Wednesday, 1 January 2014

Why don't westerners understand the concept of currency risk ?

I have been having this heated argument with some fellows on a hockey forum about gold, inflation, investing, saving and all of that. What I have come to understand is that westerners are absolutely clueless on anything to do with currency risk. The reason is because generations of them have never experienced a currency crisis. Even the inflation in the 80's was blamed on Iranians taking Americans hostage and oil prices so they didn't learn anything from that. These guys have not been easy on me so I haven't  been easy on them. Its all part of the fun. Basically we have been arguing endlessly for 40 pages. Since none of them will save in gold, I asked them what they would do with $200,000 if it fell on their lap. I'm just posting this because I did some math that I always wanted to post.

My name is LolClarkson on this forum

Here is the exchanges:

Originally Posted by LolClarkson

I've asked this question 3 times now. Nobody has answered it. What would you do with $200,000 right now if it fell on your lap ????????????
Originally Posted by Epsilon

But it all seriousness, with $200,000 I'd pay off my debts, make down payments on a house and a new car, put a chunk in my checking account to make some purchases, and put the rest in a savings account.

I wouldn't spend a cent of it on a bar of gold bullion.
Originally Posted by Roughneck

I'd spend about $10,000 on stuff I don't really need.
A sizable chunk would go towards a home.
$10,000 to a trip
The rest into savings.
Originally Posted by LolClarkson
 Here is another fool who didn't understand the question. What would you do with it as an investment ? I am not interested in what you want to piss the money away on.
You said put it in savings.
Canada Inflation Rate
The inflation rate in Canada was recorded at 0.90 percent in November of 2013. Inflation Rate in Canada is reported by the Statistics Canada. Inflation Rate in Canada averaged 3.21 Percent from 1915 until 2013 but we will use the 0.90%

Toronto Dominion Bank Account Interest Rates

Rates as of January 01, 2014

Accounts $60,000 and over rate 0.35%

.90 (-).35 = minus -0.55. So after inflation, you have a negative .55 return.

So your $200,000 in a savings account costs you $1100 a year. (.55% of 200,000 is $1100)

After year one, you are left with ($200,000- $1100=)$198,900

Is this what you call a sound investment or savings strategy ?

Negative yields.... Plus you pay income taxes on the .35% return even though it is no return at all ! Using the governments own statistics.

Interest Income
Investments such as Canada Savings Bonds, GIC’s,
T-bills or strip bonds, pay interest income which
is taxed at your marginal tax rate
without any
preferential tax treatment.

So the law says that you have to pretend that your $1100 dollar loss on your $200,000 savings doesn't exist. And you have to pay taxes on the imaginary return. Lets do some imagining...

.35% return on $200,000 = $699

Federal tax rates for 2013

15% on the first $43,561 of taxable income.

15% of $699= $104. So you lose $104 to taxes.

So you can add that to your already negative $1100 loss.

$1100+ $104 =$1204 loss.

$200,000-$1204= $198,796  

Originally Posted by Roughneck

LolClarkson: the guy who has all the gold in the world but isn't smart enough to use a TFSA (Tax Free Savings account)properly.
Originally Posted by LolClarkson
^This guy thinks that a Tax Free Savings Account will shield him from loss via inflation !

And we have already been through many currency risk lessons on this thread !

ZeroHedge compares the Asian Financial crisis to the US dollar bloc.

My second post on this blog went over the Asian Financial crisis in detail and how it compared to the US dollar bloc over the last few decades. I still think this particular crisis does not get nearly enough coverage in these times.  But props to Tyler and ZeroHedge for mentioning it in a recent post.
Although I don't agree with the premise that Thailand is imploding now (its a creditor now and political crisis has been priced in for 30 years), they have it right about the 1997 crisis and the comparison. Here is the post.

The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion.

The crisis started in Thailand with the financial collapse of the Thai baht after the Thai government was forced to float the baht due to lack of foreign currency to support its fixed exchange rate, cutting its peg to the US$, after exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.

Indonesia, South Korea and Thailand were the countries most affected by the crisis.


The causes of the debacle are many and disputed. Thailand's economy developed into an economic bubble fueled by hot money. More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called "crony capitalism". The short-term capital flow was expensive and often highly conditioned for quick profit. Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centers of power.

At the time of the mid-1990s, Thailand, Indonesia and South Korea had large private current account deficits and the maintenance of fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.

In the mid-1990s, a series of external shocks began to change the economic environment – the devaluation of the Chinese renminbi and the Japanese yen, raising of US interest rates which led to a strong U.S. dollar, the sharp decline in semiconductor prices; adversely affected their growth.


Many economists believe that the Asian crisis was created not by market psychology or technology, but by policies that distorted incentives within the lender–borrower relationship. The resulting large quantities of credit that became available generated a highly leveraged economic climate, and pushed up asset prices to an unsustainable level
 Just like the US dollar bloc. And it bares repeating that the AFC currencies lost 50% of their value with no QE and no money printing at all. 

This was my post on the subject: