Sunday 26th November, 2006


Mopping up the cash flow

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The signal by Central Bank to issue bonds at a coupon rate of eight per cent per annum is described as an attempt to reduce the liquidity in the domestic market. It is hoped that the issue will mop up some $700 million.

Looked at from another perspective, the Government is seeking to borrow the money from those who have liquidity (cash), and will repay the sum after eight years, beginning November 30, and maturing November 30, 2014. It is willing to pay the lender eight per cent per annum, with distributions of interest earned, every six months.

There have been submissions by experts in the field that the increases in prices of goods and services have been fuelled by the abundant flow of money into the domestic market. This they say, has increased purchasing power, and has prompted artificial increases.

Other experts refute that the relationship is so simple.

However, the simple view is that if people have more money in their hands, they will easily pay higher prices, since the money is flowing like water. Hence, if we stagnate the flow, by pulling out the money, we may bring down prices.

But all of that is theoretical, and because there are many interrelations, it is not always simple to interpret what will be the net effect for us. It is about money supply and monetary policy.

To better understand how these theories work, perhaps we need to revisit some fundamentals and recognise the three things that is money.

Money is used as a:

* means of payment or a medium for exchange,

* medium to transport purchasing power into the future, via savings, often referred to as a “store of value,” and

* means of quoting prices for goods, etc that allows comparison

The major weakness of money is its use as a store of value. Remember when the dollar was representative of a certain value in gold? In those days when prices went up, the price of gold also went up. Thus, there was an equitable distribution of value to those who held money as well as those who held gold. The “store of value” remained sound.

Since our dollars are no longer weighted in gold, how does our “store of value” relate in the global market? But this is a question for other experts in economic self-sufficiency.

Our immediate concern, as small investors with small amounts to set aside for the future, is to preserve “store of value.” We need to know what rates are available now, and some intelligent guesswork hints that if banks are willing to pay more, those rates may curve upwards. But that’s an IF, with inflation as a factor!

While the mopping operation goes into full swing, do you know of an investment option that pays better than eight per cent for eight years, for small investors?

Continued next week

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