Currency markets and national sovereignty

In my job, I get to interact with bright minds of the next generation and I am often in awe about how much sharper and well informed each new generation is, compared to the previous ones. 

Yet, despite growing intelligence and awareness at an individual level, some core structural pathologies continue to ruin our lives, and most of us are blissfully unaware of this happening. And those who do have some idea of these pathologies, either cynically exploit this pathology for individual benefit, or have no recourse but to watch helplessly seeing their deepest long-term fears come true over a period of 10-20 years. 

The thing with structural changes is that they happen gradually, over a long period of time, leading to the parable of the boiled frog where we incrementally adapt every time circumstances change slightly, until it is no longer possible to adapt, and then, there is nowhere else to go. 

This post is a short primer about how structural elements of international currency markets affect the destiny of nations, and in turn, over its people. I have been studying and writing about this for more than 25 years now. 

One of the primary changes that the new century brought in is that it connected the world like never before-- using Internet, mobile and IoT technologies. A direct result of this is the many fold increase in cross-border transactions as compared to earlier-- a phenomenon called as "globalization". 

At that time, globalization was seen as a major, virtuous force that was argued, will break down local hierarchies and create a decentralized world of equals. Terms like "world citizen" were thrown about as a flex. 

But fast forward a couple of decades, and we see today, the very places that advocated globalization are now wanting to go back to their conservative past, and put all kinds of restrictions on immigration, and sanctions and tariffs on the rest of the world. 

So what exactly is happening? Is it just a pipe-dream to think of a truly global society where the world becomes one, large, happy family? Vasudha eva kutumbakam, and all that? 

Globalization has multiple dimensions-- cultural, financial, national, environmental, etc. At an individual level, people largely project the cultural dimension as their rationale for making their choices, but make decisions based mostly on the financial dimension. For instance, one would say that they that they are relocating to a new country in order to "open their minds" and "become a cultural ambassador" or some such corny line, while the primary decision that moves their needle is the amount of money they can make for the same or lesser effort. 

But why would someone make more money abroad, than they can in India? Is it because these countries are "developed"? Well maybe (whatever "development" means), but that is just part of the story. 

The main structural element that drives international trade today is not so much of demand and supply, but of currency arbitrage. This comes by the disparity between market exchange rates and the exchange rates due to purchasing power parity (PPP) between currencies. 

Market exchange rate is the exchange rate determined by the currency exchange markets, based on demand for one currency over another. On the other hand, PPP is the exchange rate based on what a unit of currency can buy in one country over another. 

Here is the market and PPP exchange rates between the Indian Rupee and some major world currencies: 

Currency	Symbol	Market Rate (INR)	PPP Rate (INR)
US Dollar	USD	92.80	20.34
Euro	EUR	110.32	33.90
British Pound	GBP	126.83	30.36
Chinese Yuan	CNY	13.67	6.18
Japanese Yen	JPY	0.60	0.22
UAE Dirham	AED	25.45	8.96
Swiss Franc	CHF	119.67	22.11

What this means is, on an average what one can buy for $1 in the US, one can buy for Rs. 20 in India. Similarly, what one can buy for 1 Euro in Europe, one can buy for Rs. 33 in India. 

However, when we exchange $1 in the currency markets, we get Rs 92, and when we exchange one Euro, we get Rs. 110, more than 300% higher than PPP! 

And this is what makes India very cheap whenever someone visits from the US or Europe. The Internet is full of reels that talk about the cheap and affordable healthcare in India, where a blood test costs less than $3, as one YouTube influencer once remarked. Well, the blood test costed Rs. 250, which is not exactly cheap for an average Indian who is living and earning in India. 

The following table shows what a salary of INR 1 lakh would translate to different currencies, when compared with PPP and market exchange rates: 

Currency	Symbol	Market Rate Salary (What you get)	PPP Equivalent Salary (Lifestyle Match)
US Dollar	USD	$1,077.59	$4,916.42
Euro	EUR	€906.45	€2,949.85
British Pound	GBP	£788.46	£3,293.81
Chinese Yuan	CNY	¥7,315.29	¥16,181.23
Japanese Yen	JPY	¥166,666.67	¥454,545.45
UAE Dirham	AED	3,929.27 AED	11,160.71 AED
Swiss Franc	CHF	835.63 CHF	4,522.84 CHF

For instance, if someone from India were earning Rs. 1 lakhs salary per month, their lifestyle would be comparable to someone earning approximately $5000 in the US. But if the Indian were to visit US, taking their hard-earned savings of INR 1 lakh, they would get approximately about $1000 in exchange, and would be able to afford much lesser than their counterparts earning $5000. Same thing for Europe-- earning in Europe gives 300% more wealth in rupee terms than having to transact with them directly from India. 

So where is this extra money coming from, whenever someone exchanges a foreign currency in India? Literally nowhere! 

Most money systems today are what are called "fiat" currencies, where money is printed based on the demand for the currency. So more money actually gets minted based on how much demand is there for the currency. So then does this not mean, that we should all be encouraged to live abroad and send more foreign currency back to India, so that the "demand" for Rupee grows? 

Not exactly. 

For an economy to be healthy, the amount of currency in an economic system need to correspond to the overall "capability" in the system-- which is an abstract term for the ability for value addition, or meeting demand with supply. Economic strength comes from building capability-- capability to conduct business, capability to manufacture, capability to build, capability to learn, capability to serve, etc. 

When we have too little money supply compared to the capability in the system, the economy undergoes a deflation, where despite existing capabilities, economic transactions cannot happen due to a dearth of currency. This is also called an "economic hole"-- a condition where capability exists, but money doesn't exist. 

On the other hand, if the money supply is more than the available capability of the system, we encounter a "hyperinflation" where the available money cannot get converted into value. 

I'm reminded of a movie where a group of soldiers who are lost in Amazonian jungles come across a crashed airplane that has was transporting a couple of million dollars. They are all very excited to find this huge stash of money and each one grabs whatever they can. But then, in that small "economy" that they have, they are unable to exchange it for any value. As a result, when one of the soldiers who has cigarettes with him, "sells" it to the others at $1000 a piece! The other one who has a matchbox sells each matchstick for $2000 since he knows that everyone who bought a cigarette will need a matchstick! 

Just blindly bringing in more foreign currency into the system will eventually result in an economy that has gone bonkers! 

(Our economy has already gone bonkers to quite an extent. Just look at the state of basic things like public infrastructure in a city like Bangalore that boasts of being the world's third biggest tech cluster. I remember when the roads in front of our house were left dug up for more than 2 years, and we used to get Whatsapp forwards to "feel proud" because India is now building high-speed trains for Australia or some such! We think we have the capability-- but we don't. We just build technology that has already been conceptualized and designed by others. When we are asked to dream big and create startups-- we only think in terms of food delivery apps, ice cream stores, etc.). 

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

So why then is the market exchange rate so different from PPP? 

The answer is not economics, but geopolitics. 

Fiat currencies today are ideally supposed to print currency based on the available capability of their economy. But they print currency based on the demand for the currency. Both are not the same. 

Today, a large part of currency demand comes from the geopolitics of which currency is used by countries to trade among themselves. Most petroleum trade for example, needs to happen in US dollars. Hence, if country A has petroleum deposits, and country B has money to pay for it-- country B will first need to buy US dollars from their money, and then buy the oil from country A. 

And how is this enforced? Through sanctions, trade, diplomatic manipulations, and even military action! In that sense, whenever we pay Rs 94 for a dollar when its purchasing power parity is at Rs. 20, we are paying Rs 74 for the geopolitics of sanctions and military actions. 

If a country becomes largely dependent on foreign currency inflows for running its economy, it has basically compromised its sovereignty to external forces. This video about the sovereign debt of the US, and the sovereign debt of other countries dependent on the US dollar provides a lot of clarity: 

So at an individual level, what can we do to ensure that we are not contributing to this slow game that creates dependencies between nations? 

The principles are simple, really. Go abroad if you must, to obtain skills, knowledge and exposure. But come back when time is still on your side, and contribute to the economy by just living in the country (put your skin in the game). Work honestly and smartly in whatever you are good at, to add value. Invest smartly and strategically in the country. Participate by voting in elections, and by contributing your expertise where needed. Innovate to help reduce dependency of the country on external resources. Exercise vigilance to keep at least your surroundings safe. 

AI and the uncanny valley

 (This content is not generated by AI-- even if it is boring! 😄) 

I don't know about you, but for me, reading AI generated content, or looking at AI generated art triggers an intense kind of boredom-- the term ennui comes close. It is not the usual boredom, but a mind numbing feeling that is both painful and numbing at the same time-- or, should I say "soul crushing"?. The closest analogy I can give is the feeling of eating cardboard pieces, instead of actual food. 

There is this concept called "uncanny valley" in robotics that tells about the creepy and uncomfortable feeling that we get when robots become increasingly human-like. I think somewhat similar is happening with general AI generated content as well. 

Here is my explanation to what is happening. When we read a book or appreciate a work of art, we are not admiring the output, but we are connecting with the creator of the output. When a book deeply resonates with us, we feel a deep connection-- not with the words, but with the person behind the words. Similarly with a work of art. It is the creator's state of mind and their journey that led them there, which touch us through their writings and art. 

With AI generated content, there is no person behind and there are no travails that we can associate with. 

This is analogous to the difference between outputs and outcomes that I have written in this blog several times. Outputs are what we produce, while outcomes are what we become, as a result. Be it education or economy or raising a family; what we want are outcomes, but what we focus on, are outputs. Much of our grief comes by not bridging the gap between the two.

When we appreciate a work of art or a piece of writing, we are not just appreciating the output or the creation-- but the outcome, or what the creator must have become in order to create this. 

As it happens these days, for most of my deep questions, the best clarity (I would not say "answer") has come from Vedanta. And here too, there is an explanation from Vedanta about why we experience uncanny valley. 

Vedanta and most other Indian philosophies as we know, has one key point of departure from the modern scientific worldview. They posit that consciousness that gives us our first-person experience, cannot be reduced to material causes. Consciousness is not caused by material interactions, but exists on its own. The consciousness that we experience in our waking state (our ego or the sense of self) is essentially "reflected consciousness" (chidaabhasa). 

Mainstream science insists that everything ought to have a material cause, and the question of consciousness is still debated as the "hard problem of consciousness". 

Vedanta goes further to say that the only entity that is real is this entity that is variously called Brahman, Samvid, and many other names, which represents existence-consciousness-bliss. It is this entity because of which we can perceive the existence of something, become aware of something, and express emotions. 

Brahman is not an entity that exists-- it is existence itself. It is not an entity that we can become aware of-- it is awareness itself. (The explanation in the Upanishads go: Brahman is not something that the eyes can see, it is that by which the eyes can see; Brahman is not something that the mind can imagine, it is that by which the mind can imagine, etc.) 

And Brahman is the only entity there is. It is existence itself, and something that is not Brahman is non-existence, which does not exist (duh!).

Based on this hermeneutic, there is this theory of perception by the philosopher Vidyaranya, who lived in present-day Karnataka between 1260 to 1333 CE. He was also instrumental in the establishment of the Vijayanagara Empire and served as a spiritual advisor to its rulers. His guidance helped shape the cultural and religious landscape of south India.

Among his writings is this book called DrgDrishya Viveka (or the wisdom of the "seer" and the "seen"-- subject and object). In this, there is a model of perception in Verse 20, that says: 

अस्ति भाति प्रियं रूपं नाम चेत्यंशपञ्चकम् । आद्यत्रयं ब्रह्मरूपं जगद्रूपं ततो द्वयम् ॥ २० ॥

Transliteration: asti bhāti priyaṃ rūpaṃ nāma cetyaṃśapañcakam | ādyatrayaṃ brahmarūpaṃ jagadrūpaṃ tato dvayam || 20 ||

It says that when we perceive something (interact with the external world)-- five things happen simultaneously, that are called asti, bhāti, priyaṃ, rūpaṃ, and nāma. Asti is our realization of the existence beyond the perception, bhāti is the way the underlying reality affects our awareness, priyaṃ is the emotion that it elicits in us (every perception is said to elicit an emotion in us, however small), rūpaṃ is the class or category of the object that we perceive and nāma is the label we attach to the experience. 

The second part of the verse says that the first three elements and the last two elements are at different levels of cognition. The first three are our experience of the reality that lies behind our transactional reality of space, time, and causation, while the last two (categorization and labelling) are the constructs of our mind. It is the first three that gives us the connection, and results in outcome; while it is the last two that we use to transact intellectually and produce outputs. Unless the first three elements are there in any interaction, there is no connection that we feel. It does not move us. And we end up only trying to organize things intellectually. 

With AI generated content, our experience of asti, bhāti and priyaṃ are greatly attenuated, if not completely absent. There is no reality that we experience behind the perception, since the content is just a creation of an artificial mind that is based on predicting the next word or denoising of a signal. We only experience rūpaṃ, and nāma leaving us with a sense of emptiness and ennui, even feeling creepy-- thinking, what just happened-- was that profound writing or not, does this art move me.. or not?

Samkhyan Theory of Evolution

Recently, on a long drive through post-Deepavali Bangalore traffic, I started listening to a podcast by Swami Sarvapriyananda, on the Samkhyan theory of evolution. This post is a summary of my learning from this very interesting talk. I will provide a link to the talk itself, by the end of this post. 

Samkhya is one of the oldest known philosophies to humanity, far predating the Vedas, dated to about 6000 years ago. One of the primary proponents of this philosophy is Sage Kapila, whom, Swami Vivekananda calls the "first philosopher of humanity". 

Sage Kapila proposed a theory of causality that also had a theory of evolution as a part of it. In contrast to the Origin of Species by Charles Darwin, Kapila's theory talks not just about the evolution of life-- but of the universe itself. 

One of the most important arguments in Kapila's theory is the dual nature of reality-- comprising of the physical universe called Prakriti, and of consciousness, called Purusha. The theory that consciousness cannot be reduced to material causes is one of the defining elements of Indian thought, that has shaped this civilisation for thousands of years hence. Modern science in contrast, is deeply rooted in material realism and keeps trying to explain consciousness through material interactions-- without any success. This is famously called "The hard problem of consciousness" by David Chalmers. 

While this post is primarily about the theory of evolution within the larger Samkhyan philosophy, the dual nature of reality becomes important in the way the Samkhyan theory of evolution differs from that of the now popular, Darwinian model of evolution. 

As mentioned earlier, the Samkhyan theory of evolution is not just about the evolution of biological species-- but of the universe itself. The material universe is postulated to have begun from a single source (which is now called the big bang). Once the universe is set in motion, it is driven by causality-- at least the Prakriti part of it. Until this point, modern science agrees with this formulation. But Samkhya goes one step further and posits that causality is overridden when Purusha (or consciousness) intervenes in Prakriti with free-willed decisions.  

Purusha does not have a material cause, and its influences as well, are only informational in nature, and not material. That means, the intervention of Purusha in Prakriti cannot create new material forms, but can only change the state of existing material configurations. This also means that all the material properties of the effect should be directly attributable to the cause. The example given here is that all the myriad colours and beauty of a peacock are all present in a seed form in the yolk of the peacock's egg and does not come from anywhere else. 

The interaction between Prakriti and Purusha puts it in contrast with the theory of natural selection propounded by Darwin. Despite bring presented as the cornerstone of scientific thought, Darwin's theory has a "judgment day" ring to it, where, at the core of the evolutionary process, nature would come and judge phenotypes and decide who is fit enough to survive and who is not. Of course, later explanations of Darwinian thought define fitness to be the compatibility between a phenotype and its environment. When the environment changes, some phenotypes survive while others don't. 

Despite the abdication of the "judgment day" paradigm in Darwinian theory, the theory still leaves several questions unanswered. Later theories by people like Richard Dawkins explain evolution as being primarily the game of the "selfish gene" that tries several different ways including cross-over, mutation, and reproduction, to keep on surviving. While this explains the "how" of evolution, it does not explain "why" does the gene do so-- bringing us to the core limitation of modern science-- that of machine hermeneutics that cannot differentiate between how and why questions. 

In contrast, the Samkhyan theory of evolution does not have a concept of fitness, or judgment day. There is no overarching fitness function that judges evolution. One does not have to aspire for, or become something, to be judged favourably by nature and there is no selfish gene that keeps on manipulating nature trying to survive for as long as possible. 

The core idea in Samkhyan thought is the differentiation between causality and evolution. Causality is basic physics that we see everywhere. A purely causality driven system-- we know from the second law of thermodynamics-- always tends towards higher disorder over time. Evolution on the other hand, seems to favour order over disorder. 

According to Samkhyan thought, causality is Prakriti acting on its own, and evolution is what happens when Prakriti and Purusha interact. In today's terminology, when causality from the physical realm, interacts with consciousness from the informational realm, it results in a discontinuity in the causal process with the system jumping to a different configuration (from where, causality continues once again). From the Samkhyan perspective, life happens when Purusha and Prakriti interact, which is why for example, even though physics works everywhere in our solar system, it is only on earth that we get to see evolution, or "the greatest show on earth" (the term used by Richard Dawkins to describe evolution) in action-- this is where Purusha and Prakriti seem to be interacting (at least, at a much great rate than on other planets at the moment). 

To take this argument one step further, Elon Musk's dream to convert Mars into a lush, green landscape like Earth, would be, if successful, an example of consciousness (Purusha) interacting with Prakriti and changing the course of its causal chain towards order (life) over disorder.

Evolution in Samkhyan thought is the emergence of more complex order from simple, orderly bases. For example, the emergence of a grand tree from its seed, or the emergence of a vibrant peacock from its egg. In addition to differentiating between causality and evolution, Samkhya also introduces yet another concept-- that of "involution" (this English term was proposed by Swami Vivekananda much later, in the 19th century CE). Involution is the process of packaging complex order into a simpler form-- much like a tree packing all its information into a seed for the next generation, or a bird packing all its information into its egg. 

Samkhya argues that it is not just biological creatures, but the entire universe goes through several cycles of evolution and involution. The big bang was hence just one small part of the grand cycle of the universe. 

In all these arguments, the key point to note here is the separation of consciousness from physical reality, and the vital role of consciousness in driving evolution-- without which, we will only have causality that leads to increasing entropy. 

Darwinian theory lead to several social and cultural implications coming from interpreting the concept of fitness in different ways. For instance, some people interpreted fitness as physical fitness and started to promote gymming, while some others interpreted fitness as the ability to produce offsprings, and went off in a different direction. For some, the lion or any apex predator is an archetype of fitness, while for others the stubborn cockroach that survived in the same form since the dinosaurs, or the nimble rabbit that produces many offsprings at one go, are examples of fitness in action.

So, what were/are the implications of the Samkhyan model of evolution? Since evolution is driven by Purusha or conscious awareness-- adopting the Samkhyan model would mean to bring awareness into each and every aspect of our lives and to act with intention rather than on impulse or habit. Habit or impulsive behaviour is purely Prakriti in action. These actions are the result of causal pathways that are hardwired into our implicit memory (called Samskaras). In contrast, intentional actions are those driven by conscious oversight. Evolution is made possible by conscious, intentional, and deliberate action. 

Samkhya also posits that every one of us is a source of awareness-- each of us have the Purusha/Prakriti duality that defines our being. Later philosophies in India went even a step further and said that while we may all have different Prakritis, there is only one Purusha-- consciousness is singular! There is no such thing called "consciousness-es". But those theories are beyond the scope of this post.

Here is the talk that started this chain of thought in my mind. Listen to it for more fascinating details: 

Microcosm and Macrocosm-- Swami Sarvapriyananda