The Complexity of Money

indian rupees

Vivek Kaul

Over the last two weeks I have come to realise that people share a very complex relationship with money. A friend of mine who makes more than Rs 50 lakh a year, owns two homes, a couple of cars, and holidays abroad in exotic locations ever year, has constantly been cribbing about the 10% increment he got after the yearly performance appraisal.
“So were you expecting more?” I asked him. “Not really. The company hasn’t been in a great shape, so even 10% is very good. The average increments this year have only been around 6-7%,” he replied.
“So then what is the issue?” I asked.
“Well you know,” he said, such and such person, “who I tend to compete with got an increment of 11%.” This difference of 1%(actually I should be saying 100 basis points, but that sounds too technical) had been bothering him no end.
I tried telling him that his salary was nearly 50% more than the other person he was talking about. “So in absolute terms your increment is greater than his,” I explained.
“Yeah. But it would have been better if I made more in percentage terms as well,” my friend replied.
What this little story tells us is that people share a complex relationship with money. How else do you explain what my friend earning more than Rs 50 lakh per year was going through? There is no doubt that money motivates. An experiment carried out in 1953, showed just that. As Margaret Heffernan writes in 
Wilful Blindness – Why We Ignore the Obvious At Our Peril “Patients were asked to hang on horizontal bars for as long as they could; most could take it for about 45 seconds. When subjected to power of suggestion and even, in some cases, hypnosis, they could stretch to about 75 seconds. But when offered a five dollar bill the patients managed to hang from the bar for 110 seconds.”
So money does motivate people to work longer. And in many organisations that is equivalent to working harder. But as Heffernan puts it “money has a more complex influence on people than just making them work longer.”
Experiments carried out by behavioural psychologist Dan Ariely suggest that the less appreciated we feel our work is, the more money we want to do it. Ariely gave research participants a piece of paper that was filled with random letters. The participant were divided into three groups, and had to find pairs of identical letters on the sheets of paper given to them and mark them out.
While returning their papers, the the participants in the first group wrote their names on the sheets of paper and handed it back to the experimenter. He took the sheet, looked it over, said “Uh huh” and put it in a pile.
The participants in the second group did not write their names on the sheets of paper. The experimenter took their sheets without looking at them and without saying anything. He placed them in a pile. The sheets handed over by the participants of the third group were immediately shredded, as soon as they handed them over.
In order to be a part of another round of the experiment, those in the third group whose sheets were shredded wanted twice the amount of money in comparison to those in the first group, whose sheets were simply put in a pile. Those in the second group whose work was saved but ignored wanted as much as participants of the third group whose sheets were shredded.
As Ariely put in a blog on “Ignoring the performance of people is almost as bad as shredding their effort before their eyes.” And when that happens people want to be paid more.
The next question that crops up is that does paying people more money make them work smarter?This question is of utmost importance given the fact that some of the highest paid people in the world brought it to the verge of economic collapse a few years back in late 2008.
Ariely and a group of researchers tested this out in an experiment they carried out in India (to control the costs involved in running the experiment). In this experiment, research participants were asked to play memory games and assemble puzzles while they were throwing tennis balls at a target. One third of the participants were promised one day’s pay, if they performed well. Another one third were promised two weeks pay. And the final third were promised five months pay (the real reason behind conducting the experiment in India), if they did well.
The results were surprising. Those who were promised a day’s pay and two weeks pay as a financial reward, performed equally well. But those who were offered five months pay, performed the worst.
Ariely explained this surprising finding in an article he wrote for 
The New York Times. Very high financial rewards act as a double edged sword, Ariely wrote. “They provide motivation to work well, but they also cause stress and preoccupation with the reward that can actually hurt performance.”
Of course this in no way means that people don’t want to paid more, even though the prospect of earning more money starts hurting their performance beyond a point. Also, more money doesn’t always make people happier.
Research carried out by economist Angus Deaton and psychologist Daniel Kahneman (who won the Noble Prize in economics) in 2010 found that more money makes people happier upto an income of $75,000 per year. As Kahneman writes in 
Thinking, Fast and Slow “The satiation level beyond which experienced well being no longer increases was a household income of $75,000 in high cost areas (it could be less in areas where the cost of living is lower). The average increase of experienced well-being associated with incomes beyond that level was precisely zero…Higher income brings with it higher satisfaction, well beyond the point at which it ceases to have any positive effect on experience.”
So earning more money is not always directly proportional to greater happiness. But then why does money continue to bother people (as we saw in my friend’s case) so much? Nassim Nicholas Taleb perhaps has an explanation for it in 
Anti Fragile “The worst side of wealth is the social association it forces on its victims, as people with big houses tend to end up socialising with other people with big houses.”
Beyond a point the need for more money is an essential part of being seen at the top of the rat race. More money is also equated with higher intelligence and leads to greater respect from the society at large. As John Kenneth Galbraith, one economist who thoroughly deserved a Nobel prize, but never never got it, put it in 
A Short History of Financial Euphoria: “Individuals and institutions are captured by the wondrous satisfaction from accruing wealth. The associated illusion of insight is protected, in turn, by the oft-noted public impression that intelligence, one’s own and that of others, marches in close step with the possession of money.” Hence, money after a point becomes a measure of intelligence and success and that creates problems of its own.
The article originally appeared in the Wealth Insight magazine dated August 1, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Don’t count gold out: it may be the last man standing

goldVivek Kaul
At the very outset let me confess that this has been a difficult piece to write. When everyone around you is shouting the same thing from their rooftops, it is very difficult to say something which happens to be exactly the opposite.
Gold over the last one week has turned into a four letter word. Last Thursday (i.e. April 11, 2013) the closing price of the yellow metal was $1564.2 per ounce (one troy ounce equals 31.1 grams). A week later as I write this gold is selling at around $1375 per ounce. The price has fallen by around 12.1% over the period of just one week.
And this fall has suddenly turned investment experts (at least the ones who appear on television and write and get quoted in newspapers) all bearish on gold. They have been giving different reasons to stay away from it. But if they were so confident that the price of gold would fall, as it has, why didn’t they warn the investors before fall? Everything is obvious after it has happened.
But as the Nobel Prize winning economist Daniel Kahneman writes in Thinking, Fast and Slow “The ultimate test of an explanation is whether it would have made the event predictable in advance”. Those offering the explanations now, clearly did not predict the massive and sudden fall in price of gold. What is interesting is that before the price of gold started to fall the Bloomberg consensus forecast for gold by the end of 2013 was at $1752 per ounce. Hence, the broader market did not see this coming.
So why is the price of gold falling? One conspiracy theory doing the rounds has the investment bank Goldman Sachs at the heart of it. As John Cassidy 
of the New Yorker magazine puts it “Last December, Goldman’s economic team turned bearishon gold, saying the multi-year upward trend in gold prices “will likely turn in 2013.” And last Wednesday,(i.e. April 10, 2013) the bank’s commodities team advised its clients to start shorting gold.” Short selling refers to a scenario where investors borrow gold and sell it with the hope that as the price falls they can buy it back at a lower price and thus make a profit.
Goldman Sachs was not the only big bank turning negative on gold. On April 2, the French bank, Societe Generale, the also issued a report titled 
The end of the gold era, and turned bearish on the yellow metal.
This many believe is a conspiracy on part of the big banks to drive down the price of gold. As Paul Craigs, a former assistant US Treasury Secretary 
told Kings World News “This is an orchestration. It’s been going on now from the beginning of April…Brokerage houses told their individual clients the word was out that hedge funds and institutional investors were going to be dumping gold and that they should get out in advance. Then, a couple of days ago, Goldman Sachs announced there would be further departures from gold. So what they are trying to do is scare the individual investor out of bullion. Clearly there is something desperate going on.”
Nevertheless, conspiracy theories are easy to talk about but difficult to prove. There are several other reasons being offered on why the price of gold will continue to fall. A major reason being offered is the improvement in the American economic scenario and that leading to the Federal Reserve of the United States, the American central bank, printing lesser money in the days to come.
The Federal Reserve currently prints $85 billion every month in the hope of reviving the American economy. Societe Generale in its report 
The end of the gold era believes that this will continue till September and come down to $65 billion after that, until being fully terminated by the end of the year.
The Federal Reserve on its part has guided that money printing will come down if it sees a ‘significant improvement in the outlook for employment’. The latest U3 rate of unemployment in the United States for the month of February 2013 stood at 7.6%. U6, a broader measure of unemployment, was at 13.8%. Both numbers have declined from their peaks. U6 touched a high of 17.2% in October 2009, when U3, which is the official unemployment rate, was at 10%. In December 2012 U6 stood at 14.4% and U3 was down to 7.8%.
So yes things have improved but they are still far away from being fine. U3 in the pre-financial crisis days used to be at around 5%. Also long term unemployment (where people are out of work for 27 weeks or more) has changed little and is at at 4.6 million or 39.6% of the unemployed people(U3).
(There are various ways in which the bureau of labour standards in the United States measures unemployment. This ranges from U1 to U6. The official rate of unemployment is the U3, which is the proportion of the civilian labour force that is unemployed but actively seeking employment. U6 is the most broad definition of unemployment and includes workers who want to work full time but are working part time because there are no full time jobs available. It also includes “discouraged workers”, or people who have stopped looking for work because the economic conditions the way they are, make them believe that no work is available for them.)
Another measure of the US economy turning around is the increase in real estate prices. As per the S&P Case-Shiller 20 City Home Price Index, real estate prices have gone up by 8.1% between January 1, 2012 and January 1, 2013. This after falling by 3.9% between 2011 and 2012.
One of the reasons the Federal Reserves prints money is to ensure that there is enough money going around in the financial system and interest rates continue to remain low. This ensures that people borrow and spend more. Hence, the low interest rates have helped in reviving the real estate sector in the United States.
But lets think for a moment on what will happen if the Federal Reserves stops printing money? Interest rates are likely to go up. People will take on fewer home loans to buy homes and that in turn will mean the real estate sector will go back to the dumps that it was in. So will the Federal Reserve take the risk of going slow or stopping money printing? Also, economic growth for the three months ending December 2012, was at -0.1%. So much for the American economy improving.
In this scenario it is unlikely the Federal Reserve will go stop money printing anytime soon, even though its Chairman Ben Bernanke, its Chairman, may keep dropping hints about doing the same.
As Stephen Leeb writes on “The Federal Reserve also wants to beat up on gold, via its drumbeat, suggesting that liquidity may be drying up and monetary easing might end soon. Never mind that recent economic data, on the whole, appears much weaker than expected, or that any halt to U.S. monetary easing could only follow higher inflation and commodity prices.
And as long as United States keeps printing money gold will remain a good investment bet, its current huge fall notwithstanding.
The last bull market in gold ended soon after the legendary Paul Volcker took over as the Chairman of the Federal Reserve in August 1979. As
 economist Bill Bonner wrote in a recent column “Paul Volcker replaced G. William Miller as chairman in August 1979. A loose money policy became a tight money policy. Volcker jacked up interest rates…But what’s the Fed doing now? Has it reversed course? Has Ben “Bubbles” Bernanke been replaced with a tough-as-nails inflation fighter? Has the Federal Open Market Committee(FOMC) vowed to stop printing money? Has the loosest monetary policy in US history given way to a tight policy?”
And the answer on all the above counts is a big no.
Moving on, another reason given for the gold price falling is that Cyprus is selling gold worth $500 million in order to raise cash to pay its debt. As Peter Schiff 
president of Euro Pacific Capitalwrote in a recent column “Concerns quickly spread that other heavily indebted Mediterranean countries with large gold reserves like Greece, Portugal, Italy and Spain would follow suit. The tidal wave of selling would be expected to be the coup de grace for gold’s glory years.”
The stronger countries of the euro zone (the countries which use euro as their currency) led by Germany have been rescuing the heavily indebted weaker ones for a while now through multi billion dollar rescue packages. In case of Cyprus the rescue came with terms and conditions which included seizing a part of its banking deposits and selling its gold.
This experts feel is likely to be repeated in the days to come with other countries as well. What they forget is that if the euro zone makes a habit of seizing deposits and selling gold, countries are likely to opt out of the euro and move onto their own currencies. As James Montier writes in a recent research paper titled 
Hyperinflations, Hysteria, and False Memories “If one were to worry about hyperinflation anywhere, I believe it would have to be with respect to the break-up of the eurozone.” Another reason to keep holding onto gold. If there is even a slight whiff of a euro breakup gold is going to fly.
Another logic being bandied around (especially by some of the Indian analysts) is that with the price of gold falling the investment demand for gold is likely to go down. Fair point. But a falling gold price can also push up the jewellery demand for gold. In 2011, gold jewellery consumed around 1972.1 tonnes of gold. This was down to 1908.1 tonnes in 2012, as prices rose.
A slowdown of Chinese growth has been offered as another reason for gold prices falling. As Cassidy of New Yorker writes “Many of today’s 
news storiesabout the gold price emphasized disappointing economic figures from China, which showed economic growth slowing down slightly in the first three months of 2013. China is a big consumer of virtually all natural resources, and gold was but one of many commodities that fell sharply after the report from Beijing.”
But this theory doesn’t really hold either. “The purported slowdown in the Chinese economy was very slight. First quarter growth came in at 7.7 per cent, compared to 7.9 per cent in the last three months of 2012. Allowing for the vagaries of the statistics, the difference is inconsequential,” writes Cassidy.
Also the gold bears who have suddenly all come out of the closet are not talking about what is happening in Japan. Japan has decided to double its money supply by printing yen to create some inflation. The hope is hat all this new money will create some inflation as it chases the same amount of goods and services, leading to a rise in prices. When people see prices rising, or expect prices to rise, they are more likely to buy goods and services, than keep their money in the bank. This is the logic. And when this happens businesses will do well and so will the overall economy.
A side effect of this money printing which is expected to be thrice as large as that in the United States, is the Japanese yen losing value against other major currencies because a surfeit of yen is expected to flood the financial system.
A weak yen also makes Japanese exports more competitive. (
For a detailed argument click here). But it puts countries like Taiwan, South Korea, China and even Germany in a spot of bother. As Societe Generale analysts write in a report titled How to make profits from the Sushi-style QE in Japan “In effect Korea, Taiwan and China are losing competitiveness while Japan regains it.”
Printing money is not rocket science, if Japan can print money, so can the other countries in order to weaken their currency and thus keep their exports competitive. Hence there are chances of a full fledged global currency war erupting. And this is another reason to own gold.
The final argument against gold has been that central banks have been printing money for more than four years now. But all that money has not led to high inflation, as the gold bulls had been predicting that it would. So central banks have managed to slay the inflation phantom. “After more than four years of quantitative easing in the United States, the inflation rate, as measured by the consumer price index, is running at just two per cent…In Britain, where the Bank of England has followed policies similar to the Fed’s, the inflation rate is 2.8 per cent—a bit higher, but hardly alarming,” writes Cassidy.
But just because money printing hasn’t led to inflation till now doesn’t mean we can rule out that possibility totally. There is huge historical evidence to the contrary. Let me quote Nassim Nicholas Taleb here, something that I have done in the recent past. As Taleb writes in 
Anti Fragile “Central banks can print money; they print print and print with no effect (and claim the “safety” of such a measure), then, “unexpectedly,” the printing causes a jump in inflation.” James Rickards author Currency Wars: The Making of the Next Global Crises says the same thing “They can’t just keep printing…All major central banks are easing…Eventually so much money will be printed that this will lead to inflation.”
And in a situation like this, gold will be the last man standing.
To conclude, this is how I feel about gold. I maybe right. I maybe wrong. That only time will tell. Hence its important to remember here what John Kenneth Galbraith, an economist who talked sense on most occasions, once said: “
The only function of economic forecasting is to make astrology look respectable.”
Given this it is important that one does not bet one’s life on gold going up. An allocation of not more than 10% in case of a conservative investor is the best bet to make. And if you are already there, stay there.

The article originally appeared on on April 18, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

One Bofors got Rajiv. But will UPA’s bag of scams hurt Cong?

Vivek Kaul

It was May 22, 1991. My summer holidays were on. And I was at my grandfather’s duplex flat in South Delhi. I had woken up very late. It must have been around 10.30am. As soon as I came down to the lower level, an uncle who has since become an Art of Living guru, told me that Rajiv Gandhi had been killed late last night( he didn’t use the word assassinated, that I remember very clearly).
Given his penchant for practical jokes, I thought that he was pulling a fast one on me, early in the morning. Those were the days before cable television became a part of our everyday lives, and so I picked up the Hindustan Times newspaper, my grandfather used to subscribe to, in order to verify whether he was really speaking the truth.
And as it turned out my uncle wasn’t lying. He wasn’t playing a practical joke. Rajiv Gandhi had been assassinated by a human bomb at 10.10pm on May 21. “Bofors killed him,” was a random remark I heard during the course of that day. But since summer holidays were on I had better things to think about than Bofors and how it killed Rajiv Gandhi.
This entire incident came back to me while reading an excerpt of an upcoming book titled Decoding Rahul Gandhi written by Aarthi Ramachandran. As she writes “Sonia writes in Rajiv that Rahul would telephone from America, “consumed with anxiety” about his father’s security arrangements. She says Rajiv’s specialised security cover was withdrawn after he became leader of the opposition and it was replaced with a force not trained for this specific task. Rahul, who had gone to the US in June 1990 to start his undergraduate studies at Harvard University, insisted on coming back to India at the end of March 1991 for his Easter break. He accompanied his father on a tour of Bihar and was “appalled to witness the lack of elementary security around his father”. Sonia says that before going back to the US, Rahul had told her that if something was not done about it, he knew he would soon come home for his father’s funeral.”
Something did happen to Rajiv Gandhi a couple of months later and Rahul had to comeback from Harvard for the funeral.
Rajiv Gandhi had taken over as the Prime Minister of India after the assassination of his mother Indira by her bodyguards. Riding on his honest image and sympathy for his mother the Congress party got around half the votes polled and more than 400 seats of the total 515 seats in the Lok Sabha.
In 1987, the Bofors scandal came into light and tarred the honest image of Rajiv Gandhi. Bofors AB, a Swedish company, had supposedly paid kickbacks to top Indian politicians of around Rs64 crore to swing around a $285million contracts for Howitzer field guns in its favour.
The impact of this on the Congress party was huge. It lost the 1989 election to an alliance of Janta Dal and Bhartiya Janta Party. Rajiv Gandhi had to become the leader of opposition. His security was downgraded and he was assassinated two years later. So in a way Bofors killed Rajiv Gandhi.
But if one takes into account the size of the scam at Rs 64 crore it was hardly anything in size to the scams that have come into light over the last few years. The coal scam. The telecom scam. The commonwealth games scam. The Adarsh Housing Society scam. The Devas Antrix scam. And so on.
Each one of these scams has been monstrous in proportion to the Rs 64 crore Bofors scam. There has been a surfeit of scams coming to light since in the second tenure of the Congress led United Progressive Alliance started. These scams would have been on for a while but they have been coming to light only over the last couple of years.
The Canadian American Economist John Kenneth Galbraith has an explanation for this phenomenon in his book The Great Crash 1929. “At any given time there exists an inventory of undisclosed embezzlement. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. In good times people are relaxed ,trusting, and money is plentiful. … Under these circumstances the rate of embezzlement grows, the rate of discovery falls o , and the bezzle increases rapidly. In depression all this is reversed. … Just as the (stock market boom) accelerated the rate of growth (of embezzlement), so the crash enormously advanced the rate of discovery.”
In an Indian context the economy and the stock market were booming between 2004 and 2008. 2009 was a bad year. Things recovered a bit in 2010. And have been looking bleak since the middle of 2011. And it is since then when all these scams have been coming to light. Galbraith’s explanation clearly works here. When things were good the scams were being created and as things turned around, all the scams have been coming to light.
But the bigger question here is will the people of this country remember about all these scams (and more that may be highlighted in the days to come) by the time the 2014 Lok Sabha elections come around? One Bofors scandal running into a few million dollars was enough to put Rajiv Gandhi out of power and even take his life in the end. But will all these billion dollar scandals carry enough weight in the days to come? Or will they just become background noise, leading to people not bothering about them, while deciding who to vote for in 2014?
As Umberto Eco (an Italian author) and Jean Claude Carriere (a french scriptwriter) write in This is Not the End of the Book: “But an abundance of witnesses isn’t necessarily enough. We witnessed the violence inflicted on Tibetan monks by the Chinese police. It provoked international outrage. But if your screens kept showing monks being beaten by police for months on end, even the most concerned and active audience would lose interest. There is therefore a level below which, news pieces do not penetrate and above which they become nothing but background noise.”
Isn’t India going through the same situation right now when it comes to scams? There is a race on among various sections of the media to highlight more and more scams (and rightly so). News channels talk about scams all day long. The front pages of newspapers are full of it. And so is the social media. So will a surfeit of scams make us immune to them?
I don’t have hard and fast answers to the questions that I have raised here. But I do have this lurking feeling that all this scam talk everywhere might just end up benefitting the Congress led UPA government, rather than hurting it. Or to put it in a better way it might not hurt the Congress led UPA as much as it should.
(The article originally appeared on on September 4,2012.
(Vivek Kaul is a writer and can be reached at [email protected])