The problem with currency markets

Yesterday, in two different conversations, I got to speak of my misgivings about current day currency markets. In one of them I was asked, if I were able to change something, what would it be? And I responded by saying that I would abolish currency markets in their current form.

Currency, which is fundamentally supposed to be about trade, has today become a weapon of power. And at the centre of it is the current form of currency markets, which, rather than help facilitate global free trade, is actually exacerbating power dynamics across countries and civilisations.

The current form of inter-currency trade has an interesting history. We will not go into detail into this-- I've explained the history of inter-currency trade, in my 2006 book The Power Law of Information.

Currency today is predominantly tightly tied with nations and their sense of national sovereignty. There have been several exceptions to this, but with limited success.

Some countries use or accept currencies of other countries throughout their economy. Similarly, some countries (most notably, countries of the European Union) have come together, to form a common currency across them. None of these are without their complications. Nepal for instance, which used to accept Indian currency in addition to its own currency throughout the country, recently has started discouraging this practice, with its growing anti-India sentiment. Similarly, the Euro is often at the centre of the hurricane whenever there is an economic crisis in any of its member countries. Recently, it was told that the Euro was propped up solely by Germany, and it is in fact underwriting the economic costs of other countries like Greece, which were in crisis.

While currencies spanning across national borders has its problems, inter-currency trade has its own alternate set of issues.

Inter-currency trade is meant to establish a "fair" exchange rate between currency denominations. How do we know what is a good exchange rate between say the US Dollar and the Indian Rupee? The answer to this is to let the "market forces" decide.

So what are these market forces? These are the few hundreds of traders in the currency marketplace who bid to buy and sell currencies. This marketplace is hardly representative of the economy-- let alone "fair". It is largely run on trader sentiment, rather than any form of serious economic valuation of the currencies.

It is common to see the following pattern-- whenever there is a crisis in India, the Rupee falls against the Dollar; and whenever there is a crisis in the US, it is the Rupee again that falls against the Dollar. When I started learning to count as a kid, the exchange rate between the Rupee and the Dollar was about 4 Rupees to a Dollar. Since then, never once has the Rupee gained against the Dollar in a sustained or significant fashion. The latest is the Covid crisis which has hit the US more than India, and the Rupee has promptly fallen against the Dollar to almost reach 80 Rupees to a Dollar.

There is no mystery behind this. Currency markets run on sentiment. Indian traders are much more insecure and crave for the Dollar, than their US counterparts crave for the Rupee. So, whenever there is a crisis anywhere, the clamour for hoarding Dollars increases among Indian traders, while the other side has no such qualms about hoarding Rupees.

These emotional knee-jerk reactions, that are full of herding, groupthink and other fallacies, now becomes representative of the strength of the economy of 1.3 billion people!

There is an alternate notion of inter-currency valuations. This is called the Purchasing Power Parity (PPP). This model is based on a systematic study of prices for different commodities, and calibrating exchange rates based on this.

For instance, on an average, what we can buy for $1 in the US, we can buy for approximately Rs. 15 in India. So according to PPP, one Dollar should exchange to 15 Rupees. But whenever someone exchanges a Dollar, they get close to 80 Rupees! Hence for every Dollar that is exchanged, they receive about 65 Rupees extra!

This disparity between market and PPP exchange rates leads to an enormously skewed economy that has no bearing on economic fundamentals of demand and supply.

In the last century, this difference in exchange rates didn't matter much. Not many people inside the country cared for or were affected by the exchange rate with another currency. But with information technology, and its new line of businesses like IT, software and allied services, this disparity in exchange rates now touches every corner of the economy.

For a fresh graduate in India today, it is much more attractive to serve some other market and earn in Dollars, rather than understand and solve local problems to only earn in Rupees. The professional who has earned 1 Dollar, would have put in the same amount of expertise and labour as someone who has earned say 15 Rupees. But the former will have a much higher buying power within India than the latter.

This economic skew is not some academic curiosity. Its impact goes deep. It rips apart not just the economy, but also families and individual relationships. The 1987 movie "Wall Street" hits close to home for many of us in India, because we face the same kind of social and family strife that is seen in the movie.

With the current system of inter-currency trade, we now have just one definition of wealth, one definition of poverty, and one goal of life. Earlier, when economies were largely independent of each other, national and cultural sovereignty meant something. Cultures and nations had a lot of leeway in deciding what is important for them. But today, there is a homogeneity in wants and ambitions, that are orchestrated by a small set of multi-national corporations.

If I had my way then, I would abolish currency markets in their current form. Currency valuations would be computed year on year, based on PPP, and currency trade would be restricted to keep exchange rates within a maybe 20% error margin of the PPP exchange rate. Hence, if a Dollar exchanges for 15 Rupees, then currency marketplaces would not be allowed to exchange Dollar and Rupee only within the range of 12-18 Rupees to a Dollar.

Once we bring back exchange rates to relative purchasing power, currencies will start becoming meaningful as an economic instrument once again. 

Life after Corona

Disclaimer: The opinions expressed in this post are just speculative-- meant to initiate objective and dispassionate discussion. It is not a fatalistic rant, meant to appeal to emotions. 

What we are seeing today, it goes without saying, is unprecedented in recent times. Nowhere in living memory was the entire world in a state of lockdown, with no end in sight as to when and how things will come back to how they were.

What we are seeing today, is a state of saturation of our existing crisis responses. All our existing responses and strategies to handle epidemics have proven to be inadequate in stopping the Corona, which continues on its rampage worldwide.

What we are seeing today is a very imminent discontinuity in the nature of our lives. No longer will our lives be a linear projection of our past, and no amount of past successes of businesses, organisations and even of countries, can guarantee future sustainability.

What we are seeing today, as Nassim Taleb would put it-- a black swan event. What we need to adjust is not just our actions or strategies-- but our very beliefs and hermeneutics.

We are also mostly like the goat in Bertrand Russel's analogy about inductive understanding of our world. A goat that is well fed and taken care of by its owner, grows up believing that its owner is its saviour and protector-- until one day when it is Bakrid. By then it is too late.

We have all built our lives based on our beliefs. We have bet our careers, finances, and emotional well-being on institutions, economies and cultures that we believed were our saviours and protectors. For some of us, this belief was so intense, that we left behind our country, our culture and severed connections with our entire past, to start new lives in lands that promised us wealth and fortunes.

None of them foresaw or were prepared for this discontinuity.

And this is what "disruption" really means. These days, every new mobile app or website imagined itself to be an example of "disruptive innovation". None of the "disruptive innovations" of yesteryears-- be it Google or Facebook or 4G or whatever else, could stall the global onslaught of the virus. Sure, without them, we may have already seen huge casualties like that of the 1918 Spanish flu (which has nothing to do with Spain, incidentally) that killed millions. Yet, we are in a state of lockdown today and pretty much stopped everything around which we built our daily lives.

As companies and nations strive to get back on track in the aftermath of the Corona, life will not be easy. It is imperative then, to ask ourselves-- as individuals, what should our strategy be? So, here are some heuristics that I could garner, in no particular order:

1. Come "home": Given the uncertainty that is looming in front of us, it is important for us to be in a place where we feel we are at "home". It need not be the place of our birth or the culture we grew up in-- although, that would make it much more easier. It is important to be in a place where we feel a sense of emotional and spiritual attachment, ownership and belongingness. We should be willing to face whatever challenges it throws at us, and work for its sustainability. One way to ask what is "home" is to ask yourself the question, where would you prefer to die?

Conventional "rational choice" decisions based on what technology has a lot of "scope" or which currency is stronger, is not likely to help us survive the discontinuity.

2. Get rid of debts: All of them. As quickly as possible. Including non-performing assets like land or real estate that is just bleeding us. Debts are modern-day shackles that prevent us from responding adequately to challenges. Facing an uncertain future while burdened with debt, is like trying to fight a raging bull with our hands tied behind our back.

Getting rid of debts is easier said than done, of course-- and I'd like to have some pointers how to perform this step as well. But it is important to be done.

3. Build your new joint family: One of the primary things that saw India survive its cultural trauma of colonisation and resultant poverty is its cultural emphasis on large, joint families. Emotional support networks-- which is what true families are supposed to be about-- are highly underrated. In fact, in today's "modern" schooling, joint families or large family networks are ridiculed and mocked. And families themselves have become a case of "healthy competition" among its members getting into a cancerous stage. In families today, younger generation are under tremendous pressure to "prove" themselves with all kinds of achievements, when all that is required for emotional support networks is the age-old wisdom of acceptance and celebration of our diversity.

Joint families are not necessarily made of blood relatives. It is made of people who can resonate with us at a spiritual and emotional level. It does not have any rules or norms. It just is a network, where its members look out for one another. Joint families need not have to live in the same place and need not adhere to a single ideology. They need not have to be in the same profession-- nor do they need to have common finances. All they need is a common sentiment that helps them look out for one another-- and just call up or message one another to just ask "how are you?"

4. Seek intrinsic, not extrinsic rewards: In the coming years, the surest way to ruin our lives is to respond to external stimuli and build our sense of self-worth around them. Given the disruption, there are going to be a large number of no-holds barred greed and insecurity that will be practiced by organisations and nations alike. They will create all kinds of "incentives" to get young people to do what they want them to do-- which need not necessarily be in the interests of the people who are doing things. It is hence important, for the younger generation to deeply introspect and ask what gives them a sense of meaning and purpose for their lives. It is important to not fall into peer pressure and getting into a trap of excessive consumerism, debt and an endless effort to keep status quo.

None of these will of course, guarantee our sustainability. By definition, a discontinuity means that we are entering into the realm of the unknown-- where we don't even know what we don't know. The speed with which, some things have entered our lives just like that, we have no idea where it is going to take us. For instance, we have argued and debated for years and years on things like individual liberty, privacy, ethical AI, etc. But all that have been brushed aside and state-of-the-art surveillance and control technologies have been deployed in most countries across the world, in a matter of days. Sure, they may be needed now. But will they ever be removed?

We are now staring in the face of a possible "perfect" power singularity in the future. Where the powerless are almost absolutely powerless and the powerful are almost absolutely powerful.

So stay safe.. from the Corona, and what is likely to come after Corona!

Network paradoxes galore!

The nCovid-19 saga really scares me. Yes, the virus and its highly contagious nature, is one part of the scare. The other part of the scare is our response to it.

Yes, we need aggressive measures to "flatten the curve" and enforce social distancing, hand washing, etc. But the way we are going about implementing it, has the potential to make the problem worse, with long term collateral damage.

Let me explain.

One of my primary areas of research is in complex social networks and its emergent properties. What we are seeing today is almost a textbook case of all kinds of network paradoxes in action-- Braess' paradox, Cobra effects, Streisand effects, Prisoners' dilemma, bull-whip effect, etc. Just about all of these, refer to situations where a given policy or norm is adopted towards achieving a particular goal, but the end result would be exactly the opposite.

It is somewhat like the popular saying that, "The road to hell is paved with good intentions."

One of the good things India did was to act early and put in screening procedures in place, as early as mid Jan, when even the WHO recommendation said the following:

WHO does not recommend any specific health measures for travellers. It is generally considered that entry screening offers little benefit, while requiring considerable resources. In case of symptoms suggestive to respiratory illness before, during or after travel, the travellers are encouraged to seek medical attention and share travel history with their health care provider. WHO advises against the application of any travel or trade restrictions on China based on the information currently available on this event.

For a long time, India, despite sharing a border of more than 3000 kms with China, and large extents of business interactions, had one of the lowest incidences of Corona infections.

Yet, in the last week or so, we have seen increasing rates of Corona positive cases, and increasing rates of panic responses to the crisis.

For instance, the Prime Minister announced a "Janata curfew" yesterday so that people stayed home and practiced social distancing. He also implored the citizens of the country to applaud the people in the frontline at 5:00pm. This was a great success in the sense that a lot of people came out to applaud and the sense of national commune was palpable. But what also happened was that yesterday at 5:00pm, there was a celebration of sorts in several places, with people gathering in large groups to applaud and improve morale! Thus, creating a situation that was exactly the opposite of what was intended.

Given that the virus shows no signs of abating, today, the government issued a lockdown order all over the country, and cancelled public transport, inter-city transport and even domestic air travel starting tomorrow. What was the response from the population to this? As current news reports go, our highways leading out of the city are packed with people trying to leave the city to their home towns before everything is locked down. Busses and trains are packed with people on panic commutes. I do hope that the virus knows that the lockdown starts from tomorrow, and that it should not infect anyone today!

In addition to the above, there are other kinds of social panic reactions. Nurses who are working on the frontline and staying in rented apartments or paying guest accommodations were in some cases, asked by their landlords to vacate their premises in fear of the Corona! That doesn't really help in our struggle against the virus.

Then there were reports of racial attacks against people from the North-East of India, because they look like Chinese!

And yes, there are already Corona related suicides!

~*~*~*~*~*~*

I am completely aware that the situation is very serious and the virus is highly contagious with an R0 rate of about 3.0. The fact that we need quick, large-scale measures are also well taken. 

But the approach we are taking towards this problem may not only have the opposite consequences, it may also create a large collateral damage. 

There are already talks of imposition of emergency and draconian measures to keep people home. But "draconian measures" are no guarantee that the infection does not spread. Draconian measures are meaningless if they are not implemented properly. In order to implement draconian measures, some segment of the population should necessarily go out and implement it. The system of people implementing the draconian measures may themselves act as the carriers of the virus passing them from one isolated community to another. 

Complex networks of self-interested agents (human societies is an example) are replete with such emergent properties that are very counter-intuitive. These "network paradoxes" are not some academic curiosity to banter about when people in the frontlines are battling the disease. These are real consequences that can lead to systemic collapse that can greatly amplify the already serious crisis. 

So how do we deal with these paradoxes? What should we do to take swift action without the resultant panic reactions? 

There are no simple answers to this question. But some heuristics can definitely help. 

We know for example, human social networks are not uniformly random. A person is not equally likely to interact with just about anyone else. Social networks are known to be clustered, with a property called triadic closure. In simple terms, what this means is, if a person A interacts with two other persons B and C, then B and C are likely to interact with one another, the more the interaction strength between AB and AC. 

If we work out the math, this leads to a society of several clusters, with some connections between the clusters-- which are called the "bridges". These bridges are critical elements in diffusing something across clusters-- be they ideas or pathogens. 

Similarly, human societies are known to display a "scale free" and "small world" property. What this means is that, despite the complex and clustered nature of human social connections, human societies tend to have small degrees of separation. This means that we can connect anyone to anyone else with a small number of hops. This is where the popular notion of "six degrees of separation" comes from. 

A small world network is bad news in the face of a contagion. This is precisely why this virus that originated in a city in China has now become a global pandemic within a few weeks. 

But how does a network get its small world property, if it is also characterised by clusters due to triadic closure? Remember, we said that not everyone is equally likely to interact with everyone else. So how does the small world property arise? 

The answer to this is the existence of hubs in any social network, at any scale. Hubs are network nodes that connect to a large number of other nodes. The number of large hubs with respect to the number of nodes in the network remains more or less the same, regardless of the scale in which we are looking at a network (thus the name "scale free network"). 

Hubs are the primary connectors between disparate parts of the network. If we are to contain a contagion, the first thing we need to do is to shut down major hubs like airports, bus stations, railway stations, etc. or tightly regulate their traffic. Ironically, in many airports across the world, people were made to queue up in large lines for mandatory screening, which would have only increased the chances of more contagion within the place. A better strategy would be to first reduce the traffic in the hub, and divert airplanes to several other nearby airports and spread out the crowd and mandatory testing. 

Similarly within a city, if we mark out several localities, we can see that once WFH and an advisory lockdown is in place, most people would stay within the locality. Go to each locality regulate entry and exit on all the roads that connect it with other localities. Thoroughly check and sanitise every vehicle and person that cross these "bridges" between localities. Within each such sanitised locality, people should be able to move around freely-- subject of course, to periodic and proactive testing. 

Much of the exacerbation of the situation happens due to panic psychological reactions from people that impair their sense of sound judgment. One such reaction is psychological denial. The more we push in a sense of seriousness and urgency through all media channels, the faster this state of psychological denial is likely to set in. Once there is a sense of psychological denial or fatalism, people tend to act in bigoted, vindictive and reckless manner, like for example, the several cases of Corona-infected people in China, deliberately infecting others. 

Human free-will and psychology are central elements of social responses to crises. It is important to understand what could happen in response to a crisis response, rather than just what should happen. 

Deindividuation and Deracination

Not sure how many of us can see this-- but from what I can understand about social dynamics in India, the picture is not reassuring at all. In fact, almost on a daily basis, I struggle not to panic about what is happening, and to think calmly about what can we do to counter this.

I still have no answer about the latter, but here is what I learned about the former.

Indian society today is a deadly combination of deindividuation and deracination.

Deindividuation refers to cultural invalidation of individual agency. The irony of this is that, our cultural roots are deeply anchored in the importance of individual self expression. Enlightenment is seen as self awareness, and our texts recommend several pathways (called margas) for self realisation. Yet, over the centuries, we have turned 180 degrees in this regard, and have made passive compliance and obedience to the collective will, as virtues.

It is not uncommon to see people proudly exclaiming that they are going to "lead their lives through their children." Not too long ago, when attending the birthday party of a toddler, I witnessed the father proudly saying that he would make his son achieve what all he could not achieve himself. The child is seen as an extension of oneself and not as a separate individual, whose individual agency needs to be nurtured and developed, rather than devices onto which we project our unfinished dreams.

Children's views are hardly taken seriously. Some time ago again, some elderly folks from India visiting the US were greatly amused by how their little grandchildren in the US confidently went up to the receptionist in a hotel and asked some questions, and to which, the receptionist answered with all seriousness (they were expecting her to laugh at them or say "aww how cute" and ignore their questions altogether).

This de-recognition of individual agency is the norm. The general template of behaviour is that, if one's child complains about something about the external world-- then by default, the child is the one who gets chided for being weak or not careful enough. The child's opinions and preferences have no legitimacy.

When a parent is suddenly supportive of his/her child, it usually means that they have a "plan" for their lives-- about their marriage or career. This plan usually involves setting up of some ground truths in the child's mind about what is considered successful and virtuous, which in fact would be representations of the parents' own dreams. Hence, for example, if the parent always wanted to live the "American (or "foreign" in general) dream" the child becomes the vehicle for realising it. The child is gaslighted to believe that realising this dream is a virtue, and just about every other alternative-- including asking why-- as unethical or lazy or something such.

Another commonly occurring pattern that I have seen being implemented rampantly, is the "dog and horse" pattern. Thanks to "family planning" in the previous generation, most families in my generation and circles, have just two kids. They don't enjoy a big sibling network like in the previous generation, to help build their lives. But there is hardly any acknowledgement of this "weak wicket" that our generation has. Rather, it is the opposite. We are considered "pampered" because we have received a lot of attention (which in fact, is a lot of expectations).

With just two children, the "dog and the horse" template is executed as follows. One of the child is gaslighted to stay back to look after the previous generation (the "dog"), while the other (the "horse") is used as a vehicle by the previous generation to live their dreams. This solves the problem of both realising one's dreams, and having a home to come back to. Except that the "weak wicket" that the next generation is playing on, becomes much weaker. But then, that is not the previous generations' problem.

This is a very very common pattern, which is "rediscovered" by different families, separately.

Deindividuation extends beyond family interactions to include just about all kinds of social interactions. Bosses are often worshipped and treated like Gods, by the subordinates. Their birthdays celebrated with great pomp and grandeur. And even the legal framework is such that one can get into trouble for vague things like "hurting sentiments."

"Selflessness" is considered a virtue, and independent critical inquiry is considered arrogant and disrespectful.

~*~*~*~*~*~

The second aspect of the deadly cocktail that we are fed with, is deracination. This refers to social psychological dynamics that alienates us from our own roots.

We all live at two levels-- what may be called the "doing" and "being" levels. The doing aspect of our lives pertains to what we do for a living, what technology we develop, what service we provide, what value we add, etc. The being aspect of our lives is about who we are. This is usually called our emotional self-- which is the result of thousands of years of evolution. We are all endowed with some latent characteristics which define who we are as a person. Usually it is late into one's life that one starts asking questions about who we are-- which is typically called the "spiritual" journey.

To help understand doing versus being, I usually give this example-- I can "do" the job of a teacher and earn my salary, but I can also "be" a teacher, which goes far beyond doing my job and earning a salary. And I can "be" a teacher, only if I "am" a teacher at my "being" level-- without which, I can only "do" the job of a teacher.

Most people ask the "who we are" question when most of our lives are over. There is no point to understanding ourselves when there is not much of our lives left to live anyway. This "spiritual quest" is something that needs to be asked in one's youth.

Unfortunately, our formal system of education leaves no room to address the "being" aspect of our lives. Usually, this "spiritual education" is left to the family, which itself is increasingly out of touch with its spiritual roots. Most "educated" families bring up their children for performance in the "doing" realm and teach little or nothing about how to explore one's own being.

Worse, a spiritual quest into one's being is equated with "religion"-- and there are all kinds of distorted understandings about our "religion." And "religion" awareness in the family is reduced to meaningless rituals, narrating of weird stories and superstition, which are not to be questioned.

I have written a lot about the physical concept of dharma and how it has been central to our worldview, and how it is incorrectly translated into English as "religion." This distorted understanding is now all pervasive and has become pretty much the standard understanding of dharma. Recently, I was reading an English translation of the Bhagawad Gita by a well known spirituo-commercial agency that has its branches all over the world. In this book, the term adharma is translated as "irreligion"!!

Now what is the world is "irreligion"? As it is, we have suffered enough due to "religion"-- and now, here is a translation of a "holy book" that warns us against practising "irreligion"!!

That is how muddled and murky is the being space. For someone who has been brought up with "mainstream" education-- there is hardly anyone who can provide answers and guidance to navigate through the very painful space within us, to understand who we are.

Understanding our being, basically means understanding how we came to be. There is the broad contours of collective history (narrated from the victor's perspective) that we study in our history books. But there is also an individualised history of our individual, that is documented nowhere. We are our own book. And reading this book is extremely painful, since it stokes a lot of very raw emotions that we didn't even know we had within us.

Without someone who can help guide us in this labyrinth of our own selves, we end up denying those emotions that we have within us-- we are either very afraid or very ashamed of them. We then end up building elaborate defences and start projecting the insecurities we have within us onto others.

Understanding our being is very important to help us develop deep roots. As the saying by Carl Jung goes: The taller the tree wants to grow, the deeper its roots need to be. If we need to build an empowered population that can help sustain the society and the world, we need a lot of "being" level education.

Today, not only are we not helping individuals develop their roots, we are actively uprooting them and using them as resources to feed our dreams. An uprooted tree is just deadwood-- it is only useful for industries and factories, where they can be moulded into furniture and end up decorating someone's house or office.

A deracinated tree ceases to be a tree-- it will no longer enrich the soil, will no longer produce oxygen, no longer be home to an entire ecosystem under its shelter, and will no longer be part of the lung that sustains the earth.

~*~*~*~*~*

Next time someone asks why I am so depressed all the time, perhaps this post can help explain a bit. It is hard not to be depressed when the world around us is dying a slow death, and we are helpless to do anything about it.

The need for fiat currency

In a recent post, I'd expressed concern that the current economic slowdown is a symptom of structural issues, rather than just a liquidity crunch. My main argument is that, the slowdown we are seeing, is actually a result of the massive economic growth we saw in the last few years leading to increased capability for value addition, and a resultant increase in demand for money supply.

Money supply is not the same as liquidity crunch. In the latter, there is enough money in the system to cater to its demands, but the money is not "flowing" (probably due to hoarding and distrust). But, money supply scarcity is an even more fundamental problem. It refers to the dearth of money itself, to meet the growing demands of the economy.

There is a recent video (in Kannada) on social media, that makes a pretty convincing case that the current slowdown is not due to structural issues with the economy. The speaker likens the slowdown to us deciding to walk for 15 kms and taking a rest after about 8 kms. He also provides a very convincing argument that the slowdown is not in all sectors, by noting that sales of smartphones, refrigerators and AC units have actually gone up. He then goes on to end in an optimistic note that the current trade war between US and China, may mean that more manufacturing jobs will now come to India.

The arguments are very well made, but not convincing enough to dispel my misgivings about the structural issue itself.

Let me give another analogy about the problem. The growth of an emerging economy like India, is not so much like us walking for 15 kms, but somewhat more like a child growing up into a teenager. This transition from a developing and largely impoverished economy, to a potential economic leader, requires several structural evolution along the way to manage growth pangs. There is not enough evidence that we are recognising this.

Money supply reserves in India, are largely based on valuation of our foreign exchange and gold reserves. What this means is, the amount of money that is there in the system is proportional to the amount of stuff we can buy from other countries, and the amount of gold we can pay for it. Our capability for meeting demand and supply within the economy itself, has no say in the amount of money in the system.

So what do we do if we need more money in the system? We either flagellate ourselves to go and meet economic needs of other economies to increase our foreign exchange reserves, or try and dig up more gold-- either from our mines, or from the lockers of families. None of it results in an economic incentive for citizens to solve our problems first.

The "gold standard" for money supply primarily came to vogue a couple of centuries ago, when inter-currency trade took centerstage as a result of industrial revolution. However, the gold standard has been obsoleted for "fiat" currency (or currency minting by decree), by several major economies of the world. There are several examples of "economic skew" that happens when money supply is based on very narrow criteria like gold reserves. For example, in the Irish potato famine of the 19th century, the government decided to export food to buy gold reserves (and hence mint more money), than reduce its food exports and feed its own people. Similarly, during the California gold rush, a bottle of water costed as high as $140-- because everyone was trying to figure out how to mine more gold, rather than how to harvest water. Because, gold meant money.

These problems are well known, and most major economies around the world, have put mechanisms in place to mint money by governmental fiat (decree), rather than base it solely on foreign exchange or gold reserves. The fiat is not arbitrary of course-- and not every fiat would result in hyperinflation. It is possible to implement fiat models that makes a fairly accurate estimate of money supply demand in the system.

Finally, the "optimism" about manufacturing jobs coming to India is not really optimistic. Given the fact that Indian diaspora are all over the world, India does have the knowledge and capability to build its own industries in just about all hi-tech sectors like semi-conductors, hi-res optics, etc. However, it is still so difficult to get anything built in India. Flawed money supply models (coupled with liquidity and trust issues), make it a herculean task to convert our theoretical knowledge into practice. Even today for example, opening a high-end hotel requires about 156 different kinds of permits! The licence and permit raj was supposed to have ended long ago?

So even when multi-national companies come to invest in India, they only outsource some low-end work to India and keep all the necessary intellectual property and competitive advantage to themselves.

And it goes without saying that, basing our economic growth on the arrival of multinationals, only increases the disparity between the market exchange rate of the dollar to its relative purchasing power. What we can buy for 1 dollar in the US, on an average, we can buy for 15 rupees in India. But, if we exchange 1 dollar in currency markets, we get about 74 rupees per dollar! What this means is that there is no incentive for educated professionals to take up any of our own country's problems and solve it, when they can instead solve somebody else's problem and earn more money for the same or lesser amount of effort. 

Asking the "right" questions

As a professor, I am often approached by students wanting some form of career advice-- especially when they plan to take a major leap in their lives, by going abroad for higher studies for their Master's or PhD.

It takes me back to my own times when I took this major leap in my life, and my professor, very strangely, didn't seem very happy. I had expected him to congratulate me when I told him that I had won this prestigious fellowship to study in one of the most prestigious university in Europe. And his lack of enthusiasm, made me hurt and defensive. At that time, I had haughtily and contemptuously believed that he was upset with me because I'd decided to go abroad and build my own life, rather than registering for a PhD under him.

Such was my delusion that his comments had completely missed their significance. Even though he seemed less than enthusiastic, he had discussed at length with me about my plans and I had asked him a lot of questions like: which field of study to take up, what has the most scope, how are European universities ranked vis-a-vis American ones, etc.

And he kept repeatedly telling me, "You're not asking the right questions!"

All these happened more than 20 years ago. Today, I think I'm in a better state to articulate what those "right questions" were, in the hope that the youngsters who come to me for guidance do not make the same old mistake. (They can make newer mistakes, of course!)

As part of our schooling and mainstream education, I realise that we are never taught the following things:

1. What is meant by a sense of identity.
2. How money works. 
3. How cultural persuasion works.
4. What is meant by ownership. 

Instead, we are fed with all kinds of social cues and signals, which we believe as the underlying truth.

Firstly let me set aside the myth of the "prestige" of a university and its effectiveness on our careers. Sure, a prestigious institution name on your CV may open a few doors. But if that is all is your trump card, then the problem is really somewhere else. The way I see it, there is something seriously wrong if someone were to make a higher education choice, based primarily on the prestige of the university. Higher education leading to a Master's degree or a PhD requires achieving mastery or even extending the boundaries of known knowledge. The primary factor that should drive the pursuit for higher education is our strong interest, curiosity, and a willingness to commit in the subject matter that we wish to study.

And what defines this "strong interest and curiosity"? No, it is not how "cool" or "contemporary" is the topic, or what is its future "scope" or something such. The "strong interest and curiosity" is driven by a deep sense of identity. We somehow identify with the problem that we wish to pursue. It is way more relevant to us, and we have a sense of "ownership" towards the problem. We care about it, and even feel responsible for finding answers. At some level, we are saying to ourselves, "I cannot wait for someone else to find answers to these questions.. if I don't answer these questions, who else will?" It is this sense of identification and ownership of the questions that we are pursuing, which is what gives us direction and helps keep our wits together when the going gets tough.

By default, the rapidly industrialising world is geared to view every individual as a resource to be consumed for obtaining greater competitiveness, power, glory or profits (for the company, country, leader, etc.) I'd once remarked that education ought to be an "irrigation" mechanism that nurtures and builds strong roots for the individual; while instead, it is more of a "harvesting" mechanism that injects hormones and steroids (read: latest technological buzzword) and packages the individual to be sold to the highest bidder from the industry. Industry continues this even more, and treats the individual as a billable resource for its clients. Hiring departments are called "Human Resources" for a reason!

This "componentization" of the individual happens in so many subtle ways using a variety of persuasive mechanisms including money, "cultural values", religion, etc. And much of it is not a painful journey at all. In fact, the journey can be downright beautiful, flattering, even "inspiring" and full of pleasant surprises, lasting over several years. You would be praised, awarded, called a "genius," given a lot of freebies, club memberships, business class tickets, and ever so subtly orienteered to a state where the only option you have is to be the resource that is expected of you-- fully and completely.

During the days when slavery was legal, such a thing used to be called, "accepting your chains with joy and gratitude"-- just saying.

A lot of people are in fact, happy being just that. For instance, a lot of IIT graduates are perfectly happy selling soap and toothpaste for multinationals. It is perfectly fine and it is their choice. But really, did they need higher education for that? Wouldn't that seat that they took up might have been better filled by someone else who had a fire in them to really identify with and help solve some pressing problem for the society?

The pain about our life's "meaning" really hits us when age has caught up with us, when our spirit has dwindled, and we are of no use to anyone. By that time we would be deeply entrenched in an economic machine that runs on keeping us perennially in a state of debt and insecurity. It is then that we realise that the big decisions we thought we had made, were not made by us at all. They were made for us by someone else, including people close to us and whom we trusted blindly. These decisions were more of a strategic decision for them, than a meaningful decision for us. And most painfully, they would have taken this decision for us with a genuine belief that it is for our own good. As the saying goes, "The road to hell is paved with good intentions."

If we want to really help someone, the best we can do is to help them build their individuality. Individuality is built by understanding principles of self inquiry. If we do not know how to build our individuality and find what is meaningful for us, right where we are, it is unlikely that we will be able to do so by cliched things like "travelling the world to find oneself (in debt)." (parenthetical extension, mine).

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!

*~*~*~*~*

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!)