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.
As I have explained earlier, concentration of wealth at the very top is an excellent way to cut inflation. Mukesh Ambani has done his bit to fight inflation by building an expensive house. Those who are decrying this as an example of conspicuous consumption are missing the point. If, instead of building an expensive house, Ambani had distributed the money as salaries to Reliance employees or as profits to shareholders, the money would have chased goods that the poor also consume. By keeping the money for himself, he has caused a reduction in prices. The consumption of the super-rich is different from that of the rich and the middle-class. As long as the super-rich spend money on status-goods and as long as their money goes to other super-rich people – such as when they pay M F Hussain for a painting, or Hafeez Contractor to design their house, it keeps money out of circulation from the general economy. The super-rich should, as a social obligation, take utmost care to ensure that their money circulates among themselves and does not leak out.
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.