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More Silly decisions by the Govt

01/08/10

Permalink 03:32:44 am, by Skillachi
Categories: Politics, Business, Commentary

More Silly decisions by the Govt

Ok so in another round of "wise" decisions by our leaders, the government has told the Bank of Jamaica (BOJ) that it needs to start printing more money... Just to clarify essentially what the government has been doing is telling the BOJ to loan them (govt) money so that it can purchase other government bonds, and these "loans" are essentially just the BOJ printing more money. But the recently publicised $3 billion request from the BOJ seems to be just the tip of the iceberg, as over time the BOJ has admitted that it has helped the government by giving over $20 billion dollars in the past two months. I wont even bother going into the fact that most of this has been backed by the new BOJ governor... and was not backed by the previous governor.

Now I have done economics, and I have done quite a few business courses and with the knowledge gained from that I do know the following... Printing money in large amounts... BAD, also taking loans in situations where interest rates are falling is not exactly a smart move either. In the article I posted above Omar speaks to many things such as lack of confidence in the bonds and other economics lingo that most of us will probably never fully understand, that is all well and good but I am going to speak about what I do understand.

First of all the printing of money, the thing about money is that its value is tied to something. That is the reason why J$100 in Jamaica maybe able to buy say 2 mangos, or say 1 patty, either way the value is clear and understood. Foreign exchange rates are also tied to something, and that is other foreign currency, and the value local goods produced. It is tied to other foreign currency in that if for example the market is flooded with one currency and it is easily available to everybody, the value of that currency will fall in relation to the currency that is not available to everybody and you have to fight to get. So in essence, you try to keep the market with as little actual cash floating around as possible, this is the reason why one of Hitler's strategies during the war to defeat the British was to print and distribute counterfeit money so that with so much money floating around, the British dollar would become cheap and of an extremely low value, especially in comparison to other world currencies. In some cases this is useful though like Japan, that wants its dollar to be cheap so that its products will sell for a lower cost internationally. Essentially what the government has therefore done by printing money (while not matching with production like Japan does) is further screwed our exchange rate (backlash will eventually happen) by putting too much cash into the system... and being a country that loves to import everything this means that all sectors will feel the effects of this move.

The next issue is the bonds which were purchased, one has to remember that the whole reason one purchases a bond is so that they will get payed a high enough interest return and the interest can then be used to do something else, its an investment. However it doesnt make sense to invest in a company where one does not stand to make any great gain as you will be without the cash for a certain period (until the bond matures), whereas during that period you could've used the money to make better investments with better returns.

I hope I explained everything properly, however essentially what the government is doing is digging the country a much deeper ditch to get out of... and the ditch was already too deep to begin with.

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Three Ministers

Three ministers - a Presbyterian, a Methodist, and a Southern Baptist and their wives were all on a cruise together. A tidal wave came up and swamped the ship, and they all drowned. The next thing you know, they're standing before St.Peter.

As fate would have it, the first in line was the Presbyterian and his wife. St. Peter shook his head sadly and said, "I can't let you in. You were moral and upright, but you loved money too much. You loved it so much, you even married a woman named Penny."

St.Peter waved sadly, and poof! Down the chute to the 'Other Place' they went. Then came the Methodist. "Sorry, can't let you in either," said Saint Peter "You abstained from liquor and dancing and cards, but you loved food too much.

You loved food so much, you even married a woman named Candy!" Sadly, St. Peter waved again, and whang! Down the chute went the Methodists.

The Southern Baptist turned to his wife and whispered nervously, "It ain't looking good, Fanny."

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