Glad To Be Wrong!


Our government might have had its problems with Duvvuri Subbarao refusing to pump money into the system on demand,but I personally felt he didn’t attack the inflation problem in the country vigorously enough.So when I heard of the government’s decision to appoint a new RBI governor to replace him,I was like…….hmmmm,new guy brought in to toe the government’s line,somebody who when told to jump would ask “How High?”…….The rock star like  coverage of his appointment,in even the pink papers,made me even more cynical.”Stage-Managed”,”Command-Performance”were the sort of words that came to mind.And I tuned out whatever Raghuram Rajan had to say.

I am pleasantly surprised about his concern for savers,liquidity and inflation.And I am eagerly awaiting his Inflation Indexed Savings Certificate based on the CPI New Index.

In this case I am glad to be wrong!Here’s hoping Raghuram Rajan remains true to the anti-inflation tradition of the Chicago School of economics


Bill Gross and Frogs

wealthymatters.comUsing the metaphor of frogs Bill Gross explains Financial Repression and the ways of dealing with it.Of course he speaks of the situation in the US but there is no reason why investors in other countries whose governments are struggling with debt can’t learn from him.All said and done not for nothing he is the Bond King!

To quote him “Put a frog in a kettle of boiling water and he’ll jump out faster and further than any of those blue ribbon winners at the Calaveras County jumping frog contest.Put him in a pot at room temperature, however, slowly turn up the temperature to boiling, and you’ll have frog legs for dinner. This latter, more unfortunate toad temporarily adapted to his external environment, which seemed like a practical thing to do, until – well, until he reached 212 degrees at which point he was cooked.”Financial repression is similar to slowly turning up the heat on poor froggy/the bond holder/saver. And the boiling point is when the nominal returns on bonds turns negative. Read more of this post

Using Inflation To Create Wealth

Those who learn from history, have the ability to PROFIT from it.So here is some history:

wealthymatters.comInflations start out slowly.Governments will not openly admit to debasing the currency. They will cite other reasons for why inflation is going up. In Weimar Germany,for example, government officials and those within the finance community blamed their trade partners and foreigners for the Reichsmark depreciating.  German writers and politicians at the time had said that “paper inflation was not the cause or consequence of the external depreciation of the Reichsmark.  The depreciation of the Mark was held completely independent of the condition of paper circulation between 1921 and 1923″ – even though money in circulation went up 23 times within 2 years !  Prices of imported goods back then – denominated in US dollars – went up 344 times.  The official view from within the government of the Weimar Republic – the chancellor, the head of finance, the head of the Reichsbank – was to blame it on the excessive burdens thrust on the German people with war reparations, the violent policy adopted by France (when France invaded and took over an entire industrial section of Germany), and they also blamed it on increases on the price of imported goods.Conversely, the view held by those outside of Germany was that the depreciation of the Reichsmark was due to the government’s huge budget deficits, which required Germany to continuously print paper money. I guess people around the world will recognize the current day parallels to this scene from history.Quite a few governments are doing something like this today.  Read more of this post

Inflation and the Velocity of Money – Lesson from the Weimar Republic

wealthymatters.comInflation in the beginning is like a drug, sort of a good feeling in the economy to start with because there are more jobs, more goods, house values are increasing, the stock market rises, etc.  It isn’t until the money velocity accelerates that you begin to feel that something is wrong.  And that’s when everybody begins running faster and faster just to keep up.

Velocity of money is the turnover of money in the economy.  As you start printing more money the depreciation of a currency begins, more money goes into circulation, but not all of it gets turned over very rapidly.  Some of it goes into foreign hands, like when Germany had to buy imported goods for war materials.  Also, some people may decide to hold onto the excess currency like they did during the war, hoarding cash which also kept the money velocity low (in the beginning stages).  So even though the supply of money was increasing in the economy and along with it the cost of goods and services, Germans were savers, saving the marks that they got which kept this increasingly large quantity of money moving slow, therefore building up the inevitable effects of inflation but delaying the impact. Read more of this post

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