Cash22 - A personal finance blog

It’s been more than a decade since the 2008 recession but a lot of people still don’t know what actually caused it, just like a lot of people do not know what caused the great depression. It’s important to learn and understand these, as they give you insights into what happens when financial instruments are abused and the government may or may not do its part and the importance of economic policies and how they can effectively bring countries out of tough times. What caused the 2008 recession? The US Fed had lowered interest rates after 9/11 to keep the economy going – to ensure that money was available for very cheap to every American. The low interest rates combined with the Fed’s home ownership policy encouraged more people to buy houses at low interest rates. The intentions were not bad. As a consequence, the total mortgage debt was as its peak by 2008. As more Americans bought homes, the real estate market boomed dramatically in the years between 2002 & 2008. Banks were en...

If you took a notebook and pen, and travelled the world, and you wrote down the prices of a pack of 6 locally produced eggs in every supermarket in the world, what would you discover? Apart from the fact that you may have had a lousy trip, you will realize how cheap it is to buy eggs in Bucharest (Romania) and how it is more expensive to by eggs in Dubai (UAE). In a perfectly competitive world, all eggs everywhere would cost the same after factoring in the exchange rate. Same goes for Crude oil. Or for a Mattel toy car. Or for a Lego toy box. These should cost the same everywhere in the world. Except it is not the case. The PPP theory states that, over a long period of time, the cost of similar goods in 2 countries would be the same if you converted the currencies at the prevailing exchange rates. However, this rarely happens. Due to a host of reasons; transaction costs, government interventions, tariffs & duties, non-competitive prices or even sticky prices (wherein even with chan...

The great depression is the period known to us right after the Oct 29th stock market crash of 1929 almost until the end of WW2, in fact – the depression started right in the middle of the interwar period. It is the worst economic phase in the 19th century according to economists and here is a brief summary about what really happened.  (I will talk about it briefly first, but since there are many things about economics the depression can actually teach us, I will cover them separately after the summary) The US experienced a huge boom in the stock market in the 1920s, wherein there was almost a growth of 20% each year in the 5-6 years leading up to the 1929 crash. On September 3rd, 1929, the DJIA - Dow Jones Industrial Average - was at 381 – margin trading (financial invention at that time) giving way to excess liquidity, led to a lot of people heavily investing in the markets without their own money and there was an overall boom in confidence. However, in 1929, fueled by a huge ove...