Wednesday, July 30, 2014


Can we imagine something that seems a bit odd today? There is a digital currency called Ripple. There are more than 8 billion ripple coins in the global market. They are worth over $50 million today. They offer transactions in all major currencies of the world as well as the gold. There is no need of any bank or financial institutions involved and hence no transaction cost involved. Its cost is very near what was the worth of Bitcoin in 2009 just after its discovery. Still, every day, over $100,000 worth of Ripples are bought and transacted. Let us assume that some company like Amazon, Facebook, Alibaba, Google, Microsoft or Apple or a group of them decides to make Ripple payment another alternative payment currency sometime in 2016. Suddenly, the network that is limited to some lakh users shall immediately shift to hundreds of millions of users. The credibility stamp of such a big network shall add a big worth to this digital currency. Don't forget that this ripple coin is like electronic version of gold. There is an upper limit to the number of ripple coins that can be issued unlike paper currencies that can have unlimited money supply. It means that possibility of embedding digital currencies in existing social and media networks is huge. That is why the monetary scene in the world is sitting at tenterhooks. Once these are gone, people will change money so fast that no national system can adapt accordingly. This will be like a computer virus that will spread to millions in days if not in hours. That is why the anchoring of paper currencies to actual gold or silver is very important. No keynesian economist would accept such a possibility but that is the biggest fear that is stalking them at present. This may seem odd but for the imminent survival, they would have to anchor the paper money if they want to secure any credibility. An inflation ridden money is always like an uneasy burden. The moment a national citizen gets a credible global alternative, things would change very fast. I am talking of only Ripple coin at present but there are over 200 digital currencies like Ripple in this world. The chances of world currencies hitting a digital black hole is not very remote these days. I am not talking of big business or big banks rather i am talking of retail transactions. That is why no established voice or government agency is actually speaking of this danger because their interests are directly linked to status-quo. But this may not last for long because once people start shifting paper currencies with digital currencies, it would turn into an alternative revolution.

Saturday, July 26, 2014

Rethinking Money-8

What is the value of excess unused cash that lies with you? You will either keep it as it is or you will invest it in some financial instruments depending upon how much you can wait for the  expected returns. In most of the cases, you will keep some amount with yourself for your regular or emergency needs and save the rest in some time-determined instruments with some returns. This means that time and cash-in-hand is a very serious factor when you decide the valuation of your future returns. What happens when you think that time is not ripe for longer duration investments? Everything now comes down to the shorter duration. That means that you will turn all your time deposits into demand deposits even if they are in banks. For you, short term is very important if your money is not in your hands. In direct contrast to it, for banks, long term is very important if the money is locked in bank reserves. Short-term is a very dangerous zone for a bank. The bank does not earn from demand deposits rather it earns only from time deposits. In short term, they only incur expenses and don't earn money. The way banks manage their call money rates for very short-term cash-needs, is a story which many people know that it is bank's nightmare many times. Let us assume that there comes a time when people are not sure of the long duration and they turn most of their deposits from time deposits into demand deposits. The moment it happens, the chain starts and runs and will keep running like anything. The bank would simply lose all cash very soon if people don't trust the nature of time. In electronic age, the transfer of wealth from time deposits to demand deposits and from demand deposits to immediate cash is very less rather almost negligible. That is what makes the value of paper currencies very unsustainable. What a government does with money, will determine the future of currency and if government keeps printing money and sustaining inflationary economy, the time factor can kill any monetary system in very short duration. That is what is possible in electronic age if currencies are not pegged with commodities like gold and silver or any other reliable commodity. The moment there is crisis, people will lose trust in the currency and there would be serious backlash in the electronically managed transactional network. The lesson obviously is that time for non-anchored money is gone and we need to get back to Bretton Woods era when dollar was pegged to gold at the rate of $35 to an ounce of gold. If US federal bank could not pay back money, it was liable to pay back in terms of gold. I know that is too difficult at present but think of the catastrophe we can witness once the currency starts collapsing in electronic age. The age of money-throwing welfare state is over.

Friday, July 18, 2014

Rethinking Money-7

Have you ever thought of bank as a holder of cash? Just try to observe your relationship with bank in the smartphone and online age? Are you noticing that this is a strange age in a special sense? Today, you use cash as currency paper note. You are always in need of this cash and a bank is the provider of that cash. There is monopoly of bank in terms of providing cash flow to the people. But think if that currency note goes digital. This means that in a bank server, this is a digital figure or a bit of information. Similarly, when you use your mobile smartphone, tablet or computer for financial transaction, it means that your money is a just a digital figure or a data. Practically, there is no difference between you and the bank holding digital money. That makes you a digital equivalent of a bank. It also means that the bank does not have the monopoly it  used to have. What can happen if instead of banks, you and millions like you stop using any such currency. This will be equivalent of bank run because now, you are the real bank who holds money. Think if ten million people just exchanged a hundred dollar note for an unknown currency. It would be a figure of 1000 million worth of new currency. People will use the new currency but will dump the dollar. The one billion dollar cash would be gone for good.  Now, just forget this assumption for some time and read the following.............
Everybody says that dollar will eventually lose this status of reserve currency but nobody challenges the US power to stop the powers that challenge dollar. After all, the one who creates money out of thin air, would remain powerful till the world stops using that money. The people don't have an alternative. They created bitcoin but the too much of dollar cash in the hands of federal powers has already bought a majority of bitcoins and has locked it out of common man's use. The first warrior is dead but don't forget that the world is using at present over 200 digital currencies like ripple coins, dogecoins and many more. The world is like a big bank with dollar deposits in the hands of people and can you imagine how much money, people can exchange in a minute, an hour, a day, a week, a month or so on? When people choose to dump dollars for bitcoin like currencies, there will be change. This will not be bank run but rather, it will be currency run. The toxic inflation-driven cash will simply fly once mob starts doing it. Remember that people use money and by using that money, they make the creator of that money the king of users. No scholar can predict the timing of this change. Just think of the power of over three billion smartphones choosing to start something of this kind! People will change the system; governments won't.

Thursday, July 10, 2014

Too much cost, too less of Education: Papa-Beta comparison

Today afternoon, my son gave me his quarterly fee slip and I was a bit shocked to find the increased fees increase totaling Rs.10,000/- for a quarter. It means Rs.3,333/- for a month. This is not a small cost per month by any Indian standards.  The figure irritated me a bit but I had no better option or the option to opt out. Somehow, I managed the discomfort within and remembered the good old days when I was myself a student as my son is. Suddenly, a question surfaced in my mind “What were my fees in the similar class way back some 32 years ago?” A bit of recollection helped me and I found that mine was Rs.30/- per month. My school was one of the top five schools of the city and it enjoyed fairly good reputation among the public. My parents were pretty satisfied with the school teachers and other related activities. In last 32 years, the fees jumped over a hundred times and my kid’s school should be rated not among the top five rather among the top twenty schools of the city. I cannot say that my son is really being trained for skills of the future or his teachers are really great or committed teachers. It means that the cost of my son’s education is over hundred times more than that of mine despite the fact that I consider the important factors of quality on the declining side.  In a period of 32 years, the hundred times increase seems huge. I enquired the same from a fellow friend who calculated his similar situation and said that his comparative ratio of father and son was 1:110. In order to be clear, I enquired the same from couple of more acquaintances and this figure turned out to be nearly above 1:105. What does that mean in economic terms? The inflation figures of foodgrains, fuel and electricity may be disturbing but have we ever bothered to think of cost of education and hidden inflation inside it. If calculated properly, this item would turn out to be the most inflation-prone one in last 25-30 years. During 1970s and 1980s, the factors like regular off-campus tuitions, coaching for competitive examinations, capitation fees etc were not very prominent but if these factors are added to the current cost of education, the actual financial burden of education would be really heavy for a middle-class family. The cost of educating two kids can sometimes take even more than one-fifth of a family’s total budget. In America, the student debt burden of the entire country has gone beyond $1 trillion and average debt per student is over $27,000. In India, the average of student debt may not be there because bank loans for education are not a regular practice here but if parents’ debt for kids’ education is calculated, it would not be less in terms of comparison. This is the debt that has to be paid back by skills and competence but are we really gaining in capacity for that? Are we really getting a good education?  Are our students really earning hard enough to pay back their parents’ loans? The skills deficiency is increasing day by day. Whatever we invested in our education is being sucked by inflation of degrees. Marks are turning less and less the hall mark of a good and talented student. How to handle this situation of perfect storm? This is a question for all the schools and colleges to answer.