What is a Black Swan?
N N Taleb wonderfully describes a Black Swan moment in the following analogy…
If you keep inviting me for dinner at your home, I will possibly miss it at least 999 times. When you will almost certainly believe that I don’t attend dinner parties, I will show up and eat enough food to make it up for my 999 previously missed dinner invitations.
In essence, Black Swan events are almost impossible to predict, and you have no idea about the amount of losses it can induce. However, the good thing about a Black Swan events is that it teaches you something very important – Your assumptions are almost always wrong.
Last night (8th Nov 2016), Indian PM during his address to the nation did offer us a Black Swan moment – he announced that Rupees 500 & 1000 currency notes will no longer be legal tenders for exchange of goods & services beyond mid-night (barring a few exceptions). And what followed was an interesting night for most. Most business people started calling their friends, family, and other financial advisers to get some immediate advice. And the one who belong to salaried class took this entire episode to their WhatsApp groups. Either people had tons of fun discussing this matter, or they consoled each other about some possible solution in the days ahead, and there were some who immediately took some preventive steps to safeguard their ‘hard earned’ Black Money.
Modi government, in its address, emphasized upon the fact that they doing this demonetization to curb Black Money, fake currency, and terrorism funded by ghost money. All these points, though worrisome for any democracy, the primary reason has to be reducing the amount of Black Money prevalent in the system. And for this reason, Modi government has designed a complete 50 days program (with some extension, for those may need) to completely remove old currency notes of higher denomination and replace them with equivalent notes.
No one could have imagined that this much of planning (and execution) has already gone in the background, and no one had any clue about it. The secrecy of this project is definitely an impressive achievement for the Modi government. (Yes, I do have my doubts over the really big fishes. How could they remain unaware of such a Tsunami like move. That is just not possible. But for most people like you and me, we didn’t have any clue.)
What is expected out of this exercise?
If Mr Arun Jaitley is to be believed, this process will bring out almost 85% of the ALL BLACK MONEY into light and back into the Bank Coffers in next 50 days. Finance Minister absolutely understands that almost 15% of the Black Money will not come out of their hiding places and hence vanish in the thin air after 50 days.
And once these notes are out in the public view, they shall get replaced (or registered in your account) with the new series currency notes. And that would mean, at least in theory, that India is free from Black Money.
And whats happening?
I appreciate the entire war against Black Money until here where each currency note has to come out in public domain to remain relevant. But what makes me a little skeptical about its real impact in killing Black Money doesn’t give me much hope. And let me illustrate it by sharing some real use-cases I have witnessed in last 24 hours.
A. The moment PM’s address was over, people sitting on room-full of currency notes went ahead and did Gold shopping for the whole night. Evidence comes from Jewellery store sales in Mumbai, Delhi, Kolkata, etc. and that too without PAN being mentioned anywhere. These people bought Gold in KGs! (Read an article here)
B. As soon as it was clear that Rs 100 currency notes will remain untouched and unquestioned by the government, money lenders in every town offered huge incentives amount to their regular loan recipients, to flush out most Rs 100 notes from the market. And this was primary reason why most shopkeepers stopped taking Rs 500 & 1000 notes and wanted only Rs 100 notes. And some of them started over-charging and rounding it off to the next 100.
C. Owner of a multi-crore business has done some calculations and found out that – in next 7 weeks, one can certainly renew the life of black money amounting to Rupees 70,000/- and put it back in the same vault. Now if I have 7 Lakhs to renew, I just need help from 10 people. If I have 70 Lakh in Black, I would need 100 people to do me this favour. And If I have 7 Crore, I need 1000 people. Beyond 100 it sounds unrealistic, but what if I change the mathematics a little, and offer 2+ L rupees in cash to each of these 100 (non-taxable-slab) guys and ask them to deposit it in their accounts only to return me later, say after March 2017? I would happily be able to convert more than 2.7 Crores of my black money. [Yes, it has its own risks but in a country like India, this is very much possible to achieve and people consistently achieve it. Right from today, when the banks start operating, many many people will start converting their black money into black once again using this very method.]
The issue with demonetization is simple, and which is precisely my issue – A person holding black money has the capability to break his entire sum into many many small money chunks which can be then assigned to someone who is untraceable in the financial system to do the needful, and then put it back into the coffer. Which brings back the system to the same position where it started its journey – A system full of Black Money holders! Of course 15% less in volume.
While government’s intent can not be doubted, it impact is certainly doubtful – Demonetization is nothing more than a Black Swan with limited impact! And I understand that reducing even 15% of the Black Money from the system is not an easy task, but what I fail to understand is that this move has no lessons for those incorrigible man who will compulsorily keep accumulating black money.
I hope government does a better job in making this an impacting & long-term lesson for this country. I so wish this doesn’t turn out to be an Opportunity Missed, like many other missed items by this government.
[Some people say that Modi government will get some undue advantage in the UP elections because of this move. I say – that’s a super BS thought! No political party has any heads up in accumulating the new series currency notes to be distributed among voters of UP. That is if UP voters don’t accept cash in Rs 100 notes 😉 Everyone will start the race afresh and from the same starting line.]