Gabbar’s motto would’ve been better than Lata’s song, Mr Das

Shaktikanta Das, the governor of the Reserve Bank of India (RBI), projected optimism in the latest monetary policy by reminding us of the great Lata Mangeshkar song “aaj phir jeene ki tamanna hai (Now, again, I desire to live),” from the movie Guide.

The eternal message of optimism needed to be projected in order to defend the monetary policy committee’s decision to not raise the repo rate or the interest rate at which the RBI lends to banks. The repo rate has some impact on the interest rates at which banks carry out their lending. When a central bank raises the repo rate it’s essentially signalling that it is getting worried about inflation or the rate of price rise.

The RBI under Das started cutting the repo rate in February 2019, when it was at 6.5%. By May 2020, it was cut to 4%, which is where it has stayed since. So, the monetary policy has been in what economists like to call accommodative for close to two years. Along with cutting the repo rate, RBI also printed money and flooded it into the financial system by buying bonds.

The idea, in the aftermath of the covid pandemic, understandably, was to drive down interest rates, with the hope that people would borrow and spend more, and industries would borrow and expand, and the government would be able to borrow at low interest rates.

But the times are changing now, with inflation becoming a global phenomenon. As per the February 5th-11th issue of The Economist global inflation now stands at 6%. Retail inflation in the United States in January stood at 7.5%, the highest since February 1982. In December, the retail inflation in the Euro Area was at 5%, the highest it has ever been since data started to be collected in January 1997.

Not surprisingly, central banks all across the world have been raising interest rates. The Bank of England has already raised interest rates twice. The Federal Reserve of the United States will have to soon start raising rates to rein in the four-decade high retail inflation.

Retail inflation in India in December 2021 was at 5.6%, lower than 6% level above which RBI starts to get uncomfortable. Interestingly, the RBI believes that inflation during the next financial year will be at 4.5%. This, given the evidence on offer and the fact that we live in a highly globalized world, seems a tad unlikely.

Oil prices continue to remain high with the price of Brent crude being at $90 per barrel. Also, the supply chain problems, which had cropped all across the world due to the spread of the covid pandemic, haven’t gone away. Then there is the joker in the pack, on which, as always, a lot depends in the Indian case: a normal monsoon. As Dipanwita Mazumdar, an economist at the Bank of Baroda, puts it: “Another upside risk to inflation is the possibility of a below normal monsoon. Statistically, with six successive monsoons, there could be a sub-optimal one this year.”

Further, we have close to 6% retail inflation despite consumer demand at an aggregate level continuing to remain muted. Due to this, companies have been unable to pass on the increase in the cost of their inputs to the end consumers. This can be gauged from the fact that from April to December 2021, the wholesale inflation was at 12.5%, whereas retail inflation was at 5.2%. As Das put it in his statement: “The transmission of input cost pressures to selling prices remains muted in view of the continuing slack in demand”.

The lack of consumer demand has held retail inflation down. Nonetheless, companies have started raising prices as consumer demand has started to pick up. As the RBI’s monetary policy statement put it: “The pick-up in… bank credit, supportive monetary and liquidity conditions, sustained buoyancy in merchandise exports… and stable business outlook augur well for aggregate demand.”

This, in an environment of continued high oil prices, supply chain constraints and more expensive imports, implies higher retail inflation in the months to come, which means the RBI should have started raising the repo rate by now. But it hasn’t.

So, why has the RBI maintained a status quo? It’s the debt manager of the government. The government’s gross borrowing stood at Rs 12.6 lakh crore in 2020-21. It will end up borrowing Rs 10.5 lakh crore in 2021-22, with plans of borrowing Rs 15 lakh crore in 2022-23. Given this, the RBI has to help the government to borrow at low interest rates.

To cut a long story short, the RBI is not bothered about retail inflation, controlling which is its primary mandate. It’s more interested in ensuring that the government is able to borrow at low interest rates.

Finally, Das just quoted one line from the beautiful Lata song written by Shailendra and composed by SD Burman. The next line of the song goes like this: “aaj phir marne ka iraada hai ((Now, again, I desire to die)).” The translation doesn’t do justice to Shailendra’s writing which metaphorically captures the tormented state of mind of a married woman who has suddenly found love in another man, at once feeling both exhilaration and guilt and dejection.

The binaries in economics are never as strong as life and death, nonetheless, they do exist. It’s just that RBI under Das likes to be an optimistic cheerleader rather than an institution which should realistically assess the state of the Indian economy.

Hence, as far as projecting eternal optimism goes, Das should have been quoting the Gabbar Singh dialogue from Sholay written by Salim-Javed: “Jo darr gaya samjho mar gaya (the one who is afraid is dead),” and not Shailendra, SD Burman and Lata’s song.

(A slightly different version of this column appeared in the Deccan Herald on February 13, 2022.)

How RBI Generated a ₹ 99,122 Crore Surplus for the Government

On May 21, the central board of directors of the Reserve Bank of India (RBI) approved the transfer of Rs 99,122 crore as surplus to the central government for the accounting period of nine months ending March 31, 2021 (July 2020-March 2021). 

This transfer to the government has raised a few issues. Let’s look at them point wise. But before we do that, I want to make a disclaimer here. This is a complicated topic and to make sure that I am able to explain it in simple English, I have left out a few details. At the cost of repetition, the idea is to explain the issues at hand, than get all the details right. So, to everyone who understands this inside out, apologies in advance.

Here we go. 

1) The RBI’s accounting year was from July to June, different from the April to March period that the central government follows. From 2021-22 onwards, the accounting year of the RBI will be the same as that of the government. Given this, the last accounting year of the RBI was for the period of nine months from July 2020 to March 2021, as it moved to the government’s accounting year.

Despite this shortening in the accounting year, the RBI surplus to the government has jumped big time. The surplus transferred to the government from July 2019 to June 2020, had stood at Rs 57,128 crore, for a period of full 12 months. Clearly, there has been a huge jump in the surplus transferred to the government, once we consider the fact that the last accounting year of the RBI was just nine months long.

2) The annual budget of the central government presented by the finance minister Nirmala Sitharaman on February 1, had assumed that the central government would earn Rs 53,511 crore as way of dividend/surplus from the RBI, the nationalised banks and the financial institutions (read the Life Insurance Corporation of India). A few months later, the surplus transferred just by RBI is much more than Rs 53,511 crore. So what gives?

3) Let’s first try and understand how the RBI managed to generate such a huge surplus, which was unexpected (or at least not made public) up until the budget was presented earlier this year. From July 2020 to March 2021, the RBI gross sold a total of $85.2 billion of its foreign exchange.

An accounting change made in 2019, thanks to the Bimal Jalan Committee report, now allows the RBI to pass a part of the profit made from selling foreign exchange, to the government as a surplus. The earlier system was different (for the sake of simplicity we won’t go there).

There is a certain weighted average price at which RBI has bought these dollars over the years. The RBI doesn’t reveal this detail. As per Ananth Narayan, Senior India Analyst at the Observatory Group, this weighted average stood at Rs 55.70, from July 2019 to June 2020.

It would be fair to say the weighted average would be a little higher in the last accounting year, more towards Rs 58-60 to a dollar. The RBI would have sold these dollars, from July 2020 to March 2021, at Rs 72-75 to a dollar, and thus made a profit of around Rs 15 for every dollar sold.

A part of this profit has been passed on to the central government as a surplus. So far so good.

4) While at the aggregate level, everything looks fine, if we start to look at the detailed data, this doesn’t pass the basic smell test. Take a look at the following graph, which basically plots the total gross dollars sold by the RBI every month from July 2020 to March 2021.

Source: Centre for Monitoring Indian Economy. 

The above chart makes for a very interesting reading. Close to 60% of the dollars sold during  the accounting year were sold in the last two months ($50.5 billion of the total $85.2 billion). More than 77% of the dollars sold during the year were sold in the last three months ($65.9 billion of the total $85.2 billion). 

What does this tell us? It tells us that the RBI sold a lot of dollars after the finance minister had presented the budget. And a good chunk of the surplus given to the government was probably thus generated. If I was a gossip columnist, I would have definitely speculated, whether one of the secretaries in the FinMin dialled RBI for more money, around the time the budget was presented.

5) As mentioned earlier, the facts stated above don’t pass the basic smell test. The RBI at various points of time needs to sell dollars in order to manage the dollar rupee exchange rate. While the RBI sold $65.9 billion from January to March, it also bought $61.8 billion during the same period. On the whole, this wouldn’t have made much of a difference in moving the foreign exchange market in a particular direction, when it comes to dollar rupee exchange rate.

Take a look at the following chart, which plots the dollar rupee exchange rate from January 2021 to March 2021.

Source: Yahoo Finance.

As can be seen from the above chart, the dollar rupee exchange rate moved within a narrow  range of Rs 72.4-73.6, for the first three months of 2021.

So what does this really mean? The RBI sold lots of dollars after the finance minister’s budget speech, not because that was what was required in the foreign exchange market, but in order to generate an accounting surplus for a cash-starved government. If I were to put it in very simple terms, the RBI led by Shaktikanta Das, resorted to jugaad.

6) The way things stand the RBI is not allowed to directly finance the expenditure by printing money and handing it over to the government to spend. Hence, over the last couple of years, it has been resorting to different ways to do so. Selling and buying dollars in order to generate an accounting profit is one such way. 

If I were to be slightly flippant here I would ask a rhetorical question – Is RBI a central bank or is it a government sponsored hedge fund?

Another way of financing the government has been printing money and buying existing government bonds from banks and other financial institutions.

While this move does not hand over money to the government directly, it does ensure that the supply of money in the financial system goes up, and the newly created money can be used by banks and financial institutions to buy fresh government bonds. Hence, this is indirect monetisaton of the government’s fiscal deficit or the difference between what it earns and what it spends.

To conclude, while nothing can stop a central bank from printing money, the tactic of selling dollars in order to generate a profit depends on how much the rupee depreciates against the dollar. While the weighted average cost of the dollars that the RBI currently has, is less than Rs 60 to a dollar, it will only rise in the years to come.

Hence, for enough profit to be generated through this route, the rupee needs to depreciate against the dollar. But that’s where atma nirbharta will come in and limit the RBI’s hand. Strong nations have strong currencies, at least that’s the idea in the heads of the politicians who run the current government.

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. 

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.