It turns out that the UPA government, which presided over the boom phase of the business cycle has ended its term with an incredibly high fiscal deficit. It got away with its legal responsibility to keep the budget within limits by keeping them within limits on paper and simply spending more than it was allowed. Chidambaram’s response to those who pointed out that he had not actually provided funding for the NREGA was, in effect “Trust me. Do you think I am so stupid as to not provide funds for such an important scheme?” Now, we will enter the bust phase of the cycle burdened with a huge deficit. For some reason, I am reminded of the discussion I got into here.
I have been remiss in pointing out that George W Bush too has caught on to what I have been pointing out. It is the prosperity of the middle class that causes inflation. If you have a few rich people and lots of poor people, the poor would be free of inflation. It is the middle class in India and China that causes the problem. Ajay Shah explains better.
My heartfelt commiseration to the unfortunate soul who complimented Dilip D’Souza on his “sound economic training”. It has been said in the Mahabharata that a lie that achieves a good purpose will save you from hell. But this false compliment not only did not do any good to society, it has also not made the recipient happy. The unfortunate soul has now been blamed for not keeping track of and complimenting Dilip for every instance in which he allegedly displayed his sound economic training.
Incidentally, if you wish to know the right answer to the problem in Dilip’s post, here it is:
Our esteemed Prime Minister, Dr Manmohan Singh, has precisely the right solution. High salaries to employees of Multinational Corporations is the cause of inflation. Giving salaries to too many people causes them to chase goods pushing up their prices. Instead, salaries at the low levels should be cut and it should be increased at the highest levels. That will reduce inflation in two ways. First, the consumption basket of the rich is different. The likes of Anil and Mukesh Ambani do not compete with the poor people as much as people like me do for their consumption basket. Second, super-rich people save more than merely rich people, putting downward pressure on prices.
Increasing income disparity is just the right approach to controlling inflation.
I see that the phrase “Hindu Rate of Growth” evokes strong emotion in some quarters. Gaurav wants Hindus to flinch when they hear that phrase. I do flinch, not because I am a Hindu, but because I am a member of the Cartel. The phrase is one of the Cartel’s worst nightmares – a bad pun gone horribly wrong. As a service to humanity, I shall explain the origins of the phrase.
The culprit, the originator of the phrase was an economist named Raj Krishna. I do not know where he stood on the pseudo-secular scale, but he was a free market supporter and also presumably a punster. If the Cartel had existed at that time, he would have found sanctuary among us poor misunderstood souls.
“Yes, you can lend money as many times as you wish, but what interest do you charge for the money?” The cabbie asked.
“Well, I charge whatever I can get. ”
“In the beginning, it was quite high. There had been no development in the village for years. I checked out the first entrepreneur’s business proposal and saw that his factory, because it would be the first factory to produce whatever it was producing, would make obscene profits. So I adjusted my cut accordingly.”
“What happened then?”
Long long ago, nestled among the mountains, there was a village perfectly isolated from the rest of civilization. Its inhabitants led a hand to mouth existence. Because this village always behaved according to our macroeconomic models, it was called “The Model”.
Now, in The Model, villagers used gold coins, and only gold coins for trading. They used gold for nothing else. The total number of gold coins in The Model was fixed.
But gold coins were cumbersome to lug around and exchange with each other. So one day, a wise villager named Arjun Banker (or AB for short) made them an offer. He told them to deposit all their gold coins with him. He would maintain their titles to the gold coins. Whenever they wished to make a transaction, they could inform him and he would transfer the titles to the gold as needed.
I am writing a series of posts that will tell you everything you need about the banking system and about how money works. It will be simple to understand because I am not a real economist. First post will be up on Monday morning.
Anonymous Coward wants to know what exactly is wrong with the logic in the paragraph I linked to below. Let me explain:
Rothbard claims that when I open a current or savings account with the bank (“checking account” or “demand deposit” for you Americans) the bank is implicitly promising to keep the money locked up in its vault, which means that lending it out constitutes fraud. I don’t see how that makes sense. The bank is only promising to pay me my money on demand. How it manages to do it is the bank’s business.
A demand has arisen in some quarters that I explain what exactly I find objectionable in Rothbard’s article criticising Fractional Reserve Banking. I don’t want to spoonfeed my readers, so I will point out the paragraph where all his errors are concentrated. Readers are invited to point out specific errors: