Learnings In Finance

Quantity of goods and services  unit of money can purchase is defined as purchasing power of money. With 100$ people could purchase more items 20 years back than they can do now.(Ref  inflation calculator ) Inflation is defined as general rise of prices of goods and services over a period of time.In normal times, inflation occurs year after year and money loses its purchasing power. If you keep 100 $ in your shelf for 10 years, at 10% yearly inflation (Still some emerging economies have high inflation.Analysis will be simple to understand at 10%) it is worth only 35$ (100*(.9^10)).Inflation and purchasing power loss due to inflation is said to be biggest risk by investors. Say bank is providing 10% interest on deposit and the actual yearly inflationary expectation is 7%. What is the real returns we get? This 10% interest is called Nominal interest, as its not adjusted for inflation.If you need to adjust for inflation you will get real interest rate. Ni ...

Paul Volker, Ex chairman of US Fed in 2010, after financial crisis declared that the only useful financial innovation in 25 years was ATM that helped  people on the ground and others were of no use. He is the one who is credited for breaking the backbone of inflation in US as Fed Chairperson in early 80s. Robert Shiller, Nobel Laureate, tends to disagree. He says financial innovation is evolving and there could be some loopholes. It will get plugged as it evolves. Sure, the instruments are getting complex but we have sophisticated system to handle the complexity. He bats for more innovative products to plug the current loopholes. There are concerns expressed if top brains of a nation should be dedicated to finance industry in huge number rather than some other domain , say technology or healthcare. Any major project you can think of,   be it railways, hospitals etc,  is financed through equity/debt or held by Government. Even many privately held firm will have t...