An oldish post by lulzmoney (HT: JP Koning) but highly relevant as Governments are at a war on cash.
Post Berlin Wall, the currency in East Germany was Eastern Mark or Ostmark. I am leaving the earlier history of its starting etc to the reader and moving straight to 1989 when the wall fell. What then happened to Ostmark is straight out of movies:
There have been some comments over this RBI Annual Report table which indicates household financial savings being higher than physical savings. The idea is that thanks to several government measures we are seeing people moving towards financial savings over physical savings.
One just dug out the savings data from 1950-51 onwards and we see quite a few times this has happened. I have highlighted those years in Red. First time we see fin savings higher than physical ones is 1981-82 which continues till 1986-87 barring one year in the middle. Then we see from 1991-92 to 1998-99. Then there is just one year in 207-08 where this happens on the hype of 9% growth. Will have to figure the reasons for other years.
| Year | Financial Savings | Physical Savings |
| 1950-51 | 0.6 | 6.2 |
| 1951-52 | 0.1 | 6.2 |
| 1952-53 | 0.7 | 6.2 |
| 1953-54 | 1.4 | 5.3 |
| 1954-55 | 2.8 | 4.9 |
| 1955-56 | 4.3 | 6.1 |
| 1956-57 | 3.3 | 8.9 |
| 1957-58 | 2.9 | 7.4 |
| 1958-59 | 3.6 | 6.2 |
| 1959-60 | 4.3 | 8.3 |
| 1960-61 | 4.6 | 7.7 |
| 1961-62 | 4.9 | 7.5 |
| 1962-63 | 5.0 | 10.2 |
| 1963-64 | 7.4 | 8.5 |
| 1964-65 | 7.1 | 11.8 |
| 1965-66 | 10.7 | 15.2 |
| 1966-67 | 8.6 | 23.0 |
| 1967-68 | 8.7 | 24.1 |
| 1968-69 | 8.0 | 24.8 |
| 1969-70 | 9.2 | 34.6 |
| 1970-71 | 13.7 | 31.6 |
| 1971-72 | 15.6 | 36.7 |
| 1972-73 | 21.3 | 32.0 |
| 1973-74 | 36.1 | 44.1 |
| 1974-75 | 23.7 | 63.0 |
| 1975-76 | 39.2 | 58.7 |
| 1976-77 | 48.5 | 63.5 |
| 1977-78 | 58.5 | 78.3 |
| 1978-79 | 66.6 | 98.2 |
| 1979-80 | 60.8 | 102.6 |
| 1980-81 | 86.1 | 95.1 |
| 1981-82 | 96.1 | 94.0 |
| 1982-83 | 127.4 | 92.3 |
| 1983-84 | 132.9 | 136.6 |
| 1984-85 | 178.8 | 149.2 |
| 1985-86 | 185.4 | 181.3 |
| 1986-87 | 233.4 | 187.8 |
| 1987-88 | 268.2 | 304.8 |
| 1988-89 | 271.8 | 398.8 |
| 1989-90 | 380.0 | 449.9 |
| 1990-91 | 496.4 | 589.6 |
| 1991-92 | 621.0 | 435.3 |
| 1992-93 | 653.7 | 625.8 |
| 1993-94 | 947.4 | 567.2 |
| 1994-95 | 1207.3 | 664.1 |
| 1995-96 | 1057.2 | 928.7 |
| 1996-97 | 1416.6 | 829.9 |
| 1997-98 | 1467.8 | 1373.5 |
| 1998-99 | 1803.5 | 1717.7 |
| 1999-00 | 2066.0 | 2322.5 |
| 2000-01 | 2152.2 | 2485.3 |
| 2001-02 | 2474.8 | 2978.1 |
| 2002-03 | 2532.6 | 3109.1 |
| 2003-04 | 3132.6 | 3443.3 |
| 2004-05 | 3279.6 | 4357.3 |
| 2005-06 | 4383.3 | 4306.6 |
| 2006-07 | 4842.6 | 5101.4 |
| 2007-08 | 5802.1 | 5381.4 |
| 2008-09 | 5710.3 | 7598.5 |
| 2009-10 | 7747.5 | 8560.5 |
| 2010-11 | 7738.6 | 10263.2 |
| 2011-12 | 6322.0 | 14225.4 |
| 2012-13 | 7171.3 | 14952.8 |
Infact RBI Annual report table is for 2015-16 which have already been given earlier. It is not really new data:
From 2011-12, it has changed the style of reporting this data. It looks like as shown in the RBI Annual Report table. The figures are:
| Gross financial saving | Less financial liabilities | Saving in physical assets | Saving in the form of gold & silver ornaments | |
| 2011-12 | 9327.29 | 2901.2 | 13893.22 | 336.35 |
| 2012-13 | 10640.41 | 3304.25 | 14650.13 | 366.5 |
| 2013-14 | 11907.7 | 3586.79 | 14164.28 | 367.82 |
| 2014-15 | 12826.33 | 3633.85 | 15908.74 | 455.62 |
| 2015-16 | 15142.07 | 4317.55 | 14951.5 | 439.3 |
Infact if we add Gold and Silver to Physical Savings, the share of Physical Savings remains higher than Financial savings even in 2015-16.
We have seen in the past that if overall global financial environment goes for a toss, people switch back to physical savings. What will happen this time around is there to be seen…
When RBI announced that surplus transferred to government is Rs 30659 Cr less than Rs 65876 cr, all hopes of a government bonanza from demon were dashed. But back then we knew one major item which would have led to this decline is cost of printing notes which was expected to rise given the scale of remonetisation.
Y’day Annual report released the income and expenditure figures:
We usually say in monetary economics (and even in other branches of economics), read history carefully. More often than not what was said previously remains true until today.
So when Government in accordance with RBI Board announced to demonetise the Rs 500 and Rs 1000 notes, this blog just dug some history. In this post it pointed to statements of RBI Governors who refused to demonetise currencies during their regime in 1946 and 1978. This led Governments then to use the ordinance route.
CD Deshmukh in 1946 said:
Professor of Financial Journalism at University of London (what a position!)) has a piece. The piece is based on the recent Nobel meeting at Lindau where inequality was one of the central issues of discussion.
Every three years, all Nobel Prize winners in economics are invited to gather in the tranquil setting of the German island of Lindau to meet a selection of bright young economists and discuss the state of their profession. But this year such tranquility was challenged by worrying political developments across the globe. Perhaps unexpectedly, one of the central themes of the meeting became what to do about inequality.
While not all laureates would go as far as Jean Tirole, the 2014 Nobel Prize winner, who said that economic inequality itself is a form of “market failure”, it is clear that the political and social effects of growing inequality are drawing increasing attention from those at the top of the economics profession.
In a panel discussion on inequality, James Heckman, the 2000 Nobel laureate, pointed out that inequality had grown faster in the US and the UK than other Western democracies. Heckman said that changes to the tax system that favoured the rich had to be a key part of the explanation. He was also worried about the decline in social mobility, particularly for those on low pay.
Heckman also pointed out that the low income of many single-parent families, whose numbers have increased sharply over the last few decades, had also increased inequality. He argued strongly for wage subsidies to boost the income of the working poor, and increased subsidies for childcare to help more single parents enter the labour market.
Hmm…Much more there..
As Mumbai goes through another deluge and crisis, you begin to wonder how superficial nature of our urban development. The maximum city does not even have minimum facilities in place.
It is not just Mumbai but we have had this water logging problem in most cities this season. We had floods this year in Ahmedabad, Bangalore and many more regions. And of course there was Chennai too in 2015 (though Chennai went to another extreme of water shortage soon thereafter). More summary here.
One sticks to Mumbai in this post given the coverage.
It is a really cruelty check as this year of 2017 marks the 10th anniversary of much hyped and debated Report on Making Mumbai as International Financial Centre. There was this whole feeling around 2005-07 just before the crisis, that India is not doing enough to attract global finance. This led to multiple reports around the time each one asking India to be more open on global finance from its own angle.
This specific report looked at how Mumbai could become an international financial centre and compete with others in the business like New York, London etc. After all the committee was formed as then Finance Minister in his 2005-06 budget speech said:
Spotted this notice in Bangalore airport on Monday morning:
How Qatar’s diplomacy crisis effects the legal tender aspect of Qatar currency. Suddenly, the currency is not acceptable for exchange at international airports. I am not sure whether all countries follow this and who decides whether the currency will be legal tender or not at international markets.
The mind went back to this Terminal movie where Tom Hanks lands in US only to realise his passport is invalid. This is because US no longer recognizes his country Krakozhia as a sovereign nation after the outbreak of a civil war. Thus, he is not permitted to either enter the country or return home as he is now stateless.
This currency crisis could have impacted travellers/immigrants from Qatar carrying the currency only to realise it is worthless in international markets. Thus, even though they have come to safer shores will have to figure ways to make a living.
How eventually monetary systems get impacted by even things like diplomatic crises…
ECB chief Mario Draghi gives a nice speech on the topic. It is at Lindau Nobel Laureate Meeting.
He looks at how research has impacted policies over the years summarising many years of research and policy. In the end points t0 5 lessons:
This account of how policymakers and researchers have interacted in the past ten years shows how indebted the former are to the latter. From my point of view, one can draw five lessons for policymakers.
First, sudden shocks often make visible the flaws in our policy frameworks and challenge the explanatory power of existing theories in ways that have been previously overlooked. But analysis conducted by researchers and embraced by policymakers remains essential in designing the policy response.
Second, a policy response that has its foundation in rigorous research is less prone to being impaired by political compromise and easier to explain to the general public.
Third, Keynes is often quoted as saying, “When the facts change, I change my mind. What do you do, sir?” Well, for policymakers, it is not that simple, and research helps us to decide whether a change in the facts deserves a policy response or, as we say, we should look through it.
Fourth, when the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defence of previously held paradigms that have lost any explanatory power.
Fifth, we must be aware of the gaps that still remain in our knowledge. Our mainstream macroeconomic models still have little to say, for instance, about the non-linear propagation of shocks, the distributional impacts of policies, or how endogenous firm entry and exit can affect economic performance.[15] Policy actions undertaken in the last ten years in monetary policy and in regulation and supervision have made the world more resilient. But we should continue preparing for new challenges.
The changes that we have discussed, profound as they are, often hinge on one fundamental idea. A natural question to ask is whether such an idea sprang out as a response to a specific policy problem or was rather conceived previously in an entirely different, unrelated intellectual environment, perhaps addressing a different set of problems. It is a question that is especially relevant in economics, when previously held consensus views change. But it is a question that is unlikely to have a precise answer.
Let me rather use the 1939 words of Abraham Flexner, the first director of the Princeton Institute for Advanced Study: “Almost every discovery has a long precarious history. Someone finds a bit here, another a bit there. A third step succeeds later, and thus onward till a genius pieces the bits together and makes the decisive contribution.”[16]
Today, I have had the privilege of addressing such people – geniuses who have pieced the bits together and made decisive contributions.
He misses the 6th and most important lesson: avoiding hubris and need for humility in both research and policymaking. We often see a lot of problems when both research and policymaking think they have solved all economic problems and nothing can go wrong, is when all wrongs happen…
How Governments keep thinking of ways to intervene in central banks is quite something. The way demonetisation was conducted in India was a wake up call on importance of Central Bank Boards.
ECB is not just a central bank but also adviser to national European central banks both which have joined Euro or are members of European Union. In this space, the other central banks keep asking ECB for advise for instance on limits of cash usage and so on.
It was interesting to read this recent ECB advisory note on composition of board of Belgium Central Bank. The Belgian Government has recently proposed changes in the Board by lowering number of members from seven to five. Earlier legislation said maximum 8 members (Governor + Vice Governor+ 6 members) and minimum 6 members. The new legislation proposes reduction of maximum members from 8 to 6 (Governor + Vice Governor+ 6 members) but no minimum limit is suggested.
ECB sees it as a possible case of intervention in central bank affairs in future:
The superb Gulzar blog has a mid-week linkfest (previous week) in which he points to this starting thing.
The Trump administration has been mostly condoned by one and all. However, one barometer proves all this wrong. This is is the equity markets which ahs emerged as one of the key benchmarks for comparing everything. Any policy or action is usually judged in terms of stock markets. If markets are fine so is the action is the general call of things.
However, this blog does not really buy this recent stock market fascination for everything as it is quite biased and could go terribly wrong as well. Markets correct and move on but leads to all kinds of problems for people who built certain expectations based on equity market reactions earlier.
But nevertheless, it is amazing to note that despite all kinds of admonitions, the volatility in equity markets is lowest in Trump’s first 6 months compared to any other President:
Superb piece about a firm behind bitcoin mining.
The article is quite in the Coasean spirit. People often talked about markets but Coase saw that most exchanges are actually governed by firms. Which led to one of the most amazing insights of economics that it is firms which via lower transaction costs enable exchanges.
Likewise, we talk about how cryptocurrencies shall usher in a new world of decentralised digital currency and lead to better monetary markets. But we really do not look at the back-office of these cryptocurrencies and ask who is doing all this stuff?
This interesting article speaks about this Chinese firm Bitmain which provides 4% of the processing power in the global bitcoin network. It was fascinating to connection between old industry and new one. The region was first a coal bed and thus was a natural home to electricity which is needed immensely in these operations:
Prof. Victor Ginsburgh of Université Libre de Bruxelles pays a tribute to Prof Baumol who just passed away. He points to this interview Alan Krueger takes of Baumol:
William Baumol is the ‘inventor’ of the cost disease, an idea that initiated the field of cultural economics. According to Blaug (2001: 123), “cultural economics or the Economics of the Arts, as it used to be called, may be said to have been created almost de novo 30 years ago by Baumol and Bowen’s (1966) book.”
Instead of defining the disease – every cultural economist should know what it says – here, according to Baumol himself, is the story of its birth:
“John D. Rockefeller III and August Heckscher of Twentieth Century Fund had decided that it was time for the United States to do something to encourage the arts. So they decided they would have a two-pronged operation. One was a panel composed of good, solid business people who could show that the arts were not a Communist homosexual plot. Then they wanted a serious study. They talked to a number of people, and then someone told them that there was this crazy economist at Princeton who was interested in art. Well, it was the wrong art. I was interested in painting and sculpture. So they called me in, and I told them how I would go about selecting somebody to study it… And then the next day they called me and said, ‘We’d like to give you those instructions.’ I said, ‘I’m terribly busy. I can’t do it.’ And they called again, and I said, ‘Well, I’ll do it on one condition. There’s a young assistant professor here, in whose work I have great confidence. If he’s willing to do it and you’ll pay him…’ And they agreed and Bill Bowen came and took over the whole thing, as you can imagine. It was such a pleasure working with him. So we started to work on it, and he laid out all the things that had to be covered, how one should go about covering them. And then we started to get all these statistics about budgets. Then one night, it was 4:00 in the morning, I suddenly woke up and said I know why those costs are going up! I got up, wrote down a few notes, and went to sleep again. That’s literally how it happened.” (Krueger 2001: 217-18).
The productive nature of sleeping seems to recur in science: a French mathematician called Andre Lichnerowicz once said that there is no difference between a mathematician who sleeps and a mathematician who works. This is very close to what Baumol’s son, Daniel, recounted about his father: “During a long trip, he would sit in the back of the car, oblivious to the world, and as we pulled in, he would announce, ‘I just finished that article’” (New York Times 2017).
Brilliant..
Though these gifts are possessed by rare few. Most of us struggle to come with any ideas despite all eyes awake…
My new piece published in Mint today.
It is quite humbling to figure financial and business history during the highly tragic period. How people managed to move their businesses and banks from one country to another with all the political and human turmoil must have been quite something. But it has been barely studied. This is just a small step towards what is really an ocean of things to figure and understand.
Comments and suggestions are welcome.
This blog is on a short break. I will try and blog but unlikely to happen.
Hope to resume next Tuesday. Keep sending your comments and suggestions..
Thanks for visiting and motivating to keep the blog going..
What started as a series of Tweets has become a very interesting Mint column today.
Avinash Tripathi explains game theory basics using one of the iconic scenes of iconic movie Sholay:
The deflation chorus keeps coming in India. A drop in inflation is termed as deflationary by media every now and then. Former ECB member Lorenzo Bini Smaghi had earlier warned that one should use the two D words – deflation and depression with caution. The reason is that both suggest really difficult times for both economy and policy. However, we seem to be using the word deflation with little caution.
For instance, this time around even Economic Survey says India suffers from deflationary impulses atleast in short term:
Optimism about the medium term and gathering anxiety about near-term deflationary impulses simultaneously reign over the Indian economy. Optimism stems from the launch of the historic Goods and Services Tax (GST), the decision in principle to privatize Air India; actions to address the Twin Balance Sheet (TBS) challenge; and growing confidence that macro-economic stability has become entrenched. Optimism, even exuberance,
is manifested in financial markets’ high and rising valuations of bonds, and especially stocks. At the same time, anxiety reigns because a series of deflationary impulses are weighing on an economy yet to gather its full momentum and still away from its potential. These include: stressed farm revenues, as non-cereal food prices have declined; farm loan waivers and the fiscal tightening they will entail; and declining profitability in the power
and telecommunication sectors, further exacerbating the TBS problem. For the year ahead, the structural reform agenda will be one of implementing actual and promised actions— GST, Air-India, and critically the TBS. The macro-economic challenge will be to counter the deflationary impulses through key monetary, fiscal, and agricultural policies. The opportunities created by the “sweet spot” that recent Economic Surveys have highlighted
must be seized and not allowed to recede.
Even in RBI MPC Minutes, both Governor and Deputy Governor mention deflation in food prices:
Statement by Dr. Viral V. Acharya
Inflation prints since the last policy have turned out even lower, though there are emerging signs that certain deflating food items are on a price rebound.
Statement by Dr. Urjit R. Patel
…….An assessment of whether the recent deflation in food items is sustainable, despite a normal monsoon, would require more hard data going forward.
There is always this confusion when the term deflation is mentioned. What people perhaps mean is disinflation but they end up calling it deflation.
Robert Ophele, then Deputy GOvernor of Banque de France clarified:
Inflation refers to a sustained increase in the general price level in an economy. It is not an instantaneous shock limited to the prices of certain goods. It is a persistent and general process. Inflation is fuelled by expectations – when workers and companies expect prices to rise, they adjust upwards their prices and wages accordingly.
Conversely, deflation is a sustained decrease in the general price level in an economy. If only certain prices fall, it is not deflation. For example, the price of laptop computers or hi-fi equipment may decrease due to technological progress, but this is not deflation.
Disinflation is a reduction in the rate of inflation or a temporary decrease in the general price level in an economy. For example, if inflation falls from 3% to 1% per year, this is disinflation. If, however, the rate of inflation falls into negative territory, to 1% per year for example, and this decrease is expected to last, this is deflation.
In a recent piece Tandit Kandu of Mint clarifies the so called deflation only on account of fruits and veggies:
The second volume of the Economic Survey released a little over a week ago by the Union finance ministry warned that the Indian economy faces deflation risks owing to the problem of over-leveraged private sector balance sheetsand other headwinds such as GST and rural distress. Concerns over deflation risks are understandable, given the recent downward trend in retail price inflation.
However, a Mint analysis suggests that the sharp drop in inflation below the Reserve Bank of India’s (RBI’s) 4% target has been driven by only two items—pulses and vegetables. The analysis shows that consumer price index (CPI), excluding pulses and vegetables, rose at the rate of 3.8% in July, much higher than the official headline figure of 2.4% inflation for the month. The re-calculated CPI is based on adjusted weights after excluding pulses and vegetables from the basket of goods and services.
…..
Thus, there does not seem to be any imminent threat of deflation in India. A more apt characterization of the recent trends in prices may be ‘disinflation’ (a fall in the inflation rate) rather than deflation (falling prices) given that overall inflation, excluding pulses and vegetables, is close to the RBI target of 4%.
This is pretty much the story each time deflation is mentioned in India. One or two items/categories lead to decline in inflation levels and we call it deflation in India and clamoring for monetary and fiscal stimulus. Whereas deflation is persistent decline in most prices (if not all) and there is nothing of this sort happening here.
Nice speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas.
He cites several awards given to the Philippines central bank recently and says it is all due to team work:
One just blogged about women stockbrokers in NYSE.
Then was reading this article by Tamal Bandypadhyaya on how with each subsequent data, men are being seperated from boys in Indian banking. To this Bindu Ananth of IFMR Trust tweeted and rightly so : “Given that a majority of banking assets are managed by women CEOs, the title needs editing”. Indeed!
As one finished Tamal’s piece, popped another piece from Stephen Mihm in Bloomberg View.
Michael Kulikowsky (Professor of history and classics at Pennsylvania State University) has a piece on the topic:
Apart from the small and ethnically circumscribed exception of the Jews, the ancient world had never known an exclusivist faith, so the rapid success of early Christianity is a historical anomaly. Moreover, because some form of Christianity is a foundational part of so many peoples’ lives and identities, the Christianisation of the Roman empire feels perennially relevant – something that is ‘about us’ in a way a lot of ancient history simply is not. Of course, this apparent relevance also obscures as much as it reveals, especially just how strange Rome’s Christianisation really was.
That a world religion should have emerged from an oriental cult in a tiny and peculiar corner of Roman Palestine is nothing short of extraordinary. Jesus of Nazareth was a Jew, though an eccentric one, and here the concern is not what the historical Jesus did or did not believe. We know that he was executed for disturbing the Roman peace during the reign of the emperor Tiberius, and that some of his followers then decided that Jesus was not merely another regular prophet, common in the region. Rather, he was the son of the one true god, and he had died to bring salvation to those who would follow him.
Federico Neiburg of Museu Nacional, Universidade Federal do Rio de Janeiro has a superb research piece (HT: JP Koning who else).
Haiti Dollar is just imaginary money. The currency is neither traded or exchanged but used as a unit of account. So you buy/sell anything in Haiti, you will be quoted prices in Haiti Dollars but paid in some other currency!
I examine here a singular feature of the Haitian monetary universe: the generalized use of a currency without any material existence, past or present, as a coin or banknote: the Haitian dollar. In most transactions in Haiti (price negotiations in markets, working out wages and contracts), calculations are made in the Haitian dollar, while payments are made in other currencies, principally in gourdes (HTG, the national currency), but also in US dollars, Dominican pesos, telephone cards, and other forms, such as the pieces of plastic or metal that smooth the flow of various commercial circuits of basic goods, like water and coal, among the poorest people.
The rate of conversion between the Haitian dollar and the gourde is one Haitian dollar to five gourdes. After haggling over a bag of mangoes in a street market, for example, the buyer and seller may agree on a price of three Haitian dollars: the [76]buyer pays with a fifty gourde note (ten Haitian dollars), the seller keeps three dollars for the mangoes (fifteen gourdes), and gives seven Haitian dollars in change (thirty-five gourdes, in three notes of ten and one coin of five). Or another example: a supermarket bill comes to 234 HD (Haitian dollars). The buyer pays with 1500 gourdes (300 Haitian dollars), the cashier says, “Here’s your change: sixty-six dollars” and gives the buyer 330 gourdes, keeping the 234 Haitian dollars for the purchase.
All travel tips for foreigners (in tourist guidebooks or websites aimed at ex-pats) warn about this “bizarre” way of undertaking transactions. The Haitian government, with the support of public intellectuals, has tried many times to ban use of the Haitian dollar, condemning it as just another sign of the country’s barbarity or backwardness.1Nevertheless, people continue to calculate in Haitian dollars while they exchange other currencies.
Many dollars circulate in the monetary space of the contemporary Caribbean, including the US dollar, the Jamaican dollar, the Belize dollar, and the East Caribbean dollar—issued by the islands forming a Common Market, like Bermuda, Dominica, and Grenada. From the viewpoint of standard monetary theories, all of these are “normal” currencies: they serve as a unit of account, means of payment, medium of exchange and store of wealth. They are identified by a symbol (USD, JMD, XCD, etc.) and exist in a physical form, minted and available to be handled. The Haitian dollar also has a symbol (HD), but unlike the other Caribbean dollars, it is an imaginary money, a pure unit of account. Although basically an oral and conceptual phenomenon, the Haitian dollar is also written and objectified in supermarket receipts, restaurant menus, gas station price signs, contracts for international cooperation projects, notebooks recording debts and credits for bets or lotteries, and at banks, where we can find conversion tables like this: 1 USD:8 HD:40 HTG.2
One of my main aims, then, is to examine the entanglements (rather than oppositions) between materiality and immateriality, the reality and the conceptualization of the Haitian dollar. As we know, this tension traverses the social history of money.
Superb stuff…
Mostly Economics 