McKenna’s Gold and Moral Dilemma

Yellow Metal – From Nanotechnology to Currency Buffer (Gold Reserve)

gold-nanoparticles-applications-and-challenges-10-638

For centuries now, we are aware of the value of Gold. Gold Standards have, in fact it has taken a central place in our nomenclature and reference. It is not surprising to see that Gold has made a foray into nanotechnology – from diagnostic tools, to conserving solar power to touch screens and advanced data storage. However, to me, the most influencing impact of gold is the gold reserve, that determines the health of the local currency of that country.

Known Gold and unreported Gold

gold-photo-1

Current gold reserves for India stand at 580 tons. India is the largest consumer of Gold in the International market after China. However, it is said that, India has a maximum of yellow metal with its household, amounting to 23,000 -24,000 tons. Countries as close to that value are China and Turkey. Though US has the most amount of gold reserves, standing at 8000 plus tons, it has the least gold consumption amongst the top consumers of Gold worldwide.

If only Southeast Asian countries like India bring the Household Gold on record and to international reserve, it would probably be one of the most influencing factor in circumvent the pressure on the national currency and buffer against the intransigence of fluctuations.

How do we bring the household gold to national reserve?

Of course a change of mindset is paramount. However, more than mindset, much of the gold is from unreported earning. That makes the conversion difficult. However, let us presume, we have the owners ready to declare the Gold. That conversion to national reserve can be on similar lines as holding a piece of land. Once the household gold is considered national reserve, it will be easy to protect that part of the Gold from theft or threat.  It is definitely a cultural change, no one wants to declare the amount of Gold they have, so also, no one wants to declare the amount of cash or other assets they hold. Gold can follow similar lines. We have to overcome the dilemma of declaring Gold.

Why not to expand Gold Reserve?

Expanding Gold reserve will reduce the pressure on the economy and the currency. However, the status quo may be affected because of doing so. Just imagine a currency reversal. Exporter will be significantly affected as exported products would become costly in the international market. However, imports too will be cheap. Products made abroad, ‘Foreign Made’ will flood the streets. Expat dollars flow will be reduced. All these will need a huge modeling to understand the impact. However, it would certainly equalize the value of currency (and efforts) of the common men.

‘Waiting for Godot’

 

As per the statistics published by as per the 8th Edition of the Status Paper on Government Debt released on Jan 19, 2019, the latest data available till September 2018, the total debt of the Central government stood at Rupee  82,03,253 crore, the corresponding amount till June 2014 was Rs 54,90,763 crore, the Finance Ministry’s data on government borrowings shows.

While the same white paper also projected the GDP to hit 7.5%. However, the rising GDP is not to the credit of the Government, Federal or State. So, despite the economy expanding, we still see mounting debt. To put it simply – those who are working hard, are truly increasing their output. However, servicing the union is drastically mounting. Let’s review select findings from the white paper.

  1. 35% of the current 82 Lakh crore debt is incurred in the last 4 years
  2. Velocity of debt accumulation was .84% from 1948-2014
  3. Velocity of accumulation has climbed to 1.14% since 2014-2018

 

Not sure if the spike since 2014 can be ascribed to devaluation. However, Its not Modi alone, let’s understand, he could not control the spiraling debt, it has been mounting since last 60 years. We and our media tend to be partisan, never issue based and our partisanship drowns our national interest and what we call as nationalism is actually pseudo inflated nationalism.

This is also a reason for the Rupee to depreciate against internal currency basket. That depreciating Rupee obviously makes imports, borrowing and servicing debts costly. Earlier i shared a clip on farmers loans. Unfortunately, farmer and the poor, who occupy the bottom of the food chain, really get squeezed due to these national macroeconomic malady. The unfortunate truth is that we are caught in the sensational and placating democracy model. This model induces the political dispensation to make concessions that in itself incur spiraling stare support for the masses (to win their votes). Consequently, the lure of power or its sustenance as a ruling party draws us further into this debt cycle which gets exponentially exacerbated with the passage of time. What’s the root cause? Of course the cause and effects are admixed above and the video by Justice Markandey.

Political Servitude to Pseudonationalism and Sensational Politicking.

 

This video from Justice Markandey is old but the facts remain true. We blame China but look at the quality of life, we find wrong when 1 million party workers are punished for corruption (of course there are underlying political reasons too), but corruption is punished, nepotism, communalism all are treated as perverse to the development of the nation. Here, we have pseudo nationalism, pseudo sense of religious identity and pseudo sense of glorious past to cajole us. However, the fact remains that the institutions formed to safeguard the purpose, themselves are under duress from our own sense of tolerance and indulgence. Be it corruption, communalism, nepotism, casteism, favoritism, we have totally devalued and eroded the system with our kind of Governance. Justice Markandey is bold to articulate that pain but rustic and rude to suggest its resolution. The next wave will capture, not our culture but subject us to servile economic conditions due to financial imperialism, mostly from east.

‘Waiting for Godot’ , a play by Samuel Beckett, in which the characters wait for the arrival of Godot (a fictitious character) who is a supposed to be a panacea for their problems. Our 70 year history is no different; we are waiting for the messiah who will help us through this impending economic imperialism. However, like the characters in Samuel Beckett’s novel, we too are engaged in a variety of discussions while we are waiting for Godot.

waiting for godot samuel beckett

India’s debt up 50% to Rs 82 lakh crore in Modi era 

A route to sell (debt)?

While the world is busy with Islamic terrorism, rising pockets of right wing political confluence, reactions to lopsided economic policies (Trumpism), rising carbon dioxide, green house gases, population pressure on nature and infrastructure, we are hardly realizing the emerging imperialism that will drive the next few decades and the struggle of mankind understanding and dismantling the effect of these economic aggression. This should not be considered as a plunder by any outsider, a third country. These are our own dilemmas that are subjugating us to emerging exploitation. Hambanbtota, CPEC, Africa are all examples of such crisis in making.

Hambantota – A White Elephant on Sri Lanka’s Backyards

NYT Ship Cargo

Sometimes in childhood, our parents always insisted to remain contained within our means. I never realized the importance of this in the context of nation and its economies, until I analyzed the huge infrastructure investments and its negative impact on the economies of Sri Lanka, Kenya, Pakistan and many African nations. The build huge airports, docks, railways etc. that were costlier beyond the business value they provided. Let me take two examples – Sri Lank built their Hambantota ports despite the feasibility studies indicating to the contrary. Only 32 ships docked in an entire year. Such hugely expensive infrastructure became a classic example of a white elephant for not Sri Lanka and all economically poor countries. Sri Lanka was unable to service the debt for this project and the terms of the lease also meant, Sri Lanka to lose the lease to this 15, 000 acre of land for 99 years.

https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html

Nairobi Mombasa Railway – Can Kenya service the loans for a lavish railroad?

Obviously a cash strapped economy such as Kenya has to rely on outside assistance for financing and technology to build this 300 mile long rail line. Does this mean this infrastructure was not required? Time and again, countries have been taking recluse to Keynesian philosophy and fiscal policies. Over the last more than 9 decades, it has provided a solid foundation for decision making in infrastructure investment. However, that does not mean a cash deprived country like Kenya should built one of the most sophisticated railway to breed communication and economy. It simply cannot sustain the financing. A simpler economic model would have been feasible.

https://www.theguardian.com/world/2018/mar/01/kenyan-conservationists-protest-as-chinese-company-starts-work-on-railway

China Pakistan Economic Corridor – A classic case of Conflict of Interest

At least, China should utilize this route through Pakistan built with Chinese financial assistance and with the aid of Chinese companies and man power. It deprived $62 Billion dollars of Pakistan’s precious foreign currency in building this economic passage that passes through complex land and even more complex political corridors.

https://en.wikipedia.org/wiki/China%E2%80%93Pakistan_Economic_Corridor

From Djibouti, Sierra Leone, Ethiopia, Senegal, Rwanda Mauritian, Morocco, Zimbabwe – No shortage of underperforming deals

Consulting firm, McKinsey computed that, Chinese loans accounted for about a third of new debt by African governments. These are not lone countries, the list runs long. Gullible minds were only aware of China as a power house of cheap obsolescent products. However, these infrastructure projects turn out to be not just imperialism but ravaging the countries and its people. In Sierra Leone, the presidential elections are heavily influenced by China. Djibouti has an official military Chinese base. Scores of examples are coming out into the open from such investment decisions that will influence the fate of nations and its people. It isn’t economic imperialism, it is neocolonialism

https://foreignpolicy.com/2018/08/31/chinese-aid-and-investment-are-good-for-africa/

https://thediplomat.com/tag/chinese-investment-in-africa/

https://thediplomat.com/2017/07/china-officially-sets-up-its-first-overseas-base-in-djibouti/

While we resent the devaluation of currency, these are currency raiders. While the West plundered the East, these are times of economic poaching and Neo Colonialism of the poor nations.

Johns Hopkins School of International Studies

Rail roads, ports or expresses way all infrastructure to support China to expand it’s market and sell its products? Or else, China should help build these African nations with factories and manufacturing units that will financially enable these countries to be on their own.

Should the World be worried about China’s Belt and Road Initiative (BRI)?

Policy makers and politician across the World are stunned and watching with consternation, the massive ‘Belt and Road Initiative’ undertaken by China. Is this infrastructure investment project centered on China? Is this similar to nation building foundational utilities for a nation similar to building freeways, electricity and other amenities? Keynesian theory has been underpinning the development of several countries across the world. It has consistently shown results and it is this formulation that scares the policy makers across the world. Should the world not be worried?  https://wp.me/p7XEWW-14k

BRI China

Fundamentally this infrastructure investment cannot be based on flawed interpretation of the vision for the future. However, it assumes a unipolar work wherein, they are extrapolating the analysis of the last 25 – 40 years of fulfilling the global demand for products, especially in Europe and North America. This intelligence is based on few fundamental assumptions that the world will forever be a unipolar manufacturing house, wherein the customers are perpetually based in Europe and North America. As long as the status quo remains, i.e., China is the manufacturing hub and the consumers are the developed world, this assumption provides a competitive advantage by investing in Belt and Road Initiative (BRI). Somewhere, this model emulates how the US-UK controls the Suez or Panama Canal and its impact of the global economic flow. Let us understand the situation other than the happy path.

Increasing competition:

First, in the last few decades, the world has grown more multipolar. There is significant competition amongst the nations for capturing the marketplace. Especially those nations, which were at the precipice, are gradually bouncing back to garner their share in global economy. After their chaotic transition, these nations are gradually stabilizing and as the maturity proceeds, they will enter the fray and be competitive.

Dwindling Customer Base in First World:

Last decade has been a testimony to how several Western European countries are gradually receding economic footprint or into recession. This will eventually erode the customer base from Europe. Overall, the population growth is stabilizing and the median age is rising. That does not mean, the customer base will vanish altogether. However, even a modest erosion of customer base from Europe would wipe the profits to make it uncompetitive.

Does that mean the global demand for consumption will decrease? The answer is obviously no. Where is the consumer base moving? First, the consumption will not decrease; instead, it will increase, as is indicated by several policy planners. This will follow phasic manner – the initial burst and the sustained period. The immediate burst will be centered on China, India and South East Asia and the sustained phase will be around the growing economies from African Nations and Latin America along with the traditional customer base in North America and Europe. South East Asia, China and the Indian peninsula will has a potential future growth due to dual factors – rising income levels and incremental recruitment of the expanding population base to propel the consumer market. The sustainment phase will be due to two major pockets – the traditional consumer base in Europe and North America and the expanding base in rising economies. Irrespective, the consumer base will move and be multipolar.

Transition of Blue Collar to White Collar Workforce in China:

As the population is China evolves makes a transition from blue collar to white collar, it will also see an increase in consumption. This can be very well corroborated with the Maslow’s phases of self-actualization. This transition will not support the earlier model of cheap low cost labor required to support a manufacturing economy. In fact, the white collar will propel consumption and China will move towards a net consumer economy.

Collaborative rather than pugilistic policies:

In the last decade, China has been increasingly assertive, lean heavily towards currency manipulation, disrespect world order and hegemonist in its approach. All these would deter the business environment and move the fulcrum towards unfriendly business environment, not realizing the impact of its short sighted policies at the detriment of its national cause.

Simply following Keynesian theory and investing in infrastructure in unlikely to propel the country in eschewing the benefits of it investment policy. China knows that and it will not be a surprise to see either the partner nations pulling out of such collaborations or China itself pulling out of such investment execution with the resultant fall in those ‘Belt and Road Initiative’ bridges.

The Economist | Planet China

https://www.economist.com/news/leaders/21746901-project-century-may-help-some-economies-political-cost-chinas-belt-and-road?frsc=dg%7Ce

https://www.rand.org/blog/2018/03/one-belt-one-road-one-ruler-china-term-limits-ban-imperils.html

 

GDP Post Demonetization

The impact of demonetization in day to day life are well discussed and evident. Select state elections will reflect people’s verdict as well.

GDP is the barometer and an objective evaluation of the impact. Recent reports on the fourth quarter economic parameters point towards economic compression directly related with demonetization. Despite demonetization being a fundamentally appropriate policy towards containing the unaccounted money within the system, it floundered. It is not a political question – it was a national initiative and a unique opportunity. What went wrong? This is a prelude to an upcoming blog on how change could have been managed properly.

Sometimes, those seating at far off can see things better than those who are seating at the epicenter. This is the case with GDP. I had already prognosticated, that the GDP would suffer setback from 0.5 to 1.25. I also opined that demonetization is good in the long term, GDP effect is a short term disability. Of course, the way demonetization was carried and the way the system defaulted to earlier state, it proved no value overall. In the absence of mid – long term value, we can only focus on the short term impact.

Though arguable, it impacted the GDP. True, it removed all soiled Rs.500 currency from the market, possibly from some black marketers and terrorists. That’s the sum total of Demonetization. Here is my question – Did Modi lacked resources in envisioning, (impact and scenario) analysis, planning and executing or did he not trust folks around him or did he do this in haste? I trust, it was a combination of the first and the last reason.

India is too heterogenous country. A system wide change needs a vision, deep rooted trust in people, a sound understanding of the ground level constraints and a thorough evaluation and impact analysis capturing those into the execution plan. In hindsight – Can we think of how this could have been done better, more surgical? Less traumatic? Possibly, therein lies the solution for Second Generation Demonetization.

‘I have not failed, I have just found 10,000 ways that won’t work’ – Thomas Edison.

That which does not kill us makes us more stronger.


Citations:

Despite demonetisation, India’s GDP growth stays 7 per cent: Govt data

https://www.forbes.com/sites/timworstall/2017/03/07/as-fitch-says-that-7-gdp-growth-for-india-looks-odd-given-demonetisation/#3ac3c61c48ed

http://economictimes.indiatimes.com/news/economy/policy/modis-victory-has-made-a-mockery-of-the-criticism-that-demonetisation-got-christopher-wood/articleshow/57627263.cms