One wonders if he should be happy or sad with the govt’s decision of allowing FDI in retail. The decision marks a sad day for the country but happy that it will hasten to conclusion the obituary of reforms and reformists thus paving the way for a new beginning.

FDI is another form of debt that will attempt to temporarily avert the crisis of falling rupee and rising inflation but alas! only at the cost of greater future pains. FDI gives us capital account surplus, which is a liability. It is a debt which has to be paid back. We have been using this money on capital account not to open factories but to pay FOR OUR IMPORT BILLS because we are a trade deficit (Import > exports) nation. Now when FII’s starts cashing in their profits and pull out from markets, we need to pay them back their money. The point now is that how do we do it? Because we are a trade deficit nation (read it as a poor nation) , options available before us are fairly limited.

1) by raising more debt either by selling our assets or interests to FIIs and asking for investments


2) by taking loans from IMF, World bank etc which also we have been doing aggressively last few years.

Any 3rd option of meeting this pull out demand from current account, which is possible for a trade surplus country like China has, in not available to us. From the last 2 decades, we have been adopting both methods to pay our rising import bills and enjoying this debt financed prosperity. This exposes how successful these reforms have been all these years. Recently, we saw another example of how hollow and dangerous this debt financed growth has been, when our rupee was in free fall a few days back and have reached all time low and RBI was scared of intervening due to lack of reserves. The reason was that our foreign exchange reserves is close to external debt. So what good FDIs have been doing in last 20 years? It has made us no wealthy a nation but one that is more on debt than it was earlier.

Wallmart is not here for charity. All it will do is to kill our entrepreneurs and create a few slaves with lesser buying power. It will take the profit out thereby increasing the outflow. When it will do that, rupee will fall and our import bills will drastically rise. On top of it, massive unemployment, that it will cause will mean less purchasing power with people therefore low production. And eventually after sucking the nation when these foreign firms will shut their shops and move out, we will face the same consequence as southeast asian countries had faced in 1997 during the asian tigers crisis. Our rupee would have been devalued to a greater extent thereby giving way to rampant inflation marked with low growth, and massive unemployment. This STAGFLATION causing series of unrest, anarchy and chaos will be the order of the day. That surely looks like the trend unless some intervention saves or change the course.


Amongst the various evils caused by loose monetary policy, one is speculation which further adds and contribute to inflation. Let us see how it happens.

Quantitative easing always causes prices to rise. Price rise encourages speculation and hoarding. Because you tend to buy it today when you know prices will go up tomorrow. What is happening today is that for a speculator, the risk of loosing is very low. Because he knows more money (demand) will be created by govt and as money (demand) will go up prices will go up always. Now if there is no money printing but sustained production, price rise will stop. As people will have to produce before they demand. A speculator in this situation is guaranteed to loose. When speculators will start loosing, the risk will become high and it will discourage people in the business of speculation.

Speculation contributes to price rise because the speculator knowing very well that prices have to rise as a result of quantitative easing, also starts hoarding. Thereby contributing to the momentum of the bubble.

I would like to quote a classic example recently given by Ron Paul in the republican presidential debate in US. “A dime of silver minted before 1960 can still buy the same gasoline today as it could buy in at that time”. What does it mean? It is not the price of commodity rising but the value of currency going down. We know that govt is printing and dumping the money in the economy. Money printing cost nothing but production of commodities is not that easy and cannot grow at the same rate as money printing. Availability of more money (demand) and less supplies are causing inflation.

A Clueless Government?

The Indian govt has decided to once again raise the price of petrol. And this followed RBI’s decisions to raise the interest rates. As previously mentioned in this blog, this was well anticipated because Government is doing nothing to improve fundamentals problems but only taking forward its failed policy of debt financed consumption.

Govt deficits are the real reasons for price rise. Deficits are high because govt spending is high and way beyond its means. Now since RBI is tightening and cost of borrowing going up they are trying to fill the gap by directly taxing people. The tax could be in various ways , raising the prices of petrol, LPG, Train fairs, etc. The bottom line is they have to get money for their deficits.

The question then is why and where they are spending so much to create such high deficits. Ideally when you borrow to open a factory that produces something, the borrower can repay to the lender. But what will happen if we start taking personal loan from bank and consume it. Once this money is over, thats it…there is no way the lender can get his money back because the debt money was never used efficiently. Govt has propped up a huge service sector of govt employee whose contribution to the economy is almost zero. Govt debt is used to finance the salaries of this service sector and several of its useless schemes which are like cash distribution to people to get votes. Recently when the petrol prices are hiked, you might also have noticed that govt has also increased the DA and pensions by 7%. It is not that I do not want people’s salary to increase at this time of inflation but from where this money is coming? When govt does not have money, they either print money (QE) or take debt. In both cases the problem of production is not solved but the crisis is only pushed forward. We are not taking debt to open factories but actually consuming on debt and thats the problem. I am wondering why the TV anchors are not calling and questioning the likes of Sudhir Bhalla, Gurcharan Das, Montek Singh Ahluwalia who all these 20 years supporting the current economic policy of Manmohan Singh.

Analysing and deciphering trends of Indian economy as well as the minds of our leadership is not very difficult…just listen to what their western fathers are saying and you will hear the echo in action. Our leadership is so hollow that they simply believe that by copying west all their problems will vanish. First they followed west like a loyal soldier without the slightest of application of mind and then when the west got into trouble, their faith and inferiority complex is so high that they are unwilling to think differently. Everything that Bernanke and Geithner or their masters like Paul Kruggman are thinking and doing, rest assured the same policy will be followed here. So if Bernanke said, “we don’t have enough tools”, Chidambaram repeated the same thing few days after. In the G8 summit in Canada in 2009 (If I remember correctly) when the Europe called for austerity fearing inflation and US was alone demanding stimulus, our much trumpeted economist PM called for more spending supporting Ben Bernanke.

Now when Pranam Mukherji called rising inflation as “sad news” … it means he is clueless and does not have a right to be in his position. If inflation is to be predicted by astrologers what is this ICRIER type instituions are doing?

(This article was written in response to a comment from author Venkatesan Vembu’s comments in -> “Here’s the real reason why gold prices are soaring”.

I strongly believe that China has no options but to dump treasuries and the delay they do in realising it, the more money they will loose.

There are only 3 ways to pay debt.
a) produce : export (with interest) to get dollars back into economy.
b) default : declare bankruptcy
c) inflate : print money and devalue currency

Having a glance at the total debt + unfunded liabilities US has, producing its way out of debt is out of question. If it is option b) which is default, it means extreme levels of austerity, much much more severe then we are seeing in Greece. Expecting this level of honesty from US, to bear extreme pain, to repay debt, is simply insane. The whole nation will erupt in violent revolution and no govt has the guts to accept it. Infact that situation has to happen eventually until the crisis is pushed to a point beyond which it can not be pushed any further. How the crisis is pushed further, we will see it in 3rd point.

The 3rd and the most convenient way is inflation, which means devalue your currency and print more money to get out of debt. This suits the borrower if it is the issuer of the currency in which debt is taken. But the creditor is going to suffer because he will get the money back with REDUCED PURCHASING POWER.

Let me quote what our own RBI says about Rupee denominated debt, in “India’s External Debt, A Status Report 2009-10”, (page 11) … “Unlike foreign currency denominated debt, where the currency risk is borne by the borrower, the characteristic feature of domestic currency denominated debt is that the exchange risk is borne by the creditor. The contractual liability, however, is settled in terms of the designated foreign currency (through exports in case of Rupee debt owed to Russia).This implies that the borrower gains (and the creditor loses) when the local currency depreciates since less has to be repaid in foreign currency terms and vice versa.”.

So we clearly see that central banks knows fully well that if they are the issuer of the currency in which debt exists, they can devalue and pay less. And that is what we have been seeing federal reserve doing all these decades, while at the same time accumulating more debt. The reason was that US was having the unique advantage of being the issuer of world’s reserve currency and they were exploiting this position. Therefore I believe that US will continue to inflate to get out of debt. Falling dollar means, China as a creditor in dollar denominated debt looses the value of its money anyway even if it does not do anything.

Understanding this risk of loosing value of its dollar investments, China offlate has been aggressively trying to diversify. But thats where it gets trapped in the web, because to ensure that its dollar investments do not loose value China has to continue to invest in US treasuries so that US doesn’t have to do quantitative easing and devalue its dollar. Since US is the biggest market for China, later has to continue to work and provide more goods to US to get  dollars to be invested in US treasuries. So effectively goods provided by China is filling up the supply gap  caused due to massive dollar printing by US. Now the trap here is that if China does not invest in US treasuries, quantitative easing will be required resulting in more dollar devaluation  thereby loss of Chinese investments. Since the US deficits are growing exponentially, China will have to do greater investment in US treasuries, to save dollar value. To do this greater investment, China will need to supply more goods to US (so that it gets more money to invest). So basically to get back its money from US, China has to lend them more. The pace with which China reduces the investment in treasuries, dollar devaluation will increase (because of quantitative easing). On the other hand, if China increases the investment in US treasuries to save dollar value, inflation in China will increase causing civil unrest, thereby destabilising the government. The situation as it stands today is that, thanks to trillions of dollars worth deficit US has, despite of Chinese investments the debt requirements are growing exponentially, requiring massive quantitative easing and thereby causing dollar devaluation. To help dollar retain its value, China so far has been devaluing its currency almost at the same pace but it can not do so without threatening its internal political stability as the inflation is breaking all records and causing civil unrest. China will have to quit dollar when the cost of saving dollar (inflation) will start to threaten the national stability itself. Infact China will also see that despite of their sufferings of inflation, US deficits are growing exponentially causing greater dollar devaluation and therefore making their efforts futile, to save their dollar investments’ value.

Some people argues that in the absence of other currency alternative dollar will not crash. They say that Euro, GBP and almost all major currencies are falling. Yuan and Yen both are deliberately devalued to maintain the exchange rate with dollar. So there is no alternative to dollar and therefore it will not crash. The point these people miss in their assessment is that what is the purpose of currency? Why does one holds the currency? Only to buy commodities. If the currency is fast loosing value, people will instead of holding currency will start holding the commodity. So investors will start diversifying its investments from currency to commodity because currency is loosing its function “store of value”.

Here we are talking about China particularly and same principle applies to them. When they will realise that to hold dollars they are actually investing more (providing debt to US) and in turn getting negative returns (loosing money to dollar devaluation), they will definitely aggressively offload dollars which will create a panic in the currency market and global economy. This will  result in inflation which actually means prices of commodity in terms of currency will go very high.

WHEN THE BETTER SENSE PREVAILS UPON CHINA, the unthinkable will happen and IT WILL DUMP THE TREASURIES. Gold will be the real money as nobody will trust currencies. China and US both will blame each other and the likes of Marc Faber are not wrong in saying that there may be War. I see a serious US vs China war / conflict whatever you want to say, as a strong possibility. And I strongly believe that Arab’s will support China because they also have huge investments in dollars. The clock is ticking for the OPEC / China to pull the trigger…

In response to the article published in -> “Here’s the real reason why gold prices are soaring”

The author does not give any evidence / explanation against the arguments put forth by the likes of Marc Faber, Jim Rogers etc. In this article I will try to explain the other side of why gold prices are soaring and at the same time counter some of the evidences author has given in support of his argument.

The author says, “But in fact, the US today, although in rotten economic shape, is struggling with deflation, not inflation…”. Deflation can be temporarily caused by flooding the market with goods bought on debt at a time when people do not have enough credit. But when debt becomes difficult what remains is scarcity of goods along with massive unemployment or no goods and no money. Why does US TRADE DEFICIT is high if there is surplus production causing deflation? Why does US not exporting its surplus and getting back its dollars to meet its welfare expenditure to create jobs, rather than increasing external debt and printing more money? The answer is simple that US is not producing but simply consuming on debt.

Today Japan, China etc are not only supplying goods to US markets but also investing their earnings into US treasuries. Exponentially growing US debt requirements has lead to inflation in emerging economies like China who are exporting to US. Because… 
a) the good which otherwise would have been available to their own people are being exported to US consumers. 
b) they have to print more money in line with falling dollar to make their exports competitive.

So more money and less goods is causing their inflation.

Now as the better sense is prevailing upon, China is slowly increasing its diversification out of US dollar. At the same time, debt requirements, to generate employment and to stimulate the economy, is increasing in US. This widening gap due to higher debt requirement and reducing Chinese (and other’s) investment requires more money printing or quantitative easing. We have seen 2 rounds already apart from TARP. And now I am sure we will see a 3rd round soon which is being called as QE3. I expect that to happen quite soon, timings may always be debatable.

US had clearly outsourced its production to countries like China and Services to India and have adopted an easy way to finance its expenditure, i.e., to print money. More dollars coming into world economy is making dollar cheap w.r.t gold and commodities. The INFLATION in US CAN BE PREVENTED TILL SUCH TIME WHEN THE LENDERS LIKE CHINA and JAPAN CONTINUES TO DEVALUE THEIR CURRENCY AND SUPPORT DOLLAR indirectly. The investors are already attempting to get rid of dollar. In the absence of any currency alternative, they are moving to commodities specially to Gold which has historically been the money for international trade. THEY ARE DOING IT TO PRESERVE THE PURCHASING POWER WHICH IS STORED IN THE FORM OF CURRENCY. BY CURRENCY DEVALUATION, IT IS THE PURCHASING POWER THAT IS STOLEN e.g., the currency becomes weak and your Rs or $ 100 can buy less goods than what it was previously able to do so. 

The trigger of the real currency crisis could be anything such as OPEC stops accepting the dollar because of its constantly falling value. The Sheikhs of Arab eventually sees the loss of purchasing power of their dollar investments due to falling dollar. China realizes the reason of its rising inflation and start asking for something in return for the goods it is lending to US, that is not being devalued or loosing its purchasing power. When it happens heck of the crisis will come. GOLD MAY SKY ROCKET as not only investors but sovereigns will attempt to get hold of it to enable international trade. And Marc Faber is not wrong when he says we can even see war in future. Because Sovereigns nations interests will clash, specially arab’s, china (creditor nations) on one side and US, west (debtor nations) on other side. I am still leaving some dots to connect, hope you will be able to see that.

If we have the right understanding of economics it is not difficult to see the trends. Timings of events can be debatable but trends can be forecasted based on changing situations. GOLD IS GOING UP BECAUSE MONEY IS LOOSING ONE OF ITS KEY FUNCTION “STORE OF VALUE” which is much required in these days of growing uncertainties.

Recently there is a news that India has allowed the export of 0.5 million tonnes of sugar. In a country where hundreds of thousands of people are dying out of hunger, kids are malnourished…do we have any right to export food? Why despite of rising inflation we are exporting food? The answer is Govt deficit. Govt deficits (both fiscal and trade deficits) are exponentially growing and they are aggressively seeking ways to fulfill it. Why the deficits are growing? the answer is govt has created a huge unproductive service sector who needs to be paid salaries, even if their utility to the economy and producers is nil. The revenues which primarily comes from tax + other sources are not sufficient to meet these expenses, which are only growing as if there is no tomorrow. Any attempt to fulfill the deficit is basically an attempt to promote & sustain an unproductive service class. This can only happen by putting more burden on the shoulders of producers. And this can be done by raising tax and making people poor, devaluing the currency, exporting food thereby inflating the prices, etc. Thus the current system is a reverse pyramid where the the producers are in the bottom and being burdened more and more everyday. The day the bubble of “growth” will bust, the farmers will become rich because they will no longer have to bear the burden of unproductive class who were giving them no value. Today a farmer after his hard work is getting very little money. And whatever he gets, is being devalued by massive curreny printing. This is a daylight theft of the invisible purchasing power which the farmers have earned as a result of their hard earned labour. 

The reason deficit financing is done and debt financed consumption is encouraged because Govt follows keynesian philosophy which believes principals of public finances are different than principles of private finance. They believe that consumption drives demand and which in turn drives production. But who has a right to consume? only that who produces OR who provides a real value to the producer(e.g., service sector that is a value to the producers). This reminds us of Jean Baptist Says law “Supply creates demand”, which is basically a derivative of universal vedic principle तेन त्यक्तेन भुंजीथा, which means first sacrifice then enjoy, first give then take, first produce then consume. Sacrifice gives us savings. Savings gives us capital. Capital is invested and as a result we get production. that is the real way to earn and produce wealth…not by printing of money.

(This was also written as comments to R Jagannathan’s article in on 9th May 2011. The link is given below.)

RBI or government can not fix inflation because growth of economy is actually growth of paper money which in itself is inflation.

Growth is measured in currency. When we say growth, it actually means growth of paper money. Quantitative Easing (15-19% per annum) + fractional reserve system is creating a flood of money in the economy which is bound to create inflation. Money is not based on gold anymore after 1971 when United States defaulted on its debt and brought down the Brettonwoods system, thereby breaking the last thread of gold standard. Reckless printing of money without any discipline of gold standard devalues currency and it is not the price of commodities going up but the value of currency going down. While the currency can be printed easily commodity can not, and instead, is a result of hard work and time. The resultant inflation as a result of currency devaluation can be temporarily controlled by increasing debt and thereby increasing supply. Since debt is not considered in GDP and discounting a low inflation which is temporarily pulled down by raising debt, shows a mirage of rising GDP. This gives an incorrect impression that economy is growing. 

When debt can not be increased at the same pace as growth of paper money, then, suppressed inflation is bound to re-surge. Today, that is what is happening as due to soveriegn debt crisis there is enormous pressure on countries to contain debt. The total money supply is almost doubling in every 4-5 years and so as our national debt and GDP.

RBI is raising interest rates but at the same time pumping money into the economy, thus neutralizing any measure taken to suck liquidity from the system and therefore we are not getting much relief from inflation despite of series of interest rate hikes in last 1 year.

Growth and inflation are synonym as growth of paper money (which is not based on gold after 1971 when Richard Nixon brought the Brettonwood system down unilaterally) devalues currency and there is no resultant automatic rise in commodity production as is assumed by keynesian philosophers. Instead, growth of paper money with negative real interest rates encourages speculative investment by way of financial markets thereby turning the whole economy into a casino economy where wealth is not created but only redistributed. This is the cause of rich becoming richer and poor becoming poorer.

Currency devaluation by way of Quantitative easing and fractional reserve system is a day light robbery of buying power of real wealth generator such as a farmer who, after great deal of pain and hard work, earns this buying power stored in a paper currency. However more cheaply printed money takes away store of value function of money and reduces its buying power. Why do you think counterfeit is bad? because counterfeit works like adding water to milk thereby reducing milk’s potency. In the same way when new cheaply printed money is added to already existing money than it reduces the buying power of existing money because more money is now available to chase same supply.

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