Ruminations II

UPDATE: There seems to be a mistaken inference from this post, that the concept of "economic holes" is the same as liquidity crunch, and demonetisation from 2016 is the cause for that. This is not true. Liquidity crunch typically happens due to hoarding of cash, arising primarily from uncertainty in the economy. Economic holes is a money supply problem. It is much deeper, and has nothing to do specifically with the current government or demonetisation. Both the current government and previous ones, have ignored this problem. I'd written about economic holes back in the early 2000s. It is really about whether an economy has relevant mechanisms to make its money supply keep up with the demands of a growing economy. 

The Indian mind may have an acute acumen for sustainability, but what we really don't understand is growth and its importance. To put it in dharmic terminology-- we have an instinct for dharma, but we don't understand the importance of prana.

Be it Kingfisher Airlines, Jet Airways, or now the tragic end to the founder of Cafe Coffee Day, there is one common pattern. They are all seen from some lens as cheaters, because their companies could not repay the debts they had accrued.

But the fundamental problem is not about debt repayment or even restructuring-- it is about money supply. Money, or currency, is a representation for economic value present in a system. Currency by itself is of no value, unless someone is willing to receive the money we have, and provide goods or services.

Everybody seems to understand hyperinflation-- that is, what happens when there is too much currency in the economy. This is what our adversarial neighbours aim to do, when they push fake currency notes into our system. Too much currency in the system with respect to value, will reduce the utility of the currency itself.

What we don't seem to understand is the opposite of hyperinflation-- which is what I call an economic hole. What happens when the potential for value addition, exceeds the money supply in the system?

Indian economy is full of economic holes. There is demand and there is supply-- but they don't meet because there is no "money" to facilitate this economic exchange.

For instance, it is common to see so many apartment owners struggle to find tenants who can help pay off their EMIs, and similarly, so many people looking for rental homes, struggling to find an apartment that suits their budget. As a result, many apartments in large cities go empty, while there is overcrowding in chawls and graymarket PGs.

The demand is there, the supply is there, but the "money" is not there.

The same thing is true for major companies that are facing shutdown or have been shut down ("shot down" is more like it). There is an increasing demand for air travel. There are many empty airports (from the UDAAN scheme) waiting for airlines to connect them to the aviation map. And there are many businesses and a complete ecosystem whose survival depends on a thriving aviation industry.

Similarly, there is a huge demand for coffee lounges-- the concept pioneered in India by Cafe Coffee Day. They are not just a place for college students to hangout. CCD lounges are where business deals are made in the millions, everyday, across the country.

Yet, all of these businesses are struggling to pay their debts. Why? Not because, they made bad business decisions, but because we have economic holes-- there is not enough money in the system.

It is somewhat like an apartment owner, who has to pay a monthly EMI of Rs. 30,000/- but only gets a rental income of Rs. 10,000/- per month.

There is just not enough money in the system to fuel the growth in value addition that is happening. So, when faced with a contention between lack of money supply on the one hand, and economic growth on the other, we (the system), prefer to curtail economic growth and kill businesses (and people along with it), instead of increasing the money supply in the system!

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So what is the solution to this? How do we increase money supply in a way that does not result in hyperinflation, but helps in filling economic holes? 

In the 1930s, the US economy was in a state of depression. People had to stand in queues in their harsh winters, to get their daily doles of bread loaves. 

But just a few decades later, the US became the undisputed economic leader of the world, in the 20th century. 

A lot of factors went into making this happen. But an important factor is about how they managed to keep up money supply, with the increasing demands of a growing economy. 

They introduced the concept of scrips-- which are essentially debt or IOU statements, that companies issue to their lenders. The state in turn, treated scrips as legal tender, which allowed the lenders to sell the scrips to others in exchange for value. But more importantly, the state infused that much amount of currency as mentioned in a (genuine, recognised) scrip, into the system.

The newly minted currency against a scrip, was not given to the company or its lenders. They were just infused into the economy (through banks and NBFCs that could offer cheap loans, and also in the form of social security or welfare benefits to people below poverty line). It meant that consumers now had more money to buy goods or services that the companies were producing, which in turn helped the companies meet their debts. 

Yes of course, the US economy is in quite a bit of mess now. But that is not because of the money supply issue, but because companies tried to cut costs by pushing jobs overseas and leveraging on arbitrage benefits coming from differences in currency rates. That is a completely different story altogether. 

The primary point here is that we don't recognise the problem of economic holes-- or the paucity of money supply for increasing demands of a growing economy. Instead, we shoot down businesses, hound their leaders, and bring down entire ecosystems, simply because we don't understand that these businesses have the ability to create value (which is what an economy is about), but they don't have the "money" to stay afloat.

(On a lighter note-- when our adversarial neighbours push fake currency notes into the system, the government should seize as much these fake notes as possible, and put a stamp of legitimacy on them and make them legal tender and infuse them back into the economy! It can help fill several economic holes! And we get our currency notes printed for free by our neighbours!)