Tuesday, January 28, 2014

Absolute Zeroes

The Indonesian currency is about to go on a crash diet

 If you live in Indonesia, then I'm sure you've had the following experience. You delve confidently into your wallet, snap out a nice, crisp note, and for a split second you're not sure whether you're clutching Rp. 10,000 or Rp. 100,000 in your perspiring mitt. Part of the reason for your discombobulation derives from the fact that Bank Indonesia, in its infinite wisdom, elected to print both notes in a similar shade of red ink. The colour issue is undoubtedly compounded though by the number of zeroes that one has to get into the old optical crosshairs when dealing with Indonesian currency.

Well, annoyances such as this could soon become a thing of the past, as plans for a rupiah redenomination are slowly gathering momentum in the country's corridors of power. Redenomination (and, crucially, not revaluation) of a currency involves changing the numbers printed on notes and coins, but not their value, in order to simplify things. In terms of the Indonesian rupiah, such a process would naturally involve the lopping off of a few zeroes. Now admittedly this raises the danger that in the country’s kampungs and boondocks, a potentially explosive perception may emerge that by substituting a Rp. 10,000 note for a Rp. 10 note, one has lost Rp. 990. This is apparently why the planned redenomination changeover will take a full six years to “socialise” and implement. In comparison, it took Europe's economies under a year to ditch their local currencies in favour of the then-proud euro. As ever though, the pace of change in the good old Republic of I remains glacial. Seeing as the redenomination of the rupiah will affect legal contracts between banks, their clients and overseas institutions though, with all of the accompanying IT headaches that go along with this process, maybe it’s as well to take things slowly.

The tentative plan is to multiply the nominal value of the rupiah by a factor of 1000, thereby dropping three zeroes from those bothersome bills. In South-East Asia, only the Vietnamese dong currently has a higher dollar exchange rate than the Indonesian rupiah does, and it is hoped that the move to redenominate the national currency will give the rupiah a bit of an image boost in the eyes of a world that looks somewhat suspiciously on currencies that sport so many digits. Endless zeroes tend to evoke images of hyperinflation and people pushing bundles of notes around in trolleys in Weimar Germany during the 1920s. More recently, in Robert Mugabe's economically imploding Zimbabwe, the monthly inflation rate reached an eye-watering 6.5 sextillion percent at one point. Obviously Indonesia isn't going through such a meltdown, however many of the fiscal inflows into the country through capital markets are so often short term only, as there is a perception that the rupiah is "cheap".

Indonesia is currently basking in the warmth of economic good times though (well, some of its citizens are) and inflation is well under control, which should help the process to run smoothly, ensuring that the redenomination failures of countries such as Russia and Brazil, whose economies were in pretty parlous conditions when they attempted to renumber their currencies, are avoided. A strong legal framework will be necessary though and the Indonesian Parliament, a body not particularly celebrated for its speedy deliberations of bills of national importance, will hopefully get around to the great redenomination debate this year.

We are all instant millionaires in this country of course and this status could be about to be confined to the dustbin of history, however there will be positives to enjoy in the redenomination of that old rascal the rupiah. Salaries are paid in millions here and government budgets clock in at millions and even trillions of rupiah. Lopping a few zeroes off the currency will ease accountancy headaches and, as an added bonus, the public should be able to gain a better mental picture of how much cash various politicians and regional leaders are pilfering from public coffers, as the endless parade of corruption cases continues its sorry march through the nation's courts.

Hopefully, the redenomination of the rupiah won't lead to any major riots and the plan is to implement a transition period which will see both old and new denominations in circulation simultaneously, although presumably this could lead to some short-term confusion. Maybe in the longer term though, a new era in economic and political reform will be ushered in by this measure. At the very least, redenomination should improve the currency’s purchasing power in world markets and strengthen the rupiah in the foreign-exchange market.

Numbers rule our lives though, and there are no bigger integers that we have to deal with than those pertaining to large amounts of money. Indonesia scores particularly highly here and, alas, humans are psychologically ill-equipped to deal with large numbers, or so the scientists and psychologists tell us.

People can rationalise numbers such as three or 50 through the use of visual mental models. We've all seen three glasses of beer side by side, or 50 peanuts in a bowl, for example. When we get into the thousands, millions and billions however, we flounder, and the higher we count, the harder it becomes to conceptualise numbers.

Visualising the planet's seven billion humans, or, more pertinently to this feature, the US national debt of USD 16 trillion stacked up in USD 100 bills, is simply not doable by the human mind, which perhaps helps you if you're trying to rip off the public budget by billions of rupiah. The brain crashes like a creaking operating system when one tries to get one's head around the large figures on the front pages of the papers, and the reader thus ends up turning to the sports section for a little light relief.

More positively though, an appreciation of the vertiginous heights of numerical value may instill just a little humility in humankind and its self-important concerns. There are around 400 billion stars in our galaxy and around 100 billion galaxies in the known universe. Rather puts my broken toilet in perspective.

Consider this though. We have come up with names for some stupendously large numbers. A googol is one such inconceivably huge quantity, and is defined as ten to the power of 100, i.e. a one with 100 zeroes after it. And if you think that that's a lot of glasses of beer to get through, then consider a googolplex. A googolplex is ten to the power of a googol, i.e., a one followed by 10 to the power of 100 zeroes. In fact, you'd need to get your hands on a piece of paper larger than the entire universe just to write out this colossal number in full. Food for thought the next time you find yourself pulling your hair out in front of an ATM screen. Just as an aside, Larry Page and Sergey Brin named their famous search engine after these lofty numbers, and indeed the company's headquarters is affectionately known as the Google Plex.