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Absolute poverty of strategy

Electronic currencies could give traditional, unstable ones a run for their money. Pratik Kanjilal writes.

columns Updated: Sep 23, 2011 23:11 IST
Pratik Kanjilal
Pratik Kanjilal
Hindustan Times

After months of brutal inflation, absolutes are beyond my grasp. Rs 100, a litre of petrol or milk, 10 grams of gold, a square foot of land - these things mean nothing to me any more. I can only size up relative quantities, ratios like 12% return, 0.2% repo rate hike, 2% of GDP and, on a homely note, two Sanifresh for the price of one. I find these ratios relatively easier to understand.

Wonder how many of us are suffering from this new cognitive deficit as we accept that nothing has a stable, absolute value anymore. Even the sober, measured Planning Commission made an absolute twit of itself this week by telling the Supreme Court that poor people who spend more than Rs 32 a day on themselves are above the poverty line.

"Overfed, insensitive bastards!" everyone ranted. Not so. Like me, they are just benumbed by absolute numbers. The quantity 'Rs 32' means nothing to them. But if the statement were made in relative terms, they would have appreciated its absurdity. Relatively speaking, the Commission had said that to qualify for help, poor people must be famished, naked, homeless, hopeless and beyond help.

How do governments help? With money, whose value keeps dwindling. They fund their expenses with taxes, try to make up the difference by borrowing and to bridge the last mile, they print more money by fiat. Which means that there's constantly more money to go around and it has less value.

Which means more inflation.

Banks contribute their mite through fractional reserve banking. Let's say you put Rs 10 into your savings account. The bank parks Rs 4 with the central reserve and lends out Rs 6, both on interest. The trouble is that since you can withdraw your Rs 10 anytime, now there's actually Rs 10+4+6 = Rs 20 loose on the market. The money supply has doubled. Result: more inflation.

Such theories suspicious of fractional reserve banking and fiat currencies controlled by government are almost as old as libertarianism, which is suspicious of institutions in general and government in particular. But the failure of governments in the US, Europe and Asia to control markets, banks, financial bodies and money in general have lent them weight.

In fact, there is already an electronic currency which isn't controlled by governments, institutions or even individuals.

Bitcoin is controlled by a peer-to-peer computer network which itself is not under anyone's control. The currency was authored in 2009 by a shadowy individual named Satoshi Nakamoto, who has left a very light footprint on the internet and may not actually exist.

And yet Bitcoin follows the principles of traditional money. Over 7 million are in circulation. You can buy pots of things with it, from wedding managers to firearms. If you have a conservative fit, you can even trade it for traditional cash. But unlike traditional money, Bitcoin is transacted directly between buyers and sellers, without a bank or government either in the way or offering any protection.

So what? If governments and institutions continue to fumble and bungle in search of economic solutions, libertarian currencies like Bitcoin will look increasingly attractive. Traditional money has become an absolute nightmare.

Relatively speaking, I mean.

Pratik Kanjilal is publisher of The Little Magazine

The views expressed by the author are personal

First Published: Sep 23, 2011 23:09 IST