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 that 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 of 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 put is, 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.

Source: https://www.coindesk.com/price/dogecoin.

 

शर्मा जी, वर्मा जी एंड द रिटर्न ऑफ़ कोरोना

सुबह के साढ़े पांच पौने छे बजे थे. सूरज धीरे धीरे निकलने का प्रयत्न कर रहा था. 
वर्मा जी अपने घर के बगान में गरम पानी लेकर कुर्सी पर अभी अभी बैठे थे. गरम पानी मोशन सुधारने के लिए नहीं था. उसमें वर्मा जी ग्रीन टी का एक बैग डुबोने वाले थे. 
twinings ग्रीन टि का बड़ा डब्बा दो दिन पहले छोटी बहु ने अमेज़न से भिजवाया था.
“पापा आपकी तोंद फिर से निकल आयी है,” बड़े प्यार से वो बोली थी. “थोड़ा सुबह उठकर ग्रीन टी पीजिये.” 
इस पर मिसेज वर्मा खिसिया कर बोली: “हाँ, अब तो आप हमारे हाथ की बनी चाय भी नहीं पियेंगे.” पहले तो केवल बेटे को खो देने का गम था. अब पति भी हाथ से निकला जा रहा था. 
इतने में शर्मा जी अपने घर से पूरी तरह तैयार हो कर सुबह की सैर करने के लिए निकले. और जब लोग मुँह पर दो दो मास्क लगा रहे हैं, उन्होंने ने एक भी लगाने की गुंजाईश नहीं की थी. 
“अरे शर्मा जी मास्क तो लगा लीजिये,” वर्मा जी ने पुकारा. 
“भाई हम दो दिन पहले ही गंगा जी में डुबकी लगाए हैं,” शर्मा जी ने जवाब दिया. 
“अच्छा तब तो ठीक है.”
“हाँ.”
“वैसे भी मिश्रा जी अभी दो दिन पहले…”
“कौन वाला मिश्रा, पान वाला या गुटका वाला?” शर्मा जी ने पुछा. 
“पान वाला.”
“हाँ फिर ठीक है.” 
“क्यों?” वर्मा जी ने पुछा. 
“अरेु ऊ गुटका वाला बहुत थूकता है हर जगह.” 
“अब का करेगा, गुटका का पीक मुंह में थोड़े रखा रहेगा.” 
“छोड़िये. आप क्या कह रहे थे?” शर्मा जी ने पुछा.  
“हाँ तो मिश्रा जी एक ठो फॉरवर्ड भेजे थे व्हाट्सप्प पर.”
“अच्छा.”
“उसमें ऐसा लिखा था कि, ऑक्सफ़ोर्ड यूनिवर्सिटी में रिसर्च हुआ है…”  
“अब ऑक्सफ़ोर्ड यूनिवर्सिटी में रिसर्च नहीं होगा तो का रांची यूनिवर्सिटी में होगा?” शर्मा जी ने टोका और फिर अपने ही चुटकुले पर ज़ोर ज़ोर से हसने लगा. “आप भी न वर्मा जी.” 
“अरे आप बोलने तो दीजिये.” 
“अच्छा, बोलिये बोलिये.” 
“तो ऑक्सफ़ोर्ड यूनिवर्सिटी में एक ठो रिसर्च हुआ है. उसमें ये पाया गया कि गंगा जी में डुबकी लगाने से बॉडी में ऐसा ऐसा मिनरल आ जाता है, जिससे कोरोना पास भी नहीं आता है, दुरे से निकल लेता है.”
“हम तो बोल ही रहे थे,” शर्मा जी ने कहा. 
“हाँ, पर फिर भी लगा लीजिये, नहीं तो ठोलवा सब पकड़ लेगा.”
“इतना सुबह सुबह?” 
“हे हे.” 
“ऐसे मिशरवा हमको भी एक फॉरवर्ड भेजा था,” शर्मा जी ने कहा. 
“पान वाला या गुटका वाला?” 
“गुटका वाला।” 
“गुटका वाला?”
“हाँ थूकता बहुत हैं, पर फॉरवर्ड अच्छा भेजता हैं.”
“हमको तो नहीं भेजता है.” 
“अरे, आप टेलीग्राम पर हैये नहीं है की.”
“टेलीग्राम? ऊ तो कितने साल से बंद हो गया नहीं?” वर्मा जी ने एकदम आश्चर्यचकित हो कर कहा. 
“अरे, वो वाला नहीं.”
“तो फिर कौन वाला.”
“अभी अभी व्हाट्सप्प जैसा आया है.” 
“व्हाट्सप्प जैसा टेलीग्राम?” वर्मा जी के पल्ले नहीं पड़ रहा था कि शर्मा जी क्या बोल रहे थे. 
“आपके यहाँ कपडा कौन वाशिंग पाउडर में धुलता है?”
“मिसेज़ को तो सर्फ एक्सेल पसंद है. पर बहुत महंगा पड़ता है, इसलिए थोड़ा रिन के साथ मिला देते हैं.”
“हमारी मिसेज़ को अरियल पसंद है.”
“अच्छा.”
“अब जैसे अलग अलग वाशिंग पाउडर आता है…”
“अच्छा अब समझ में आया. टेलीग्राम नया टाइप का व्हाट्सअप है,” वर्मा जी ने मुस्कुराते हुए कहा. 
“हाँ.”
“तो आप क्या कह रहे थे?” वर्मा जी ने पुछा. 
“तो गुटका वाला मिशरवा एक ठो फॉवर्ड भेजा,”  शर्मा जी बोले. 
“अच्छा.”
“उसमें ये बताया था कि कोरोना जैसा कुछ नहीं है. पूरा का पूरा एक साज़िश है,” शर्मा जी ने कहा. 
“साज़िश? किसका?” 
“सीआईए और बिल गेट्स का.”
“एह. हम तो सुने कि चाइनीज़ लोग चमगादड़-वमगादड़ खाकर इसको फैलाया है.”
“अरे ऊ तो पुराना न्यूज़ है. अभी सुनिए.”
“अच्छा.”
“सीआईए और बिल गेट्स, मिलकर अफवाह फैलाया है कोरोना के बारे में.”
“पर वो लोग ऐसा क्यों करेगा?”
“देखिये सीआईए का तो मालूम नहीं, पर बिल गेट्स का हम समझ सकते हैं.”
“समझ सकते हैं?” वर्मा जी ने पुछा. “कैसे?” 
“अरे, अब इतना पैसा कमा लिया. माइक्रोसॉफ्ट को इतना बड़ा कंपनी बना दिया. तीन ठो बच्चा लोग भी बड़ा हो गया है उसका. घर छोड़ कर जाने के लिए तैयार है.”
“हाँ तो?” वर्मा जी के समझ में कुछ नहीं आ रहा था. 
“हम लोग के यहाँ तो बच्चा लोग जब घर भी छोड़ता है, तो माँ बाप के बारे में सोचता है. दादा दादी, नाना नानी बनाता है. इसलिए हम लोग का मन लगा रहता है और समय बीतता जाता है.”
“एकदम सही बोले आप शर्मा जी,” वर्मा जी ने कहा. कल रात को ही खबर आयी थी कि उनके सबसे छोटे बेटे चिंटू और उसकी बीवी रिंटू को, इशू होने वाला है. 
“पर अमरीका में इंडिया जैसा वैल्यूज नहीं न है. तो बिल गेट्सवा अब बोर हो गया है. इसलिए सीआईए के साथ मिलकर अफवाह फैला दिया कोरोना के बारे में.” 
“अरे बाप रे.”
“एकदम. मिश्रा जी का फॉरवर्ड कभी गलत नहीं होता है. कोरोना जैसे कुछ नहीं है. और जो है ही नहीं वो किसी को कैसे हो सकता है.”
तभी शर्मा जी के घर के अंदर से आवाज़ आयी. 
“अच्छा सुनते हैं,” मिसेज़ शर्मा बोली. “आधा दर्जन अंडा और एक डबल रोटी भी ले आइयेगा.”
“हाँ ठीक है,” शर्मा जी ने जवाब दिया. 
“अंडा?” वर्मा जी ने पुछा. “आप लोग अभी भी अंडा खाते हैं?” 
“काहे?”
“अरे आप को कोई मेनका गाँधी का अंडे वाला फॉरवर्ड नहीं भेजा क्या आज तक व्हाट्सप्प पर.” 

मिसेज़ शर्मा, मिसेज़ वर्मा एंड द रिटर्न ऑफ़ कोरोना 

शाम के छे-साढ़े छे बजे हैं. सूरज ढल चुका है. कोरोना की दूसरी वेव का प्रकोप शहर में फैल चुका है. ऐसे माहौल में, मिसेज़ शर्मा और मिसेज़ वर्मा अपने अपने घर के सामने छोटे से बगान में बैठी हुईं, सोशल डिस्टन्सिंग बनाये हुए, एक दुसरे से बातें कर रही हैं. 
आईये सुनते हैं. 
“और आप सूई ले लीं? मिसेज़ शर्मा ने पुछा. 
“अब क्या बताएं,” मिसज़ वर्मा ने जवाब दिया. “अरे परसों मिस्टर और हम गए थे. अस्पताल पहुंचे तो Compounder मिस्टर से बोलिस, आज तो ख़तम हो गया है सर.” 
“ख़तम, ख़तम कैसे हो गया?”
“हम भी वही बोले.” 
“तब तो टीका उत्सव चल रहा था न.”
“हम भी वही बोले.” 
“मोदी जी दिन में 18 घंटे काम कर रहे हैं और ई सब compounder लोग से दू ठो सुई नहीं संभल रहा है.”
“हम भी वही बोले,” मिसेज़ वर्मा ये बोलकर जैसे अटक सी गयी. 
“और आपका चुन्नू ठीक है?” मिसेज़ शर्मा ने पुछा. 
“हाँ ठीक ही है,” मिसेज़ वर्मा का जवाब आया. 
“और इशू–विशु के बारे में कुछ सोचा कि नहीं?”
“अरे क्या बताएं,” मिसेज़ वर्मा बोलीं. 
“ऐसे अभी तो टाइम भी सही था,”  मिसेज़ शर्मा बोली. 
“मतलब?”
“सबका वर्क फ्रॉम होम चल रहा है.”
“हाँ तो?”
“अरे आदमी घर से काम करता है तो थकता कम हैना. ज़्यादा ताकत रहता है ” 
“अच्छा समझे.”
“ऐसे तुमको एक बात बोलेंगे, बुरा मत मानना.” 
“अरे नहीं बोलिये, बुरा काहे मानेंगे, ” मिसेज़ वर्मा ने कहा. 
“हमारी मंझली दीदी का लड़का हैना.”
“कौन बबलू?” 
“हाँ. तो वो भी बहुत दिन तक इशू नहीं किया.” 
“अच्छा फिर?”
“फिर क्या, दवाई का आदत लग गया. बहुत मुश्किल से हुआ.” 
“अरे बाप रे.” 
“इस लिए समय रहते कर लेना चाहिए,” मिसेज़ शर्मा ने कहा. “हर चीज़ का एक उम्र होता है.” 
“ऐसे हम परसों ही पूछे उससे कि क्या प्लान है,” मिसेज़ वर्मा ने कहा. 
“क्या बोला?”
“बोला, मम्मी ऐसी दुनिया में बच्चा लाकर क्या मतलब.”
“मतलब?”
“हम समझाये, के बेटा, बच्चा कोई मतलब के लिए थोड़े पैदा करता है. बच्चा पैदा करना होता है, इसलिए पैदा करता है.”
“अच्छा. फिर क्या बोला?” मिसेज़ शर्मा ने पूछा. 
“बोला, मम्मी तुम समझ रही हो क्या बोल रही हो.”
“ओह, ऐसा बोल दिया.” 
“हाँ.”
“हम तो तुमको बोले थे, जेनयू वेनयू मत भेजो. बच्चा लोग घर से बहार डॉक्टर इंजीनियर बनने के लिए निकले तो अच्छा लगता है. हिस्ट्री पढ़ने के लिए इतना मेहनत…” 
“हाँ आप तो बोली थी. और हम भी मिस्टर को बोले थे. पर वो उधर से बोले, कब तक अपने पास बांध के रखोगी,” मिसेज़ वर्मा ने कहा.
“ऐ माँ, गाय है क्या जो बांध कर रखेंगे.”
“सही कहीं आप.” 
“हमारी बड़ी दीदी का लड़का…”
“चिंटू?” 
“हाँ. वो भी जेनयू गया था, करीब दस साल पहले.” 
“अच्छा.” 
“बस बंगाली लड़की से शादी कर लिया.” 
“अरे बाप रे. बहुत एग्रेसिव होगी वो तो?”
“हैये है कि. कच्चा चबा गयी अपनी सास को,” मिसेज़ शर्मा ने कहा.
“दीदी और जीजाजी आपके मान कैसे गए?” मिसेज़ वर्मा ने पूछा.
“शुरू में नहीं माने थे. फिर चिंटू बोला, शादी कर रहे हैं, आना है तो आईये, नहीं तो भाड़ में जाईये.”
“बच्चा लोग के सामने आदमी मजबूर हो जाता है.”
“एकदम. हम तभी राजू को जेनयू नहीं भेजे. बोले यहीं रांची यूनिवर्सिटी में पढ़ लो.” 
“एकदम ठीक की.” 
“तभी मोदी जी कहते हैं, हार्डवर्क इस मोर इम्पोर्टेन्ट दैन हारवर्ड,” मिसेज़ शर्मा ने कहा. 
“कहेंगे नहीं. वो तो पूरा पोलिटिकल साइंस पढ़े हैं,” मिसेज़ वर्मा ने कहा. 
तभी मिसेज़ वर्मा के घर के अंदर से आवाज़ आयी. “शीला, गप मारना ख़तम करो. भूक लगी है. डिनर दे दो.” 
“मिस्टर बुला रहे हैं लगता है?” मिसेज़ शर्मा ने कहा. 
“हाँ.”
“पर पौने सात बजे डिनर?”
“अब क्या बताएं.” 
“क्या हुआ?”
“अरे छोटी बहु बोल दी है कि पापा आपका तोंद निकल गया है. अच्छा नहीं लग रहा है.” 
“ओह चुन्नू की मिसेज़ ऐसा बोल दी.” 
“हाँ.”  
“तो?”
“इसलिए, आजकल जल्दी खा रहे हैं…उसको का बोलते हैं.” 
“इंटरमिटेंट फास्टिंग.” 
“हाँ वही करने की कोशिश कर रहे हैं.”
“अच्छा.”
“इनको न हमेशा से मन था कि एक बेटी भी हो,” मिसेज़ वर्मा ने थोड़ा शर्मा के कहा. “इस लिए छोटी बहु का बात इतना ध्यान से सुनते हैं.” 
“अच्छा.”
“तीन लड़का के बाद, बोले एक बार और ट्राई करते हैं, हो सकता है इस बार बेटी हो जाए.” 
“अच्छा.” 
“पर हम हाथ खड़ा कर दिए.”
“अच्छा.” 
“बोले, और ताकत नहीं है.” 
“अच्छा.” 
“पहले ही तीन बच्चा संभालना…” 
“शीला,” मिसेज वर्मा के घर के अंदर से फिर आवाज़ आयी. 
“अच्छा तो हम चलते हैं,” मिसेज़ वर्मा ने कहा. 
“फिर कब मिलयेगा?” मिसेज़ शर्मा ने पुछा. 
“जब आप कहियेगा.” 
“जुम्मे रात को?”
“नहीं आधी रात को.”
 

Matthew Effect of Covid Pandemic: Rich Got Richer and Poor Got Poorer

In 1968, sociologists Robert K Merton and Harriet Zuckerman, came up with the concept of the Matthew Effect of accumulated advantage. The term takes its name from the Gospel of Matthew, which points out: “For to everyone who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.”

In simpler terms, the Matthew Effect of accumulated advantage is stated as the rich become richer and the poor get poorer. This is precisely how things have played out over the last one year, as the covid pandemic has spread through India and large parts of the world.

Let’s take a look at the different ways in which this has happened.

1) Central banks in the rich world have printed a massive amount of money post covid. Just the Federal Reserve of the United States has printed more than $3.5 trillion between end February 2020 and now. Other big central banks like the Bank of England, the Bank of Japan and European Central Bank have also done the same.

This has been done in order to drive down interest rates. The hope is that at lower interest rates people will borrow and spend money, and businesses will borrow and expand. This will help the economy revive. Many rich countries have put money directly in the bank accounts of people, encouraging them to spend.

Some of this money has found its way into stock markets all around the world, including India, driving stock prices way beyond what the earnings of companies justify. The foreign institutional investors invested a whopping $37.03 billion in Indian stocks in 2020-21, the highest they have ever invested. The next best being $25.83 billion in 2012-13.

This sent stock prices soaring with the Sensex, India’s most famous stock market index, gaining 68% in 2020-21. In fact, the market capitalisation of all BSE listed stocks (not just the 30 Sensex stocks) went up by Rs 90.82 lakh crore in 2020-21.

The poor don’t buy stocks, the rich do. The rally in the stock market has benefitted them tremendously, making them richer. In 2019-20, investment in shares and debentures (which includes mutual funds), despite all the hype, formed a minuscule 3.39% of the overall Indian household financial savings. In 2020-21, this would have definitely gone up, but given its low base it would have still formed a very small part of the overall financial savings of Indian households.

As per the 10th Edition of Hurun Global Rich List 2021, India added 55 new dollar billionaires in 2020, with the total number of billionaires in the country going up to 177, a 45% jump in the number of billionaires in comparison to 2019. If one looks at the list of the richest Indian billionaires, most of their wealth is in the stock market. And with stock markets rallying big time in 2020-21, their wealth has gone up.

2) Like the central banks of the rich world, the Reserve Bank of India (RBI) also joined the money printing party and printed Rs 3.6 lakh crore between the beginning of March 2020 and the end of March 2021. This has primarily been done in order to drive down interest rates and help the government borrow at lower interest rates. The central government borrowed Rs 12.8 lakh crore last year and is expected to borrow Rs 12.06 lakh crore in 2021-22.

While money printing helps the central government borrow at lower rates, it hurts the middle class and the poor, who invest in fixed deposits and other forms of fixed income investments to save money. It needs to be remembered that most Indians save by investing in fixed deposits, small savings schemes, provident and pension funds and life insurance. In 2019-20, 84.24% of the household financial savings were made in these financial instruments. Low interest rates largely mean lower returns from these investments. 

In the last two years, the average interest rate on bank term deposits (fixed deposits, recurring deposits, etc.) of more than one year has come down dramatically. It was at 7.5% in March-April 2019. In March 2021, it stands at 5.5%. A bulk of this fall has happened from the beginning of 2020. Recently, the government had majorly cut the interest rates on small savings schemes for the period April to June. Nevertheless, it reversed the decision overnight, probably because of the assembly elections that were still on. It is now expected that the government will cut the interest rate on small savings schemes for the period July to September. 

Lower interest rates, hurt the middle class and the poor especially when the rate of inflation is as high as the interest rates on offer.

The money printing by the RBI to drive down interest rates is likely to continue in the months to come. The Indian central bank is expected to print Rs 1 lakh crore during April to June . This means that bank interest rates will continue to remain low, continuing to hurt the poor and the middle class.

3) While the Indian economy is expected to contract during 2020-21, data from Centre for Monitoring Indian Economy (CMIE) shows that the listed corporates (both financial and non-financial) have made their highest profits ever during the period July to September 2020 and October to December 2020.

As Mahesh Vyas of the Centre for Monitoring of Indian Economy pointed out in a recent piece: “In the December 2020 quarter, the net profit of listed companies exceeded…the record profits of September 2020.” The net profit during the quarters stood at Rs 1.51 lakh crore and Rs 1.53 lakh crore, respectively. These were the highest quarterly profits ever made by listed Indian corporates. 

This means that owners of these businesses have grown richer and so has the top management of these companies given that they own employee stock option plans and benefit from the dividends paid by the companies every year.  

But how did listed Indian corporates make their highest profits ever, while the economy was contracting? The net sales of the non-financial companies, which are a bulk of the listed corporates, fell by 10.4% in the quarter ending September and by 0.9% in the quarter ending December, in comparison to a year earlier, but the companies still made record profits. This happened primarily because the companies were able to drive down their operating expenses.

In the quarter ending March 2020, the operating expenses or the cost of running a business, made up 91.1% of their sales. In the quarters ending September 2020 and December 2020, the operating expenses amounted to 81.4% and 82.8% of the sales, respectively.

In simple English, the companies slashed employee expenses and they renegotiated their contracts with their suppliers and contractors, to drive down their costs. The larger businesses benefitted in the process  at the cost of the smaller ones.

Of course, if a small company gets paid a lower amount of money from a large company, it also has to renegotiate the money it is paying to its employees and suppliers. This also leads to job losses as smaller companies then need to fire employees in order to cut costs and continue to stay viable.

This has played out for the last one year and continues to play out now as well, with the second wave of covid spreading. It is not easy to put a number to this phenomenon, but that does not mean that this is not happening or is not important.

4) Data from the Centre of Monitoring Indian Economy shows that the size of the labour force between January 2020 and March 2021, has shrunk by 1.66 crore. This when the size of the working age population or the population greater than 15 years of age has increased by 2.88 crore during the same period.

What this means is that many individuals who can’t find jobs, have stopped looking and simply dropped out of the workforce. To be counted as a part of a labour force, an individual needs to be either employed or unemployed and be looking for a job.

The sheer size of numbers here tells us that it is the poor who are dropping out of the workforce, giving up on job search. Also as I have discussed in the past, women have faced the brunt of India’s unemployment problem.

5) The rise of the internet and the availability of cheap broadband has ensured that the need to have all hands on the deck is no longer there.

Of course, this does not mean that everyone can work from home. The working class has faced the brunt of the crisis. As Scott Galloway writes in Post Corona – From Crisis to Opportunity: “Most working-class people… can’t do their jobs at home, since they are tied to the store, warehouse, factory, or other place of work.”

People working in factories, hotels, bank branches, hospitals, real estate projects, mom and pop shops, emergency services, delivery services, etc., or driving cabs for that matter, need to turn up at their places of work and job sites every day.

Also, extended working from home, will end up having other major economic consequences. Other than permanent employees, every office has office maintenance jobs which are not on the rolls of the company. Most large offices have canteens run by a contractor. Some companies offer pick up and drop facilities to their employees.

This is how services companies create low-skilled and semi-skilled jobs. Around many large office complexes there are tapris (very small shops) selling tea, coffee and food. Further, the app cab drivers and normal taxi drivers, have already seen their business go down.

Working from home has already hit people in these professions hard. Again, while it is not easy to put a number to this phenomenon, that does not mean that this is not happening or is not important.

6) Given these factors, it is hardly surprising that many people have dropped out of the middle class. A Pew Research centre analysis found that “the middle class in India is estimated to have shrunk by 32 million in 2020 as a consequence of the downturn, compared with the number it may have reached absent the pandemic.”

This accounted for three-fifths of the global retreat in the number of people in the global middle class (defined as people with incomes of $10.01-$20 a day).

While the number of people dropping out of the middle class is high, the increase in the number of poor is shocking beyond belief. Their number is “estimated to have increased by 75 million because of the COVID-19 recession.” This also accounts for around three-fifths of the global increase in poverty.  

In fact, this is something that Nobel Prize winning economist Angus Deaton confirms in a recent research paper, where he points out:

“China did better than almost all other countries, while India did worse. China’s 1.4 billion people experienced few deaths and growth in per capita income, which took them closer to the richer countries of the world and decreased (weighted) global inequality. India’s 1.4 billion people experienced many more deaths, as well as a large drop in income, which increased (weighted) global inequality.”

Of course, with the second wave of covid starting, all this is likely to continue. One point that we need to consider here is the ability of individuals to make a living in the years to come. School and college students are being taught digitally since the last one year. It needs to be considered here that not every student has access to a computer. Further, even if there is access to a computer, it might have to be shared among multiple siblings. Then there is the question of internet speed, electricity and so on.

The quality of education being delivered digitally will impact the earning capacity of many middle class and poor students, in the years to come.

In short, like the disease itself, the negative economic effects of covid, especially among the poor and the middle class, will continue to be felt in the years to come. 

Ten Things to Remember While Buying a Home

This piece emerged out of a couple of WhatsApp conversations I had over this weekend, along with a few emails that I have received over the last few months.

From these conversations and in trying to answer the emails, I have tried to develop a sort of checklist of things to keep in mind, while buying a home. Of course, as I have said in the past, when it comes to personal finance, each person’s situation is unique, and which is why it’s called personal finance.

Nevertheless, there are a few general principles that can be kept in mind. Also, this list like all checklists, is complete to the extent of things I can think of.

So, let this not limit your thinking and the points that you need to keep in mind.

Here we go.

1) If you are buying the house as an investment (not in my scheme of things, but nonetheless), please learn how to calculate the internal rate of return on an investment. Believe me, you will thank me for the rest of your life.

Also, keep track of the cost of maintaining a house and other costs that come with it. Only then will you be able to know the real rate of return from investing in a house.

Otherwise, you will talk like others do, I bought it at x and I sold it at 2x, and get lost in the big numbers, thinking you have made huge returns. While this sort of conversation sounds impressive, it doesn’t mean anything.

2) Don’t buy a house to generate a regular income. The home rentals in the bigger cities have come down post covid. Even if they haven’t, the rental yields (rent divided by market price) continue to be lower than what you would earn if you had that money invested in a fixed deposit (despite such low interest rates).

Of course, the corollary here is that as a landlord you choose to declare your rental income and pay an income tax on it. Many landlords prefer to be totally or partially paid in cash and choose not to pay any income tax. 

3) From what I have been able to gather from my conversations, people in a few cities are still flipping houses. In fact, the trick is to invest before a project gets a RERA approval and then sell out as soon as the approval comes through. This reminds me of the old days when the builder never really knew the people who ended up living in the homes that had been built.

Anyway, if you are flipping homes, do remember that many people caught in the real estate shenanigans of 2009 to 2011, are still waiting for their homes. Many of them are investors. So, if you are flipping homes, do take some basic precautions like not betting your life on any one deal. As the old cliche goes, don’t put all your eggs in one basket. 

4) Also, do remember that you are an individual and the builder is a builder. While many stories of David beating the Goliath have come out in the media, many more stories of Goliaths having crushed Davids, never made it to the media.

It was, is and will remain, an unequal fight. Do remember that. For a builder this is the life that he leads, you, dear reader, on the other hand, have many other things to do. And you are looking for a home to live in, not a builder to take on. So, be careful.

5) One question that I often get is, which bank/housing finance company should I take a loan from. I don’t think this should matter much. Most big banks and housing finance companies charge similar interest rates. As we say in Hindi, bus unees bees ka farak hai.

So, go to the financial institution which seems to be the most convenient to you.

6) One story being pushed in the media is that you should buy a home now because interest rates are low. Among many dumb reasons for buying a home, this is by far the dumbest. Interest rates on home loans are not fixed but floating interest rate loans. If the cost of borrowing for banks and housing finance companies goes up, so will the interest rate on floating rate home loans.

No one can predict which way interest rates will go in the medium to long-term (That doesn’t stop people from trying. Many economists build careers around this). So, currently, the interest rate on a home loan is around 7% per year or thereabouts. If you are buying a home, make sure that you have the capacity to keep repaying the EMI even at an interest rate of 10% per year. This is very important.

7) How do you structure the amount you pay for the home? What portion of the home price should be a downpayment? What portion of the home price should be your home loan? These are very important questions. The answer varies from person to person. Nevertheless, the one general principle I would like to state here is that don’t dip into your retirement savings as far as possible to pay for the downpayment.

It might seem like a good idea with retirement far away and your parents encouraging you to do so because they did the same and it worked out fine for them. Nevertheless, do remember that on an average the current generation will live longer than its parents, and the family support that your parents had or will have in their old age, you may never have.

8) Also, from the point of diversification, it makes sense not to bet all your savings on making the downpayment for a home. Do remember, no job or source of income is safe these days. Further, do ensure that at any point of time you have the ability to pay six to 12 EMIs, without having a regular source of income.

Other than being able to continue repaying your EMI, it will also help you have some time to look for a job or another source of income, if the current one goes kaput.  Money in the bank, buys you time, which helps you make better decisions in life.

And most importantly, if your EMI is more than a third of your take home salary or monthly income, rest assured you are in for trouble on the financial front.

9) If you want to buy a home to live in, go for a ready to move in home. I have seen completion dates for RERA approved projects going beyond 2025 in Mumbai.

The other advantage with a ready to move in home is that some people are already living there and if there is some problem with the building (not a huge deal in India) then there are many more people who have a stake in solving the problem (as convoluted as this might sound). As always there is strength in numbers. 

10) Finally, be sure why you are buying a home. You want to live close to your place of work. You want your child to have some stability in life. You don’t like the idea of moving homes, every couple of years. And so on.

But please don’t buy a home because your parents, in-laws, extended family or relatives, expect you to do so and it gives them something to chat up on or some meaning to their lives. These are financially difficult times and making the biggest financial decision of your life to impress others, isn’t the smartest thing to do possibly.

To conclude, as I said in the beginning this isn’t a complete list by any stretch of imagination. Each person’s situation is unique. Also, you may not end up with a tick mark on all these points mentioned above and you may still end up buying a home. But the advantage will be that you will know clearly where you are placed in the financial scheme of things.

The points essentially help you think in a structured way to arrive at a decision. They do not make the decision for you. That you will have to do.

PS: Don’t know if you noticed that the terms house and home, have been used at different places. Hope you appreciate the difference between the two.