How stubborn can Central Bankers be? It is surprising – and I am not saying it is easy to be a central banker..just commenting.

Inflation in the US and UK are about 5% – if you ask the people living there (increasing ‘consumer confidence’ is inflation assisted). However the Central Banks are refusing to believe this. With interest rates pegged at 1-2% in both the places, the Central Bank is making a mockery of the ‘smart’ people who ‘saved’ money. Money is losing value real fast – and asset bubbles are getting created ONCE AGAIN…in both these countries.

China holds its currency low, so the Chinese guys who export are INVESTING the money outside (Money is brilliant, it finds the best risk-return avenues). If a Chinese company has exported to Singapore, it buys more properties in Sing rather than bring it to China. Now the average Chinese who cannot do this kind of stuff happily buys gold. Gold here is not an investment – it is a way of saying ‘I do not know what will happen to the yuan’.

Our own RBI CANNOT control inflation, prices of real estate, prices of other non essential commodities. The Government of India is in sleep mode and doing nothing to reduce inflation.

We have a huge supply constraint – 30 years CTC for a house (clearly a bubble? I do not know) or complete failure of infrastructure (5 hour power cuts in parts of the suburbs of MUMBAI) cannot bring the prices below Rs. 90 lakhs for a 2BHK – 40 kms from South Mumbai!!

So at best we can only say what a tough job it is to be the Governor of the Central Bank, do sensible things with your policies, hope that the government will do sensible things, – and talk to the media on a quarterly basis (sounding smart too!),….God…are you listening!!

 

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  1. Dr Mohammed Ali Khan

    @Sanjay
    20 years ago a “Super” Computer cost crores of rupees.( I still remember Door Darshan claiming that Rajiv Gandhi has ordered a super computer for so many crore rupees).

    Now, you can get a thousand time better computer for a thousand times less cost. Is it not a good thing? Don’t we all like stuff to be cheap, and get cheaper everyday. Then, why do Nobel prize winning “economists” decry the specter of deflation? Are they living in some other universe?

    Why don’t we apply the same logic to housing? Shouldn’t building costs get cheaper, should not advances in transport free up more land for construction and thus making land costs cheaper?. Right now , loans made out of funny money, tax rebates for people taking loans, urban land ceiling laws, protectionism in construction material has skewed the market in favor of the builder-gangster-politician nexus.

    To get an idea of the madness of these Keynesian idiots, just listen to this “Maestro” speak. Please watch the video in full for the full blast of his idiocy.( It’s a false claim that Alan Greenspan is STILL an Ayn Rand follower- A true follower would have bought back the gold standard, dissolved the Federal Reserve and then resigned as its chairman, which, obviously he did not do!)
    http://www.therecession.org/videos/greenspan-govt-should-destroy-houses-peter-schiff-destroys-greenspans-idea.html

  2. @pravin : I agree with you. I am finding it difficult to imagine a gold standard with no inflation. I am finding it difficult to imagine that double the amount of food grain can be bought after some time for same piece of gold (though I think this is exactly what has happened in last 4 years. Imagine this happening for next few decades in gold standard.) Gold standard will give rise to deflation and not just 0 inflation.
    In the sudden-discovery-of-gold scenario : note that gold itself is currency. You cant say that supply is increased until it is in circulation. (Oil demand is decreased now still price is high. Also opec countries increased oil price at one go. In a sense, oil is also a standard of its own – though not so mighty as dollar.) The owner of country will try to dictate world economy. And then US and Europe government will leave gold standard.

    Most funnier thing with gold standard is you are not sure how gold production growth and world GDP growth would match up each other. For the stable case, they have to match each other. As of now, this task of matching is assigned to government which owns fiat money supply.
    To explain the scenario of deflation I explained you the scenario of real estate apartment; what I am saying that even if it involves same quantity of input, same quantity of labour to develop a apartment, still the price will go down simply because gold production growth cannot match real estate growth.

    And if you have to invest money somewhere in era of gold standard, where would you invest? Won’t it be just the gold? Everything else can be more efficiently produced as compared to gold.

    Also, you said that gold is available in the right quantity. You cant know for sure. There has been immense growth in productivity and population in last 200 years and that is the place where gold standard has seen few hiccups.

    Seems like I am too much anchored to fiat money standard. Everything depends on market forces and the trust of citizens on government. Those forces will find true value of every fiat currency.

  3. @mohammad : You are missing one big point. If gold production growth doesn’t match up to world GDP growth then things will fall apart. In that case of gold standard, a person’s salary will decrease every year. And fully aware of this scenario, I will start hoarding the gold.

    Example of supercomputer even strongly support case of fiat currency. It highlights how competition and innovation will keep driving down the prices even in fiat currency standard. Innovation in transport or real estate will keep driving down the prices even in fiat currency standard.

    Monetary policy should take care of asset bubbles. Running towards gold standard is not the solution. Just see how RBI is managing real estate bubble by hiking interest rates.

    Isn’t it surprising that, in case of economics, people trust dead metal more than elected government? Or given a chance, people will take away every responsibility from government?

  4. Dr Mohammed Ali Khan

    @Sanjay
    “Isn’t it surprising that, in case of economics, people trust dead metal more than elected government?”

    Ok Mr sanjay, We will do an experiment, Ill invest my money in an idiotic, dead metal like gold and silver & you will keep all your labour and money in “living” paper money issued by an elected, honest, scam-free, corruption-free government staffed by service-minded selfless bureaucrats and run by politicians who are honest, upright, uncorruptible, don’t think about only the next election and who are not in the pay of special interest groups.

    We will meet after 10 years and see what has happened.

    Good luck to you!

  5. sanjay,
    you are way off base.GDP growth has nothing to do with availability of gold .just like GDP doesnt increase or decrease just because your faith in govt is strong,gold is a tool for measurement which remains constant(more or less over multiple decades).
    i find it a sign of our times and a depressing success of govt provided education that people have faith in some random representatives suddenly becoming honest and omniscient once they wear govt uniforms and call themselves ministers while an inert metal with no personality is so unexciting.

    in the past,people could simply hold gold coins -especially the poorest people .today they absolutely need access to banking system or the share markets where they have to literally gamble with the given volatility,just to beat inflation.the fiat system is horrible for the poorest of the poor -the same people the govt is supposed to take care.

    gold production : -gold is rare and it takes years for a mine to come up with gold.it is scarce.that is precisely the reason it is not inflatable like paper or cowrie shells.gold is extremely limited.this is precisely the property of gold which makes it impervious to manipulation.

    why do you keep insisting that GDP and gold production has any relation? it has none.you are arguing a position no sane gold advocate espouses.

  6. the RBI IS the cause of the real estate boom.the central bank causes both the BOOM and the inevitable BUST.so unless you are a central planning lover like soviet russia,central banking should be relegated to the dustbin of history.
    central planning can never work: for pencils or shoes and indeed money.

  7. I am not sure about the gold advantages but the gold fans are saying that gold is a great asset as gold supply is limited, in the same way the realtors in my hometown are saying that real estate is great investment as we can’t produce any more land

    Who is correct?

  8. @Praveen. if gold were money,it would be not be an ‘investment’.it would be a saving device equivalent to that of a savings bank account today,but without the attendent risk of a bank failure.
    gold is an asset today ONLY because paper money in the world is increeasing relative to gold.otherwise it is simply only worth as money and perhaps some jewelry and industrial demand

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