one more thing i.e suing each other.

The following image ( by George Kokkinidis ) gives a clear idea of who's suing who in the mobile industry.



Today morning I was thinking about blogging about this and by evening one more lawsuit got added to the list. Yesterday Microsoft sued Motorola on 9 patents and today Motorola doubled the number of patents and sued Apple on 18 patents. Day by day diameter of this circle  and the number of chords are also increasing. In fact this is turning interesting.

As every one knows its takes years to settle these suits. I think by the time these are settled, we would surely have something more advanced and attractive than what we have today in our pockets.

Saturday, October 2, 2010

Two Things

This is my first blog post and I was thinking very seriously about what to start with. I like reading a lot, what ever it may be blogs, news, articles etc... After thinking for a while about a good thing to blog about. I finally decided that I will go with my thoughts. Hence my first blog post "Two Things".

Even though I am away from India, I follow most of the things going on there from movies to movements, IPL to Saina Nehwal's winning streak. But two recent events made me think more about my country and where it is heading. One of them made me sad and worry about where India is heading, other made me proud and happy and gave me assurance that we are in right direction.

First one among those two is CWG. The massive scale of  corruption that took place, delays in completing the arrangements with in schedule and athlete's & nations criticizing the arrangements made me feel really sad. At one point of time I read articles by international and national media speculating that games might be cancelled. 


I was more surprised when I learnt that India won the bid to host 2010 Common Wealth Games in 2003 (So we had time). According to Bussiness Today cost of organizing these game is around  70,000 crore (US$15.47 billion). This makes 2010 CW Games costliest Common Wealth Games so far (we invested a lot even in the times of recession). With this expenditure, available time and lot of human resources, India could have made a great impact in international stage and showed to the rest of the world that we are ready for Olympics. 

This whole mess I think is due to few political leaders and bureaucrat's who put their egos, monetary and political agendas ahead of national interests. 

Anyway the games will start in a day and we finally got everything ready. Keeping aside all these controversies, I hope these games will go well and show the world that India is a good host. It's good to know that Delhi Commonwealth games is the highest attended Commonwealth games till now.

Coming to second thing that made me happy is the Ayodhya verdict and how people reacted to it. I was eagerly waiting for the verdict as billions of my fellow Indians did. Government took every step to stop any violence that can be caused by the verdict, some state governments even declared holiday. This shows how important this verdict is. 

Babri masjid case was a 60 year old case which got national importance after demolition of babri masjid in 1992 that resulted in huge spread communal voice which took more than 2000 lives. No one wants to see it again, but they are worried. To everyones surprise, people showed restrain after the judgement, there is no single violent incident reported. This may be partly due to the judgement (thanks to the judges). But, people surely showed to the world our great secularism, our oneness , unity in diversity, what ever we call it. This shows that common man is more worried about their future, education and their daily living than about temple/masjid or church.

Even the religious organisations requested for peace and displayed their respect for judiciary. But, there  are bunch of people who never want to loose a chance to gain from the situation, they are called politicians. Who started again their vote bank politics, by making statements that can cause damage to our unity.

Above two events, have one thing in common. They are our great politicians, who failed in both the cases. There are many leaders who worked hard, who had vision for the future of India. But there are some politicians who I don't want to talk or even think of.

"Leaders care about the people they serve.
Politicians care about themselves and their party."

And finally here's a video I loved watching, some of the statement in this video are a lill bit old (indeed we bettered our position :) ).




--MAK