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.
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?