Posts tagged ‘inflation’

Does speculation cause inflation?

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?

Why RBI or Government can not fix inflation?

(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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