Tuesday, October 25, 2011

GD2

Pretend. Things have become foul in a way that there seems to be no escape from this dump. In India, RBI increased the repo rate once again to 8.5%. Europe is struggling with its woes... France might suffer from a downgrade. Italy needs a better plan. Spain was downgraded again recently. It's all very amazing. It so happens that I have begun reading this book - America's Great Depression - by Murray Rothbard. The book, for now, seems a little to theoretical for me but Mr. Rothbard speaks of something quite simple; in plain words he says that things should be allowed to take their own course. It is a classic case of Keynes v/s Austria :D

Keynes said that the economy should be stimulated from time to time and Austria said that stimulus cant be the magic pill. This current 'global crisis' which we have been a part of since 2007/08 is going to be great fodder for economists once we are back on course... You see, the global economies tried stimulating their respective countries and some succeeded, only to be unfounded by Europe, currencies, commodities and (China which is a fake fake fake faker!!) and the US.

The basic idea here is that monetary stimulus can go only so far - even Bill Gross referred to the same idiotic policy followed by the US in this month's investment outlook. Deflation is what the Fed is trying to stay away from, but deflation is exactly what is needed. Why are goods so much cheaper in the US than in Europe? Why is it an implied right for an American to own a home? Why are traders and bankers paid so much money? Why can a Company located in China avail of extra cheap finance, when a similar company located in Germany has to fight for profits?
A correction is required to sort these things out. Holding long-term interest rates down (Refer Operation Twist and QE2 by the Fed) is not a solution, it is a comma.

One of the fundamental reasons that the deflationary spiral was so bad was that the money supply was linked to gold prices (which were stagnant). When FDR broke the gold price peg in 1933, that broke the back of the deflationary spiral and what ensued was a knee-jerk jump in prices. Difficult to say what could possibly break a potential deflationary spiral in the future but the dangers of hyperinflation are manifold compared to deflation or a glut. Hyperinflation just mauls everybody... the motive of people changes from productivity to consumption because people try to buy as soon as possible; it robs the economy of productivity.

The problem with my posts is that I tend to go in many directions almost simultaneously. The gist is that the correction needs to happen - it need not be a falling stock market, may be it is realignment of real industries (may be from China to Turkey or Vietnam or India or the US), may be it is the re-valuation of currencies, a break-up of the Euro is essential because it is a clearly flawed model. We will see a grinding halt to the global economy - not for too long, but it should be a bit of a thud.

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