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Fed Can’t Print Its Way Out

A well-known stock market commentator this week said, “There’s been no growth in the money supply for two to three years.”

He also suggested that the recent increase in consumer credit is a positive economic development.

Well, here are the facts. At the end of November, the latest date for which data is currently available, the most common measure of the money supply, known as M2, had risen 11.4 percent since November 2005 and 16 percent since November 2004.

(Just in case you wanted to know: The M2 money stock includes currency, coins and traveler’s checks held by the public; balances in commercial bank checking accounts; balances at credit unions; savings accounts and certificates of deposit accounts less than $100,000; overnight repurchase agreements at commercial banks; and non-institutional money market accounts).

A broader measure of the money supply, the MZM money stock, has risen at an even faster rate over the past few years.

As of Nov. 30, MZM had risen 18.2 percent since Nov. 30, 2005 and 20.8 percent since Nov. 30, 2004.

(In detail, MZM includes all of the components of M2 mentioned before, plus institutional money market accounts and greater-than-one-day repurchase agreements).

So, as you can see, the money supply has clearly grown over the past few years.

My guess is that the well-respected economist who made the comments about the lack of growth in the money supply was referring to a different measure of money, known as the monetary base. That’s defined as currency in circulation plus funds held by commercial banks at their respective region’s federal reserve bank (“reserves”).

Although the monetary base also has risen over the past few years, it has grown at a much slower pace than the M2 or MZM money stock. As of Dec. 31, 2007, the monetary base had risen a modest 4.2 percent since December 2005 and only 8.5 percent since December 2004.

So, you’re probably thinking “Why all of the talk about the money supply?”

The answer is this: When the money supply increases, short-term interest rates tend to decline, and when the money supply decreases, short-term rates tend to rise.

In fact, the Federal Reserve adjusts the target rate for the Fed funds rate by affecting the level of the money supply, or more precisely, by affecting the monetary base.

When the Fed seeks to lower the target Fed funds rate — the rate at which commercial banks borrow (overnight) from one another — the Fed increases its purchases of U.S. Treasury securities in the open market.

(Those who follow the Fed may have noticed that the press releases issued by the Federal Reserve following meetings on interest rate policy always begins with statement, “The Federal Open Market Committee decided to… ”. That’s why it’s called the “open market” committee, because it buys securities on the open market.)

Likewise, when the Fed desires a higher Fed funds rate, it sells U.S. Treasury securities.

However, the Fed is not able to set the exact level of M2, MZM or other money supplies, because there are other factors that affect the money supply.

For example, the ongoing credit crunch and large sums of money that commercial banks have lent to financially-strapped businesses and to individuals over the past six months has caused commercial bank reserves to fall — even though the Federal Reserve has increased its purchases of Treasury securities.

As a result of the decline in bank reserves, the monetary base has grown at an anemic rate over the past few months. In fact, the monetary base rose only 1.5 percent during December 2007 from the same period a year ago.

In light of the ongoing credit crises, the Fed will likely need to significantly increase its purchases of Treasury securities in order to increase the monetary base. Many Wall Street economists have recently been encouraging the Fed to take this step in an effort to lower short-term interest rates.

(Note: When the Fed increases its purchases of Treasury securities, the prices of those securities rise as a result of their increased demand and the yields — interest rates — on those securities therefore fall.)

Well, here’s what I have to say about the recommendations of these “insightful” economists. Go ahead, persuade the Fed to increase the monetary base, because one outcome is certain if the Fed follows the desperate advice of these “experts.”

The result will be that the exchange value of the U.S. dollar will plummet and inflationary pressures will skyrocket. Gold prices, already breaking records, will continue to surge.

In regards to the esteemed economist’s comment regarding the supposedly positive increase in consumer credit, you should consider the following: When the economy is in an expansion mode, an increase in consumer credit is usually a positive development, because such a development indicates that consumers are confident in the future direction of the economy.

To be more specific, when consumers feel good about their employment prospects and their future earning power (that is, salaries and wages), they tend to take out more loans for automobiles, consumer electronic devices and home appliances. They also tend to use credit card debt more willingly for spending on clothing and other personal items, as well as dining out at their local restaurant.

As a result, aggregate consumer spending tends to rise during such periods, as does the total output of goods and services (GDP). That’s because consumer spending accounts for approximately 70 percent of U.S. GDP.

However, when consumers become more fearful of losing their jobs and their confidence in future economic conditions falls sharply — which is exactly what has been occurring over the past two months — an increase in consumer credit should be interpreted as a very negative development.

This is especially so when a large number of consumers begin using credit card debt to help pay their home mortgage loan, as they have also been doing over the past few months. But, don’t worry, there’s also a way to profit from this type of supposedly “positive” economic development.

How would what goes on in the US economy affect the rest of the world, one would ask? Because US Treasury Securities are the world’s most trusted and are purchased by almost every enterprise public or private. So when they are catch a cold, the world sneezes …

Copyright (c) 2008 Money News

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LUSAKA (AFP) — Zambia’s international reserves hit over a billion dollars this year, the highest figure in the country’s history, the central bank governor announced on Saturday.
Caleb Fundanga said Zambia had recorded 1.1 billion dollars in foreign reserves up from 706 million dollars that the country accumulated in 2006.

“Zambia has continued to record favourable external sector performance resulting in an accumulation of gross international reserves of 1.1 billion in December 2007,” Fundanga said in a statement.

“This is the highest the country has ever accumulated,” he added.

He said Zambia’s economy is expected to grow by 6.2 percent in 2008, while the country’s inflation will remain at the single-digit level.

“The overriding objective of monetary policy in 2008 is to consolidate the gains made in establishing price stability by achieving a third consecutive year of single-digit inflation,” Fundanga said.

Zambia’s inflation rate stands at 8.9 percent.

He said the country will face major challenges next year due to the projected rise in prices of petroleum products at the international market and the higher electricity tariffs in the southern African region.

Copyright © 2007 AFP

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By Stephanie McCrummen

Washington Post Foreign Service

Easy Steps For Zambians Abroad To Invest in LuSE

NAIROBI — One ordinary afternoon in a bright, marble-floored lobby downtown here, the following conversation took place between two women, a government worker and a self-employed soapmaker.

“I bought KenGen at 9.90 shillings,” said the government worker, Josephine Nduta, referring to her stake in the initial public offering of Kenya‘s power company last year. “I sold them at 28 — I made a lot of money!”

Traders conduct transactions at computers on the floor of the Nairobi Stock Exchange. Until 2005, the exchange traded stocks using a paper system.

Traders conduct transactions at computers on the floor of the Nairobi Stock Exchange. Until 2005, the exchange traded stocks using a paper system. (By Stephanie Mccrummen — The Washington Post)

 

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Explore the history, people and politics behind one of the world’s bloodiest conflicts.

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Wake Up Call
Photo essay by Patrick Davison documents life in Vukani, a squatter camp near Grahamstown, South Africa.

“I also made money on that,” said Mary Kariuki, the soapmaker, recalling how she used the $1,000 to pay her children’s school fees. “I bought 3,300 shares.”

The two women carried on about liquidity and profit margins, and recalled with pride attending the first shareholder meeting of KenGen this year, an event so huge that it had to be held in the city’s largest soccer stadium. About 200,000 people from all corners of the country came like so many newly minted executives.

“I felt so good,” Kariuki recalled. “It was just normal, common people. People dressed well. What impressed me was the number of old women — they were coming in their traditional clothes. They were telling me, ‘Yes, we bought!’ ”

Stock market fever is sweeping Kenya and other sub-Saharan African countries such as Tanzania, Uganda, Nigeria and Zambia, where stock exchanges, along with national economies, have shown steady gains in recent years as people who have traditionally invested in cows or land are learning to trust in the abstraction of corporate shares.

Perhaps nowhere has the idea caught fire more quickly than in Kenya. With investment banks conducting education campaigns in rural areas and daily newspapers thick with personal finance sections, the Nairobi Stock Exchange has transformed in recent years from a rich man’s club into a computerized, mass-appeal institution.

Since 2002, the number of investors has risen from 50,000 to more than 750,000, according to stock exchange executives, with much of that growth coming from rural areas. The exchange’s total value has jumped from $1 billion to $12 billion, amounts that are predicted to swell again following the biggest initial public offering in Kenyan history.

Cellphone giant Safaricom, expected to go public later this year, has attracted such foreign investment banks as Goldman Sachs to Nairobi for the first time, offering their services, and analysts expect that as many as 3 million individual investors in this country of nearly 36 million will participate.

“People are coming on a daily basis just to see what it’s about,” said Chris Mwebesa, 36, chief executive of the Nairobi exchange. “We’re seeing more rural folks coming to the market, working professionals, retirees, farmers, young people, even students.”

The boom has its skeptics, especially in a country with a history of entrenched corruption. And while people such as Nduta have made money on the whole — she is using some of it to electrify her house — she is also aware of the risk of losing big. Even so, the boom underscores a feature of life in Africa that often gets lost amid more prevalent images of a continent in perpetual collapse: dogged optimism.

A recent opinion poll by the Pew Global Attitudes Project found that people surveyed in 10 African nations were on the whole optimistic about the future. In Kenya, 78 percent of those surveyed said life was getting better, even though a majority also reported that there were times in the past year they did not have enough money for food.

http://www.washingtonpost.com/wp-dyn/content/article/2007/08/25/AR2007082501291.html?sub=AR

  

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Bill Gates, Microsoft
Estimated Net Worth: $56 billion 

The second richest man in the world is also arguably the most philanthropic in history. He and his wife preside over the Bill & Melinda Gates Foundation, with its $33 billion endowment–not including the additional $31 million committed by Warren Buffett last year.

Among his many goals is to increase the agricultural productivity of African farmers, develop preventative treatments for malaria, HIV/AIDS and tuberculosis, and expand financial services to the poor. “The philosophy that Carnegie had in The Gospel of Wealth,” Bill Gates told Charlie Rose last summer, “It really helped me think about philanthropy, and, you know, how you ought to set very high goals.”  Bill Gates will this year leave his position at Microsoft to solely concentrate on philanthropic work around the world using Bill & Melinda Gates Foundation. 

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Pierre Omidyar, eBay
Estimated Net Worth: $8.8 billion

The eBay founder is a vocal proponent of microfinance–small loans to those generally too poor for traditional bank loans–as a method of cultivating entrepreneurship in Africa. Two years ago he and his wife Pamela donated $100 million to Tufts University to create a microfinance fund that will provide millions of loans, some as small as $40, in developing African and Latin countries.

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Oprah Winfrey
Estimated Net Worth: $1.5 billion

Earlier this year the Queen of All Media opened the $40 million Oprah Winfrey Leadership Academy for Girls outside Johannesburg, South Africa. Two months later she cut the ribbon on another. Her charity, the Angel Network, raises funds for everything from HIV/AIDS treatment for African communities ravaged by the disease to Christmas gifts for African orphans.

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George Soros, Hedge Funds
Estimated Net Worth: $8.5 billion

Soros’ investment in Africa began in 1979 when the already wealthy financier helped bankroll the educations of black students attending the University of Cape Town in apartheid South Africa. Among his many recent projects on the continent are the funding of free and open media, greater public participation and local government, and compliance of African nations to human rights. Last year Soros pledged $50 million to support the Millennium Villages, some 30 villages in sub-Saharan Africa in need of health, education and farming support.

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ALTStephen Case, AOL
Estimated Net Worth: $1 billion

Through his Case Foundation, the former AOL chairman and his wife Jean have committed at least $5 million to PlayPumps, which builds water pumps that also function as merry-go-rounds for rural African communities in dire need of clean drinking water. The Foundation also provides fund-raising expertise and support to KickStart, which sells low-cost farming tools and supplies to help African families “kick-start” their family’s economic growth. During her last visit to Zambia, US First Lady Laura Bush visited PlayPump at a Basic School in Lusaka promoted by Stephen Case’s philanthropy.

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Sanford “Sandy” Weill, Citigroup
Estimated Net Worth: $1.6 billion

The retired Citigroup chairman is now an active philanthropist. As chairman of the board of the Weill Medical College of Cornell University, he is overseeing the development of a medical center in Tanzania, where an estimated 9% of the population is afflicted with HIV/AIDS. Weill’s wife Joan sits on the board of the Touch Foundation, through which the couple have donated millions to underwrite medical training for Tanzanian doctors and care workers.

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ALTWarren Buffett, Berkshire Hathaway
Estimated Net Worth: $52 billion

Last year, the Oracle of Omaha, and until recently the second-richest man in the world, committed $31 billion of his fortune to the Bill & Melinda Gates Foundation, which is particularly active in alleviating poverty and promoting sustainable growth in Africa. Buffett and the Gates’ appeared on PBS’ TheCharlie Rose Show last summer to discuss the gift. “The diseases we’ve already been working on and the education and the inequities that we’ve been looking at for so long just basically doubled by Warren’s gift,” Melinda Gates remarked.

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ALTThomas Hunter, West Coast Capital
Estimated Net Worth: $1.1 billion

The Scottish billionaire plowed proceeds from the 1998 sale of his sneaker business into West Coast Capital, which invests primarily in real estate and retail businesses. Two years ago, he hooked up with former President Bill Clinton to launch the Clinton-Hunter Development Initiative, which he seeded with $100 million. The funds will help provide health care, clean water, sanitation and security in Rwanda and Malawi. Hunter has also committed $12 million to UNICEF’s food program in Niger.

Of the eight philanthropists above – now commonly known as ” Billionaires For Africa”, seven of them live in the United States of America and the only black is a woman from Chicago, IL … thanks a trillion

Brainwave R Mumba, Sr. 

CEO & President – Zambian Chronicle 

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