If you are a true Keynesian then ofcourse this proposal is heresy. But India is in a unique position. The last 12-18 months have shown how fragile the global financial architecture is. The USD is being used solely for achievement of USG objectives, the rest of the world be dammned. Why should India which is this unique position of being able to back up 100% of its M3 money supply with domestic gold not look at unique solutions? It does not have to be M3, it can be M1, heck it can even be 25% of M1. But what it will give the rupee is credibility. Eventually in an ideal world, and 20 years down the road, anybody in the world should be able to hold the rupee with confidence. Even a 25% margin, will have credibility.... it can also provide GOI with some flexibility if that is what they need..... But there will always be long term limits to fiscal and monetary irresponsibility. Totally the opposite of the open ended money printing being done by everybody today.
Consider that money creation is nothing but debt creation and also consider that the relationship between money creation and asset prices is highly non linear e.g. $10B of FII inflows into the Indian stock market makes the sensex jump by 30% and adds $300B to market capitalization. This is not confined to the Indian markets. As you know Wall street is the original purveyor of this lunacy and itt continues today.... in fact at an accelerated rate with thin trading volumes. Is this madness or what? Asset price increases are nothing more than the devaluation of the currency that they are denominated in. I would much rather that productive assets be created. Yes, asset price inflation can feed into the "real economy", but that is a highly dangerous game to be playing as many countries have discovered.
For all of these reasons, one should consider a currency for what was its original purpose i.e. as a store of value.
To provide a link between gold with Indians and money supply GOI should:
1. Make purchases of gold, tax deductible without any limit.
2. Abolish capital gains tax on gold profits.
3. Provide an ammnesty with no time or amount limits for declaration of black money provided the same is invested in gold.
4. All Indians holding gold will have to declare annually their gold holdings.
5. Purchase for the account of the RBI any amount of gold tendered and pay in rupees at then current market price.
Taken together 1 through 4 should provide a disincentive to not declaring the gold each family has. Further disincentives via a tax or inspection regime can be decided on. The only objective of the exercise being to tie, say MI money supply to Declared Gold.
Whats the advantage of this? Simply that it will impose disclipine on creation of money supply either via deficit spending or via monetization. If Declared Gold is tied to M1 then money creation via the multiplier effect will not be impacted and as such M3 can continue to increase to support additional business/consumer borrowing demand as and when warranted. Similarly when demand wanes and there is a cyclical recession, M3 can be destroyed via the same reverse multiplier mechanism. But there will no permanent increase in the monetary base as is the case under the present fiat currency regime.
Why is this needed now? Because unless India wants to live in perpetuity either under a mismanaged dollar regime or a new yuan regime, the time to begin acting is now.
India is probably the only country in the world which has this unique capability now where domestic gold with citizens can back money supply. In no other major country are the two numbers even close together. In fact if the objective is to back M1, then M1 money supply as of June 5 in the RBI site link given in my last post is the equivalent of $250 billion which is about 25% of the estimated gold holdings in India. As such even if a declaration scheme as outlined in the 4 points above has a success rate of only 25%, the gold linkage can be established for the rupee.
I cannot think of a better time politically than now for GOI to act. The numbers in Parliament are such that this government should last for a full 5 years. Any difficult decisions they make now will begin to payoff in time for the campaigning for the next elections.
This "representative gold standard" does not have to there for the really long term. But it can provide a very solid foundation for the Indian economy over the next 20 years. The stock of gold in country now at about 30,000 tons at current prices and if it provides backing for a 50% MO margin, will ensure that M3 can ultimately grow to $12.5T at the current multiplier and at current gold prices. If the velocity of money remains constant (unlikely, in fact it will become faster), this will support a $15T economy. If you reduce the margin to 25% of MO, then it can support a $30T economy. Are we really limiting the size of Indian economy here? Is $15 trillion or $30 trillion peanuts for Indian GDP? In fact, at the end of this process, the Indian economy will be a rupee centric economy because such a scheme if successful will tie the rupee far more closely to gold than any other currency including the US dollar.
More importantly, when the next global financial cataclysm does arrive, and it will arrive at some point of time, what with the way Obama is spending money the US does not have (makes a drunken sailor look sober by comparison).....India will have a currency with which it will be able to buy what it needs from the rest of the world.
See, if Indian politicos get their heads out of from where the sun does not shine and look ahead 20 years, they will have no hesitation in adopting or adapting such policies.
China on the other hand is f*****. The only way out of this mess for them is to get hold of real assets in the ensuing period as they are dirt cheap. GOI should do the same, Buy Petroleum feilds, Mines, grasslands and encourage private enterprises to do the same. Give a line of credit.
This 'Latrine' economics of Obama and company - printing more money will doom the dollar in the period of 6 to 10 months. Get ready for hyperinflation after that. The root cause of this mess was the cheap credit nd the way being found out of it is also cheaper credit. How will it work? Friends, the only smart way is please buy assets, Gold land, Farmlands anything... When the wunbum $$$ crashes, it will take down lots of currencies and thus the inflation will ensure that the real outflow of your money towards loan repayment will be much lower.
meanwhile GOI should look at pegging the INR to Gold, bring about credibility.
Till the time Petroleum continues to be traded in $$ this latrine economics of Obama and Amirkhan will continue and that is the real worry for China and russia. That si the real threat for Iran. Iran wants to move to Euro as currency for trading their oil and US will not allow it. it deprives their printing press of employment and them a cheap source of money without working for it.
3 comments:
Thanks for the site... great source of info and hope to learn a lot by staying around...
What great things hard power can do is clear from American arrogance towards Iran.. Some people are already smoking hemp over here (on internet boards) when they say the US government will simply not pay the Chinese debt. Simple ethics of hard work and deserved payment are hitting the fan..
Btw.. can you make a study on how current Indian hard power can help in economic affairs?
1. Hard power is what makes the nation visible and in the fight for assets, it is what will assure our survival. We have a huge economic zone being a peninsular nation and off course the Andamans. We must develop the capabilities to throttle the Malacca strait for everyone. The race for Antractica has begun and we must capture as much land as possible for ourselves.
Use of hardpower as well as mild soft power should be used in Burma over a period of time. Bay of Bengal has huge Gas & Oil reserves and we have growing population and the only pace we can push the bulge is Burma and West( Pakistan) is a no go, North is Himalaya ( Tibet) and east is Burma. We must look at getting into Tibet in the period of 20 years to secure our fresh water and in-habitat the land. Secure Burma and cut off the Chinese from this land.
I don't think frankly that we are in a position to use our hard power to our advantage. For that to happen we need to wait for some more time, to be more specific till the time America withdraws in it's borders from Afg- Pak. The anglo saxons must be tied in the mess and must be made to stay and they will wear themselves out. We are a civilsational nation and we must wait, patiently. Our time is about to come - 5 years.
2. We must modernise rapidly, build infrastructure and unshackle the economy for PIO investment. More importantly get technology in defense industry - beg , buy , steal.
3. America is not going to pay the chinese debt - period. The government will not be able to force people and Ombaba is not coming back to office again. The chinese won't understand the freedoms guaranteed in American 'Bill of Rights'. CPC heads a nation where they believe the government has rights and the serfs, er, population has privileges they grant, where American founding documents express the precise opposite view - They believe that all people have rights that are endowed by founding fathers, that government can secure and protect rights but is incapable of bestowing them (since it didn't have them in the first place), and that government has mere privileges granted by the people - and that the people have the right to revoke those privileges.
Americans have a long history of suffering various usurpations and injustices, but Americans also have a history of "snapping" when pushed too far. Ask the British about what happened at Concord on April 19th, 1775.
Sooner or later, whether by peaceful election or less-than-peaceful means, a leader will arise in America who will contemplate erecting the middle finger back in Chinese direction, just as many Americans have flipped off Washington DC. Ben Bernanke, Mr. Kohn and Ms. Yellen are just the first three they've seen in american officials who are willing to tell chinese where to stick their expectations - the day will come, I assure you, where a decision is made to simply tell them to stuff it at the highest levels of american government. Yes, such a declaration - that Chinese alleged and dear "Treasuries" are in fact nothing more than toilet paper - would have severe geopolitical consequences. So what? By then American nation will be incapable of paying anyway - a default by any other name is still default. But american citizens, unlike chinese, are and will be armed - go ask Admiral Yamamoto about the wisdom of considering an attempt to enforce your alleged debt by force
This money is not going to be paid period and the chinese know it. Trust me they can't dump the dollar in open market, it will erode their asset prices. This quantitative easing will eventually lead to hyper inflation and theoretically it will agian bring back the asset prices to pre melt down levels.
What started of a a result of asset price melt down will be restored as bank balance sheets will be once again healthy. Get ready to ride the bus and the fun has just begun. Chinese are going to wipe their arse with the wunpum $$$ as it will have no use.
Great article Chandrabhan! Its really interesting to realize the possibility of Rupee becoming one of the dominant currencies.
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