India’s Vaccine Demand-Supply Math Shows a Royal Govt Screwup

Earlier in the day today, I published a detailed thread on the demand-supply scenario of the vaccines against covid, in India.

If you have read that thread, this piece is not for you. If you haven’t, do keep reading.

Up until today (April 30), vaccines against covid were only available for those aged 45 and above.

The number of people aged 45 and above in India is around 35.6 crore. This projection can be accessed from the Youth in India 2017 report. Of this, 12.4 crore individuals have taken only one dose of the vaccine and 2.6 crore have taken both the doses. (This number was as of the time of writing and keeps changing).

This basically means that 20.6 crore Indians (35.6 crore minus 12.4 crore, who have taken one dose, minus 2.6 crore, who have taken both the doses), aged 45 and above, are yet to take even a single dose of the vaccine.

In order to vaccinate them, the number of vaccines required will be 41.2 crore (20.6 crore multiplied by 2 doses each). Over and above this, 12.4 crore individuals who have taken just one dose, need to take a second dose as well.

Hence, the number of vaccines required, for those aged 45 and above stands at 53.6 crore (41.2 crore, who haven’t taken any dose, plus 12.4 crore, who have taken one dose).

From tomorrow (May 1), vaccination is open even for those aged 18 and above as well. As per the Youth in India report, the number of people in the age bracket 20-44, stands at around 55 crore. It doesn’t have a break up for the age bracket 18-44. So, it’s only fair to assume that the number of individuals in the age bracket 18-44, will be around 60 crore. In fact, that is the assumption I worked with in my Twitter thread.

One of the readers pointed out that economists Renuka Sane and Ajay Shah in a piece estimate that the number of individuals in the age group 18-44 stand at 62.2 crore. I will work with this number here. (I am trying to workout a ballpark estimate here and not write a research paper). 

The number of vaccines required for those in the 18-44 bracket stands at 124.4 crore (62.2 crore multiplied by two doses). The overall number of vaccines required to vaccinate everyone aged 18 and above, is, 178 crore (124.4 crore plus 53.6 crore).

This is where things get interesting. In May, Serum Institute (Covishield) is expected to produce 7 crore vaccines. Bharat Biotech (Covaxin) is expected to produce 2 crore. That’s 9 crore vaccines, when 178 crore vaccines are required. If we take vaccine wastage into account we are looking at a number higher than 178 crore and closer to 190 crore vaccines.

Serum Institute’s capacity is expected to go up to 10 crore vaccines by June and Bharat Biotech’s capacity is expected to go up to 6 crore by July. By July we will have 16 crore vaccines being produced per month.

Of course, other vaccines like Sputnik and Pfizer will also come in, and thus the supply will increase and go up to more than 16 crore.

The point is that the supply of vaccines will continue to be a problem for the next few months. There are only two companies and there is only so much they can produce.

What does this tell us? It tells us that the authorities assumed that there will be no second wave and hence, had no plans to vaccinate a large section of the population quickly. The government has been caught napping at the wheels.

Also, even with the availability of 20 crore vaccines a month, it will take at least five to six months, for a significant portion of the population to be vaccinated, so that the population can achieve herd immunity.

One reader on Twitter told me that the capacity may also be used to fulfil commercial export commitments of the vaccine suppliers. I have no idea about whether that is the case. If that is the case, vaccination of a significant portion of the population will take even longer.

This easily explains why state governments are running out of stocks. The supply is very low in comparison to the demand. This is a problem that is not going to go away at least for the next two months. This is also explains, why even though vaccination for those over 18 is now allowed, there aren’t vaccines available to vaccinate them.

Of course, there will be a great fight for access to vaccines, not just between state governments, but also between state governments and the private sector. That is what the current vaccine strategy will lead to.

I have already heard stories of corporates throwing money to ensure that their employees are vaccinated and can get back to work quickly. For them, it is the cost of doing business, which can be easily passed on to their consumers. Of course, this evidence is anecdotal, but many corporates, especially those in the services business, have an incentive in doing so. If this plays out at a significant level, it will make vaccines even more inaccessible for the common man. 

Basically, it’s a royal screwup, which cannot be corrected quickly. Give it another five to six months and hope for the best.

Meanwhile, don’t step out if you can, and if you do, stay doubled masked! 

Of Money Printing and Covid Vaccines

I recently wrote a piece for, explaining why the central government should ensure that free vaccination against covid is available even for those in the 18-45 age bracket, and why the principles of free market do not work in this case.

In this piece, I carry the argument forward.

One of the arguments being made is that the companies making the vaccines should be allowed to price the vaccine at a price they deem to be appropriate because they need to be compensated for the risk that they are taking on.

In a normal situation, I would completely agree with that. But this is not a normal situation. We are in the midst of a health emergency of a kind India has not seen in a long time. Also, more than that, allowing companies to decide on the price of the vaccine is bad economics. (I had explained this in the livemint piece and I make a new point here). 

Let me explain. There are two companies which are supplying vaccines, Serum Institute and Bharat Biotech. They have access to the entire Indian market for the next few months, before the foreign competitors come along. Of this, Serum Institute has been supplying 90% of the vaccines up until now. Basically, it has more or less got a monopoly over the Indian market.

This is a very important point that needs to be taken into account. As per India Ratings and Research 84.19 crore out of a total population of 133.26 crore are now eligible for the vaccine, basically people over the age of 18. This is something that the central government needs to keep in mind.

Even if these companies made Rs 100-150 per dose of the vaccine, there is a lot of money to be made, running into thousands of crore, and that is an adequate compensation for the risk involved. Also, it is worth remembering that Serum Institute did not develop the vaccine. It is a contract manufacturer. These points cannot be ignored. 

Other than letting the vaccine companies decide on a price, the central government has also decided to let state governments procure vaccines directly from these companies. The price fixed for the state governments by the Serum Institute is Rs 400 per dose. Bharat Biotech has priced it at Rs 600 per dose.

For the private hospitals, the price has been fixed at Rs 600 per dose and Rs 1,200 per dose, respectively. Of course, these are wholesale prices, and the price eventually charged in the private hospitals, will be higher than this, as those entities need to take their costs of administering the vaccine into account and make a profit as well.

Over and above this, central government will continue to buy vaccines from these two companies and continue supplying them to state governments for free, so that those over the age of 45, can continue to be vaccinated for free, at government vaccination centres.

What will this do? Multiple price points for the vaccines in the midst of a health emergency is bad strategy to say the least. It will encourage black marketing, with black marketers sourcing vaccines from the cheapest source (central government supplying to state governments for free) and selling it for a higher price in the open market. This, especially at a time when there is a shortage of vaccines. 

Hence, it makes sense that central government continue to buy the vaccines from the manufacturers and allocate it to the state governments. This does not mean that the private hospitals should not be involved in the vaccination effort. They should be because the aim is to vaccinate as many people as fast as possible. 

But at the same time it needed to be ensured that the government vaccination centres vaccinated everyone for free, and not just those over 45. This would have ensured that the private hospitals could not have charged a very high amount to vaccinate. This would have keep prices in control and those who wanted to pay could have paid for the vaccine, as well. 

Many state governments have declared that they will vaccinate those in the 18-45 age group, for free. While this is a good move, it needs to be said that this is something that should have happened at the central government level. The central government has many more ways of raising money than a state government. Also, the central government had allocated Rs 35,000 crore towards vaccination in the budget, with a promise to raise the allocation if required. 

Over and above this, there is a more important point. But before I explain that. Let me deviate a little here and talk about an Irish-French economist called Richard Cantillon, who lived in the seventeenth century. Cantillon came up with something known as the Cantillon effect.

He made this observation based on all the gold and silver coming into Spain from what was then called the New World (now South America). When money supply increased in the form of gold and silver, it would first benefit the people associated with the mining industry, that is, the owners of the mines, the adventurers who went looking for gold and silver, the smelters, the refiners, and the workers at the gold and silver mines.

These individuals would end up with a greater amount of gold and silver, that is, money. They would spend this money and thus drive up the prices of meat, wine, wool, wheat, etc. Of course, everyone in the economy had to pay these higher prices.

How is this relevant in the world that we live in?

When central banks print money as they have been doing regularly since 2008, in order to drive down interest rates, they do so with the belief that money is neutral. So, in that sense, it does not really matter who is closer to this money being printed and who is not. But that’s not how it works.   

The Cantillon effect has played out since 2008. When central banks printed and pumped money into the financial system, the large institutional investors, were the ones closest to the money being printed.

They borrowed money at cheap rates and invested across large parts across the world, fuelling stock market and bond market rallies primarily, and a few real estate ones as well.

The larger point being that if a central bank prints money and throws it from a helicopter, those standing under the helicopter, get access to this money first. 

The important word here is access. With state governments and private hospitals being allowed to buy vaccines directly from the two companies, access becomes very important. When vaccination for those between 18-45 opens up on May 1, demand will go through the roof. But the supply will not go up at the same speed, with companies taking some time to scale up. So, how will the vaccine companies decide who to sell how much to?

Should they fulfil the demands of state X first or should they sell more to state Y? Or should they sell more to private hospitals, because the price is higher in that case. In this scenario, access becomes very important. This is the Cantillon effect of vaccines. The phones of the CEOs and the top management of these two companies won’t stop buzzing in the months to come. 

What will also happen is that many corporates will look to vaccinate their workforces (in fact, they already are), so that everyone can get back to work fast (Please remember everyone can’t work from home. India has large banks and many service businesses, in which people can’t work from home). In this scenario, private hospitals will have to decide whether they should vaccinate individuals or should they vaccinate corporate work forces, first.

Corporates might decide to pay a higher price for vaccination simply because it might be more profitable for them to have a vaccinated workforce going out there and doing their work, than not. 

The current structure of vaccination at multiple price points makes the issue of access to vaccination very important and that shouldn’t be the case. The central government shouldn’t be propagating inequality in access to vaccines.

Hence, the central government should have bought vaccines directly from the manufacturers and supplied it to the states.

Nevertheless, this is not going to happen simply because that would mean that the strategy of multiple price points was a mistake. And the government doesn’t make mistakes, especially even when it makes them.

कोरोना काल में छोटू बाबू की बड़ी शादी

शाम के पौने सात बजे थे. बिजली कटी हुई थी. पूरी गली में अँधेरा छाया हुआ था. 
पर प्रोफेसर पी के श्रीवास्तव का घर दूधिया रोशनी में समझो नहा सा रहा था. उनके बड़े बेटे छोटू की शादी थी. 
अमूमन तो छोटे बेटे का नाम छोटू रखा जाता है. पर यहां हुआ ऐसा था कि जब छोटू पैदा हुआ तो वो इतना छोटा था कि लोगों ने उसका नाम छोटू रख दिया. भाई मोहल्ले का भी कुछ हक़ तो बनता ही था प्रोफेसर साहब पर. 
खैर फ़िलहाल छोटू को रहने दीजिये, काम की बात करते हैं. 
पूरी गली में अँधेरा था तो प्रोफेसर सब घर टिमटिमा कैसे रहा था? उसके लिए आपको प्रोफेसर साहब के छोटे साले लल्लन को धन्यवाद देना पड़ेगा. लल्लन जी ने पीछे के फेज से बिजली खींच ली थी. अगर बिजली खींचने में कोई यूनिवर्सिटी पीएचडी वगैरह देती है तो लल्लन को तो ज़रूर मिलना चाहिए. 
“बहुत बढ़िया बिजली खींचे हो लल्लन,” प्रोफेसर साहब ने लल्लन से कहा. 
लल्लन ने इसका जवाब अजीब तरह से मुस्कुरा के दिया. ये वैसी ही मुस्कराहट थी जो मिडिल एज्ड भारतीय आदमियों में अक्सर पायी जाती है, जब वो कुछ कहना चाहते हैं पर कह नहीं पाते हैं. 
“क्या हुआ?” प्रोफेसर साहब ने पुछा. वो समझ गए कि लल्लन कुछ कहना चाह रहा है. 
“जीजाजी वो व्यवस्था हो गयी है ना?” लल्लन ने एकदम लजा लजा के पुछा, जैसे की किसी की शादी में पहली बार दारु पीने वाले हों. 
“हाँ, आखरी वाली कार में सब रखवा दिया है. ओल्ड मोंक, वैट 69, सब कुछ.” 
“और चखना वगैरह?”
“उसका भी बंदोबस्त हो गया है. समधी जी को गाडी का नंबर दे दिया है. जैसे ही हम लोग बरातघर पहुंचेंगे, सेवा शुरू हो जाएगी. चिल्ली चिकन वगैरह सब.” 
इससे पहले की लल्लन कुछ कह पाते, कमरे में, छोटू, बड़े ही गुस्सैल मूड में घुसा. 
अब थोड़ा सा आपको दूल्हे राजा के बारे में भी बता दे. 
छोटू दिल्ली यूनिवर्सिटी से पढ़े थे. पिताजी का बहुत अरमान था कि आईएएस अफसर बने. दो एटेम्पट दे चुके थे. दूसरी बार mains भी क्लीयर हुआ था. इंटरव्यू में वो थोड़ा लड़खड़ा गए थे. पैनल में दो लेडीज़ थी और उनके सामने छोटू जी ने एकदम चुप्पी साध ली थी. 
खैर, mains क्लीयर करने के बाद, पूरे मोहल्ले में उनका बहुत नाम हो गया था. लोग छठवीं-सातवीं के बच्चों को लेकर छोटू के पास करियर एडवाइस मांगने आते थे. 
इन सब चीज़ों से ज़्यादा मैरिज मार्किट में छोटू का वैल्यू बहुत बढ़ गया था. इस साल mains क्लीयर अगले साल कलेक्टर भी बनेगा, पंडित ये बोल बोल कर रिश्ते फिक्स करने की कोशिश कर रहा था. 
प्रोफेसर साहब ने ये सोचा की अभी छोटू का वैल्यू ऊपर है, इसलिए उसे भंजा लेना चाहिए. क्या पता कलेक्टर बने या न बने? प्रोफेसर साहब ने तो शहर के सबसे बड़े आईएएस कोचिंग सेंटर वाले से भी बात कर रखी थी. अगर तीसरा एटेम्पट भी बेकार गया तो छोटू को वहां लगवा देंगे. 
और छोटू की उम्र भी हो रही थी. ऐसे तो तीस साल के थे पर सर्टिफिकेट पर 27 की उम्र थी. इसकी वजह से शादी में प्रॉब्लम भी हो गयी थी. जिस लड़की से बात चल रही थी, उसकी उम्र सर्टिफिकेट पर 28 थी. फिर बातों बातों में पता चला की लड़की असल में 29 की है और मामला सुलझ गया. 
छोटू जी बहुत गरम थे. 
“पापा, आप भी कौन से बैंड वाला लेकर आ गए हैं.”
“क्यों, जमाल बैंड है. हमारी शादी में भी यहीं बजाया था.” 
इससे पहले की छोटू कुछ कह पाता लल्लन बीच में कूद पड़े. 
“क्या बढ़िया बढ़िया गाना बजाता है. आज मेरी यार की शादी है. मेरी देश की धरती सोना उगले, उगले हीरे मोती…” 
“सब पुराना गाना है,” छोटू ने कहा. 
“अरे क्या पुराना है. यही सब गाना पर तो नागिन डांस होता है. अब क्या हम लोग तुमरा शादी में नागिन डांस भी नहीं करेंगे,” लल्लन ने थोड़ा गरम होकर जवाब दिया. 
“पापा, पर दोस्त सब कैसे नाचेगा. वो लोग को ई सब गाना नहीं बुझायेगा.”
“क्या करें फिर?” प्रोफेसर साहब ने पुछा. 
“एक ठो डीजे बुला ले?”
“डीजे?” प्रोफेसर साहब थोड़ी सोच में पड़ गए. “किसको बुलाओगे?”
“अरे पीछे वाली गली मैं पुट्टुवा रहता है ना? 
“कौन पुट्टु? वो जो चार बार एटेम्पट दिया?”
“हाँ वही पापा।”
“डीजे बन गया है आजकल वो?”
“हाँ पापा, बहुत जोरदार बजाता है. डीजे वाले बाबू मेरा गाना चला दे. डीजे वाले बाबू मेरा गाना चला दे.” 
“अच्छा बुला लो.”
प्रोफेसर साहब की इतनी कहने कि देर थी और छोटू उछलते कूदते हुए कमरे से बाहर निकल गया. 
उसके निकलते ही प्रोफेसर साहब ने लल्लन से कहा: “जाओ देखो तुम्हारी दीदी तैयार है कि नहीं.”
“हाँ जीजाजी,” कहकर लल्लन कमरे से निकल गया. 
प्रोफेसर साहब ने अपना मोबाइल फ़ोन निकाला और समधी को फ़ोन लगाया. 
“बस आपका ही इंतज़ार कर रहे हैं,” समधी जी ने जवाब दिया. 
“अच्छा, थोड़ी सी समस्या हो गयी है.”
“क्या समस्या?”  समधी जी ने घबरा कर पुछा, आखिर लड़की की शादी का मामला था.  
“अरे छोटू बाबू को अब डीजे भी चाहिए.”
“तो इस में क्या है. बुला लीजिये. एक ही बार तो हमारी बेटी से शादी करेगा. तो थोड़ा नाच गाना तो होगा ही.”
“धन्यवाद्,” प्रोफेसर साहब ने जवाब दिया.
“अरे आपका बेटा हमारा बेटा।” 
“हम लोग एक घंटे में पहुँच जाएंगे,” ये कहकर प्रोफेसर साहब ने फ़ोन काट दिया. 
प्रोफेसर साहब का फ़ोन काटते ही समधी जी उठे और अपनी पत्नी को खोजते हुए निकले. 
“अरे रश्मी, खाने का 50 प्लेट और कम करना पड़ेगा.”
“काहे?” पत्नी ने थोड़ा इर्रिटेट होकर पुछा. 
“छोटू बाबू को डीजे चाहिए.”
“भाई हम आरबीआई में केवल क्लर्क थे, नोट छापने की मशीन आरबीआई के पास है हमारे पास नहीं.”
आधे घंटे बाद. 
छोटू की बारात रोड पर है बरातघर की तरफ, कछुए की रफ़्तार से बढ़ रही है. 
डीजे वाले बाबू तेरा गाना चला दे, बार बार बज रहा है. एक बार डीजे बजा रहा है. एक बार जमाल बैंड. दोनों में प्रतिस्पर्धा चल रही है. 
लल्लन नागिन डांस करने में लगे हुए हैं. पर तोंद इतने निकल गयी है कि कम्बख्त हाथ ज़मीन नहीं छू पा रहे हैं. 
इतने में धमाका टीवी के रिपोर्टर राजू जो वहां से गुज़र रहे हैं, बारात में इतने सारे लोग देख कर चकित रह गए हैं. कोरोना काल में सरकार ने बारात में परमिशन तो केवल 50 लोगों की दी है. पर यहाँ तो कम से कम 200 लोग चल रहे हैं. 
रिपोर्टर राजू माइक लेकर अपने कैमरामैन के साथ जल्दी जल्दी दूल्हे के घोड़े की तरफ भागे. 
छोटू टीवी रिपोर्टर को देखकर बहुत  खुश होता है, घोड़े से नीचे उतरता है उससे बात करने के लिए.
“कितने लोगों का बारात है?” रिपोर्टर राजू पूछता है. 
“अब सर, डेढ़ दू सौ लोग तो जइबे करेगा न बरात में,” मुँह में गुटका दबाये हुए, छोटू जवाब देता है. 
“और अगर इसकी वजह से कोरोना फैल गया तो कौन ज़िम्मेवार होगा?” रिपोर्टर राजू पूछता है. 
“कोरोना वरोना कुछ नहीं है.”
“अरे होता तो इतना बड़ा बड़ा रैली करते नेताजी.” 
“और हम अंग्रज़ी अखबार पढ़ते हैं. अभी अभी इंडियन एक्सप्रेस में भल्ला और भसीन ने लिखा कि रैली से कोरोना नहीं फैलता है.”
राजू का सर घूमने लगा. 
“जब रैली से कोरोना नहीं फैलता है तो बारात से कैसे फैलेगा?”
राजू का सर और भी घूमने लगा. 
“सब पप्पू का साज़िश है. वही फैला रहा है ये सब नेगेटिविटी. ज़रा पॉजिटिव बात कीजिये सब अच्छा होगा.”
राजू का सर पूरी तरह से घूम जाता है और अपने कैमरामैन से कहता है: “ज़रा माइक धरो.”
और इसके बाद वो छोटू को पीटने लगता है. 
बारात नाचने में मस्त है, जैसी की शादी न हो मैय्यत में आये हो, और सब के सब लगाए हुए हों. 
जब तक बारात को समझ आता है क्या हो रहा है, लाइव टीवी पर छोटू पिट चूका होता है. 
इस कहानी का अंत यहाँ से इंस्पायर्ड है. 

सोचो तो दुनिया बर्बाद हो रही है. और फिर से सोचो तो कुछ नहीं हुआ. 

“ये है विविध भारती. दिन के डेढ़ बजे हैं और आप सुन रहे हैं मनचाहे गीत. आज के पहले गीत को गाया है उषा मंगेशकर ने, संगीत दिया है राम लक्ष्मण ने और गीतकार है रविंद्र रावल. फिल्म है तराना.” 
तभी उषा ताई ने गाना शुरू किया. “सुल्ताना, सुल्ताना, मेरा नाम है सुल्ताना, मेरे हुस्न का हर अंदाज़ मस्ताना.” 
इतने में मेरा मोबाइल फ़ोन बजने लगा और मैं आजकी दुनिया में वापस आया.
चिंटू जी बहुत दिन के बाद फ़ोन कर रहे थे. 
न दुआ न सलाम, सीधे सीधे पॉइंट पर आ गए: “पिताजी नहीं रहे.”
“क्या हुआ?” 
“पता नहीं.”
“पता नहीं?” मैंने पुछा. 
“कल तक तो ठीक हो रहे थे. आज सुबह सुबह अस्पताल से फ़ोन आया.”
“हम्म,” मैं कुछ और नहीं कह पाया.”
“अकेले थे अस्पताल में. मैं यहाँ फसा हुआ हूँ और भैया अलग अस्पताल में भर्ती हैं.”
“तो फिर?” मैंने पूछा. 
 वो समझ गए मैं क्या पूछ रहा था और सीधा सटीक जवाब दिया: “भैया के साले साहब ने अंतिमसंस्कार करवाया. उनका अभी अभी फ़ोन आया था.” 
“लाइन लगी थी इलेक्ट्रिक क्रेमाटोरियम में. बाइसवी बॉडी थी पिताजी की.”
“साले साहब बहुत ही बुरी स्थिति में है. फूट फूट कर रो रहे थे फ़ोन पर.” 
“बहुत शॉक लगा होगा.”
“बड़ी मुश्किल से चुप कराया.”
“सोचा था, बाहर जाऊँगा. थोड़े पैसे कमाऊंगा और माँ बाप को खुश रखूँगा. सब गड़बड़ हो गया. पिताजी अंत में अकेले रह गए और मैं उनको आखिरी बार भी नहीं देख पाया.” 
“अच्छा रखता हूँ. भैया का फ़ोन आ रहा है.” 
फ़ोन रखते ही. अमेज़न म्यूजिक पर उषा ताई ने आगे का गाना शुरू किया, एकदम फकीरी अंदाज़ में: “मैं आज यहाँ, कल जाने कहाँ. बंजारों का कब कोई ठिकाना. सुल्ताना, सुल्ताना, मेरा नाम है सुल्ताना, मेरे हुस्न का हर अंदाज़ मस्ताना.”
बायें वाले फ्लैट में कोई मन की बात सुन रहा था. 
नीचे वाले फ्लैट में प्रेशर कुकर बार बार सीटी दे रहा था. लगता है, हर रविवार की तरह आज फिर मटन पक रहा था. 
बाहर बरामदे में, मेरे दायें वाले फ्लैट के बाप और बेटा क्रिकेट खेल रहे थे. 
“शार्ट पिच बोलिंग मत डाल,” बाप ने बेटे से कहा. 
“अरे पर बुमराह आईपीएल में ऐसे ही डालता है,” बेटे ने जवाब दिया. 
क्रिकेट के साथ साथ, एक छोटी लड़की अपनी साइकल को धीरे धीरे बरामदे में चला रही थी. 
नीचे रोड पर कोई पानी की कई बाल्टियां, जो एक लकड़ी के फट्टे पर लदी हुई थी, जिसके नीचे चक्के लगे थे, घसीट कर ले जा रहा था. 
रोड के सामने वर्ली बस स्टैंड में लाउडस्पीकर पर अनाउंसमेंट चालू थी और बसें आ जा रही थी. 
सोचो तो दुनिया बर्बाद हो रही है. और फिर से सोचो तो कुछ नहीं हुआ. 
गाना बदल चुका था. 
उषा ताई जा चुकी थी. हेमलता आ गयी थी. 
“ये आसमान ये बादल ये रास्ते ये हवा, 
हर एक चीज़ है अपनी जगह ठिकाने से.” 
जो भी कहा जा सकता था, निदा फ़ाज़ली कह गए थे. 
“ये ज़िन्दगी है सफर,
तू सफर की मंज़िल है.”

Charles Ponzi and Bernie Madoff Would Have Been Proud of the Ponzi Schemes of 2021

Bernie Madoff, the man who ran the biggest Ponzi scheme of all time, died in jail on April 14, 2021, fifteen days shy of turning 83.

A Ponzi scheme is a fraudulent investment scheme in which older investors are paid by using money being brought in by newer ones. It keeps running until the money being brought in by the newer investors is greater than the money being paid to the older ones. Once this reverses, the scheme collapses . Or the scamster running the scheme, runs away with the money before the scheme collapses. 

The scheme is named after an Italian American, Charles Ponzi, who tried running such an investment scheme in Boston, United States, in 1920. He had promised to double investors’ money in 90 days, which meant an annual return of 1500%. At its peak, 40,000 investors had invested $15 million in Ponzi’s scheme.

Not surprisingly, the scheme collapsed in less than a year’s time, under its own weight. All Ponzi was doing was taking money from newer investors and paying off the older ones.

Once Boston Post ran a story exposing his scheme in July 1920, many investors demanded their money back and Ponzi’s Ponzi scheme simply collapsed, as money being brought in by newer investors dried up, while older investors had to be paid.

Madoff was smarter that way. His scheme gave consistent returns of around 10% per year, year on year. The fact that Madoff promised reasonable returns, helped him keep running his Ponzi scheme for decades. But when the financial crisis of 2008 struck, it became difficult for him to carry on with the pretence and the scheme collapsed.  

As I wrote in a piece for the Mint newspaper yesterday, Madoff was Ponzi’s most successful disciple ever. While Ponzi’s investment scheme started in December 1919, it collapsed in less than a year’s time in August 1920. On the other hand, documents suggest that Madoff’s scheme started sometime in the 1960s and ran for close to five decades.

Nevertheless, both Madoff and Ponzi, would have been proud of the Ponzi schemes of 2021. The only difference being that the current day Ponzi schemes are what economist Nobel Prize winning Robert Shiller calls naturally occurring Ponzi schemes and not fraudulent ones like the kind Ponzi and Madoff ran.

A conventional Ponzi scheme has a fraudulent manager at the centre of it all and the intention is to defraud investors and take the money and run before the scheme collapses. A naturally occurring Ponzi scheme is slightly different to that extent.

Shiller defines naturally occurring Ponzi schemes in his book Irrational Exuberance: 

“Ponzi schemes do arise from time to time without the contrivance of a fraudulent manager. Even if there is no manipulator fabricating false stories and deliberately deceiving investors in the aggregate stock market, tales about the market are everywhere. When prices go up a number of times, investors are rewarded sequentially by price movements in these markets just as they are in Ponzi schemes. There are still many people (indeed, the stock brokerage and mutual fund industries as a whole) who benefit from telling stories that suggest that the markets will go up further. There is no reason for these stories to be fraudulent; they need to only emphasize the positive news and give less emphasis to the negative.”

Basically, what Shiller is saying here is that the stock markets enter a phase at various points of time, where stock prices go up simply because new money keeps coming in and not because of the expectations of earnings of companies going up in the days to come.

Ultimately, stock prices should reflect a discounted value of future company earnings. But quite often that is not the case and the price goes totally out of whack, for considerably long periods of time. 

A lot of money comes in simply because the smarter investors know that newer money will keep coming in and stock prices will keep going up, and thus, stocks can be unloaded on to the newer investors. Hence, like in a Ponzi scheme, the money being brought in by the newer investors pays off the older ones. In simpler terms, this can be referred to as the greater fool theory.

The investors buying stocks at a certain point of time, when stock prices do not justify the expected future earnings, know that greater fools can be expected to invest in stocks in the time to come and to whom they can sell their stocks.

Of course, this is not the story that is sold. If you want money to keep coming into stocks, you can’t call a prospective fool a fool. There is a whole setup, from stock brokerages to mutual funds to portfolio management services to insurance companies selling investment plans, which benefit from the status quo. Their incomes depend on how well the stock market continues to do. 

They are the deep state of investment and need to keep selling stories that all is well, that stocks are not expensive, that this time is different, that a new era is here or is on its way, that stock prices will keep going up and that if you want to get rich you should invest in the stock market, to keep luring fools in and keep the legal Ponzi scheme, for the lack of a better term, going.

 — Bernie Madoff 

This is precisely what has been happening all across the world since the covid pandemic broke out. With central banks printing a humongous amount of money, interest rates are at very low levels, forcing investors to look for higher returns. A lot of this money has found its way into stock markets. The newer investors have bid stock prices up, thus benefitting the older investors. The deep state of investment has played its role.

Of course, the counterpoint to whatever I have said up until now is that unless new money comes in, how will stock prices ever go up. This is a fair point. But what needs to be understood here is that in the last one year, the total amount of money invested in stocks has turned into a flood. Take the case of foreign institutional investors investing in Indian stocks.

They net invested a total of $37.03 billion in Indian stocks in 2020-21. This was almost 23% more than what they invested in Indian stocks in the previous six years, from April 2014 to March 2020. This flood of money can be seen in stock markets all across the world.

Clearly, there is a difference, and the stock market has worked like a naturally occurring Ponzi scheme, at least over the last one year.

This Ponziness is not just limited to stocks. Take a look at what is happening to Indian startups…oh pardon me…we don’t call them startups anymore, we call them unicorns, these days. A unicorn is a startup which has a valuation of greater than billion dollars.

How can a startup have a valuation of more than a billion dollars, is a question well worth asking. I try and answer this question in a piece I have written in today’s edition of the Mint newspaper.

As mentioned earlier, there is too much money floating all around the world, particularly in the rich world, looking for higher returns. Venture capitalists (VCs) have access to this money and thus are picking up stakes in Indian startups at extremely high prices.

Many of these startups have revenues of a few lakhs and losses running into hundreds or thousands of crore. The losses are funded out of money invested by VCs into these unicorns.

The losses are primarily on account of selling, the service or the good that the startup is offering, at a discounted price. The idea is to show that a monopoly (or a duopoly, if there is more than one player in the same line of business) is being built in that line of business and then cash in on that through a very expensive initial public offering (IPO).

As and when, the IPO happens, a newer set of investors, including retail investors, buy into the business, at a very high price, in the hope that the company will make lots of money in the days to come. Interestingly, IPOs which used to help entrepreneurs raise capital to expand businesses, now have become exit options for VCs. 

If an IPO is not possible, then the VC hopes to unload the stake on to another VC or a company and get out of the business.

In that sense, the hope is that a newer set of investors will pay off an older set, like is the case in any Ponzi scheme. Of course, this newer set then needs another newer set to keep the Ponzi going.

The good thing is that when investors buy a stock of an existing company or in a new company’s IPO, they are at least buying a part of an underlying business. In case of existing companies, chances are that the business is profitable. In case of an IPO, the business may already be profitable or is expected to be profitable.

But the same cannot be said about many digital assets that are being frantically bought and sold these days. There is no underlying business or asset, for which money is being paid. Take the case of Dogecoin which was created as a satire on cryptocurrencies.

As I write this, it has given a return of 24% in the last 24 hours. An Indian fixed deposit investor will take more than four years to earn that kind of return and that too if he doesn’t pay any tax on the interest earned.

Why is Dogecoin delivering such fantastic returns? As James Surowiecki writes in a column: “There is no good answer to that question, other than to say Dogecoins have gotten dramatically more valuable because people have decided to act as if they’re more valuable.”

As John Maynard Keynes puts it, investors are currently anticipating “what average opinion expects the average opinion to be.” Carried away by the high returns on Dogecoin, the expectation is that newer investors will keep investing in it and hence, prices will keep going up. The newer investors will keep paying the older ones. That is the hope, like is the case with any Ponzi scheme, except for the fact that in this case, there is no fraudulent manager at the centre of it all.

Of course, the only way the value of Dogecoin and many other cryptocurrencies can be sustained, is if newer investors keep coming in and at the same time, people who already own these cryptocurrencies don’t rush out all at once to cash in on their gains.

If this does not happen, as is the case with any Ponzi scheme, when existing investors demand their money back and not enough newer investors are coming in, this Ponzi scheme will also collapse.

– Charles Ponzi 

Given this, like is the case with people who are heavily invested in stocks, it is important for people who are heavily invested in cryptos to keep defending them. Of course, a lot of times this is technical mumbo jumbo, which basically amounts to that old phrase, this time is different.

But this time is different is probably the oldest lie in finance. It rarely is.

And if dogecoin was not enough, we now have investors going crazy about non-fungible tokens (NFTs), which in simple terms is basically certified digital art. As Jazmin Goodwin points out: “For example, Jack Dorsey’s first tweet is now bidding for $2.5 million, a video clip of a LeBron James slam dunk sold for over $200,000 and a decade-old “Nyan Cat” GIF went for $600,000.” The auction house Christie sold its first ever NFT artwork for $69 million, in March.

In a world of extremely low interest rates and massive amount of printing carried out by central banks, there is too much money going around chasing returns.

There aren’t enough avenues and which is why we have financial and digital assets now turning into naturally occurring Ponzi schemes, giving the kind of returns that the original Ponzi scamsters, like Ponzi himself and his disciple Madoff, would be proud off.

Madoff’s scheme delivered returns of 10% returns per year. Ponzi promised to double investors’ money in three months or a return of 100% over three months. As I write this, Dogecoin has given a return of more than 600% over the last one month.

Here’s is how the price chart of Dogecoin looks like over the last one month.