Wednesday, January 25, 2017
Currency Manipulation 101
Two countries – Venezuela and India – have instituted currency reconfiguration by pulling older paper currency out of circulation and replacing it with new paper money. Citizens were given a fairly short period to hand in their old notes and receive the equivalents in new notes. Sounds pretty innocuous, right? Aside from the relatively short time for people to make those exchanges, which were extended because the lines were intolerably long, there were deep political motivations behind these efforts.
Venezuela, living under the policies of a blithering idiot (Nicolás Maduro, the subject of a recall effort), who has blamed all of his mistakes on some hidden American conspiracy against him, announced his logic for the move: “President Nicolás Maduro of Venezuela made a baffling announcement on Dec. 11, saying that his government intended to yank the 100 bolívar note from circulation in three days to thwart a supposed plot to hoard Venezuelan currency abroad. Any 100 bolívar bills that were not exchanged at the central bank within 10 days would become worthless. The result of this reckless decision was predictable.
“Venezuelans, who have endured months of chronic food and medicine shortages, mobbed banks and A.T.M.s in a desperate attempt to offload their stacks of the highest denomination bill, which has become so devalued it is now worth roughly 3 cents in American dollars.
“Shops and merchants stopped accepting the note, all but paralyzing an economy wrecked by years of abysmal mismanagement. Looting and riots erupted in several cities.
“When Mr. Maduro announced a delay in plans in light of the [resulting] chaos … he predictably blamed the United States for being behind the hoarding of currency to cripple the economy, calling the plot ‘the revenge of Obama.’ [Now he will have to find a way to blame Donald Trump.]
“That is ludicrous. The unrest and violence in Venezuela are entirely the doing of the Maduro government, which has spent years suppressing the opposition and imposing arbitrary currency controls that have made a once prosperous economy one of the world’s most dysfunctional.” New York Times Editorial Board, December 20th.
India’s rational was quite different. “[In early November,] India’s Prime Minister Narendra Modi said the country’s two highest denomination currency notes — worth 500 and 1,000 Rupees (or roughly $7.5 and $15) respectively — would be rendered worthless within hours. The idea: to clampdown on hoarders of ill-gotten cash and currency counterfeiters, who, if they wanted to continue using their stockpiles of dirty cash, would have to go to the bank to convert their money. In doing so, they would end up under the government’s scanner.
“New 500 and high-denomination 2000 Rupee notes would, Modi said, replace the old, easier to fake, cash. And in the meantime, ordinary Indians left with worthless paper in their wallets could, after a day’s holiday to allow banks to prepare for the change, head to their local branch to exchange or deposit the old money.” Time Magazine, November 11th. Modi’s timing was also forced into a delay due to the resulting chaos. But about 86% of the circulating currency was directly and immediately impacted.
As people ran out of cash, a trickle and then a flood of unemployment followed. Consumers were stymied by a collapse in their ability to buy and spend. Three months later, the situation is hardly getting better. “For the sake of secrecy, the government largely avoided printing replacement notes in advance. So there has been an acute and protracted shortage of cash as the government struggles to catch up. That, in turn, has proved economically damaging.
“Exactly how harmful remains hard to determine, but the available data is not reassuring. Demand for vegetables is declining because people don’t have the money to pay for them, for example, and some service industries are reporting steep job losses.
“The International Monetary Fund this month cut its projected growth rate for India by one percentage point for the current fiscal year, to 6.6 percent. While the full impact is still difficult to discern, there is little doubt who is suffering the most. ‘This has actually hurt the poor enormously,’ said Nasser Munjee, chairman of DCB Bank and a company director at HDFC and Tata Motors.
“The pain is hidden, for the most part. Accustomed to hardship, many who lost employment were at first convinced by Mr. Modi’s speeches that their setbacks were transitory and, in the long run, would be worth the suffering. But as the crisis drags on, with no end in sight, some are growing frustrated, as they told us in a series of interviews at protests and at day labor gathering points.
“Many of them, even children, are forced to go without fruit, vegetables and milk — now unaffordable luxuries. Most had not paid apartment rents and their children’s school fees in the months since the cash ban. Many had sent their families back to their villages, and were ready to give up and follow if things did not turn around soon. Sending cash to the elderly parents they had long supported is now out of the question.” New York Times, January 24th.
But these are poorer, developing nations, being forced increasing towards an economy where paper and metal currency is so unreliable that people are choosing to replace that “old money” with digital equivalents. You’d expect modern economies to adjust rapidly toward “all digital” faster than the third world, like this example from Sweden where growing numbers of businesses post a "Vi hanterar ej kontanter" ("We don't accept cash") sign in their windows:
“In 1661 the Swedish central bank was the first in Europe to issue paper money. Now it is the first to eliminate it… Four out of five purchases here are made electronically. Plastic dominates, particularly in the retail sector, where 95 percent of all sales are handled with cards. The last area in which a Scandinavian still needs cash is the purchase of illegal items such as drugs. In general, the rule of thumb in Scandinavia is: ‘If you have to pay in cash, something is wrong.’” CreditSuisse.com (6/3/15). Soon, there may be absolutely no coins or paper money in Sweden, a reality that is expect to expanded into neighboring Scandinavian countries like wildfire.
But what is truly fascinating is the explosive growth of pure digital transactions in the developing world. An innovative African telecom executive made the connection with digital transactions early in the game. Having physical bank branches all over a nation with vastly isolated villages and towns was an economic loser … but the mobile phone was already everywhere.
Kenya redesigned its banking system to empower individuals and small businesses to step headlong into the digital world via that one ubiquitous device: the mobile phone. According to a blog from the World Bank, “What if anyone owning a cell-phone, whether rich or poor, also had access to financial services with the ability to save and send money safely, no matter where they are located? This is not science fiction; in fact it is already happening in Kenya, which has become the world’s market leader in mobile money.
“Today, Kenya has more cell-phone subscriptions than adult citizens and more than 80 percent of those with a cell phone also use ‘mobile money’ (or ‘’ [originated by the local telecom, Safaricom)…
“While the telecom revolution is not unique to Kenya, mobile money is. There are approximately 60 million mobile money users in the world, which means that almost one in three is a Kenyan. Half of all mobile money transactions are taking place in Kenya where annual transfers are now around US$ 10 billon.”
Wikipedia explains: “Safaricom has developed and launched nationwide a mobile banking service called M-PESA, that allows Kenyans to transfer money via SMS. The service does not require users to have bank accounts, an important aspect in a country like Kenya, where many people do not have bank accounts. With M-PESA, the user can buy digital funds at any M-PESA agent and send that electric cash to any other mobile phone user in Kenya, who can then redeem it for conventional cash at any agent. This system is remotely comparable to hawala banking or services like Western Union. An M-PESA-enabled mobile phone can also function as an electronic wallet and can hold up to 100,000 Kenyan shilling. Safaricom stakeholder Vodafone, which partnered in the development of M-PESA, has announced that it intends to roll out M-PESA internationally as well.” For the record, hawala banking is common in the Islamic world and is an informal value transfer system based on the performance and honor of a huge network of money brokers. The M-PESA concept is spreading to neighboring Tanzania as well.
So getting back to the unforeseen consequences of withdrawing old paper currency from the marketplace, let’s look at India as an example, where the entire monetary system appears to be changing into a truly-modern structure. “It had been two months since Prime Minister Narendra Modi’s decision to remove 500 and 1,000 rupee notes from circulation—86% of the country’s overall currency—and the surprise shift in policy was still disrupting daily life for India’s 1.3 billion people, as well as foreign travelers. One day, [graduate student Drew] Newman and his wife visited Kumbhalgarh Fort in Rajasthan. ‘The admission price was 400 rupees a person. I pulled out a 2,000 rupee note, and they didn’t have change,’ he says. And yet, even as snaking lines continued to form at ATMs, ‘without exception everyone seemed to be happy.’
“Interviews with business leaders in India confirm that impression: Citizens, by and large, see demonetization as an effective means to root out tax evasion and counterfeit currency, which has been linked to terrorism. —not to mention —have ridiculed the Reserve Bank of India for its management of the demonetization process. But Indians are looking beyond the short-term ‘cash chaos’ and toward the policy’s longer-term benefits… ‘They feel empowered,’ says Karan Sharma, a director in the financial advisory group at Avendus Capital's Mumbai office.
“And so are technology companies. Digital wallet providers like MobiKwik and Freecharge have seen enormous jumps in activations; market leader Paytm, already well positioned thanks to its user engagement strategies and [China’s] Alibaba backing, has . (As context, roughly the same number of Indians have a credit card of any kind.) In this first wave of adjustment, the big story has been local merchants’ adoption of digital payments point-of-sale solutions. On CNN, for example, a reporter visited a street food market and found snack-seekers buying samosas via QR code.
“Yet digital wallets, and their effect on local vendors, are just the beginning. In the background, digital wallets are helping to construct an infrastructure that will better support credit and e-commerce, two areas in which India has been lagging behind Western economies and rival China.
“Jainesh Sinha, COO of student loan startup , anticipates that his company will benefit in direct ways from the government’s new policy. In the past, families and friends would gather together thousands of dollars’ worth of cash to pay the tuition for a promising son or daughter’s college education (only 7% of Indian students take out educational loans, according to the ). Removing rupee notes from the system has made such arrangements more challenging.
“‘Now more and more people will have to turn to credit for paying for education, which is good for business,’ says Sinha, who previously worked for Capital One outside Washington, D.C. Now back in New Delhi, he partners with banks to offer educational loans of up to $45,000, based on GyanDhan's estimation of a student’s future income.
“‘People have gotten a taste of how convenient digital payments can be,’ Sinha says. Even his local vegetable vendor, in his 60s, has started accepting Paytm. ‘For the first few days he was like, I don’t understand this, it’s fake money.’ Now, like many other merchants, he sees that digital has its advantages.” FastCompany.com, January 20th. Americans are used to e-commerce, but getting rid of coins and paper currency entirely? How would you tip the person who parks your car? Yeah, well, get used to it, because sooner or later… Apple and Google are trying to make it sooner.
I’m Peter Dekom, and necessity is indeed the mother of invention and the accelerator of progress.