Money science pt.

2 - the global economic crisis buzz
By Bongani Khumalo We have heard the phrase ‘too big to fail’ applied many times over the last few years. This might have been the case for banks and financial service companies in the past few decades but then again the winds of change affect all things in its path, a lot can change in 65 years. Does the world need a new banking policeman? when Hitler was raging chaos across the globe in July 1944, ministers from all 44 allied nations met at the imposing mount Washington hotel in Bretton Woods, New Hampshire, to set out a set of new rules that would govern world finance once Hitler was defeated by signing the Bretton Woods Agreements, which led to the creation of the International Monetary Fund (IMF) and the World Bank. Back in the day (as in, not anymore) this was seen as a big vision, driven by grand historical figures such as Winston Churchill, Franklin D Roosevelt and the British celebrity economist John Maynard Keynes. Let’s be for real here I mean, I’m no economist, but this system was designed 64 years ago people with no plans of future amendments whatsoever like casting a paper boat into the unknown and hoping all’s well and dandy, I’m no fortune teller either but common sense should have warned that such a system was eventually bound to be proved ill equipped in 21st century banking systems, and go into a tail spin which now led to what’s been lingering on every business mans tongue and company execs happy no announce salary cuts. The world economic crisis. Where is all this money going? I mean as far as I know we haven’t made any contact with any extraterrestrial life forms, even if we did, I given our track record as a selfish species, I seriously doubt we’d be trusting them with any of our Cash. This is money you have worked for by the way money could hold in your hand the money you could spend at the store - instead you wake up one day, some bean counter on the news tells you that the electronic money we all agreed on initially has been invested by others, often without your knowledge, into ’stuff’ that has no intrinsic /real value. When this is discovered and both you and the banks have made a loss, what does the government do to help out? They pump more cash into the banks (who lost the cash in the first place) but none to you. Where I come from, we call that…being hustled or just plain out getting jerked.

To clearly illustrate what I mean let me explain markets a bit; the function of any market is to set value on ‘things’, generally linked to a number of factors such as supply and demand, its potential future value and its intrinsic value - with intrinsic value being the most significant to this argument, which is defined as the actual value of a security, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often difficult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i.e. what investors are willing to pay for the company) and intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value.

To illustrate how out of control the situation has become look at the ‘dot com’ chaos of recent times, with its rise anyone with an idea and a PC nerd to back him up was suddenly floating business that had paper values of billions with intrinsic values actually very low (or even negative) - Look at even successful ventures like Facebook - They have a digital paper value approaching R80 Billion but the company’s only means of real income is advertising (or similar issues such as selling your weird daily updates as data). Stop and think what you would get for R80 Billion in terms of a manufacturing business with real assets such as Intellectual Property Rights, plant, factory buildings, stock etc - what would you have to shake a stick at - much more than you would if you spent the same money on Facebook, chatting to yo momma that’s for sure. If times get

tough with your manufacturing site - you could sell ’stuff’, as in the tangible assets and liquidate your assets but the point is that you have ’stuff’ to sell. What happens to Facebook? The bubble bursts just like the nerdy dot com revolution and what was worth billions is now only worth a few servers and some rented office space. Who tells us these things are worth billions? Bankers. What makes them worth billions? The driven up share price bought by institutional investors spending our money from investment bonds, pensions and superannuation policies. This is real money that comes from your wages but where does it go when the bubble bursts into the pockets of other bankers - it doesn’t disappear like the inflated share price. A share that your 401K bandwidth bought for R10 one day and is worth 45 cents the next still cost you R10 today - Has this money gone up in smoke? Like the law of physics that states that energy can’t be created or destroyed, it only changes state - has this money been ‘created’ and then ‘destroyed’ when you worked an hour for that R10. This is just a damn shame the current running money policy was designed with such automation that neither the IMF, the World Bank nor any other institution has the power to police the global financial system in a way that might have prevented the excessive risk-taking which led to the sub-prime mortgage crisis and, in turn, the credit crunch. The opportunity is certainly there (to change it) but why do we have to wait until everything goes to hell? Anybody ever hear of foresight? Who dresses these bean-counters? Does the world need a new banking ?policeman? uhm.....Ja!!!! I mean it doesn’t take a surgeon to notice that these historical figures need to be pushed off their wheelchairs and a new money system needs to be put in place, another Bretton Woods Agreement? Hopefully not, I’d be happier with the plain ol' tried and tested butter system and a pogo stick to go with the caveman outfit.

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