thenewconstructs’s blog

Imagine that the official length of a meter changed day to day – 80 centimeters today, for example, and 115 centimeters tomorrow. And that every country had its own measure of length – say the meter in India and the yard in the US – and the conversion rate between the yard and the meter again varied from day to day. This confusing jumble is what we have been living with for the past 38 years with one of the most important facets of our lives – money.

Being in a global business where more than 90% of our revenues come from outside India, the company that I run bore the brunt of these vagaries last year. We were suddenly poorer by more than $25 million dollars (almost 10% of our revenues), just because the pound sterling eroded in value against the US dollar. While our revenue in the UK grew in pound sterling (something our UK teams were proud of), it declined significantly in dollar terms (which made our CFO quite unhappy).

Our modern currency and exchange rate system was agreed upon by 44 countries in 1944. All currencies pegged their values against the US dollar, and the US government agreed to exchange dollars for gold at a standard rate of US $35 per ounce. In 1971, President Nixon took the US off the gold standard, leaving every currency literally floating – with no inherent value.

Money, our measure of value, was left with neither constancy nor consistency. Instead of being worth something real – a certain amount of gold – the world’s dollars, pounds, pesos, rupees and other national currencies were worth only was someone was willing to pay for them in another currency.  

That all happens today on the international foreign currency exchange, a vast market that operates around the clock around the world and produces trillions in profits for banks and their traders. Under the guise of providing liquidity and price discovery, banks and other financial institutions set arbitrary values on the different currencies – and then profit by buying and selling currencies as the prices shift up or down.  

Why should a loaf of bread or a textbook cost more in one country that another? The International Monetary Fund uses an index indicating Purchasing Power Parity, which compares the value of world currencies in the real world. The PPP shows how some currencies are undervalued against others – not because they are really worth less, but because bankers and traders say they are.  

A key premise we want to debate is whether we, as humanity, are valuing the truly valuable. The question now is whether the way we measure value has any basis? What would the world be like if currencies were actually valued according to their Purchasing Power Parity?  
Will the world be a better place if we had a single global currency – similar to the gold standard of the past or the Euro of recent times? These are but a few questions that we will dialog on this site.

The New Constructs is an initiative to leverage Connected Intelligence in realizing the Connected Age. Please feel free to comment. We look forward to your active participation. Join the discussion on Facebook. Follow us on Twitter.

“Wealth is the tool of freedom, but the pursuit of wealth is the way to slavery”. - Frank Herbert

A friend, a successful entrepreneur and long-range thinker, laments that in recent years the best brains have been gravitating toward the financial sector. How, he and I were wondering the other day, had these bright minds become so obsessed with wealth creation?

Too many people now concentrate on investments – in real estate, equities and bonds and derivative assets – rather than earning a good living by delivering innovative products and services that improve quality of life in the world. The distinction, in our minds, is between generating income based on one’s own creativity and labor rather than creating wealth off other people’s labor and Dame Luck.

In the good old days, people earned a living doing something useful. They saved up some of their earnings to invest in productive assets – facilities and equipment – that would enhance their income. They would invest in real estate or financial assets, expecting to collect rent or interest. They would then use that supplemental income to secure their future. The value of these investments was in line with the returns.

Over time, real estate and financial assets took on a life of their own. Bright people started entering this arena, instead of becoming doctors or musicians or engineers or managers. They invented logic to convince themselves and others that these assets were worth more than what the yield would justify.

For instance, agricultural land in Kuthmangalam village (that I talked about last week) is Rs. 10 million per acre. The value of the crop produced would be about Rs. 60,000 per annum, leading to a rental value (after deducting input and labor costs) of just Rs. 10,000 per acre – a return of 0.1% p.a. The high prices are justified purely on future capital appreciation – a bubble. Stocks, similarly, are valued on capital appreciation rather than dividend yield. This spiral goes on until the bust.

Instead of deploying capital assets to generate income, in recent decades the focus has shifted to making money purely on speculation. If I make a killing on real estate or my friend’s driver makes a killing on stock options, these are pure windfalls – they cannot be construed as sustainable wealth creation.

We know a great algebra teacher who is into day trading; he is talking about quitting teaching to trade full-time. If he does, his students and his school and the community will suffer. When that happens on a larger scale, when the best brains in the world are diverted to unproductive but remunerative professions, the whole world suffers and we get a global financial meltdown.  

Britain’s top regulator, Adair Turner, regards a lot of what is done in Wall Street or the City as ‘socially useless.’ He suggests a turnover tax on all speculative activities – a move that, according to Nobel economics laureate Paul Krugman, is gathering widespread support from many people outside the financial industry.

I see better sense prevailing in the New Age. Youngsters of today are wary of the stresses of unbridled speculation and waiting for blue birds or black swans to happen. Nor do they want to sell their souls to ensure success. They will gravitate towards more meaningful and productive activities in the real world.

Asset pricing and valuations will trend more toward intrinsic worth based on cash flows rather than self-fulfilling and self-defeating prophecies. People will pursue overall well-being for themselves, their families and the society at large, rather than just personal wealth. Let us use this opportunity to dialog and debate how to make this shift happen – for ourselves and for the generations to come.

The New Constructs is our initiative to leverage Connected Intelligence in realizing the Connected Age. Use it as a platform to dialog and debate how to make this shift happen – for ourselves and for the generations to come. Please share. Stay active, stay engaged.

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