Sunday, February 19, 2017

India's war on cash: who and why

On 8 November 2016, the government of India announced its intent to demonetise large denomination currency. It is one of the most baffling economic actions taken by a government in recent memory, but a few weeks ago, the Indian news website Scroll carried an excellent three part series explaining what was going on and why. It seems some economic ideologues have joined forces with large financial institutions to force demonetisation on the citizens of India. What could go wrong? 

Note the role of Harvard economics high priest Kenneth Rogoff, the deficit scold whose April 2013 book warning that disaster inevitably resulted when a nation surpassed a specific ratio of debt to GDP, was found to contain computation errors.

Understanding demonetisation: The problem with the war on cash Force marching unprepared citizens towards a cashless utopia that has little space for the informal sector is callous and indefensible.

Part I: Understanding demonetisation: Why there’s a war on cash (and you are in the middle of it)

Part II: Understanding demonetisation: Who is behind the war on cash (and why)

Part III: Understanding demonetisation: The problem with the war on cash

Another Indian news source described the "bewildering pain and desperate hope" the real economy has been plunged into after two months of demonetization. The article includes timetable of demonetization in India.
Fast-moving consumer goods (FMCG) firms have reported lower sales, especially in rural areas. Some 90% of the FMCG market in India comprises small mom-and-pop stores, heavily reliant on cash sales. And 60% of small traders have already seen a drop in sales post-demonetisation, according to market research firm Nielsen.

In rural areas, where internet penetration is limited, cash is often the only mode of payment. People in the hinterlands have struggled to access cash—there are 7.8 bank branches per 100,000 persons in rural India—and this, in turn, has affected wage and loan disbursal in these areas.
I suspected that there would be very dramatic effects on the auto industry in India, but found that the effect was even more pronounced on the scooter industry, which sells some ten time more units than the auto industry does. Asia Times reported that "Most two-wheeler brands cost between the 50,000 rupees and 100,000 rupees (US$738-US$1,476) and cash plays a major role in the transactions. According to Credit Suisse, about 40% of purchases of two-wheelers are done in cash."

The largest maker of motorcycles, scooters and auto rickshaws in India is Hero MotoCorp, which saw its sales of scooters fall from 663,153 in October, to 479,856 in November. (Sales in November 2015 were 550,731 units.) A month later, The Economic Times reported the Hero's sales fell another 34% in December 2016, to 330,202 (compared to 499,665 units in December 2015). More recently, Hero MotoCorp sales were down 14% in January 2017.


Bajaj Auto suffered a sales drop of 12% in November last year, 237,757 (compared to 270,886 a year earlier). December sales were even worse, with a reported 225,529 being a 22 percent collapse from
289,003 vehicles in 2015. According to the India Times, January sales were 211,824 units in January 201, down 16 percent from 252,988 units in January 2016.

Meanwhile, India's homegrown automaker, Tata Motors, has reported that its profits have plummeted 96% after the cash ban.
So what could possibly be the reason for inflicting such immense pain on one's own country?  The answers are laid out in the Scroll 3-part series, excerpts of which follow:

The war on cash is being waged by four major groups. One, existing financial services providers such as banks and credit card companies. Two, technology companies, including start-ups, with financial services ambitions (known as Fintechs in current terminology). Three, governments. And four, Central banks. It is difficult to imagine a more powerful combination of forces.

It is not that they have the same objectives. In fact, they have different objectives that sometimes conflict. But their interests are complementary when it comes to driving cash out of existence.

....for banks, it costs money to count, manage, store and move cash. But the moment currency turns into digital bits, two opportunities present themselves – one, to charge tiny little fees on every single transaction and two, to create a data trail of income and expenditure of customers that would come in handy to sustain new services and business models.

Cash today forms only 22% to 68% of transactions by volume in advanced economies. Norway, Australia and Denmark lead the digital pack while Japan, Germany and South Korea are among those who still prefer cash to cashless, with the United States falling somewhere in between, with a figure of 49%. But the theoretical scaffolding and reasoning for eliminating cash altogether began being put together only after the financial crisis of 2008.

[As central banks responded to the financial crash of 2007-2008 and the ensuing economic crisis, they] "began to cut interest rates down to zero to stimulate investment and spending. But they found to their horror that zero or near-zero interest rates were not enough to get their economies humming again."

Interest rates are the single most powerful tool that Central banks have, to control inflation or stagnation. If the economy is heating up and inflation is going beyond the targeted rate, central banks raise interest rates thus cooling down investment and consumer spending. People save more and spend less, bringing down inflation and along with it, growth. But if the economy is stagnant and inflation is lower than targeted, with not enough investment or consumer demand, central banks reduce interest rates to stimulate demand. Economic theory suggests that pushing interest rates significantly below zero might have been necessary to pull many advanced economies out of the funk they have been in since 2008.

A negative interest rate means that if you keep Rs 100 with your bank for a year, instead of getting back, say Rs 105 including a 5% interest, you may get back only Rs 99.90 – the rest being taken as, say, 0.1% negative interest rate. The expectation is that negative interest rates will force banks, businesses and individuals to lend, invest or spend their money rather than keep it idle, because there’s a cost to keeping it idle.

Now this is great in theory, but there is a practical problem. Central banks can take interest rate as high as they want without limit, but they cannot take it into seriously negative territory for a simple reason: if it goes there, everyone would just take their cash out of the banks and keep it in safe deposit boxes. No spending happens, and the central bank objectives are not met. In other words, economists argue that there is an asymmetry in the way central banks can use interest rates. They have immense power to cool down an overheating economy, but only limited power to stimulate a stagnant economy by bringing down interest rates sufficiently.

The technical term economists use to describe this situation is Effective Lower Bound, or ELB – the negative interest rate below which people will just withdraw their money from banks. Since there is a convenience to keeping money in the bank, the ELB is usually not exactly zero, but a little below zero – say, - 0.5% or -1%. People don’t mind keeping their money in the bank if the negative interest rate is a minor annoyance, because there is a convenience to operating with a bank account and say, a debit card.

After the Great Recession, this is the situation that central banks found themselves in: operating close to ELB. And it is in this situation that some economists started pushing a new idea that sounded horrendous to many: eliminating cash altogether. If there is no cash, people cannot take their money out of banks, and central banks can take interest rates as much below zero as needed. In other words, eliminating cash will improve the ability of central banks to fight stagnation and improve growth.

There are two well-known economists who pushed forward the idea of eliminating cash initially: Willem Buiter, now Chief Economist at financial services behemoth Citigroup and Professor Kenneth Rogoff of Harvard University. (Buiter was a thesis advisor to current Reserve Bank of India Governor Urjit Patel, and they have authored many papers together.) Willem’s 2009 piece titled “Negative Nominal Interest Rates: Three Ways to Overcome the Zero Lower Bound

Rogoff presented his paper, “Costs and benefits to phasing out paper currency in 2014” at the National Bureau of Economic Research’s Macroeconomics Conference at Cambridge, Massachusetts,

Since these two men made their case, others have added their own powerful voices to the chorus, including former US Treasury Secretary Larry Summers (who was considered for appointment as the Federal Reserve Chairman) and Nobel Laureate Paul Krugman. Both Krugman and Summers argue that in the situation that advanced economies are faced with, there are only two choices: either have negative interest rates (along with its inescapable corollary, currency elimination), or tolerate much higher levels of inflation,

These ideas are gaining momentum. Denmark, for example, is predicting that it will eliminate cash by 2030. In Italy and France, it is illegal to make purchases exceeding 1,000 Euros in cash. In Spain the limit is 2,500 Euros. Last year, European Central Bank decided to stop printing and issuance of the 500 Euro note,

At a conference that was held in London on May 18, 2015 titled “Removing the Zero Lower Bound on Interest Rates”, Buiter and Rogoff were the keynote speakers, and other speakers represented the central banks of Switzerland, Europe, US, Denmark and Sweden, Soros Fund Management, insurance company Generali, Asset Management Company Brevan Howard and so on. So by 2015, the war had already been joined by many financial service behemoths who had begun to see the gains to be had from pushing currency out of the system. And by October 2015, the International Monetary Fund itself had released a paper titled “Breaking Through the Zero Lower Bound.”

....

There is also a belief that emerging markets are where new digital financial technologies will evolve, by leapfrogging the stages that the advanced economies had to go through.

....the Better than Cash Alliance in 2012, hosted at the United Nations in New York and funded by the United States Agency for International Development (commonly known as USAID), Bill and Melinda Gates Foundation, Citi Foundation, Ford Foundation, Mastercard, Omidyar Network and Visa Inc. The United Nation’s Capital Development Fund serves as the secretariat. In June 2015, the finance ministry put up a draft proposal on its website, recommending tax concessions to reduce the cost of credit, debit and online payments. In July 2015, 11 new payment bank licences were given out, including one for PayTM. In November 2015, a Memorandum of Understanding was signed between the Ministry of Finance and USAID – the same agency behind the Alliance – to start working on interoperable digital payment models to drive transactions that involve small businesses and low-income consumers.

On October 14, 2016, USAID, one of the founding partners of the Better Than Cash Alliance, announced the launch of a new initiative called Catalyst to drive cashless payments in India.

....a report on the great opportunity that digital finance presents in emerging economies, prepared by McKinsey and released just four months ago, in September. The report is prominently linked on the website of the Better Than Cash Alliance.

As more people obtain access to accounts and shift their savings from informal mechanisms, as much as $4.2 trillion in new deposits could flow into the financial system 

Yeah, right.

Scroll next gives us an amazing excerpt from the above mentioned  international "business consulting" firm McKinsey, which comes right out and admits the goal is to destroy small, independent "informal" producers and retailers, in order to give more "market share" to "formal" "high productivity, modern firms," i.e., multinational conglomerates run by the new world corporatist oligarchy:

....the kind of growth that will result from a forced move towards cashless is likely to be particularly weak on employment growth for a simple reason: The stated intention of the cashless push is to make it impossible for the informal sector to survive as it does today – even though it employs more than 70% of India’s labour.
“From an economic perspective, the informal economy imposes a high cost and significantly hinders growth. Many developing countries have a two-speed economy: a modern sector of healthy companies with high productivity (or output per unit of input), and an informal sector of subscale firms that drags down overall productivity and growth. Informal firms face perverse incentives and may avoid investments or growth that could increase their visibility to regulators and tax authorities. In Turkey, for instance, MGI has found that the productivity of formal companies is 2.5 times that of informal firms. The gap in productivity levels between formal and informal firms is similar in Brazil, India, Mexico, Russia, and elsewhere.
“The presence of informal firms also harms the economy by limiting the ability of high productivity, modern firms to gain market share, given the significant cost advantage informal firms enjoy by not paying taxes. MGI research has found that the cost advantage from tax avoidance ranges from 5 percent of the cost of goods sold in Mexico food retail to 25 percent in India’s apparel sector and to more than 100 percent in the case of Russian software. Formal companies also face additional costs and complexity in managing informal firms with outmoded technology in their supply chain. This dampens the healthy process of “creative destruction” in the economy in which the most productive companies take market share from less productive ones.”


Shashi Tharoor, a former UN under-secretary-general and former Indian Minister of State for Human Resource Development and Minister of State for External Affairs, is currently an MP for the Indian National Congress and Chairman of the Parliamentary Standing Committee on External Affairs, writes in Project Syndicate:

....the impact is not being felt equally by all. India’s wealthy, who are less reliant on cash and are more likely to hold credit cards, are relatively unaffected. The poor and the lower middle classes, however, rely on cash for their daily activities, and thus are the main victims of this supposedly “pro-poor” policy.

Small producers, lacking capital to stay afloat, are already shutting down. India’s huge number of daily wage workers can’t find employers with the cash to pay them. Local industries have suspended work for lack of money. The informal financial sector – which conducts 40% of India’s total lending, largely in rural areas – has all but collapsed.
India’s fishing industry, which depends on cash sales of freshly caught fish, is wrecked. Traders are losing perishable stocks. Farmers have been unloading produce below cost, because no one has the money to purchase it, and the winter crop could not be sown in time, because no one had cash for seeds. 

Perhaps the worst part is that these sacrifices are not likely to achieve the government’s stated goal. Not all black money is in cash, and not all cash is black money. Those who held large quantities of black money seem to have found creative ways to launder it, rather than destroying it to avoid attracting the taxman’s attention, as the government expected. As a result, most of the black money believed to have been in circulation has now flooded into banks, depriving the government of its expected dividend.
On top of all of this, the government’s plan does nothing to control the source of black money. It will not be long before old habits – under-invoicing, fake purchase orders and bills, reporting of non-existent transactions, and blatant bribery – generates a new store of black money. 

Modi has been discussing going even further, moving India to an entirely “cashless society.” Does he not know that more than 90% of financial transactions in India are conducted in cash, or that over 90% of retail outlets lack so much as a card reader? Is he unaware that over 85% of workers are paid in cash, and that more than half of the population is unbanked?  
Again, here are the links for the 3-part series in Scroll:

Understanding demonetisation: The problem with the war on cash Force marching unprepared citizens towards a cashless utopia that has little space for the informal sector is callous and indefensible.

Part I: Understanding demonetisation: Why there’s a war on cash (and you are in the middle of it)

Part II: Understanding demonetisation: Who is behind the war on cash (and why)

Part III: Understanding demonetisation: The problem with the war on cash

Monday, February 13, 2017

Mark Blyth refuses to let Democrats off the hook


Mark Blyth is a Scottish political scientist and a professor of international political economy at Brown Universit. Blyth first came to my attention when his prediction of Trump's electoral victory, and how it was tied to the vote for Brexit, was widely shared after the USA election. 

I very rarely urge people to watch an entire video. This is that rare one. Blyth is merciless in his critique of the Democratic Party's acceptance of neoliberalism, and absolutely refuses to let the Democrats escape their responsibility for Trump's being elected because of that acceptance of neoliberalism.

This was part of a panel discussion, Trending Globally: Politics and Policy, held by the Watson Institute on January 25, 2017.




Sunday, February 12, 2017

How the Dutch build a tunnel under a highway in one weekend

Ingenious!

Once Wall Street and the City of London are forced back into their proper role of subservience to the rest of the economy, we are going to be doing a LOT of this kind of work. Think of building rail mass transit systems in Los Angeles and Mexico City and Cairo and Lagos and all other cities, with the same densities of route miles and stations as the systems in Paris, Moscow, and Tokyo.



Here is a nice list, for North America only, of Openings and Construction Starts Planned for 2017. This is probably around only one or two percent of what we will end up doing in the next half century.

Monday, February 6, 2017

Well, that was interesting—Trump takes on the establishment


When during his inaugural speech, Donald Trump came out swinging at the political / economic establishment that has created and enforced the neoliberal Washington Consensus for at least 35 years, one could almost hear the gasping and pearl-clutching in the formerly smug and self-satisfied salons where the rich go to celebrate their brilliance. Mostly, because he was attacking the very schemes that had enriched them.

And let's not forget that neoliberalism is also a theological belief system. One must block out a serious chunk of reality to come to the conclusion that the neoliberals have good ideas. And the best way to do that is worship at the "commandments" of free trade. The most faithful are given prizes, mislabeled Nobels, by the Swedish Central Bank. And in their further delusions, they call what they do "science." For this crowd, what Trump said was blasphemy—a good sign that he was boorish and ill-mannered. Claim you want to renegotiate NAFTA on the stump in some rust-belt ghost town is one thing. Actually promising to do the unthinkable on the Capital steps is a bridge too far (gasp, clutch).

The inaugural address quote below was taken from an interesting article on Populism and Trump. The definitions of populism are all over the map these days so it is best not get too strict about definitions (too Protestant!). Just so you know, my definition of Populism grew out of an effort to understand the implications of the Peoples Party of 1892. They were the first people to call themselves Populists so they pretty much define the historical origins of the movements that were spawned by the educational efforts of the People's Party (and ITS precursors.)
“What truly matters is not which party controls our government, but whether our government is controlled by the people. January 20th 2017, will be remembered as the day the people became the rulers of this nation again. The forgotten men and women of our country will be forgotten no longer. Everyone is listening to you now.

“…At the center of this movement is a crucial conviction: that a nation exists to serve its citizens. Americans want great schools for their children, safe neighborhoods for their families, and good jobs for themselves. These are the just and reasonable demands of a righteous public.

“But for too many of our citizens, a different reality exists: Mothers and children trapped in poverty in our inner cities; rusted-out factories scattered like tombstones across the landscape of our nation; an education system, flush with cash, but which leaves our young and beautiful students deprived of knowledge; and the crime and gangs and drugs that have stolen too many lives and robbed our country of so much unrealized potential.

“This American carnage stops right here and stops right now. We are one nation – and their pain is our pain. Their dreams are our dreams; and their success will be our success. We share one heart, one home, and one glorious destiny. The oath of office I take today is an oath of allegiance to all Americans.

“For many decades, we’ve enriched foreign industry at the expense of American industry; subsidized the armies of other countries while allowing for the very sad depletion of our military. We’ve defended other nation’s borders while refusing to defend our own. And spent trillions of dollars overseas while America’s infrastructure has fallen into disrepair and decay.

“We’ve made other countries rich while the wealth, strength, and confidence of our country has disappeared over the horizon. 

“One by one, the factories shuttered and left our shores, with not even a thought about the millions upon millions of American workers left behind. The wealth of our middle class has been ripped from their homes and then redistributed across the entire world.
President Trump

You are 70 years old. You have an amazingly beautiful wife. Your kids seem capable of taking over the family business. You have a tricked-out 757-200 so you'll never fly coach again. Your meals are prepared by award-winning chefs. And while your digs are WAY too garish for my taste, they are very nice and probably well-built—and you have more than one.

So why in god's name do you want to spend your declining years picking fights with the establishment? Why do you want to get into pissing matches with media monopolies? Why do you want to take down the cultural insanity represented by mindless Russia-bashing? I mean, do the math—figure out how much money has been spent to demonize USSR / Russia over the years and decide if any cultural meme is more deeply embedded. You had trouble selling steak—selling the idea that we should be allies (again) with Russia will make that problem seem trivial. Anyway, you get the idea. This is a life considerably more hazardous and uncomfortable than being a wealthy property developer with a trophy wife.

Yes I know—silly questions. The country was founded by revolutionaries who in many cases were extremely successful. Jefferson had nice digs (Monticello), Washington was a very successful property speculator, Franklin was a rich celebrity writer / scientist / inventor who spent a lot of his energy chasing women, etc. They also had more comfortable things to do than to pledge "their lives, their fortunes, and their sacred honor" (final sentence of the Declaration of Independence) to a revolution that most certainly meant death if they failed. So history does hold examples of people who risk a lot for ideas.

And who knows, maybe your motivations are not exactly lofty. Perhaps it is something merely annoying like the fact that USA airports don't seem so nice compared to well, almost anywhere else in the world. Not only does your airplane not get petted properly, but its just plain embarrassing to folks who believe the USA should be good at things—especially things associated with aviation. Or maybe it's just a need for attention. But it's who you are so lets work with that.

The other night, I saw a brief interview with Melania. She claimed that 10-year-old son Barron liked to build things, then take them apart so he could build something else. She called him "little Donald" because of that. I got pretty excited. I know kids like Barron exist because I was clearly one of them myself. Finished projects rarely lasted more than a week because the whole point of construction sets is construction (well, duh!) So if you want to keep playing, you must simply move on to the next project. And if indeed you are like that yourself, you possess an important quality that this nation desperately needs.

So from one compulsive builder to another, I think we should discuss how you could end up on Mount Rushmore.

The MOST pressing problem facing humanity is climate change. Yeah I know you have called it a hoax. But you have also made some more enlightened comments that have been caught on tape. Besides, we all saw how well you got along with Elon Musk and he is arguably the most articulate spokesman out there when it comes climate change. Perhaps you liked him so much because he is also a serious builder.

Climate change is an interesting problem. It's a problem defined by what Musk deems his intellectual lodestar—physics first principles. Climate change is a fact whether anyone believes it to be true or not because it conforms to the laws of physics first principles. But those who seemingly cannot understand physics first principles do not understand the nature of the problem so resort to pseudo-religious responses. Think about it. They have meetings. They pass laws mandating better outcomes. They try to raise our awareness of the serious nature of the problem in the hope that their rah-rah speeches will inspire their listeners to change. And the CO2 levels climb.

There are a lot of ways that humans produce CO2 but far and away the most important is our all-time favorite invention—fire. Yes there are frivolous uses for fire—example, a 757-200 with only one important passenger. But by far, the biggest uses of fire are for heating our homes, growing and preparing our food, commuting to work, etc. We live in a world that was designed and built to run on fire. And because of climate change, this world can no longer exist. The world's infrastructure is, with a few exceptions, obsolete. Hopelessly obsolete.

Replacing the global fire-based economy with a renewable-energy economy will be, by FAR, the greatest building project in human history. And anyone who can pull this of will be remembered as the greatest builder in history. Mostly, it must be a builder who isn't afraid of big numbers. So think about this one—the serious people who have tried to assemble an honest bid for this project seem to believe it will cost $100 TRILLION spread over 30+ years. So that's the price tag for actually Making America Great Again.

Just a reminder, $1 trillion spent on salaries will create 20 million $50,000 / year jobs for one year. You think that creating that many jobs for people who would love to build the new and improved America will satisfy your supporters? I do.

So we have a BIG problem that can only be solved by builders with vision and imagination. The planet is awash in people who would love to be part of some global-scaled project that makes their world a better place—many are unemployed and most of the ones with jobs are underemployed. So we have projects that clearly need doing and people who want to do them. So what's the hold-up? That's easy. We cannot seem to figure out where the $3-4 Trillion a year will come from.

And here is where your expertise is really needed. Anyone who has ever financed a big real estate project has dealt with the moneychangers. After watching them create almost unlimited amounts of money to finance such utterly useless ventures as mortgage-backed securities in the run-up to the crash of 2007-8, it must be blazingly obvious that there should never be a shortage of money because the ability to create it is infinite.

So what is needed is for the moneychangers to get on board with the biggest project in human history. Get the big hedge funds guys, the TBTF bankers, the Fed, and whoever else is relevant in one room and say "I am going to need at least $3 Trillion per year to Rebuild America. It is your job to ensure that the money is there when we need it. If you cannot do this job, I will institute plan B—take the ability to create money away from you and return it to where the Constitution explicitly claims that power should reside—with the Treasury Department of the US government. You can play or watch—it's up to you.

And hey, if you fold in the great climate-change question into the bigger project of rebuilding the nation's infrastructure, you don't even have to take a public stand on the issue. I think the questions you really want to ask your self are these: Do I want to go down in history as the greatest builder of all time? or; Do I want to be known as the builder who when faced with the largest development opportunity in human history, chose to take a pass because upscale hotels and golf courses are much more your speed?

The ball's in your court, Mr. President. Do you want to remembered as a great man or as one of history's sad jokes? You may be some ways from sinless perfection, but you are gifted in the very skills most necessary to build a better future. That's close enough. In fact, there are deeply religious people who believe you are an answer to their prayers.