RETHINKING MONEY-9

Can we imagine something that seems a bit odd today? There is a digital currency called Ripple. There are more than 8 billion ripple coins in the global market. They are worth over $50 million today. They offer transactions in all major currencies of the world as well as the gold. There is no need of any bank or financial institutions involved and hence no transaction cost involved. Its cost is very near what was the worth of Bitcoin in 2009 just after its discovery. Still, every day, over $100,000 worth of Ripples are bought and transacted. Let us assume that some company like Amazon, Facebook, Alibaba, Google, Microsoft or Apple or a group of them decides to make Ripple payment another alternative payment currency sometime in 2016. Suddenly, the network that is limited to some lakh users shall immediately shift to hundreds of millions of users. The credibility stamp of such a big network shall add a big worth to this digital currency. Don't forget that this ripple coin is like electronic version of gold. There is an upper limit to the number of ripple coins that can be issued unlike paper currencies that can have unlimited money supply. It means that possibility of embedding digital currencies in existing social and media networks is huge. That is why the monetary scene in the world is sitting at tenterhooks. Once these are gone, people will change money so fast that no national system can adapt accordingly. This will be like a computer virus that will spread to millions in days if not in hours. That is why the anchoring of paper currencies to actual gold or silver is very important. No keynesian economist would accept such a possibility but that is the biggest fear that is stalking them at present. This may seem odd but for the imminent survival, they would have to anchor the paper money if they want to secure any credibility. An inflation ridden money is always like an uneasy burden. The moment a national citizen gets a credible global alternative, things would change very fast. I am talking of only Ripple coin at present but there are over 200 digital currencies like Ripple in this world. The chances of world currencies hitting a digital black hole is not very remote these days. I am not talking of big business or big banks rather i am talking of retail transactions. That is why no established voice or government agency is actually speaking of this danger because their interests are directly linked to status-quo. But this may not last for long because once people start shifting paper currencies with digital currencies, it would turn into an alternative revolution.

Rethinking Money-8

What is the value of excess unused cash that lies with you? You will either keep it as it is or you will invest it in some financial instruments depending upon how much you can wait for the  expected returns. In most of the cases, you will keep some amount with yourself for your regular or emergency needs and save the rest in some time-determined instruments with some returns. This means that time and cash-in-hand is a very serious factor when you decide the valuation of your future returns. What happens when you think that time is not ripe for longer duration investments? Everything now comes down to the shorter duration. That means that you will turn all your time deposits into demand deposits even if they are in banks. For you, short term is very important if your money is not in your hands. In direct contrast to it, for banks, long term is very important if the money is locked in bank reserves. Short-term is a very dangerous zone for a bank. The bank does not earn from demand deposits rather it earns only from time deposits. In short term, they only incur expenses and don't earn money. The way banks manage their call money rates for very short-term cash-needs, is a story which many people know that it is bank's nightmare many times. Let us assume that there comes a time when people are not sure of the long duration and they turn most of their deposits from time deposits into demand deposits. The moment it happens, the chain starts and runs and will keep running like anything. The bank would simply lose all cash very soon if people don't trust the nature of time. In electronic age, the transfer of wealth from time deposits to demand deposits and from demand deposits to immediate cash is very less rather almost negligible. That is what makes the value of paper currencies very unsustainable. What a government does with money, will determine the future of currency and if government keeps printing money and sustaining inflationary economy, the time factor can kill any monetary system in very short duration. That is what is possible in electronic age if currencies are not pegged with commodities like gold and silver or any other reliable commodity. The moment there is crisis, people will lose trust in the currency and there would be serious backlash in the electronically managed transactional network. The lesson obviously is that time for non-anchored money is gone and we need to get back to Bretton Woods era when dollar was pegged to gold at the rate of $35 to an ounce of gold. If US federal bank could not pay back money, it was liable to pay back in terms of gold. I know that is too difficult at present but think of the catastrophe we can witness once the currency starts collapsing in electronic age. The age of money-throwing welfare state is over.

Rethinking Money-7

Have you ever thought of bank as a holder of cash? Just try to observe your relationship with bank in the smartphone and online age? Are you noticing that this is a strange age in a special sense? Today, you use cash as currency paper note. You are always in need of this cash and a bank is the provider of that cash. There is monopoly of bank in terms of providing cash flow to the people. But think if that currency note goes digital. This means that in a bank server, this is a digital figure or a bit of information. Similarly, when you use your mobile smartphone, tablet or computer for financial transaction, it means that your money is a just a digital figure or a data. Practically, there is no difference between you and the bank holding digital money. That makes you a digital equivalent of a bank. It also means that the bank does not have the monopoly it  used to have. What can happen if instead of banks, you and millions like you stop using any such currency. This will be equivalent of bank run because now, you are the real bank who holds money. Think if ten million people just exchanged a hundred dollar note for an unknown currency. It would be a figure of 1000 million worth of new currency. People will use the new currency but will dump the dollar. The one billion dollar cash would be gone for good.  Now, just forget this assumption for some time and read the following.............

Everybody says that dollar will eventually lose this status of reserve currency but nobody challenges the US power to stop the powers that challenge dollar. After all, the one who creates money out of thin air, would remain powerful till the world stops using that money. The people don't have an alternative. They created bitcoin but the too much of dollar cash in the hands of federal powers has already bought a majority of bitcoins and has locked it out of common man's use. The first warrior is dead but don't forget that the world is using at present over 200 digital currencies like ripple coins, dogecoins and many more. The world is like a big bank with dollar deposits in the hands of people and can you imagine how much money, people can exchange in a minute, an hour, a day, a week, a month or so on? When people choose to dump dollars for bitcoin like currencies, there will be change. This will not be bank run but rather, it will be currency run. The toxic inflation-driven cash will simply fly once mob starts doing it. Remember that people use money and by using that money, they make the creator of that money the king of users. No scholar can predict the timing of this change. Just think of the power of over three billion smartphones choosing to start something of this kind! People will change the system; governments won't.

Too much cost, too less of Education: Papa-Beta comparison

Today afternoon, my son gave me his quarterly fee slip and I was a bit shocked to find the increased fees increase totaling Rs.10,000/- for a quarter. It means Rs.3,333/- for a month. This is not a small cost per month by any Indian standards.  The figure irritated me a bit but I had no better option or the option to opt out. Somehow, I managed the discomfort within and remembered the good old days when I was myself a student as my son is. Suddenly, a question surfaced in my mind “What were my fees in the similar class way back some 32 years ago?” A bit of recollection helped me and I found that mine was Rs.30/- per month. My school was one of the top five schools of the city and it enjoyed fairly good reputation among the public. My parents were pretty satisfied with the school teachers and other related activities. In last 32 years, the fees jumped over a hundred times and my kid’s school should be rated not among the top five rather among the top twenty schools of the city. I cannot say that my son is really being trained for skills of the future or his teachers are really great or committed teachers. It means that the cost of my son’s education is over hundred times more than that of mine despite the fact that I consider the important factors of quality on the declining side.  In a period of 32 years, the hundred times increase seems huge. I enquired the same from a fellow friend who calculated his similar situation and said that his comparative ratio of father and son was 1:110. In order to be clear, I enquired the same from couple of more acquaintances and this figure turned out to be nearly above 1:105. What does that mean in economic terms? The inflation figures of foodgrains, fuel and electricity may be disturbing but have we ever bothered to think of cost of education and hidden inflation inside it. If calculated properly, this item would turn out to be the most inflation-prone one in last 25-30 years. During 1970s and 1980s, the factors like regular off-campus tuitions, coaching for competitive examinations, capitation fees etc were not very prominent but if these factors are added to the current cost of education, the actual financial burden of education would be really heavy for a middle-class family. The cost of educating two kids can sometimes take even more than one-fifth of a family’s total budget. In America, the student debt burden of the entire country has gone beyond $1 trillion and average debt per student is over $27,000. In India, the average of student debt may not be there because bank loans for education are not a regular practice here but if parents’ debt for kids’ education is calculated, it would not be less in terms of comparison. This is the debt that has to be paid back by skills and competence but are we really gaining in capacity for that? Are we really getting a good education?  Are our students really earning hard enough to pay back their parents’ loans? The skills deficiency is increasing day by day. Whatever we invested in our education is being sucked by inflation of degrees. Marks are turning less and less the hall mark of a good and talented student. How to handle this situation of perfect storm? This is a question for all the schools and colleges to answer. 

Rethinking Money - 6

Read reviews of "The Dollar Trap" by Eswar Prasad. He agrees that dollar is losing the credibility of a reserve currrency but it would continue primarily because it does not have an equivalent challenger. This is a particular case of linear imagination reaching nowhere. It can predict for some years but cannot see what can be the disruptive change. I thought that same could have been said of Pound in 1930s. I think that good scholars of money don't go much back into history before reaching their judgements. Why is it so that only two countries India and China controlled 60% of world trade for nearly 2000 years before 1849? There is something hidden in the intrinsic business and monetary models of these two countries that is fundamentally different from the western model of money. I don't know exactly what these models were but they were not definitely what we have today. In order to revisit our ancient business and trading strength, we need to merge three ideas- denationalization of money across the borders, choice of currencies for all the users and commoditization of money. These ideas are not unique but not tried in Indian context. Denationalisation of money means that we need to allow money flows with full transparency in and out of the country. Every year, there is hawala route transferring money in trillions across the nations. All money is national but works in a global reality with international forces of demand and supply. Why it cannot be a transparent exchange instead of being an illegal one? There have been 100 currency crises during last 40 years across the world. Nearly $100 billion of capital has moved out of India in last five years because the businessmen were deeply worried over the weakening and poor value of Indian rupee. Could they use a currency of their choice for whatever investment while sitting within India? If Indian rupee can bend before dollar, pound and euro and fetches a very poor exchange value, we need to create a better choice of investment available to Indian traders and business. Why to limit them to a choice where they will always have a weak exchange ratio? How to do it is a question but first of all, we need to realize the fact that Indian business is not happy with fluctuating and poor exchange value of rupee? Give the choice of currency to one and all beginning with those who can invest. Secondly, let there be more Indian currencies to choose from within India. Why cannot ICICI, HDFC, SBI, Vodafone, Airtel or Reliance issue currency with sound money standards? If they can issue shares, why cannot they issue currency notes? After all, a share is a guarantee of preservation of purchasing power. If govt cannot safeguard our purchasing power, let others take over this function if they can. It will be a minimum government with maximum governance. Third, a money without any anchor is vulnerable to arbitrary fluctuations but this thing can be stopped if there is commodity anchor in form of gold or silver. Some more commodity anchors can be tried. Let there be plural control of money. Today, a city is as large as a world and a world is as large as a village. You are a group both as small as only two and as large as 8 billion. If world can have many currencies, why a city cannot have many currencies? When this can happen without serious backlash or government interference or with popular support? This would be a reality particularly when we lose our fixation with paper currency notes and use electronic money. E-currencies are global and local simultaneously; so, the big change may happen any time after 2016, when global smartphone population crosses 200 crores. This would be ripe time for change-over. Be ready for that.

Rethinking Money-V

The actual fact is that money is nothing but transfer of value from one to the other. But when the actual value as well as the supply of money is determined by a centralized monetary regime that controls prices, wages and interest rates, it becomes an absolute power for managing both present and future. We are in democracies but in terms of money, they are dictatorships; they allow only one kind of money definition and that definition is inflationist. Every saver is at loss when he saves money that is going to lose its value. The net beneficiary is the one who consumes and keeps consuming whatever may happen to the ecology and the poor. More cars mean more and more cars and more of petrol and more of traffic jams and so on. This kind of money defintion borrows prosperity from the future and saves the present from getting any lessons in sustainable development. It is like killing our kids who will see a planet with more pollution, less potable water, barren lands, industrial waste, ghost cities and townships and so on. We are all participants in this mindless money expansion that does not have any anchor. Neither dollar, nor gold, Yen nor Yuan or anything else. Everything is topsy-turvy in its core. The day is not far off when some financial virus would create havoc among current monetary orders and devastates it. Roman civilization was devastated by the inflation. Southern America lost to North America during battle of slavery because of the same factor. A strong and sound money is the only way future can be ensured. But the one who has power to print money, has the power to create more power out of thin air. This is the attraction of paper money. But this power is going to meet its nemesis. Currencies will fight currencies and none will win.

Rethinking Money-IV

Who owns the money or the capital? Particularly, the kind of money that belongs to common pool. For example, the money deposited by way of donations at a temple or a gurudwara. By this fact, there are thousands of tonnes of gold, silver and other valuable forms of stones etc deposited in the temple vaults. Who owns this money? If it is owned by the people, who represents the people - the government or the deity of the temple? If it is the government, it would be ultimately owned by the power elites of the current regime. If it is owned by the deity, it is owned by all those who respect that faith and faith related institutional network. India is governed monetarily by the western notion of singular control of money in the hands of power elites. They subvert it by choosing the term 'social contract' instead of any established faith-based practices. That is why any control of money by plurality of institutions is ruled out. We are ruled by monochromatic notions of monetary control. The central banks think in terms of only fractional reserve banking whereas the faith based institutions aggregate wealth by donation and philanthropic efforts thus by creating only the surplus and that too permanent surplus of capital. India needs to move from monochromatic control of money to poly-chromatic control where not one central bank would print money only. Anybody can print money but within the limit set by the amount of silver or gold, one has in its vault. There should be a straight-jacket on everybody not to issue money more than one is authorized to. Let there by thousand saviours of India and not the one saviour of India as is assumed by making Rupee the only legal tender option in India.

Rethinking Money-III

World money (WM) = National currency (N1)+ N2+ N3+ N4+.....................All central banks are printing more and more and this is exceptionally true for last six years. In this period, the world money has more than doubled which means that more money is actually pursuing less goods and services. At present, this is not fully visible across national markets because banks are keeping interests deliberately low across the developed economies and markets are very deficient in demand. There is no way bankers would accept any restraint on their power. The fiscal and monetary elites are hand-in-gloves with each other. Raghuram Rajan is crying for this non-system to end but nobody is listening. He may even meet much worse treatment at the hands of next government for taking this stand. This all is making the world move towards a monetary apocalypse- a world with high inflation, high rate of fluctuation of exchange rates and a total unpredictability of business decisions. This may lead to crumbling of welfare-state structures across many countries. The crux of the problem remains that we need to move from singular arbitrary monetary control to plural monetary control with gold-silver backed restraints. This is something that all elites would refuse till the last moment. All other solutions would only increase the arbitrary nature of money-printing or quantitative easing.

Rethinking Money-II

What to do when governments don't safeguard the value of money? Why money in India is so inflation-prone and turbulent in terms of all decisions regarding interest, wages and investment? After all, the reason lies with the discretionary power that lies with our governing elites. Whether you call it central banking, institutional politics or inefficient lending, the crisis still persists with the hidden arbitrariness behind determining purchasing power of money. How can this be curtailed? There are mechanisms but all of them are in the domain of parliamentary legislation. So, how to bell the cat remains the problem. Why would anybody restrain one's own power? Is it not possible to replicate a world currency model within India? Why cannot we have multiple currencies the way any global trader can have? But if US can issue a currency, why cannot HDFC bank or ICICI bank or SBI bank issue the same? Why the governments alone should issue a currency? Naturally, all governments would object to that. Let there be certain commodity standard behind all the currencies issued by both governments and non-government agencies. A currency that safeguards the purchasing power should be preferred over the one that does not. Let there be equal competition between the government and non-government agencies to claim the trust of people. So, does it mean that we should have gold or silver-backed multiple currencies available in India? Was it not the way India lived for thousands of years without serious national long-term inflation and unemployment?

Rethinking Money - I

The problem with global monetary system is that it is controlled by singular authorities in form of national/regional central banks. Today, no such institution is talking to each other for global monetary balance. US is flooding the market with easy money; China repeats; Japan is doing the same and others are simply following. As a result, there is too much money being printed. If US does not listen or correct, nobody can do anything. After all, it is the lender of the last resort but today this lender is lending to its own government endlessly. So, it does not bother about the world. How to suck this excess cash in a unique way? Make governance of money be handed over to not singular but plural institutions. Let the RBI, all banks and financial institutions who can have minimum of 100 quintals of gold or 1000 quintals of silver should issue new currencies to the public so that there is an institutional and multi-pronged control on money supply. Let there be hundreds of different gold/silver-backed currencies and people should be free to choose the money they want to own. This will attract the global money and the entire world would follow the suit. The gold based system would suck the meaningless liquidity and stop the money printing by central banks. India has a lot of gold and silver with its people though the govt. does not have even 10% of that. India needs to be the leader by becoming a monetary Ganesha that gobbles up excess cash of global finance. But who will listen? Only when 80-100 Indian rupees would fetches one US dollar or it will fluctuate too violently. This single change would make India sone ki chidiya again.

Towards a Philosophy of Money-10

The Podcast of my lecture "Funny Money" at UBS, RC, Ludhiana.

On the last day of March, 2009, I was invited to deliever a lecture at University Business School, Regional Centre, Ludhiana. I came to know of a genereal fatigue among students regarding the series of formal lectures at their centre. In order to save myself from their repulsion, I happened to give them a topic "Funny Money" which has been borrowed from Sauvik Chakraverti's article of similar title in the Times of India a couple of years back. The lecture went on for around one and half hours. I could not record the final part of the lecture but the first hour was duly recorded. I am putting the same as PODCASTS on my home page consisting of three parts.

1. 'Funny Money' at UBS, RC, Ldh- Part One

2. 'Funy Money' at UBS, RC, Ldh- Part Two

3. 'Funny Money' at UBS, RC, Ldh- Part Three

Funny money

Honourable members of faculty of University business School, regional centre, Ludhiana and the students, let me introduce myself. I don't think that I am a philospher but I am definitely trying to be the one. You might ask what a philosopher has to do in the business school particularly when the issue of money is involved. Whenever we think of philosophy, we almost negate the possibility of dealing with money. We might deal with the questions of freedom, peace, religion or metaphysics but we don't even think of dealing a hard-core material thing that money is. Philosophy and money don't seem to have any relationship. I feel that the problem comes from the way we think. As we grow old, we can to overdepend on certain methods of thinking...........................