Magic Wand

Hello, I have the magic wand! (Part I)

This is Part I of a series of articles on the present state of our economy and related topics. 

The ruling elite often say they don’t have the magic wand to solve this problem or that, be it inflation, farmers’ suicide or insurgency. I guess I have the magic wand.

Controlling Inflation

Let us take the case of inflation first. You have say Rs 1000/- in your pocket. You don’t need it now. You would like to keep it in Fixed Deposit so that you may get about Rs 1080/- or more after one year. If you have some object say gold or even a piece of land worth say Rs 1000/-, you would like it to be valued more than Rs 1000/- or for that matter more than Rs 1080/- after one year. Your money, gold or land does not undergo any value addition to deserve being valued higher after a time period. Even after a thousand years a sovereign of gold remains that much only and not a milligram more, an acre of land does not grow by a square foot or for that matter a hundred rupee note does not grow by a square millimeter. But you want it valued more. This is the very cause for inflation. Inflation is inherent in the economic system where money attracts interest. The inflation rate is practically the same as the weighted average of interest rate [lending] of banks, lenders, multans etc. put together. Whenever inflation appears to go out of control, the reserve bank barges in with an increase in lending rate, claiming tighter money supply will result in reduction in inflation, only to find that the inflation rate actually goes up further. My economic sense tells me to cut the lending rate if you want to cut the inflation rate. In fact abolish interest on deposits. Let the money be only kept safe by the banks free of cost. Let the bank in turn lend money to industries etc at a very nominal cost to cover the expenses in conducting the business. Nationalised banks do not have to make profit either. Inflation rate will crash to close to zero. This is no new theory. Karl Marx realized it more than a century back. History says the prices in China were stable for nearly 50 years during the communist rule – before they capitulated to capitalism in the name of introducing reforms. I am not advocating Communism or Marxism. I am just speaking plain logic.

In fact the ideal solution would be to have the artificial currencies abolished and declare gold as the standard currency. Thus we will deal in grams, milligrams and kilo grams of gold. There will be ‘zero inflation’ then. For the value of gold, paper currencies can be issued suitably named for easy handling. But the price of gold in this scheme will remain constant. A gm of gold will cost only a gm of gold ever. There will be no trading in gold. This also is no new idea. The idea of currency started like this only centuries back. Land price will increase if there is development in the area, but the increase will be reasonable as the artificial demand for land due to steep appreciation will disappear due to abolition of interest. The idea of investing in land will vanish. Land will be traded only to meet necessity.   

The government wants to fill the coffers with dollars. The purchasing power parity – PPP – value of a dollar is only about Rs 10/-. But you get about Rs 60/- currently, when you exchange your dollar in a bank. Say you have a product worth Rs 1000/. You should be able to sell it at $ 100 going by the PPP value in the international market. But you are happy to sell for even $ 50 to be competitive, as you can get about Rs 3000/- or more from reserve bank. You under sell your product. The country gets much needed [?] dollars and you make a wind fall. You [the dollar earning firms] in turn pay your employees handsomely, read much more than they deserve in comparison with people of other fields. It looks like everybody is happy. But they (dollar earners) spend lavishly and this leads to inflation. I call IT as ‘Inflationary technologies’. Not just that. When you go to international market to buy something with your dollar you get only Rs 10/- worth products [less shipping and handling costs] per dollar. The dollar is a double edged weapon. It is left to anybodies imagination how many trillions of rupees have been lost this way in the past 21 years since the introduction of the so called economic reforms, the LPG [liberalization, privatization and globalization] regime. I call it ‘deforms’ or ‘uneconomic reforms’. You have to just multiply the cumulative inflow of dollars in the 21 years period by Rs 50/- per dollar to get a feel. 2G scam will look trivial in comparison to this scam of fixing poor exchange rate for Rs Vs USD. Off course the PM and FM will argue they don’t fix the exchange rate. But their policies have led to this situation. They have created the environment of excessive dollar dependency forcing high demand for dollars [imports] with the supply [exports] not matching leading to the excessive exchange rate. Where does the difference between the real value of dollar and the exchange value [say Rs 60 – 10 = Rs 50] come from? You, me and the beggar on the street, or to be more charitable to the economists, it all comes from the non dollar earning public. The masses are in effect subsidizing the dollar earners to the extent of 500 percent!! A fat dollar reserve is being touted as an indicator of the strength of our economy. I am sorry, it actually indicates the weakness, to what extent we have impoverished ourselves or sold ourselves out. Off course dollar is needed to import essentials like crude. But we can definitely pull the fuse out of the inflating dollar by learning to live on less petrol and other import based items which was the case until LPG was introduced in 1991. We were encouraged to save till then. We are wooed to spend now putting undue pressure on the supply leading to inflation. We were advised to talk less and work more. We are wooed to keep on talking now so that the Rajahs – cell phone companies – may build castles.  

Whenever the value of dollar vis a vis rupee decreases [meaning rupee appreciates], instead of celebrating, the PM and FM lament and do everything possible to hold the dollar up [not rupee up]. Same is the case with the sensex. Raising sensex means money is flowing from the aam adhmi to the rich share holders. But when the sensex drops the PM and FM lament and do everything to push the sensex up instead of safeguarding the interest of the common man when the sensex shoots up. This proves that this government does not represent ‘us’ but only represents ‘US’.  

The story goes on (This is not the end).

K.Raja Rajan