Sunday, December 20, 2009

Eggs Rs. 48 for a dozen

Two things, I hate to disappoint you all, but this blog will have nothing to do with internet space, but the economic indicators can be understood in overall business sense, second, in this blog I will use movie quotes from 1967 classic “Cool Hand Luke”.

As commodities moving up by almost 50% year on year, Eggs for example have moved from Rs. 32 to Rs. 48 for a dozen, and similar trend for vegetables, fruits and pulses, the government WPI inflation showed up a number of 4.78 %, as on 14th December, 2009. On news of this high inflation, the suggestions floating around are to curb liquidity further and raise the interest rates. But how good is this inflation number, when clearly the value of currency is going down much faster than these number indicate. The currencies across the world are showing worst trends, with US Fed maintaining a 0.5% interest rate, and printing money. Meanwhile, the gold is rising all the time, with more faith in precious metal than in currency, and couple of months back, Chinese government offering official advice to its people to invest in Gold and Silver.

“What we have got here is failure to communicate”

The core of the inflation numbers, come from it being driven by age old wholesale price index, rather than consumer price index in developed nations. The other side of it, is lack of control of government on economy and liquidity as a whole. With Congress enjoying absolute power in parliament, there is no one questioning the price of gasoline, up or down, in turn commodity prices, due to hoarding, the situation for a common Indian is getting worse. And to check common man’s case, Mr. Rahul Gandhi visits a dalit’s home in UP, every two months, to have “two poories and aalu ki sabzi”, which becomes prime time news for our esteemed news networks, apart from covering “paa”.

“Sorry, Luke. I'm just doing my job.”

“Luke: Nah - calling it your job don't make it right”

The government is doing its job, the stock market is rising, the auto sales are up, the real estate is back in business, so what’s wrong? The same thing which was wrong in late 80s Japan, and to some level post Sep’11 United States. It is the budget deficit and trade deficit, that is wrong, it is the out of control real inflation, it is the Debt bubble we are building, it is the falling exports month on month. But does RBI care, nopes, they want to cover the deficits by printing money, a la helicopter Ben (Bernanke), who can be blamed for the crash, but since he later tried to put off the fire he lit, he got re-elected.

This is the new RBI solution for everything, print more, and with no focus on the problems which US is facing post making that mistake. RBI is also accumulating worthless dollars as part of its foreign exchange reserves, and some recent buying(200 tonnes) of Gold from IMF at ridiculous prices. The conspiracy theory behind it, is the insecurity of RBI as part of its printing currency blindly with no back-up.

Coming to the original question, is the currency value falling faster than inflation numbers suggest, Yes Sir! What does that mean, one clear thing that in an effort to put dirt under the carpet, that is not having effects of slowdown, RBI started printing more money, and making big money auctions to banks at lower rates. This was the same action taken by US federal reserve post Sep’11, 2001, where the US economy was badly hit, instead of taking the punch, they started printing money left right and center. Which is the case for us today, with rising debt all over the place, do remember money creation is equal to inflation, and money is always created as debt. With clear lack of control over money supply, prices are going out of the roof, and so is the stock market, owing to high liquidity and operators play.

“Luke: John-boy, lemme tell you something. You know, them chains ain't medals. You get 'em for making mistakes.”

I simply fail to believe how media and people at large, do not talk about this. The prices do not inflate on their own, these things have reasons behind them, and deficits do not get wiped out by printing more paper money. US is staring at over 10% unemployment, the common man is suffering there. As US looks at loosing its AAA rating, please remember India’s rating is still BBB.

"Luke: Nobody ever eat fifty eggs"

With these prices, nobody can!