European central bank… short movie to show what (price stability) inflation means and how it works. Listen and learn

1) The Federal Reserve System (a.k.a. The Fed) was created in 1913 when President Woodrow Wilson signed the Federal Reserve Act into law. The past several government attempts at creating a centralized bank had failed- the Federal Reserve was a new bank that served as a compromise between privatization and populism.

2) Monetary policy is how the Federal Reserve controls the amount of money and credit in the economy. Monetary policy also affects interest rates and the entire performance of the economy. The Fed’s goals for monetary policy are full employment and stable prices, which in turn promote sustainable economic growth.

3) The Fed uses open market operations, the discount rate and reserve requirements to affect monetary policy. Open market operations refer to the buying and selling of government securities. The discount rate is the interest rate that the Federal Reserve Banks charge other banks. Reserve requirements refer to the portions of deposits that banks must maintain either in their vaults or on deposit at a Federal Reserve Bank.

4) The Federal Open Market Committee (FOMC) consists of twelve members. The FOMC creates monetary policy. The committee meets eight times a year in D.C. During meetings members discuss the economy and policy options.

5) The Fed is in charge of making sure that money and credit both grow at a pace that can allow economic growth but that also keeps the inflation rate in check.

6) A depository institution is any financial institution that mainly gets its funds through public deposits. Depository institutions consist of commercial banks, savings and loans, savings banks and credit unions. A nonmember bank is any depository institution that is not a member of the Federal Reserve System, or, a state-chartered commercial bank that has not joined.

7) Reserve requirements are requirements that are set by the Federal Reserve Board of Governors that set the amount financial institutions must reserve aside. These requirements act as controls. So, lowering reserve requirements promotes bank lending and money growth, while increasing requirements restricts lending and money growth.

Ben Shalom Bernanke is the current Chairman of the Board of Governors. He was appointed by President George W. Bush in 2005 as he succeeded Alan Greenspan.

9) Greenspan had been acting chairman since 1987 when he was appointed by President Ronald Reagan. Chairmen serve four year terms and Greenspan was re-appointed to a historic record tenure before he retired. He is remembered for his handling of the Black Monday stock market crash in 1987.

10) There are also 12 regional Federal Reserve Banks. Each bank has its own board of directors to serve to serve its region by providing economic information and advice on monetary policy decisions. Federal Reserve Banks are in the following cities: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.

For more information on the Federal Reserve and its components visit the government’s website: FederalReserve.gov.

There is sometimes confusion around the difference between fiscal policy and monetary policy. Fiscal policy; Measures employed by governments to stabilize the economy, specifically by adjusting the levels and allocations of taxes and government expenditures.1 Monetary policy; The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates.2

Which one will help our current economic situation? While both are instruments that can be used by the government to influence the economy, monetary policy employs interest rates and money supply in this effort, while fiscal policy refers to taxing and spending by government to help stimulate the economy.

There are two means by which the government employs fiscal policy to influence the economy – taxing and spending. In a recessionary period like we are experiencing today, with increasing unemployment and slow business growth, government spending is a means of stimulating economic activity. Cutting taxes is another means by which government can put money back into the pocket of the consumer during a recession and thus stimulate economic growth. Conversely, during times of economic expansion, government may increase taxes, taking money out of the consumer’s pocket in an effort to moderate economic expansion and quell inflation.

The current fiscal policy in the U.S. is sometimes called a loose or expansionary fiscal policy, one in which government spending is higher than revenue. The reverse is known as a tight fiscal policy, a fiscal contraction, during which revenue outweighs spending. During a fiscal expansion, such as the one we’re in now, the desired effect of spending is to restore the output of goods and services, the gross domestic product, and put employees back to work. This, in turn increases the demand for goods and services and the overall health of the economy.

Unfortunately the fiscal policy of spending more than the revenue earned does not take into account the population confidence and emotional condition. The problem with the administration “printing more money” to create large stimulus packages to get businesses to start growth projects and expansion which in turn creates jobs and lowers unemployment, is that if the confidence of the business owners and executives is so low that they are remaining reluctant to begin growth and are continuing to add lay offs instead of hiring. This quickly becomes the vicious cycle, as the lay offs continue and consumer spending decreases, businesses decrease in production, causing more lay offs and less tax revenue is generated. With less revenue being generated and an increased need for stimulus, the administration is tempted to provide more stimuli at the expense of deficit growth.

While for the past decade or two the Federal Reserve Chairman Alan Greenspan was able to keep the United States from entering a recession by merely using monetary policy to regulate interest rates, with the situation we are in now monetary policy adjustments have little or no impact on our current economy.  One must take into account a large reason of why the economy was easily regulated by monetary policy was the fact that the technology and real estate booms were experiencing out of control record expansion, consumer and business confidence was at an all time high, Wall Street and the stock market were experiencing record growth and profits and the unemployment rate was at an all time low. 

The drastic change started in 2006 when the “perfect storm” hit Wall Street and the Capital had a drastic change in administration and congress control.  With the combination of the technology crash in 2001, the Wall Street crash from September 11th 2001, the real estate bubble burst in 2007, bringing down Wall Streets biggest banks and insurance companies, and the drastic change in fiscal policy with an administration change in 2008 the economic situation was ripe for a dramatic change of direction and the recession was inevitable.

Though there are many philosophies, from the “experts,” as to how we can and should treat this current economic situation, I have to think that the solution of instilling confidence in the small business owners to drive the economic turnaround is the quickest and safest bet.

Today, we stand on the threshold of economic recovery. According to the September 16th issue of The Wall Street Journal, “Federal Reserve Chairman Ben Bernanke said Tuesday that the recession was ‘very likely over,’ as consumers showed some of the first tangible signs of spending again.” As small business owners, it’s now time to move out from under the cloud of fear and stand beside the banner of recovery.

Do you remember the 1983 film Mr. Mom, starring Teri Garr and Michael Keaton? In the film, Jack (Keaton) and Caroline (Garr) are married with three kids and living in the suburbs of Detroit, Michigan, during the 1980s recession. As the movie opens, Jack has just lost his job in the auto industry, [a big business], and Caroline has been hired by an ad agency, [a small business], forcing Jack to trade roles and become a stay-at-home Mr. Mom. 3

Like this fictional storyline, it is the small business growth that will help the struggling middle class recover and greatly instill consumer confidence, which in turn drives the economy forward. I know a large part of the of small businesses fear is the unknown of the administrations fiscal policy, taxes and mandatory healthcare expense, however that is just hearsay at this point and the current administration is starting to get the message of how the general public feels, with the results of the recent elections in New Jersey, Virginia and Massachusetts, that a majority of the people don’t want those types of tax increases and out-of-control spending. I am fully aware that the high ticket item industries, such as the auto and real estate industries, have been damaged so badly that a lot of those small businesses that were associated with those industries are gone forever, however the owners and entrepreneurs of those business, which have proven to have the knowledge and skills to start and run a successful business, need the confidence and assets to start a new venture in another industry.  The government needs to concentrate the stimulus dollars towards the current and past small business owners to begin to grow the confidence and economy through their fiscal policy.

Having been a small business owner myself, I was put in the situation where the cost of maintaining the business was far outweighed by the risks, like having clients go out of business unexpectedly while having outstanding bills to my business. The risks coupled with increasing fees, costs of doing business and the overwhelming employee costs, made it impossible for the business to grow and my personal investment was increasing, while the venture capitalist monies disappeared. The only clear choice for my partners and I was to close the business and for me to become a “Mr. Mom” and stay home with my children. With increased capital made available by the feds fiscal policy I would be much more likely to again take on the risks of starting up another small business.

This supports the theory that the current administration needs to stop the rhetoric of how they are going to fix the economy, stop dumping stimulus money at the large corporations that self perpetuated their current economic failings and begin to create a new fiscal policy that will support and encourage expansion and growth of the small businesses in America. I have to conclude that the fiscal policy has to change and be implemented first before the monetary policy can take effect.

We all must hope that the current administration finds the complicated formula and balance between increasing the stimulus and increasing confidence soon, as the economy needs to be on the upswing before the monetary policies of lowering interest rates can again have an effect and banks in turn begin to have the confidence to take on the risks of loaning money again.

1 Britannica Concise Encyclopedia 2009.
2 Investopedia.com 2009
3 Begin Your Economic Recovery. Lower Your Prices Now! January 20, 2010, Small Business Trends, By Susan L Reid 

Whatever be your future objective of systematic investment planning-child’s education, marriage, buying a house, or retirement planning, it is imperative to handle your available financial resources in such a way that it generates the maximum possible returns with minimal risks.

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Next, it is advisable to look for profitable stocks and securities in the market. Before you choose any particular stock, find out its past performance in the financial market. Even if a particular stock or bond is expensive, but has done well in the past, don’t think twice in buying it, since it will promise you profitable returns in future.

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Trading on the NYMEX floor with commentary from Robert Downey Jr.

State treasuries serve as the banks of the state; they also manage the money of the state, and therefore serve a vital role in their overall economic success. Universal among the states of Alabama, Kentucky, Illinois, New York and Michigan is the role of the treasurer and their attitudes on university education. Each department functions to invest state funds in order to maximize profit, thereby increasing their revenue so that the public can be better assisted. Each state has an unclaimed property fund to help lost items reach their owners, and each state has a savings program implemented to assist parents in saving for their children’s education. Below is a short description of some of the more interesting programs and information about each state:

Alabama State Treasury

* Prepaid Affordable College Tuition Program(PACT):This investing plan helps families by allowing them to purchase a contract to prepay 135 semester hours of college tuition at any college or university around the country
* The Security for Alabama Funds Enhancement (SAFE): This program involves banks in securing their own funds by requiring them to pledge collateral to the Treasury Department for a collateral pool

Kentucky State Treasury

* The Treasurer position was among the first created by the state constitution in 1792; they are elected every four years and act as the chief elected fiscal officer
* KEES program: This is a lottery program set up to raise money to send graduating high school seniors to college
* Kentucky Teachers’ Retirement System: Oversees the pensions and savings of teachers

Illinois State Treasury

* Agriculture and Alternative Agriculture Loan Program: Offered to farmers or agriculture specialists who produce alternative products such as grapes, strawberries, or hydroponically grown food. Also for those who are in the Christmas Tree growing, fish farming or wine-making business
* Bank At School: This program helps elementary school children learn the basics of money management by partnering a local bank with a school to run an in-school bank.

New York State Treasury

* Linked Deposit Program: This program was started to encourage small businesses in the state to invest. Banks offer a 2-3% lower interest rate on loans
* International Fuel Tax Agreement project: this plan simplifies how commercial motor carriers report their fuel use taxes. With this plan they can buy one license that can be used throughout IFTA jurisdictions.

Michigan State Treasury

* Taxable Tobacco Settlement Asset-Backed Bonds: the proceeds from the sale of these bonds is used to buy tobacco receipts and proceeds are deposited in the 21st Century Jobs Trust Fund to create more high-tech jobs.
* Michigan Municipal Bond Authority (MMBA) : Established in 1985 to give schools and other areas of government a different financing source to use for certain projects

Are you afraid of rising inflation rates? And want to ensure better returns over inflation from your investments at lowest risk? Then Treasury Inflation Protected Securities (TIPS) can be the best investing option for you.

Treasury inflation protected securities, also known as Treasury Inflation Index Securities and Real Return Bonds (RRB), are known as ‘safest of the safe’. There is minimum downside risk on investing. TIPS are long term fixed income investments protected from inflation rate fluctuations.

TIPS are treasury notes which offer guaranteed payments – interests in every six months and principal on security maturing. In every six months the value of TIPS is automatically recalculated with respect to the inflation rate (measured based on Consumer Price Index, CPI). That is when inflation rate is up, value of TIPS is also increased automatically. In other words, inflation protection is available on both capital and investment. But there is no fall in original investment value of tips, as government guarantees that payment.

Treasury inflation protected securities are either bought directly or through mutual funds. There are TIPS with different maturity periods – 5 years, 10 years and 20 years. When buying directly, minimum capital investment is $1,000 and investments can be multiplication of thousands. Purchasing TIPS through mutual funds offer more flexibility.

There are many advantages of investing in treasury inflation protected securities.

TIPS are very good long-term investments.

They are government guaranteed.

TIPS are excellent ways to diversity your portfolio and to reduce total portfolio risk.

They are good option to hedge increasing commodity and service prices and they minimize total portfolio volatility.

TIPS require less active investment management and thus favor both beginners and experienced investors.

They are useful when inflation rates are expected to move up and when economy slows down.

But there are also some drawbacks.

Treasury inflation protected securities offer less interest on capital compared to bonds and other fixed income securities.

They offer poor return when inflation rate stays stagnant and in deflation.

Earnings from TIPS are taxed unless they are used in non-taxable and non-deferred accounts.

Investors cannot actively control their investments, as they aren’t traded as easily as equities.

And also interest rates are adjusted according to CPI, a switch from CPI to Chain-weighted CPI can cause problems.

Foreign Exchange Accounting Standard

The State of Financial Markets in the Southern African Region

Up to the end of 1994, there were 14 stock exchanges in the entire African continent. These were Cairo (Egypt), Casablanca (Morocco), Tunis (Tunisia) in North Africa; Abidjan (Côte d’Ivoire), Accra (Ghana), and Lagos (Nigeria) in West Africa and Nairobi (Kenya) in Eastern Africa. In the Southern African region, they were Windhoeck (Namibia), Gaborone (Botswana), Johannesburg (South Africa), Port Louis (Mauritius), Lusaka (Zambia), Harare (Zimbabwe) and Mbabane (Swaziland). In 2005, most of other countries in Southern Africa have developed their own stocks exchange markets. They are Maputo (Mozambique), Dar-Es-Salam (Tanzania) and Luanda (Angola). Foreign Exchange Accounting Standard

With the exception of the Johannesburg Stock Exchange, and at a different level, the Zimbabwe Stock Exchange and the Namibia Stock Exchange, these markets are too small in comparison to developed markets in Europe and North America, and also to other emerging markets in Asia and Latin America. At the end of 1994 there were about 1150 listed companies in the Africa markets put together. The market capitalization of the listed companies amounted to $240 billion for South Africa and about $25 billion for other African countries.

In the countries under review, stock markets are particularly small in comparison with their economies – with the ratio of market capitalization to GDP averaging 17.3 per cent. The limited supply of securities in the markets and the prevailing buy and hold attitudes of most investors have also contributed to low trading volume and turnover ratio. Turnover is poor with less than 10 percent of market capitalization traded annually on most stock exchanges. The low capitalization, low trading volume and turnover would suggest the embryonic nature of most stock markets in the region.

We have gathered considerable information on the current state of financial markets in Africa in general, and due to a limited time frame, it was not possible to collate, analyze and harmonize them. The format of this article cannot allow to take into consideration all the data. From the latest information, it becomes clear that with the ongoing reforms within the financial sectors in the countries under investigation, a lot of progress has been achieved in terms of regulatory and institutional capacity building. We could expect more results with the promotion of more open investment regulations, allowing more financial flows in the region.

The Experience of Financial Markets Regulation in the Southern African Countries

The financial systems of Southern African countries are characterized by high ownership structure resulting in oligopolistic practices which create privileged access to credit for large companies but limited access to smaller and emerging companies. The regulatory framework must take into account all the specific characteristics of these systems, and at the same time keep the general approach inherent to every regulatory instrument.

Financial systems in Southern Africa are also noted for their marked variations. Some systems, such as those in Mozambique, Angola and Tanzania were for a long period, dominantly government-owned, consisting mostly of the central bank and very few commercial banks. Up to date, Angola has not developed a money and capital market, and the informal money markets are used extensively. Other systems had mixed ownership comprising central banks, public, domestic, private and foreign private financial institutions. These can be further sub-divided into those with rich varieties of institutions such as are found in South Africa, Mauritius and Zimbabwe, and others with limited varieties of institutions as are found in Malawi, Zambia, Swaziland, etc.

Regulatory authorities in most of these countries have, over the years, adopted the policy of financial sector intervention in the hope of promoting economic development. Interest rate controls, directed credit to priority sectors, and securing bank loans at below market interest rates to finance their activities, later turned out to undermine the financial system instead of promoting economic growth. Foreign Exchange Accounting Standard

For example, low lending rates encouraged less productive investments and discouraged savers from holding domestic financial assets. Directed credits to priority sectors often resulted in deliberate defaults on the belief that no court action could be taken against the defaulters. In some cases, subsidized credit hardly ever reached their intended beneficiaries.

There was also tendency to concentrate formal financial institutions in urban areas thereby making it difficult to provide credit to people in the rural areas. In some countries, private sector borrowing was largely crowded-out by public sector borrowing. Small firms often had much difficulty in obtaining funds from formal financial institutions to finance businesses. Finally, the tendency of governments of the region to finance public sector deficits through money creation resulted not only in inflation but also in negative real interest rates on deposits. These factors had adverse consequences for the financial sector. First, savers found it unrewarding to invest in financial assets. Second, it generated capital flight among those unable or unwilling to invest in real assets thereby limiting financial resources that would have been made available for financial intermediation. Coupled with this was the declining inflow of resources to African countries since the 1980s.

A viable financial market can serve to make the financial system more competitive and efficient. Without equity markets, companies have to rely on internal finance through retained earnings. Large and well established enterprises, in particular the local branches of multinationals, are in a privileged position because they can make investments from retained earnings and bank borrowing while new indigenous companies do not have easy access to finance. Without being subjected to the scrutiny of the marketplace, big firms get bigger.

The availability of reliable information would help investors to make comparisons of the performance and long term prospects of companies; corporations to make better investments and strategic decisions; and provide better statistics for economic policy makers. Although efficient equity markets force corporations to compete on an equal basis for the funds of investors, they can be blamed for favouring large firms, suffer from high volatility, and focus on short term financial return rather than long-term economic return.

In various countries where domestic bond markets exist, these are generally dominated by government treasury funding which crowds out the private sector needs for fixed interest rate funding. With minor exceptions, the international fixed rate bond markets have been closed to African corporations. Thus the development of an active market for equities could provide an alternative to the banking system.

The development of financial markets could help to strengthen corporate capital structure and efficient and competitive financial system. The capital structure of firms in Southern African countries where there are no viable equity markets are generally characterized by heavy reliance on internal finance and bank borrowings which tend to raise the debt/equity ratios. The undercapitalization of firms with high debt/equity ratios tends to lower the viability and solvency of both the corporate sector and the banking system especially during economic downturn. Foreign Exchange Accounting Standard

Image taken on 2009-10-07 23:00:04 by azizuan.

live.pirillo.com – Chris and Ponzi share some of their personal money management stories. We get to learn two things: 1) Chris is horrible at math. 2) Chris hates pennies.