In the past month, we have had two currency disasters in two different countries. Both were arguably aimed at preventing contraband “mafias” and black money hoarders who have evaded paying tax for years. But the end result has been an absolute disaster that could have long term repurcussions.
In November, India, primarily a cash economy, fell into chaos when the Prime Minister Modi, while trimming his beard in the morning, decided to pull 500 and 1000 rupee notes from circulation. Unfortunately, someone (Finance Minister – Arun Jaitley) forgot to tell Mr. Modi that these two denominations make up 90 percent of all the cash in circulation by value. Mayhem ensued as crowds started mobbing banks who ran out of currency to exchange, ATM machines broke down and businesses ground to a halt as workers went unpaid. Even as those with access to credit cards and electronic payments (the wealthy) continued to thrive, many of whom do not have bank accounts or alternative forms of payment (the poor) suffered.
Last week, Venezuela, racing against the clock to prevent economic collapse, pulled its largest bill – 100 bolivar, worth less than 1 cent, from circulation, prompting customers to arrive at banks in trucks and carts filled with 100 bolivar bills. Not surprisingly, the ill thought out plan to prevent contraband ended up favoring the very people that Venezuelan government hoped to cull out. While the rich have been able pay up to exchange bolivars for US dollars, the middle class and poor are left standing at the bank for hours, not to mention their inability to buy groceries and other consumer goods. The Maduro’s government itself appears to have resigned to bartering. Uruguay hinted at paying Venezuela in beef for some of the Venezuelan oil it buys and the prime minister of Trinidad and Tobago offered to exchange toilet paper for Venezuelan oil.
This is not the first time that entire nations have suffered through poorly thought out actions that have resulted in a currency crisis. In 2009, North Korea, in an attempt to strengthen and stabilize the national currency, took on the task of replacing old banknotes but did not have enough new notes printed and almost immediately wiped out the private sector. The two “Einsteins” who were responsible for enforcement of bank note exchange program were executed in front of a specially invited audience.
Even more bizzare was the redenomination of the kyat ordered by Burmese dictator Ne Win in 1987. Obsessed with the magical properties of the number nine, Ne Win declared Burma’s existing banknotes invalid, replacing them with 45 kyat and 90 kyat notes – denominations divisible by nine. While there is no evidence of anything magical occurring after the exchange, it did wipe out the population’s accumulated savings.
Future Wealth’s View
In all the cases, the common denominator is dysfunctional leadership. The impact of these disasters will be visible to investors in company results and economic growth figures. US companies that have exposure to Venezuelan markets i.e Coca-Cola, Oracle, Ford, IBM among others will have to take massive currency related losses. GDP growth in India will take a hit as economy slowly attempts to regain some semblance of normality impacting foreign companies with meaningful exposure to Indian markets. At Future Wealth, we have cautioned against investing in emerging markets in past articles and the currency mess does not give us any reason to look favorably at emerging markets near term.