Cash rules everything around me

Ivan Petkov
Aug 28, 2017 · 3 min read
Cash is king
Cash is king

Ann: Hey Garret tell us about your favorite music.

Garret: My favorite songs are Money — Pink Floyd and Cash rullz everything around me C.R.E.A.M — Wu tang clan.

Ann: That is so YOU.

John: You are such a cash-expert, please educate us about it.

Garret: I’ll do that for you. Now focus and take notes.

By cash we understand all the money that you have (paper and electronic ones).

All your cash is in one currency or a mix of currencies. This currency can be local (the currency of your country — pounds, dollars etc.) or foreign. Having your money in a particular currency means that you are exposed to its volatility.

There are big money markets (situated in the world’s biggest Financial Centers — New York, London Tokyo) were all Currencies are been traded. The participants on these markets are national central banks, financial institutions and individuals. So money is commodity and the exchange rates between currencies are fluctuating influenced by supply and demand.

Thomas : The prime commodity you can say

Garret: The value of money can be determined by the number of goods the can be purchased with them (that is so obvious). If you are buying less and less goods with the same amount of money it means that the value of money decreases — this process is called inflation. So if you possess cash it means that you are exposed to the risk of inflation. You may buy fewer goods with your money in a year or two. The opposite process where the value of money actually increases over time is really rare event in economy with capitalism (except maybe bitcoin for now).

If your local purchasing power has decrease it may not be that case with your purchasing power abroad. Your money may be more or less valuable in some other country. So by possessing money you are exposed to local risk of inflation and foreign risk of the fluctuating exchange rates (this risk can be negative or positive).

The biggest advantage of possessing money is their liquidity. You can exchange your money for whatever goods you like at any time you like (Cash is king). Liquidity is an issue when you have invested in other assets like properties or businesses.

Can you participate on the global money market (FOREX)? — Yes. If you believe that you can predict the future exchange rate of a pair of currencies. My current knowledge and experience is telling me that I cannot do that. I do not know if such sufficient prediction is possible (more on complex system in some of our next articles).

The FOREX can be used to hedge (insure against) foreign exchange rates fluctuations. For example you are a producer and your most important raw material is been sold in a particular foreign currency. You on the other hand sell your production in local currency. If you know your future production volumes you can fix the current exchange rate for the rest of the period by making a counter currency deal on the FOREX market. Basically you have purchasing deal with your supplier and counter currency deal on the money market so the effects of exchange rates from the two deals equals zero. Of course there are transactions costs involved in each operation and you have to determine if these costs should be paid to hedge this risk.

Hedging the risk of currencies rates fluctuation means that you are also missing the favorable fluctuations.

I have to tell you that the barriers for individual for enter the FOREX market are really low. The problem is that the financial products that all the brokers are offering to their individual clients are highly leveraged (around 1:100 which means that 1% change in currency rates results in 100% profit or loss). This leverage leads to 98% client accounts bankruptcies in just couple of weeks.

Some Questions for you: Were you able to buy more goods and services with the same amount of money couple years ago? What kind of money stories do you have when going on foreign vacation/holiday/trip? Is the FOREX market a zero-sum game? Do you fucking own any cryptocurrency?


Originally published at Ivan Petkov.

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