The Future of Paper Money

Hello friends. How are you doing out there? I hope the markets are treating you well and you're able to make good profits from your trades in the markets.

This is the first time I am recording a video on this topic and the topic should be very interesting, at least from my point of view - the future of paper money.

We all love money and I sure am sure I can take the liberty on speaking on behalf of each one listening to my video that we all love money. We want more and more of it and in spite of how much we have, if somebody were to ask us, do you need more money? I would say, okay, bring it on, bring it on. I want some more.

So what is really the future of paper money?

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Now Ray Dalio, who basically manages the world's largest hedge fund and those of you who seen my videos for a fairly long time, know that I am a big fan of hedge funds, and at some point in time, our company intends to run its own in house hedge fund.

So Ray Dalio, the manager of the largest hedge fund in the world, which is known as Bridgewater Associates, last year said something which very few people really understood.

He said, cash is trash. So holding onto cash is actually counterproductive. Now, wait a minute. When I go to my club and sit with my friends, we all talk about how we should keep cash at home and the more affluent, the more well placed you are, the safer you feel if there's some amount of cash lying in your cupboards to meet any eventualities.

I have two super senior citizen parents. I have a wife and kids, and in these Corona times, you feel the comfort of having some cash lying in your cupboard. I understand that but people, when they tell me the figures that they have in the cupboards, is actually shocking.

You know, this kind of fear or this kind of comfort that you want or better asleep at night of holding so much cash at home, is it really making sense because the future of paper money, at least from my point of view, doesn't seem very great, and the fact that Ray Dalio or says it only reinforces my opinion.

So inflation, like I've said in many of my other videos is rising on two counts. Number one globally and remember in this video I'm not talking about India specific I am talking about, and only from a financial point of view, not political point of view, I am talking about most countries in the world. So please reserve your comments and note this aspect before you put in any comment here.

So inflation is rising on two counts. Number one, worldwide central bankers are printing unbacked currency, currency which is not backed by physical assets, primarily gold, and the purchasing power, therefore of that currency, will naturally fall.

Now, if something is increased in abundant supply, it will lose value and also remember that the purchasing power of the fiat currency is not just going down because more and more money is being printed and thrown about.

But in this covid pandemic, times production levels are actually curtailed. So you're inflation is rising at a galloping speed.

Now we all know that the governments are the biggest borrowers from the markets, and it's not just from covid times. It's actually started much before in 9/11, when those two aircraft went and crashed themselves into the World Trade Centre towers, governments were living beyond their means, and I am talking about world over, just remember that.

Governments were living beyond their means and they were constant borrowers from the bond markets and therefore, in order to cut their borrowing costs, they were cutting savings, so savings rates were falling and therefore, saving in your fiat currency of paper currency in fixed income assets is not exactly the best thing to do.

It is better than keeping currency in your cupboard. It is better than keeping currency in your pocket, but it's not the ideal thing to do.

Now, commodity prices are rising because, hey, that's what inflation is, raw material prices rising? That's what we call inflation. So can you invest in commodity markets?

I think it's a little late in the day. Look at the prices of lumber, steel, iron ore, Aluminium, copper, etcetera, they've already run up and there's one thing about commodities. Steep galloping, higher prices, results in demand destruction, and therefore, they will cap the rally from here on, or at least slow it down.

Agri commodity inflation doesn't invariably last too long because hey, it impacts the belly of billions of people the world over. So invariably, governments bring regulation to bring down food prices. So you can't hide for too long in commodities.

What do you do then? So over time, I think that paper currencies will have lower and lower of limited function of just facilitating transactions. You would buy something. You're gonna throw some pieces of paper at somebody and that somebody is going to give you tangible goods.

It was never really a source of saving. You never could keep a bundle of Rs 500 notes in your cupboard for six months and you see that those notes have reproduced. They've mated with each other and it's become two bundles. That never happened. So keeping currency in your house never really was a means of saving.

But now you have to be smart that you should use it purely as transactional means. Don't store too much of your money in cash.

So your returns have to be higher wherever you invest your money and higher than at least the inflation, if not higher, then at least equal to the real actual inflation, not the government figures, right?

If your returns are lower, you wind up eating portion of your capital year after year and erode our wealth anyway.

Can you consider equities instead of a paper cash or fiat currencies? I think so. Over the very long period of time, holding on to blue chips seems to be a good idea. Instead of holding paper because paper will erode its purchasing power.

Trading should not be your first choice unless you're a very seasoned, very a savvy trader with lot of experience, because losses in trading can actually be bone crunching and at the same time they can also demoralise a newbie trader.

You should also consider changing over from a lot of cash to bullion, which is gold and silver as a hedge against inflation.

If history is any teacher, you will see from the financial history of countries which have mismanaged their paper currencies or fiat currencies, and I'm not talking about history of a few 1,000 years ago. I'm talking of recent 2016, 17, 18, 19, 20 and even 21. Look at what's happening in Argentina. Look at what's happening in Venezuela, Ghana, Peru, and Brazil also, to a certain extent.

Guess what? These countries are resource rich, they actually export a lot of commodities, but the population lives in abject poverty. Now that's a very worrying sign.

Now the inflation monster raises its head wherever fiat currencies perform poorly and as of September 2012, the world, remember I'm talking about the world, not just India, is at a state of what is known as currency wars.

Globally, countries are in a race to let their currencies deliberately devalue so as to become more competitive in the export market.

Now, as and when they grab market share in the export arena, they will receive export dollars but the problem is, it raises inflation and the local population, the citizens of the country really suffer.

When inflation rises, the government basically, I remind you this is not just about India worldwide, the governments typically will try to cut inflation of the raw material prices of industry rather than control inflation of the common citizen.

If you read an excellent book by the ex RBI governor, Dr YV Reddy the title of the book is global economic crisis and uneven recovery, he says that as per double entry system of accounting, debits must equal to credit. If the government is reducing the raw material cost of industry, it will have to allow the fruits, vegetables and items of daily consumption which is used by citizens to go up.

Now you might think a rupee per kilo of potatoes or Rs 2 per kilo of tomatoes is no big deal. If you pay extra every month or every week, do remember how many million tonnes of potatoes and tomatoes are sold every day.

That much money is going out of citizens hands and so inflation is also known as silent taxation or taxation by another name.

Over a period of time, I have a fear that the future of paper currency is laced with higher inflation. So you know your cousin or your friend who, when you all go out together, boasts about digging out a ward full of currency notes and throwing them, and insists on paying by cash while you guys remove your debit cards? I don't think that guy is a smart guy because cash is earning him nothing. While you may be earning 3 to 4% per annum from your saving account to which your debit card is linked.

Don't keep too much cash. Invest it in places where it will earn returns. The higher, or at least equal to inflation the return is, the smarter you will be and the happier you will be, at least in your finances. The future of cash, my friends, is not very great.

Remember, we are going through a phase of what is known as currency wars. Ample material available on Google if you simply search it and get aware of what's in store.

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I wish you have a very profitable day. Thank you for your patience. Thank you for watching my video. Tack care. Bye.