Originally posted by kulman Originally posted by MissingLink Originally posted by kulman Originally posted by investor ... i think being in cash is actually increasing your purchasing power as the price of most other assets(realty, equity, etc) is falling day by day. Absolutely right.    Just like realty and equity, cash is also an asset (a claim on past labour) and excess of cash devalues the cash and reduces the purchasing power of Cash.   Ummm....it does. The point which Mr. Investor trying to make (as I understood it) is a bit like this: m/s John, Jaani & Janardan had Rs.100 each in the share market in Jan'08. 1. John is still holding the same shares, the market value of which is say Rs. 30. (The wealth erosion is 70%) 2. Jaani had sold half of his portfolio then. So now his shares are worth Rs. 15 plus cash Rs. 50 totalling Rs. 65. (Wealth erosion is 35%) 3. Janardan is amongst really smart & lucky few who sold all shares then. He is still holding cash of Rs. 100 Today with Markets hitting newer lows, Jaani & Janardan, with the cash they have are able to invest into 3x or 4x quantity of shares. So actually their cash is very valuable now. Note: For the sake of calculation simplicity interest earned on FD, TDS thereon & inflation are not considered.

Kulmanji,
You stopped half way through.
Jani and Janardhan may have money. But if the money looses value if many more people have such money.

Let me post an image from wikipedia.


(if the above image is not visible please go to the following link:
http://upload.wikimedia.org/wikipedia/en/c/c9/Components_of_the_money_supply_of_india_1970-2007.gif
)

• Reserve Money (M0): Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI’s claims on banks + RBI’s net foreign assets + Government’s currency liabilities to the public – RBI’s net non-monetary liabilities.
• M1: Currency with the public + Deposit money of the public (Demand deposits with the banking system + ‘Other’ deposits with the RBI).
• M2: M1 + Savings deposits with Post office savings banks.
• M3: M1+ Time deposits with the banking system. = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector (Other than Time Deposits).
• M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).

If you look at the image you will notice the following:
(1) Pre liberalization (i.e pre 1991 the Currency Under circulation was very less). Post Liberalization there has been an increase in money supply.
       Infact between 2001 to 2008 we have doubled our money supply from 250,000 crose to close to 500,000 crores.
       This means there is more money sloshing around in our system.
        Compared to 1991 we have increased the oney supply by 10 times !!!


I agree that in the short term (say between jan 2008 to Jan 2009), if you were in cash  your purchasing power of STOCKS would have gone 2x or 3x.
But that does NOT mean that your PURCHASING POWER has increased. Infact it should have decreased because there has been an increase in money supply in the country as a whole.

BTW have you noticed that NARROW Money (i.e. M1 which is M0 + Deposit Money) which was around Rs 80,000 crores before 1991 has balooned to close to  850,000 crores.  That means  lot of money is being saved in banks. Now, banks have to pay interest on these deposits. Where does this money, to pay interest, come from?
Since we dont have a gold/silver back currency, we print the currency !!
That means there is even more supply of money.

If you bother to look at M3 (more virtual money in circulation), you would faint at the rate at which we have increased our FIAT money in this county !!!!! Any defaults in the chain for M3 should lead to serious consequences....

So we earn more money and are depositing more money into banks(BTW WE includes these corporate entities as well, who deposit their excess cash in banks). This money has to earn interest which is printed out of thin air (i.e WE mark against the dollar. Since dollar is being printed by someone who is on a HIGH on marijuna, we keep printing money to peg against a constant Re to Dollar ratio).
So more money is entering the system. This gets deposited in the bank earning more interest. and it continues...

So the currency that WE hold, does not have value if it is not backed by something. As it turns out, WE depend indirectly on US treasury bonds to print our currency (indian Rupee).
So effectively the Rupee over long term keeps loosing value and hence the purchasing power is lost.

Investorji was making his observation based on the below point by CHINKIji

Originally posted by CHINKI Remember of reading somewhere that if someone had invested on Gold during Jan'08, he would have made only 5% return. So your details substantiate that statement. But the problem is, investments in shares/real estate at the same time have lost more than minimum of 50%. So that way investment in gold is better. Presently people have no choices for investments (in case if they want to do). It has to be either gold or short term fixed deposits or may be cash which anyway is loosing purchasing power.

So I butt in with my observation


Edited by MissingLink - 06/Feb/2009 at 8:59am