S.MURLIDHARAN

There is a strong case for disclosure of NAV at least by countries whose currencies are allowed to float in the international markets.

A derivative, goes its definition, is an instrument which derives its value or strength from its underlying assets. On this touchstone, option in a share is a derivative just as share futures are. Why, even a share itself, come to think of it, is a derivative deriving as it does its strength from the value of the undertaking(s) of the company issuing it.

A unit of a mutual fund derives its value from net asset value (NAV) which is nothing but the current market value of all the shares and securities the scheme has invested in as increased by the income if any that has accrued and as reduced by all the liabilities and ultimately divided by the number of units participating in the scheme.

Gold standard

Where does this leave currencies? When gold bullion standard was in vogue, one could anytime exchange actual gold for the paper currency it represented thus making the two fungible. Its international version, the gold exchange standard, practised by the US from 1944, coinciding with the birth of the Breton Woods twins IMF and the World Bank, was too good to last for ever.

That it lasted for almost three decades is as much a testimony to the US' doggedness in maintaining the status of international reference currency for dollar as to the sluggish market for gold during this period. When the standard was in vogue, the US promised to exchange each batch of $35 with one ounce of gold. The NAV of a dollar in other words was 1/35 {+t} {+h} part of an ounce of gold. Of course, the US is not bound by any such commitment now with the peg having been junked in the early 1970s in the wake of the first oil shock.

This article however is not about the gold exchange standard pioneered by the US and foisted on the world. It is about the need for underlying assets for a currency that is floating in the international market.

Today, no country is under gold standard, or for that matter, under any standard at all. So much so, the US dollar, by far the currency with maximum international acceptability, the one in which maximum international commerce takes place, is not backed by any underlying asset whatsoever. And even if it is implicitly backed, there is no way one can know what the underlying assets are.

Commodity currencies

There are commodity currencies, meaning currencies of countries whose mainstay is export of some raw material. The Australian and Canadian dollars belong to this genre. But the description is only picturesque involving no commitment to exchange the currency in favour of the commodity that is the country's forte and which it has in abundance.

People dealing in these currencies however have the satisfaction that the currency has not emerged out of thin air and is backed by a precious commodity the world needs, though to be sure there is no legal commitment on the country to exchange for its currency a given quantity of the commodity.

There are a few dubbed as revisionists who pine wistfully for the return of gold standard. With the stock of gold dwindling by the day, return to gold standard en masse would produce disastrous consequences for the world, particularly to those countries not piling up gold reserves.

Even when in vogue, one of the criticisms of gold standard was that it was stacked against nations not fortunate enough to have gold either as a natural resource or as a wise investment but were blessed with other resources like oil or coal or what have you. Indeed, gold standard was guilty of setting store by a single commodity whose availability is limited and distribution skewed.

It was this rather muted rebellion that found a feeble resonance and voice a couple of years ago when the oil exporting nations led by Venezuela, Russia and Iran toyed with the idea of minting a unique currency backed by oil only to give it up finding China baulking at it.

The international order for currencies supposed to be enforced by the IMF is as feeble and effete as the WTO in the domain of international trade in goods and services and investments. But it would be in everybody's interest, including the US', to settle for some discipline on currencies, especially those that are floating.

A currency that is not floating affects largely the domestic constituency whereas a floating currency like the dollar impinges on the fortunes of billions of people across countries, and hence its free and untrammelled minting must be reined in. Such an international order, especially for floating currencies, would bring about a modicum of discipline in minting and overall supply of a currency.

But the zillion dollar question for the dollar would be what would underwrite it. To be sure, the world cannot return back to the days of pristine gold bullion standard when one could swap a currency for the underlying gold. Neither for that matter would it be possible for Australia, for example, to exchange its dollar for a predetermined unit of coal.

True value

But at the same time every country whose currency is floating in the international financial market should be obliged to publish periodically, like a fund manager of a mutual fund, its NAV under neutral international surveillance. That the dollar is grossly overvalued would become known to the entire world at the first disclosure given the fact that the vast amount of dollars in circulation within and outside the US would weigh heavily in diluting the net worth of the nation.

The short point is when a fund manager can be obliged to publish NAV on a daily basis in case of an open-ended scheme and periodically in case of a close-ended scheme despite there being exit route through the exchange, there is no reason why the nation's financial managers should not be cast with a similar responsibility.

This of course presupposes meticulous accounting of assets and liabilities with a proper survey being done of a nation's latent and patent assets giving rise to the tantalising prospect of window dressing hitherto associated with corporations. Nonetheless, there is a strong case for disclosure of NAV at least by countries whose currencies are allowed to float in the international markets.

(The author is a Delhi-based chartered accountant.)

(This article was published in the Business Line print edition dated October 28, 2010)
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