Currency – NEWS

Why Mortgage rates are increasing in USA ?

Before COVID outbreak in 2019, mortgage rates were 3.94% and many economist thought that this is the lowest level where federal bank could go. But 2020-21 proved them wrong.

Due to global pandemic, governments all over the world had to increase their expenditure and even ordinary people needed money to satisfy their needs.

Now, if government wanted to tackle this situation, they will have to print more money and lower lending rates so people can use excess line of credit. This is basic economics. Therefore, central banks all over the world reduced their lending rates and tried to fight and then revive from this disaster.

Similarly, federal bank which is USA’s central bank reduced their lending rate to 3% in 2020 and 2.65% in 2021.

Now, when the situation starts to recover (Post Pandemic) inflation rises as more money is pumped in the economy. The most basic thing to understand inflation is if you check your monthly grocery bill before pandemic and post pandemic you will see almost 8-10% increase. This is inflation.

Now, As prices increases, there is fear of hyper-inflation so federal bank raises interest rates. Due to this, liquidity is sucked from the market. And it eventually helps to stabilize the economy.

This same policy is followed all over the world.

Now, Why does Federal Bank or Governments do these things ?

The simplest answer is ” ECONOMY’s BEST STAGE IS WHEN IT IS STABILIZE ” Stabilize means not inflationary or deflationary stage. the reason behind this is altogether a different topic for discussion.

Further, when Economy is stabilize, Federal Bank will again start reducing the Lending interest rates at very slow speed. (Not like it did at the time of COVID).

Is this the End of Stock and Crypto Market? Why did Terra-Luna Fall?

Stock Markets have been Crushed. And Cryptos are falling even harder. Before you get swayed by all the negative sentiments, here is an important story that you need to read.

Like several asset classes, Crypto too is an asset class. To add to this, it is a new asset class, so the volatility is inherently higher. Which is absolutely normal if you compare it with initial period of stock market.

2] Recently, Terra-Luna, which is a Crypto asset, got crushed by 97%. And, people seem to be losing faith without understanding the context of the problem. So here is a super simplified version.

3] In the ecosystem of Cryptocurrencies & Blockchain, Terra-Luna is: – An Ecosystem. That comprises of a blockchain, native token. – And, it is pegged to the TerraUSD or UST (which is an algorithmic stable-coin)

4] Just a quick explainer on Stable-coins:

You see Cryptos are volatile. For example, if you use one of the most trusted Cryptos (Bitcoin), it can change in value quite rapidly.

Using Stable-Coins (Eg. USDT, USDC, UST), they can change their Bitcoin to a Stable-Coin.

This is similar to you changing your “US Dollar” to a Gold ETF (if you believe that gold is more stable than USD) But, not all Stable-Coins are the same: USDT, USDC function like gold. These are non-algo driven Stable-coins.

To issue 1 USDT, technically the firm issuing that USDT/USDC needs to put one pegged asset as a reserve. A pegged asset could be anything: gold, bitcoin, USD etc. USDT & USDC two biggest Stablecoins are US Dollar pegged.

Another category of stablecoins are called Algorithmic stablecoins. In simple words, they don’t depend on manual actions of buying an underlying peg. But, are rather driven by a smart contract (a computer code– to buy/sell the peg).

4] So back to Terra-Luna: – The Terra-Luna ecosystem is pegged to UST (which is an algorithmic stable coins). – A point to be noted that Algorithmic stable projects have not usually succeeded in the past (eg. Titan and Iron Finance).

Why is Terra – Luna Falling ?

5] The way Terra-Luna ecosystem works is this:

a. In the Terra-Luna ecosystem the goal is to maintain a peg between Luna and UST (1:1 peg).

b. The smart contract essentially tracks supply and demand of UST and LUNA.

c. If price of UST > 1$, people can sell Luna to the Blockchain (Terra). This is then converted to UST. Since the supply rises, the prices falls.

d. If UST decreases in price, UST holders are offered to convert their UST into LUNA coins. And the prices go up.

e. But if a situation arises where no one wants to exchange Luna or UST, then it becomes a problem. f. This can happen for a wide range of reasons [eg. sudden price fall of UST or Luna; arbitrage opportunities etc].

On 9th May, UST fell to $0.68. This was triggered due to market sell off in Cryptos. At this stage, the investors neither wanted Luna or UST. The peg arbitrage further worsened the problem.

6] Now the folks managing Terra-Luna is trying to build back up the investor confidence by re-pegging it to alternate assets (Eg. Bitcoin), but seem to be losing the race.

7] The major problem now is that the winning advantage for Terra-Luna was that it was winning in the algo driven Stablecoin ecosystem. But, given the fact this model has somewhat failed (and given previous failures of algo stablecoins, the investors are going to be skeptical.

8] Does this mean that the entire Crypto ecosystem has failed? The answer is no. The likely outcome is that: Stablecoins now are likely to be more regulated. And, this is not bad.

9] In short if you are an investor, you should do your due-diligence before investing. The rules remain simple: a. Invest, if you truly see fundamental value on a project. b. And, be diversified within and across asset classes.

Governments Don’t want you to know this ?

1] I wish people knew this about politics and economics. Economies grow because our wants > resources. Therefore, companies try to produce things efficiently.
And, we consume them because we derive benefits.

2] If most of the things in the world were left as “free markets”, money would automatically flow to most efficient producers. In 2022, governments & citizens alike are bleeding through their nose, paying high taxes, laden with crazy debt and high inflation.

3] Why? it is a validation of the Keynesian economics going wrong. So here is the back story:- Back in the 19th century, Gold was a currency. FIAT money came and improved the speed of transaction and the fractionalisation problem associated with gold.

4] The system worked up until WW-1. Now, War is costly and if we citizens truly understood the true cost of war, no one would go to one.

5] But, this presented an amazing opportunity to devious governments to de-facto institute a system: where FIAT money (or government bonds) would be presented as a great investment opportunity to the general masses. Bonds were swapped for gold, with a promise of returns.

6] The model got tweaked and FIAT (which has infinite supply) replaced gold (which has a finite & a stable supply) at scale eventually.

7] Masses were convinced that 2% inflation is great for you (since it allows the world to grow– but de-facto it simply gives governments more power to print money).

8] The more the government can print, the more useless business it can subsidise (eg. consider Airlines, Power Plants etc in India) all are now being privatised, after ginormous failures. And, after destroying crazy amount of wealth.

9] You would ask: who gave governments so much money to destroy? Simple answer: You and me. Did we give it willingly? the answer is no. We basically gave them a licence to print as much money as they like (we pay it back through increased taxes and inflation).

10] Meanwhile, short sighted politicians go on 4-5 year spending extravaganzas dolling out political favours to people/businesses they like, offering cheap debt. Why? Because they have infinite power to print.

11] The fact remains you can earn 10 Million and put it in your bank account. You will feel safe.But, even that can be burned down to 0 through hyperinflation. Why no one talks about it? because most of the Economics that is taught in schools/universities is Keynesian

USD vs BITCOIN ? Which is Better?

Starting with history of why Bitcoin ( cryptocurrency) we’re created, Bitcoin was created with a view that FIAT currencies should be replaced by one currency which universally accepted.

When we compare this concept with actual FIAT currency ( USD), we can see that Bitcoin solves many problems we are having with USD.

Firstly SUPPLY

SO, supply is printing of notes which wholly in control of central bank of the country or the government. Government or central bank prints currency as per their convinience to stabilisation inflation or deflation. Hence, the supply of currency can be unlimited. However in BITCOIN supply is limited. This eliminates the power to increase or decrease supply hence your currency wont be depreciated.

Second is DEFI

DEFI is decentralised financing. This is basically related to blockchain technology. In layman’s term, whenever you transact through bank account there is a centralised ledger kept for records by banks known as BANK STATEMENT, in case of BITCOIN, the ledger or records are distributed so no one watch or record the transaction which has significant impact on INCOME TAX LAWS. ( this will be discussed later in next blog)

Third is Denominations,

USD is available in notes as well as coins which can be used. Lly, in case of BITCOIN it is divisible up to 8th decimal.

There are many other differences as well but they are insignificant while you are looking for an investment in crypto.

How Crypto is helping terrorism?

To understand how crypto is helping terrorism or illegal activities first you need to know what a blockchain is.

BLOCKCHAIN

So, Crypto functions on blockchain technology. In layman’s language Blockchain is chain of computers or servers (Blocks) which routes your transaction through it so that no one can find out the root of transaction.

Also, as in banks there are ledgers of every customer which is BANK STATEMENT, which shows details of all transaction. However in crypto currencies, due to blockchain, the ledger is distributed. No centralised system is there to record these transaction.

How it is helping terrorism?

Due to this, illegal transaction including money laundering, Hawala, foreign transfers, etc. are increasing day by day as no one can trace the root of transactions. This is benefitting terrorist activities as they are receiving money from the masterminds and these masterminds are untraceable.

Stay tuned for more facts related to Crypto..

Why Countries might BAN Crypto Currencies?

Everyone of us have heard about Crypto Currency or BITCOIN as an investment alternative or a digital currency.

But it has been seen as a threat to FIAT CURRENCY ( EXAMPLE OF FIAT CURRENCY IS US DOLLAR). As number of investors in Crypto Currencies are increasing day by day, Governments are getting more worried.

WHY GOVERNMENT THINKS CRYPTO IS A THREAT?

One of the power of CENTRAL BANK or Government is they can control supply of currency that is US DOLLAR. To control Inflation or to overcome deflation ( Inflation and Deflation is altogether a wider area for discussion) Government prints currency’s accordingly

However, if the world adopts BITCOIN as FIAT Currency, it will replace USD eventually. And government won’t be able to control the supply anymore. Which is a very big reason for Government to BAN crypto currencies.

As it might increase the GAP between Rich and Poor.

A detailed analysis of impact of Crypto on Inflation will be in next blog.