Archive for November 9th, 2016

How did Trump win? By taking lessons from East European leaders?

November 9, 2016

Another Brexit moment where several elites and polls got a hiding from people. The outcome was even worse for elite economists who appealed to public against Trump’s bad economic policies, but to no avail.

There will be several pieces in future looking at reasons for the unexpected win. This one by Leonid Bershidsky of Bloomberg provides some initial food for thought.  He says Trump mixed populism with anti-corruption pitch, something which has shown success across Europe (even India actually):

Trump probably won because, by the end of his campaign, he wasn’t just a nationalist populist, like the kind that has recently achieved increasing success in Europe, without, however, winning commanding heights. He was also an anti-corruption crusader. He was smart to pick up on the opportunity given to him by WikiLeaks, which tweeted on Tuesday night, “The American people don’t like corruption.”

Anti-corruption parties saw major electoral success in Central and Eastern Europe, joining or leading governing coalitions in a number of countries — Poland, Slovakia, Estonia, Latvia, Slovakia, Bulgaria — in the 2000s. Far from all of them, however, survived their second, not to mention their third election. The most successful of them — Poland’s Law and Justice (PiS) — runs the country today because it has artfully combined an anti-corruption agenda with nationalist populism.

This combination has tempted many post-Soviet politicians, too. Former Georgian President Mikheil Saakashvili honed it after his country’s 2003 “Rose Revolution,” and then, when he was swept out of power after significantly changing his country, he brought it with him to Ukraine. This week, he resigned as governor of Ukraine’s Odessa region to build a strong party and fight for an early parliamentary election. He announced his resignation in a Trump-like self-pitying, vindictive speech. He blamed corruption in President Petro Poroshenko’s administration and cabinet for his failure to reform customs and public services in the region. He said the president personally supported corrupt “criminal clans” in Odessa, and he vowed to “begin a new stage of the struggle.”


By winning a presidential election with a distinctly Eastern European recipe, Trump has shown that there’s not that much difference between, say, Americans and Poles or Americans and Georgians. It’s as easy to appeal to their national pride, tying it in with their economic discomfort, and their understanding of official corruption is quite similar. 

Obviously elites thought US is different and cannot be compared to countries elsewhere:

The U.S. is never compared to the young democracies of Central and Eastern Europe because the same arrogant U.S. elite that failed so miserably this year has been so proud of the U.S. political tradition. As the tradition collapsed, some members of the pundit class have had to admit they didn’t really understand the country. “America, we hardly knew ye,” economist Paul Krugman tweeted. “Certainly I misjudged the country.”

It’s time to give up the hubris. The U.S. is a country like many others in most important respects. Everything that can happen elsewhere can happen here. Trump has just happened.

Those times when despite differences there seems to be some similarities as well.. Just that we are not looking..

How Yale runs its endowment fund?

November 9, 2016

There are two things to  endowment fund run by US universities. One is their huge size which is more than size of GDP of several countries. Two, most of the business schools in these univs would be teaching the utility of passive or indexing fund management. So ideally all these funds should be just invested in some index fund as their own Profs would say. But the univ does the opposite by appointing an active fund manager to do the job!

Here is a profile of David Swensen, fund manager of Yale endowment fund.

Mr. Swensen’s route to the endowment world was circuitous, though. “My father and my grandfather were both chemistry professors,” he said. After earning a doctorate in economics from Yale in 1980, he considered teaching that subject. But while he was researching bond prices at Salomon Brothers for his Ph.D. dissertation, “they offered me a job,” he said.

Salomon was, of course, a Wall Street bond titan at the time and would eventually help define the go-go 1980s “Barbarians at the Gate” era of leveraged buyouts. All of that was still a few years in the future, though, and anyway, Mr. Swensen said, “I missed Yale so much that I went back to teach one class every semester.”

In 1985, the Yale provost, William C. Brainard, plucked him from Wall Street and asked him to take over the school’s $1 billion endowment.

His acceptance meant an 80 percent pay cut. But Mr. Swensen says he never regretted returning to work for an academic mission. “I am in the fortunate position of making very good money,” he said, for something he loves doing. He made $5.1 million in 2014, the latest numbers available.

From the beginning, he brought in analysts and interns to work on the portfolio. Part of that process soon included the weekly meeting to debate investment ideas. “Seeing that there was a debate, even at the most senior level, taught everyone to have their own view,” Mr. Golden said.

There is something about writing these profiles of a fund manager. They read so pristine and make the person appear as some god or something. They are so similar that they all appear too good to be true. All this lasts till the fund does well. As it makes losses all these adjectives turn into something else…

Changes in Currency usage in India since 1970…

November 9, 2016

Here is a pdf of the trends in currency usage in India from 1970-2016.

  • In 2000-01, Rs 1000 were reintroduced after being banned in 1978. In 2000-01 its share in total notes volume was just 1.7% which has jumped to 38% by 2015-16. Just to compare, in 1970-71 Rs 1000 share was 1% which declined to 0.6% in 1978.
  • Rs 500 notes started in 1987-88 comprised just 0.5% of the share and is now at 47.2%. Together, Rs 500 and Rs 1000 form 85.2% of currency share. This has been knocked off in one day. The total volume of notes to be replaced is around Rs 15 lakh crore (Rs 7.85 lakh crore of Rs 500 plus Rs 6.32 lakh crore of Rs 500)!
  • Rs 100 notes share has declined from 48% in 1970 to just 10% in 2015-16. This does not mean is usage has declined whuch has increased manifold from Rs 0.2 lakh crore to 1.6 lakh crore! It is just that its share in volumes has slipped due to the bigger notes.
  • Likewise share of Rs 10 has shrunk from 34% to 2%.
  • Rs 20 notes were started in 1972-73 with a share of 2.7%. It rose to 8% in 1982 and then declined gradually to 0.6% in 2015.

All in all a shocking rise in usage of Rs 500 and Rs 1000 notes over the years. Due to huge inflation over the years, they have replaced the Rs 50 and Rs 100 as top high end notes.

As said earlier, the government and central bank should have seen these trends earlier. The share of these two notes was 26% in 2000-01 and had risen three times to 81% by 2011 itself. Since then it has actually plateaued. The writing was on the wall for a while till they decided to tear the wall completely and build a new one…

Case of fiat currency: history, power and denominations..

November 9, 2016

There is just so much happening that one does not not know what to read/blog and what not. The Trump event looks like another Brexit case where the pollsters failed miserably.

But the blog has to start from the shocker of a night where you realised the fickleness of fiat power money. Then you wake up to see this post topping the daily stats: Why is currency in circulation in India rising?

Endless amount of media and expert commentary has followed with each one saying the same thing. Of all , this piece by Prof JR Varma was different. He said the world runs on credit and not money. So we should be more worried about losing our source of credit than source of money.

I also wanted to take a different perspective as well.  No one has asked the following  question: How does government decide overnight that what it itself said as legal tender a few seconds ago is no more a legal tender just a few seconds later?

The answer is simple here: The government proposes and disposes. It is this single monopoly to print and manage the currency which makes governments the most powerful entities. As countries warred so often earlier, they realised the superiority of who wins the war does not depend on better war machinery but on better currency/financing machinery. Napoleon figured much later though that what gave England edge in Anglo-French wars is not superior war technique or machinery but financing facilities pioneered by Bank of England. Thus, came Banque de France in 1800 nearly 106 years after Bank of England.

Even before or without these banks, role of financiers was crucial in these war outcomes. History of Rothschild tells you the same and same is the case with our very own Jagat Seths.

One just remembers and rephrases the famous dialogue from the Hindi movie blockbuster Deewar.  Just that the dialogue is between people and the government. The people say : “Look we both started together in this journey. But I have voting power, I have consumption power, I invest and make money and so on. What is it that you have?”  The Government says “I have currency printing monopoly..” And no explanations are needed.

Apart from putting up central banks to finance wars, some other central banks basically evolved to monpolise this very currency. Before central banks, banks issued their own currency backed usually by gold or some other asset. So one could always encash the currency note with some of those assets. As some banks failed to do so, it led to concerns amidst the public (just like when bank fails to payback deposits today). This led the then governments to monopolise the currency function under one of these banks. Now, the central bank issued currency and other banks were not allowed to print their currency.

In other cases, where there was no central bank as such but governments still figured a way. It ensured that only currency printed by a government bank or a government chosen bank was considered as legal tender. Only their supporeted currency was accepted in government treasuries.So even if other banks printed their own currency, they found no takers as it was barely exchangeable. This was seen in Presidency Banks case. The Presidency Bank issued their own currency from 1823-61 but were not central banks. However, due to their legal tender monopoly, the other banks could barely compete. The other private banks especially in Bengal fought against this monopoly but to no avail. A classic fight is depicted between Union Bank promoted by Shri Dwarkanath Tagore and Presidency Bank of Bengal  in Amiya Bagchi’s history of SBI.

Infact even before we had governments coming in picture, we have stories of Maharajas and their currencies. That time we actually just had coins. So each time a new king came, he demonetised the old coins and issued coins showing his legacy. The new coins would have new shape, new design and so on. Each era of new king showed a different coin.

Later as forgers caught up with the game, attempts were made to introduce new coins to prevent fake currencies from circulating. The message was same. This is the government monopoly and it shall remain that way.

One thing which ticked the game further in favor of governments and forgers was the start of fiat currency. Earlier currencies had some backing. Now, it is just based on fiat. The government just prints whatever it wants to and then one day decide to take it away as we learnt last night. It is that simple. What had some value few seconds before is just a piece of paper now.

Then there are all these mention of black money and how it will curb black money. The question is who creates black money? We have demonetised all these high denomination notes many times in the past. Each time the reason is same – curb black money. Then why do we keep reintroducing them?

The first was when Rs1,000, Rs5,000, and Rs10,000 notes were taken out of circulation in January 1946, a year and a half before the country won independence from the British. The Rs10,000 notes were the largest currency denomination ever printed by the Reserve Bank of India, introduced for the first time in 1938. All three notes were reintroduced in 1954. 

In the early ’70s, the Wanchoo committee, a direct tax inquiry committee set up by the government, suggested demonetization as a measure to unearth and counter the spread of black money. However, the public nature of the recommendation sparked black money hoarders to act fast and rid themselves of high denominations before the government was able to clamp down on them, Mint reported.

Then, in 1977, the Janata Party coalition government came into power. A year into the government’s term, party leader Morarji Desai was more bullish about cracking down on counterfeits and black money. The High Denomination Bank Notes (Demonetisation) Act, instated by the ruling party on Jan. 16, 1978, deemed the Rs1,000, Rs5,000 and Rs10,000 notes illegal for the second time.

 At the time, then-RBI governor I.G. Patel disagreed with the measure and accused the Janata coalition government of trying to cripple the corrupt predecessor governments instead of simply eradicating black money.
 For the most part, Modi’s measure mirrors Desai’s—except this time, he has the backing of his RBI governor, Urjit Patel, who applauded Modi’s “very bold step” addressing concerns about the “growing menace of fake Indian currency notes.” But that doesn’t mean all the skeptics are off his back. Economists doubt the impact of his decision.
Given this limited history and knowing that high denomination notes lead to corruption, why keep going through circles? They are the ones which first allow all this black money to be parked and then they coolly say none of these are legal!
The Rs 1000 and were reintroduced in 2000-01(by NDA I) and Rs 500 started in 1987-88 (by Congress). After years of inflation and now this habit of carrying these notes in wallets, they are now worthless.
The government could have ended this high denom notes problem once and for all.  But all you know a new series of Rs 500 and even bigger RS 2000 notes are being introduced. The same people who laud the government for decision against black money just don’t ask why again Rs 500 and Rs 2000?
All this just leads to constant source of worry for the common people. They have no idea why these things keep happening. All of a sudden there is panic across the country. One would also need to fill a form and furnish id to get the new notes. The currency notes will be rationed initially which will make lived even tougher.
Earlier these high denom notes were held by the top income class. Now it is help by everyone. The government has specified deadlines and places where old notes will be accepted. But it also knows no one will take these notes as who wants the headache of going to the bank? Visiting bank and exchanging notes is a problem never really foreseen by the ministers or bureaucrats as they themselves never have to stand in these queues. It is easy to say things like short term pain without experiencing any pain whatsoever.
One is also wondering why note security measures were not upped in another demonetisation exercise 1-2 years back. That time we just introduced notes which had years mentioned at the back.
Then there is this hype over cashless economy. Much of this discussion comes from big cities where plastic money has taken off. Go a little deeper and cash remains the thing. We are some years away for the transition to plastic money in most parts of the country. How do we move to a cash economy so soon? Even more Ironically it will lead to more powers in the hands of governments and not people as suggested. These things should also be done taking people with you and not by force.
A free banking proponent will say told ya! Much better to link currency to gold and prevent all these government machinations trying to make the world believe that it is trying to curb illegal practices. As the government prints too much money at will, these issues were bound to crop up sooner or later…

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