RandomBlog2011 | wealthymatters

Inflation and the Velocity of Money – Lesson from the Weimar Republic

April 6, 2011 6 Comments

Inflation in the beginning is like a drug, sort of a good feeling in the economy to start with because there are more jobs, more goods, house values are increasing, the stock market rises, etc. It isn’t until the money velocity accelerates that you begin to feel that something is wrong. And that’s when everybody begins running faster and faster just to keep up.

Velocity of money is the turnover of money in the economy. As you start printing more money the depreciation of a currency begins, more money goes into circulation, but not all of it gets turned over very rapidly. Some of it goes into foreign hands, like when Germany had to buy imported goods for war materials. Also, some people may decide to hold onto the excess currency like they did during the war, hoarding cash which also kept the money velocity low (in the beginning stages). So even though the supply of money was increasing in the economy and along with it the cost of goods and services, Germans were savers, saving the marks that they got which kept this increasingly large quantity of money moving slow, therefore building up the inevitable effects of inflation but delaying the impact. Read more of this post

Filed under Theory, Tidbits Tagged with Inflation, postaday2011, RandomBlog2011, savers, velocity of money, Weimar Republic

Lessons From The Weimar Republic

April 6, 2011 5 Comments

Inflation causes a lot of change which can impoverish the majority but at the same time provide incredible opportunity for creating wealth for those who are educated and informed.So why not read the story below and benefit a little?

July 24, 1914 – The depreciation of Germany’s currency, the Reichsmark, began when the Reichsbank (Germany’s central bank) suspended gold convertibility on the Reichsmark, meaning you could no longer trade in your Reichsmarks for actual gold. From that point forward there was no limitation to the amount of money the Reichsbank could then create (money backed by nothing, basically just printed out of thin air and placed into the system thereby reducing the value of the existing currency, ie, inflation). Read more of this post

Filed under Theory, Tidbits Tagged with deflation, depreciation of currency, gold convertibility, Inflation, money supply, postaday2011, RandomBlog2011, Reichmark, Rentemnark, unemployment, wealth, Weimar Republic

The Yield Curve

April 6, 2011 5 Comments

The yield curve is a graph that plots the yields of similar-quality debt instruments against their maturities, ranging from shortest to longest. The yield curve is is also known as the term structure of interest rates. As yield curve shows the various yields that are currently being offered on debt instruments of different maturities it helps investors quickly compare the yields offered by short-term, medium-term and long-term debt instruments.

The yield curve can take three primary shapes. If short-term yields are lower than long-term yields i.e.the line is sloping upwards, then the curve is referred to a positive (or “normal”) yield curve. Below you’ll find an example of a normal yield curve.

Breaking a Fixed Deposit

April 6, 2011 9 Comments

Breaking a FD means pre-mature withdrawal of your money locked in a FD i.e. taking out the money before the term of the FD is over.When you break a FD, banks don’t give you the rate of interest at which you booked the FD ; instead you get the rate applicable for the duration for which you actually kept the money with the bank.For example if you made a FD for 4 years, at an interest rate of 8% and now you wish to break it after 2 years ,you would get the rate applicable to a 2 year FD prevailing at the time when you had booked your FD, and not the 8% which is noted in your FD certificate.So, if the rate for a 2 years FD was 7.25% when you had booked your 4 year FD, you would only get an interest of 7.25% per annum for the 2 years you would have actually kept the money with the bank.In addition there is often a penalty to be paid,comm0nly a further 1% deduction.Some banks do waive off this penalty if the liquidation or premature withdrawal of the FD is due to some emergency. But the word “emergency” is not well defined and this waiver is given on a case-to-case basis.Some banks also waive off the penalty if you reinvest the withdrawn amount with the bank. Some banks provide this waive off only if the new FD is kept for a period higher than the remaining period of the original FD.So there is some leeway to negotiate to avoid paying a penalty while attempting to break a fixed deposit. Read more of this post

Filed under Paper Assets, Tool Kit Tagged with Breaking a Fixed Deposit, calculations, emergency, FD, Fixed Deposit, Interest Rate, penalty, postaday2011, Premature Fixed Deposit, RandomBlog2011, Should you break a FD?

Tax – Saving Fixed Deposits

April 4, 2011 4 Comments

In Budget 2006, the government extended tax benefits under section 80C of Income Tax Act, 1961 to five-year tax-saver deposits. As per this provision, a tax-payer is eligible for exemption on five-year deposits on investments up to Rs 1 lakh. These fixed deposits are locked in for a five-year period . There is no option of premature withdrawal. Also, you cannot pledge this type of term deposit as collateral to secure a loan to meet liquidity needs. Similarly, banks do not offer overdraft facility on tax-saver deposits.Unlike the plain vanilla fixed-deposit products, these tax-saver FDs do not have the sweep-in facility. This means a person cannot link fixed deposit to their savings account so that the surplus funds in the savings account can be automatically invested in this fixed deposit.In addition, there is no overdraft facility available on the tax-saver FD. As this instrument of saving money is special due to its tax-saving status, banks do not extend relationship benefits on the tax-saver FD. Read more of this post