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Probably the biggest topic in the news these days is the forthcoming, seemingly unavoidable downfall of the world economy. So much so that the most read article in Romanian news this week, as listed by 9am.ro, was entitled "ALERT: Stock Markets Eveywhere Collapse".
In Romania the exchange rate reached 3.94 Lei to the Euro on Monday, October 6th, a 12% increase compared to September 1st. This obviously lead to my having all sorts of meetings and discussions seeking to address the issue. 12% is a really big number, especially since some business models rely on profit margins that are in fact smaller than 10%. If any of these businesses sold stuff in September and collected payment for it in October they practically lost more money than they made.
Hedging and diversified portfolios come up pretty frequently in conversation these days. I was talking to Larry about financial instrument security and government bonds when a very interesting point came up. Government bonds are the most secure type of investment as governments can always pay back their debts, because they can print more money when they run out. So they'll repay their debts, only their repayment might just be worthless due to the inflation created by printing money. You generally don't look at things this way but a 12% exchange rate variation over a 30 day period has a way of bringing out the pessimism in realistic people. Anyway, the lesson to be learned is that in troublesome times you need to think past what you were taught in school and realize that things aren't simply black or white, or in this case safe or unsafe.
The enclosed picture is of a 500000000000 Yugoslav dinar banknote that I got two weeks ago when I was in Belgrade. This is the largest nominal value for a banknote ever issued anywhere, the result of hyperinflation during the war in Yugoslavia in 1993 and further proof that scenarios like the one proposed above do happen. This banknote was worth about 0.08 Deutsche mark in its final hours.
Further reading:
The Worst Episode of Hyperinflation in History
The Yugoslav dinar (Wikipedia)
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