Tuesday, December 6, 2011

The Erroneous Views of the Chief Economic Advisor of Indian Finance Ministry, Prof. Kasushik Basu

Prof. Kaushik Basu - who apart from being a professor of economics at the Cornell University, USA, is currently the chief economic adviser of the Ministry of Finance, Government of India - recently published a paper titled "Understanding Inflation and Controlling It" in the journal Economic and Political Weekly (EPW), which is a well known journal in India published from Mumbai.

Since inflation is the grave problem being faced by any economy and because Prof. Basu is the chief economic adviser of the Indian government, I decided to read the article to know his economic views, especially re inflation. It is important to know what the chief economist of Indian government has to say about Inflation. Knowing his views is important because billions of common man's lives depend on this one person's economic views. If his economic views are erroneous then our lives are in a big danger. If his understanding of inflation is faulty then we all are doomed.

And as it turned out his economic views are indeed erroneous. Particularly, his understanding of 'inflation' is very poor. After reading his paper I am more worried about the future of the Indian economy because if the top economic adviser of Indian government is having a wrong understanding of economics then the chances of elimination of inflation from the Indian economy are zero!

After reading his erroneous views, I wrote a short article criticizing his views and submitted it to EPW for publication in their 'discussion section'. Being an Austrian Economist myself I thought to discuss the various issues with Prof. Basu in academic arena in front of the mainstream economic profession. Since the advancement of scientific knowledge can only take place through such critical dialogues, I thought to engage the chief economist of Indian government in a dialogue in the public sphere. But as I expected, EPW refused to publish my article. Now why they didn't consider my article for publication is only they know, but for me the message is clear that they are not interested in furthering the intellectual discussion of this extremely important issue. Never mind. In this age of internet I have other sources of taking the issue in front of the concerned public. In this blog I am reproducing the article which I submitted to EPW for publication. I have also emailed a copy to Prof. Basu so at least the chief economist of Indian government can consider the alternative Austrian economics explanation of inflation, which then can aid him in combating and eliminating inflation. So without any further delay here is my article criticizing the erroneous economic views of India's chief Economist, Prof. Kaushik Basu.

       --------------------------------------------------------------------------------------------------------------

Critical Investigation of Professor Kaushik Basu’s Economic Views

By
Madhusudan Raj


EPW vol. XLVI, No. 41 (October 8th issue) carried an article, entitled Understanding Inflation and Controlling It, of the chief economic adviser to the Ministry of Finance, Government of India, Professor Kaushik Basu. This short discussion is a critical investigation of Prof. Basu’s economic views presented in that paper.

To begin with, the title of Prof. Basu’s article itself is highly problematic in that it talks about controlling inflation. The problem lies in his intentions of controlling it instead of eliminating it altogether out of Indian economy[1]. His use of word “controlling” gives an impression that he has no discomfort with a moderate level [sic] of inflation, as is the case with the finance and prime minister. I myself being an Austrian economist and above all a common man find such economic and policy views of this top policy maker absolutely outrageous. How can someone, after naming inflation as an “Emperor of Maladies”, be okay with it is beyond my imagination. If I adopt his style of using false biological analogies to define economic phenomena then it is like saying that, cancer is the king of maladies, but I am comfortable with 10% of it in my body, and further, I only want to control and manage it! I am sure Prof. Basu, as an economic doctor [sic], will surely want to eliminate inflation cancer from his patient Indian economy’s body, and not just control or manage it!

Prof. Basu starts by asserting that, “inflation is one of the most dreaded and most misunderstood of economic phenomena (p.50)”. This is mostly true for the 21st century mainstream economists who mistake the effects of inflation with its true cause, but it is simply wrong to say such similar thing for the Austrian School of Economics who is crystal clear in its understanding of inflation since the time of 14th century proto Austrian scholars like Jean Buridan and Nicholas Oresme (1956). 15th century’s great thinker Pole Nicholas Copernicus was the first person to set forth clearly the “quantity theory of money”. As discussed by Rothbard (2006: 165), for Copernicus,

The causal chain began with debasement, which raise the quantity of money supply, which in turn raised prices. The supply of money, he pointed out, is the major determinant of prices. ‘We in our sluggishness’, he maintained, ‘do not realise that the dearness of everything is the cheapness of money. For prices increase and decrease according to the condition of money’. ‘An excessive quantity of money’, he opined, ‘should be avoided’.

 30 years after Copernicus, the Spanish scholastic of the famous school of Salamanca Martin de Azpilcueta Navarrus, in his important work Comentario resolutoio de usuras (1556), again unambiguously set forth the “quantity theory of money”. When the supply of gold and silver from the New World flooded the Spanish markets, it experienced inflation. Azpilcueta deciphered this new phenomenon and wrote:

...other things being equal, in countries where there is a great scarcity of money all other saleable goods, and even the hands and labour of men, are given for less money than where it is abundant. Thus we see by experience that in France, where money is scarce than in Spain, bread, wine, cloth and labour are worth much less. And even in Spain, in times when money was scarcer, saleable goods and labour where given for very much less than after the discovery of the Indies, which flooded the country with gold and silver. The reason for this is that money is worth more where and when it is scarce than where and when it is abundant[2].

 This great tradition was continued and fully developed in the 20th century by one of the most brilliant but heavily ignored Austrian economist Ludwig von Mises (1953; 1998). Murray Rothbard (2004) and Huerta de Soto (2006) further elaborated Mises’s brilliant work. The reason why mainstream economics is not in a position to fully understand inflation is due to their age old disappointing avoidance and stubborn reluctance to take these very important Austrian contributions seriously.

The reason mainstream economics and Prof. Basu fails to understand inflation is because their concept of inflation itself is wrong. On page 56 of his article, Prof. Basu defines inflation as, “an overall increase in prices and not the relative increase in the prices of some goods. Clearly, Prof. Basu is committing the logical fallacy of putting the cart before the horse by defining inflation in this way. He, and with him the mainstream economics too, mistakes effect for cause. As already pointed out by the above cited scholars, the root cause of inflation is the increase in the quantity of money and credit. In his brilliant one page explanation Henry Hazlitt (2004) defined inflation clearly. He wrote, “Inflation is an increase in the quantity of money and credit. Its chief consequence is soaring prices. Therefore inflation—if we misuse the term to mean the rising prices themselves—is caused solely by printing more money. For this the government’s monetary policies are entirely responsible.  

The reason Prof. Basu fails to understand inflation is because his understanding of “money” itself is extremely poor. For him money is, “nothing but a generic promise from society – the government being the most important representative of that – that you will be able to change these useless bits of paper for actual goods and services in the future (p. 57).Nothing could be farther from the truth. Prof. Basu is forgetting to take into account last 6000 years history of money. As originally discussed by Aristotle and later on elaborated by Rothbard (M. Rothbard 2008a: 6-8), proper qualities of money are, 1) already heavy demand in the market, 2) high divisibility, 3) easy portability and for that money commodity must have high value per unit weight, and for that it must be scarce[3], 4) should be highly durable so that it can serve as a store of value for a long time[4].  The founder of the Austrian School of Economics, Carl Menger, in his very important work The Origins of Money (Menger 2009), very clearly defined what money is and how it evolves in the market through thousands of years of cultural evolution. As explained by Menger, some commodities (gold and silver) which had proper qualities of money slowly evolved as a common medium of exchange in the market. Later on in 1912 Ludwig von Mises through his “money regression theorem” conclusively demonstrated that, money does not and cannot originate by the order of the State or some sort of social contract agreed upon by all citizens; it must always originate in the processes of the free market[5]. This exposes the error of Prof. Basu’s definition of money. During last 6 millennia’s evolution, gold and silver has clearly defeated all other competing monies in the market (Maloney 2008). The pure paper promise money to which Prof. Basu is alluding is actually a currency, and only 40 years old phenomenon started by American President Nixon in 1971 when he closed the gold window. Just before 100 years ago most countries were on the classical gold standard[6]. Even 150 years or so ago India was on the silver standard. The frantic rate at which Indian, Chinese and people around the world as well as most major central bankers are presently buying gold (and silver) amidst high government inflation should give Prof. Basu some reason to pause and doubt his definition of money!

I have run out of space here and so can’t discuss Prof. Basu’s other erroneous views regarding demand management, interest rate manipulations, use of price index for measuring inflation, currency competition, interventionism etc. Although I appreciate him for his realisation that human societies and economies are very complex in nature, but lament that despite this realisation he still wants to micro-manage everything, instead of leaving it all alone. 

I will end with a humble request to Prof. Basu, that in the true spirit of Science – which he hails very much in his article - he seriously consider the contributions of the Austrian school to aid him in understanding and combating the “emperor of maladies”, inflation.  

References


Hazlitt, Henry (1960), What you should know about inflation (Princeton, N.J.,: Van Nostrand) 152 p.
--- (1983), The inflation crisis, and how to resolve it (2nd edn.; Lanham, MD: University Press of America) 192 p.
--- (2004), 'Inflation in One Page', The Freeman, 54 (9).
Maloney, Michael (2008), Guide to investing in gold and silver : everything you need to know to profit from precious metals now (Rich dad's advisors; New York: Business Plus).
Menger, Carl (2009), The Origins of Money (Auburn, Alabama: Ludwig von Mises Institute).
Mises, Ludwig von (1998), Human Action: A Treatise on Economics (The Schoalr's Edition edn.; Auburn, Alabama: Ludwig von Mises Institute).
Mises, Ludwig von and Batson, Harold E. (1953), The theory of money and credit (new edition, enlarged with an essay on monetary reconstruction / translated from the German by H. E. Batson. edn.; London: Jonathan Cape) [iii],493 p.
Oresme, Nicholas (1956), The De Moneta of Nicholas Oresme and English Mint Documents (London: Thomas Nelson and Sons Ltd).
Rothbard, Murray (2006), An Austrian Perspective on the History of Economic Thought - Economic Thought Before Adam Smith, II vols. (I; Auburn, AL: Ludwig von Mises Institute).
--- (2008a), The Mystery of Banking (2nd edn.; Auburn: Ludwig von Mises Institute).
--- (2008b), What has government done to our money? (Auburn: Ludwig von Mises Institute).
Rothbard, Murray Newton (2004), Man, economy, and state with Power and market (Scholars edition) (2nd edn.; Auburn, Ala.: Ludwig von Mises Institute) xcix, 1441 p.
Sennholz, Hans F. (1979), Age of Inflation (Libertarian Press).
Soto, Jesus Huerto De (2006), Money, Bank Credit, and Economic Cycles (Auburn, Alabama: Ludwig von Mises Institute).





End Notes

[1] Eliminating inflation is very much possible. Those who want to know more can read these important works, (Hazlitt 1960, 1983, 2004; Sennholz 1979)

[2] As quoted in, (M. Rothbard 2006: 106)

[3] Government paper tickets are not scarce; they can be printed endlessly with computer digits. And this is the reason why it is causing such a high level of inflation.

[4] It is clear that government’s useless bits of paper have no such qualities. A piece of paper can’t become money even if it is forced on populace by government through fiat and other legal tender laws. Government pure paper monetary standard is dying all over the world. 

[5] See, (M. Rothbard 2008a: 3)

[6] I don’t have sufficient space here to go deeper in my discussion of these points. Interested readers are advised to read, (M. Rothbard 2008b).

Wednesday, November 23, 2011

How the Indian Government and RBI is Debasing the Currency

Inflation is killing the common man and the Indian government and RBI is hell bent on debasing the currency. This debasement is a type of inflation which government is taking resort to to finance its boondoggles. The evidences of this inflation which I am presenting here are of Indian currency coins. The pictures clearly reveal the deteriorating quality of these coins because of government debasement. Since years they are doing this, but recently the speed of debasement has increased rapidly. So without any further delay I present the evidences.

The first picture presents 1 rupee coins. First 1 rupee coin (all coins described from the left hand side) is from year 1998. This coin had at least some fine print work. When you compare it with others, you can at least say that it is bit heavy and had better print work on it. Next coin is of year 2000. Next to that is year 2008 coin. Just in 10 years time the 1 rupee coin has lost all its quality of weight and fine print. This coin is very light because government's cost of buying metal for its mint has gone up due to inflation, so they are using inferior quality metal. And it has no fine prints. Just a thumb (actually government is showing a thumb to all of us that look we are fooling you and you can't do anything!!!). Real shock is the latest 2011 coin, the last one. Compared to other past coins this coin is absolutely small; actually half size (compare the size in picture)! It has lost all the weight too. This is government debasement at full speed people.    
1 Rupee Coins (Various Years)

Alright now let's see 5 rupee coins. The first coin is of year 2003, and the next of 2010. You can clearly see the difference is size and weight. I took the picture from a 60 degree angle to show you all the difference in thickness of these coins. 2003 coin is of course more heavier than 2010 coin. And to fool people government also minted the 2010 coin in Gold color, as if it is a gold coin! Hilarious. Just keep that coin untouched for couple of months and it will start to rust. 

5 Rupee Coins (Various Years)





Now couple of 2 rupee coins. First coin is of year 2000 and the next one (showing two fingers) is of year 2010. 2000 coin is surely heavy then 2010. It also had some fine print, while 2010 coin just shows two fingers to us! Government mints now have no time to show the craftsmanship [sic] on their coins. Just quickly print and put it into circulation!

2 Rupee Coins (Various Years)
 Finally some coins which no one uses these days because they have lost all their value due to years of government inflation. These coins are rarities these days. One coin - 25 paisa - is officially withdrawn from the circulation! First coin is of 3 paisa (yes 3 paisa)!!! That coin belongs to year 1965. Long gone those days when 3 paisa had some value. Today when governments are speaking only the language of billions and trillions, there is no place for poor paisa! Next coin is of 10 paisa. It has also lost all its value and hardly anyone uses them now. Next two coins are of, now dead, 25 paisa. Due to government inflation these coins are now worthless.


To describe this grim situation of government inflation, I will end by saying, as brilliant Murray Rothbard said, what has government done to our money?!


Saturday, November 12, 2011

About Government Crony Capitalism, Vijay Mallaya and his Kingfisher Airlines

Recent economic troubles of Kingfisher Airlines has brought in focus many important issues re how the centrally planned Indian economy is faltering, how these so-called business tycoons like Vijay Mallaya are a disgrace, and how government is always helping their cronies in the business world and elsewhere.

As I have noted many times in the past, the whole story of emerging Indian economy is bunkum. Sure some people are doing extra ordinary hard work and producing the economic goods which every other lazy bums like politicians, bureaucrats, government workers, and other such parasite class of society are enjoying shamelessly. But, notwithstanding that, whatever phony growth figures Indian officials are reporting are just figures on the paper; mostly a result of Keynesian money printing programs of Indian central bank RBI. Indian economy is a classic example of an artificially (paper) inflated boom, which is now busting e.g., growth figures are now revised downward, industrial production is at 2 years low, banks are downgraded etc.

While this bubble is busting, business tycoons like Vijay Mallaya are getting exposed. His Kingfisher Airlines is facing huge amount of debt due to which he has to cancel many flight routes recently. Rising borrowing cost in the form of increased interest rates and high fuel prices has broken the back of his company. This was very much expected because when the artificial boom is going on everything looks very rosy and upbeat; businessmen are fooled by the government and central bank low interest rate policies. Vijay Mallaya was also fooled. He is now making senseless statements which is putting a question mark on his abilities to run a business profitably e.g., he is saying whether it is his duty to fly the loss making routes!? Duty of an entrepreneur is to take care of his company's share holders and his consumers. And if he fails in his duty then he should shut down his business. The problem with him is, after going bust, he went to government requesting a bailout or some sort of other help. Basically he is trying to stick his company's bill on the back of poor tax payers! He enjoyed privately the profit of his company, but now he is trying to socialize the losses. This is a disgrace. This is crony capitalism (crony capitalism has nothing to do with true free market Capitalism). I am not sure how Mallaya got so rich in the first place, but I suspect that he earned his wealth surely by being in bed with the government, in stead of truly satisfying the most urgent wants of his consumers. He squandered precious resources of his investors and thus should be allowed to be stripped off of his wealth. He must take the losses; he must foot the bill of his financial blunders. His company should be allowed to go bust or restructure and being taken over by some other healthy firm.

But, what we see in stead? We see that the wonderful [sic] Indian government and its prime minister Mr. Manmohan Singh - who, I have to finally say,  is increasingly showing signs of economic illiteracy - is promising to draw a Kingfisher airline rescue plan! I don't know from where he learned this 'bailout economics', but Mr. PM needed to be reminded of a wonderful system of  'profit and loss'. India is supposedly implementing 'market reforms', and in a market when a company fails to satisfy its consumers' most urgent wants, it goes belly up. No one rescues such loss making firms. It is for everyone's good that such firms go out of business because only then the owner entrepreneur of that firm can be stopped from wasting precious resources of investors and consumers. Not bailing out (or rescuing) such firms is socially beneficial because when such firms go out of business they are taken over by more efficient firms.

Instead of bailing out such loss making failed entrepreneurs, they should be condemned by everyone. The mass public - under the influence of lefties and commies - always blame profit making businessmen. But that is wrong. Those businessmen who are earning their profits honestly by serving consumers are true heroes of society; they are lifting everyone's standard of living. contrarily, those businessmen who are making losses are not serving their consumers and  wasting investors' resources. People should be condemning such loss making entrepreneurs and not someone who is improving their living standards.           

By rescusing loss making Kingfisher Airlines and a failed businessman Vijay Mallya, the government and Mr. Manmohan Singh are only promoting an inefficient system. They are promoting losses. They are promoting failure. They are helping their cronies who fund their elections. As I always say, governments are never here to serve people; they are here to serve their cronies. This Kingfisher episode is just another stark evidence of this centuries old known fact.

Friday, November 4, 2011

Prime Minister Manmohan Singh is Wrong on Inflation

Inflation in India is edging up steadily and stubbornly. It is not abating a bit, and people are getting frustrated. Such relentless rise in the prices of goods and services is now testing the patience and nerves of the Indian populace. Amidst all these hardships, the politicians - who are in charge of policy making - are evading any serious discussion of inflation and its causes. Not only they are not serious, but their mind numbing and irresponsible statements regarding the causes of inflation are now becoming very frustrating, especially for someone who knows economics. I can understand the ignorant statements of finance minister Pranab Mukherjee and Mr. Advani, but it is hard to fathom what is wrong with prime minister Manmohan Singh who is an academic economist having a PhD degree from Oxford! A former economics teacher of famous Delhi School of Economics seems to have forgotten his economics.

After the recent hike in petrol prices by the government owned petrol companies (PSUs - Public Sector Units) like HPCL the outrage is growing and some of the political parties in UPA government are threatening to pull out from the coalition Singh government. Looking at this uproar PM Manmohan singh issued some amazingly ignorant statements about the possibe causes of Inflation. Here is what he said:

"What prices are going up are prices of vegetables, prices of eggs, prices of fish, that is the secondary and tertiary food items. That is a reflection of the demand for these commodities exceeding supplies....That in turn, to some extent at least, is a sign of growing prosperity of our country. If our national income increases by 8 per cent per annum and our population is increasing at 1.6 per cent per annum, the per capita income is growing at 6-6.5 percent....It is bound to lead to a demand for more diversified type of food basket. I am not saying this is a fool proof way of describing this complex reality, but in analyzing food inflation, I think, this is an aspect that should not be lost sign of."

Apart from being highly insensitive to the plight of poor people, these statements reveal that Mr. Manmohan Singh is just making Keynesian rhetoric. Keynes was wrong on about everything that he wrote in his General Theory and so does Mr. Singh who is using Keynesian paradigm for finding causes of inflation. I don't need to refute Mr. Singh here line by line because Henry Hazlitt - some 50 years ago - demolished the Keynesian system literally line by line in his brilliant work, The Failure of New Economics.

I will only add one thing here is, that Mr. Manmohan Singh should try to understand Jean Baptiste Say's 'Law of Markets' which states that 'there can be no demand without supply' in the market or as famously - although rather misleadingly - known as 'supply creates its own demand'. This implies that, if Indians are becoming prosperous then they are already producing the supply of goods which they are demanding from each other. In such a situation there is no question of demand outstripping the supply of goods and services.

Although Mr. Singh is partially right when he says that the demand for goods and services is rising, but his subsequent analysis is erroneous. He needs to ask himself how and why the demand in the economy is rising? Is this demand real - i.e., created by producing real wealth - or created artificially by printing truck load of phony currency by the RBI? If he will try to find answers of these questions by using sound economic theory then he will find that this increase in demand is artificially created by RBI money printing and government's profligate spending of this money e.g., already government's fiscal position is worsening before the financial year ends.

I understand Mr. Singh is very busy and thus he won't be able to study inflation in detail. Precisely because of this reason I humbly request and urge him to read Henry Hazlitt's Inflation in One Page (pdf link). This one page explanation of inflation by Hazlitt is what is all that Mr. Singh needs to correctly understand the phenomena of Inflation. If he will read this page then he will find the following logical explanation of Inflation:

Inflation is an increase in the quantity of money and credit. Its chief consequence is soaring prices. Therefore inflation—if we misuse the term to mean the rising prices themselves—is caused solely by printing more money. For this the government’s monetary policies are entirely responsible.

After reading this, I hope and am sure that Mr. Singh will stop making highly irresponsible statements like above. It will also help him in combating the inflation monster decisively, if he is at all serious in combating it in the first place.

Thursday, November 3, 2011

Is the Present Economic and Social Mess Capitalism's Fault?

The American economy and society both are crumbling. European Union [sic] is in tatters. Majority of western world countries are on the brink of a disaster or as Doug Casey says, have entered in an eye of the hurricane. Just like the Middle Eastern countries waves of angry protests are filling the streets of Greece, Italy, Spain, UK, USA and many other occidental countries. The recent Wall Street Protest movement in America is symbolized by many as peoples' anger against Capitalism or the 1%, who are painted as wicked capitalist pigs! Many writers and so-called intellectuals are claiming that this episode in Western world is an evidence of the failure of Capitalism e.g., see here and here. Tragically, many OWS protestors are demanding Socialism!

So, is this finacial crisis and now sovereign debt default threats a wrongdoing of Capitalism? Is Capitalism responsible for peoples' misery? What is actually Capitalism? Do these writers  - who attack Capitalism - even understand what Capitalism is? I very briefly investigate these and other such questions in the following paragraphs.

Causes of Financial Crisis
The financial crisis, which began in 2007, precipitated in the present world events was actually a making of greedy government officials and its few banker buddies. Corporate greed has nothing to do with this crisis. Not only corporates are greedy, but every individual on this planet is greedy in one way or another. Businessmen work for monetary profit, an ascetic person - e.g., a monk - works for a psychological profit i.e., Nirvana. Both are greedy for achieving more and more of their subjectively chosen ends. Self interest and greed is a driving force of life. Without greed life will stagnate and stink. Bankers would have never taken this much risk if their businesses were not insured by the federal government e.g., FDIC (Federal Deposit Insurance Corporation). The so-called GSEs (Government Sponsored Enterprises) Fannie Mae and Freddie Mac were responsible for fueling the real estate bubble. Federal government's 'Community Reinvestment Act' resulted in the 'sub-prime mortgage crisis'. US Government created the moral hazards in the first place by creating these regulatory institutions and now they are scapegoating the corporate world for their greed and moral corruption! Federal Reserve - the American central bank, which btw is a cartel secretly created by the US government in cahoots with few big banking houses in 1913 - is the institution which provided the endless cheap money to bankers, which they then betted on risky financial instruments like MBS and other such derivative products. Federal reserve bank, under the leadership of Alan Greenspan - kept the market interest rates artificially low for too long creating an artificial real estate bubble. This bubble popped in 2007. And when this bubble popped, instead of allowing the toxic assets to liquidate in the ensuing recession, Bush and Obama governments created another big bubble on top of that bubble in the form of various stimulus packages and federal reserve 'quantitative easing (QE) programs'. Even right now the US fed has kept the interest rates to almost zero (ZIRP - Zero Interest Rate Policy) percent for up to mid 2013! These artificial stimulus are the real cause of this crisis, and by printing truck load of money under these programs the American government has surely baked in future (possible) hyperinflation and following greater depression.

Those who are interested in looking into an in-depth analysis of these events with empirical evidences should read Thomas Woods, Meltdown.

The EU Crisis
In Europe the situation is slightly different. The forceful creation of Euro and the EU by few greedy European politicians created moral hazards for the individual country government officials e.g., Ireland, Greece, Portugal, Italy, Spain etc. As Philipp Bagus analyzed in The Tragedy of the Euro, formation of these institutions created the problem of the tragedy of commons in Europe where by finding that free money is available from ECB (European Central Bank) these government piled on excessive debts. Now these governments are finding it hard to repay their debts - which are running in 100s of percentages of their GDP - and are about to default on their debt obligations. They have only two options left now: one, either default on their debt and repudiate the debt or, two, try and inflate to pay their debts in debased currency. In either case European countries are toast.

Capitalism or Government Intervention/Socialism?
The fact of the matter is, that in the whole world presently there are no free market capitalsim economy. All economies are controlled by the governments and planned centrally. US Fed, ECB, FDIC, Community Reinvestment Act, Fannie Mae and Freedie Mac etc., are not the product of free market capitalism. They are product of government interventionism and socialism. In absence of all these institutions there would have never been any real estate bubble, there would have never been any sub-prime mortgage crisis, and there would have been no EU and no Euro. In a free market economy, if some bank lent recklessly then they will surely go bankrupt. No government will come and bail them out like what is presently happening. If some business made error then it will go belly up; no one will bail them out too.

How in a world someone can blame a system for all these troubles when that system doesn't even exist?! People - especially those writers who are blaming Capitalism - need to wake up from their slumber and carefully see and analyze all the evidences by using sound economic theory. They can begin by reading the books which I have cited above. If they will do that then it won't be too late before they will figure out what I just said above i.e., if you have to blame someone for these troubles then blame your governments and their interventions in the economy.

As Lew Rockwell very aptly said, The State is the real 1%.

Thursday, September 29, 2011

Should Rich Pay Higher Taxes?

Yesterday's newspaper The Hindu reported that India's tainted home minister Mr. Chidambaram wants to raise taxes on rich people (you can read the full story here). He was quoted as saying, “We must raise the tax revenue to defend [the expected aggregate decline of resources]. I know many people won't like this. But, I think, I can summon up the courage to make the statement...I [was] the Finance Minister who slashed your tax rates. Therefore ... you must be prepared to pay higher tax rates, especially the rich must be prepared to pay higher tax.”

Is Chidambaram right about his proposal for raising tax on rich people? Is his policy economically and financially sound? Readers of my blog will know my answer that any kind of taxation is an outright theft of peoples' hard earn money. But I will let one of the greatest economist of 20th Century, Ludwig von Mises, answer these questions. I am reading his extremely important book The Causes of the Economic Crisis right now and came across a couple of paragraphs which specifically addresses this issue of 'raising taxes on rich people'. This is what Mises said,

One widely held view, which easily dominates public opinion today, maintains that taxes on wealth are harmless. Thus every governmental expenditure is justified, if the funds to pay for it are not raised by taxing mass consumption or imposing income taxes on the masses. This idea, which must be held responsible for the mania toward extravagance in government expenditures, has caused those in charge of government financial policy to lose completely any feeling of a need for economy. Spending a large part of the people’s income in senseless ways—in order to carry out futile price support operations, to undertake the hopeless task of trying to support with subsidies unprofitable enterprises which could not otherwise survive, to cover the losses of unprofitable public enterprises and to finance the unemployment of millions—would not be justified, even if the funds for the purpose were collected in ways that do not aggravate the crisis. However, tax policy is aimed primarily, or even exclusively, at taxing the yield on capital and the capital itself. This leads to a slowing down of capital formation and even, in many countries, to capital consumption. However, this concerns not capitalists only, as generally assumed. The quantitatively lower the ratio of capital to workers, the lower the wage rates which develop on the free labor market. Thus, even workers are affected by this policy.

Because of tax legislation, entrepreneurs must frequently operate their businesses differently from the way reason would otherwise indicate. As a result, productivity declines and consequently so does the provision of goods for consumption. As might be expected, capitalists shy away from leaving capital in countries with the highest taxation and turn to lands where taxes are lower. It becomes more difficult, on that account, for the system of production to adjust to the changing pattern of economic demand. (pp. 175-176)

Now, do I need to say anything more?

Mr. Chidambaram must understand that he has no rights to poke his nose in private business affairs. His wrongheaded economic policies will ruin the Indian economy and society if implemented. I dearly wish that instead of innocent honest hard working common man becoming unemployed, all these politicians become unemployed forever. Then and only then this country and our world can progress.

Saturday, September 24, 2011

Prime Minister Dr. Manmohan Singh's UN Speech - An Analysis

Yesterday Indian prime minister Dr. Manmohan Singh delivered a speech in New World Order's headquarter i.e., UN (United Nations) in Washington D.C. I just casually read couple of paragraph and found many things which are worthy of critical comments. Below I am critically analyzing PM's speech. PM's speech excerpts will be quoted and will be followed by my comments.

1. Till a few years ago the world had taken for granted the benefits of globalization and global interdependence. Today we are being called upon to cope with the negative dimensions of those very phenomena. Economic, social and political events in different parts of the world have coalesced together and their adverse impact is now being felt across countries and continents.

Comment: This means that neither the prime minister nor his team of economic advisers had any idea about the economic bubble which was developing in the western world. With the whole world (except few Austrian economists) he too took the artificially created fiat paper currency economic growth for granted! I wish he knew about the 'Austrian Business Cycle Theory'! I wish he also knew how the western world empires, especially American empire uses words like globalization to further their imperialism!

  
2. The world economy is in trouble. The shoots of recovery which were visible after the economic and financial crisis of 2008 have yet to blossom. In many respects the crisis has deepened even further.

Comment: There were no green shoots after the financial crisis of 2007. World economy never recovered. World governments (including India) and their central bankers just printed and spent a whole lot of money to stop the inevitable recession. Because of that gigantic spending spree of governments (stimulus packages and thug banker's bailouts etc.) the economy was showing phony signs of recovery. At that time I said that this money printing is actually going to make matters worse and it will turn the recession into a greater depression of this century. And now we can see that happening. Situation in September 2011 is much more worse than situation in 2008. By printing truck load of money these people just kicked the cane of depression down the road for couple of more years! Delaying the recession is going to make it more prolonged and painful.  

  
3. The traditional engines of the global economy such as the United States, Europe and Japan, which are also the sources of global economic and financial stability, are faced with continued economic slowdown. Recessionary trends in these countries are affecting confidence in world financial and capital markets.

Comment:  First of all, global economy is not a 'car' and US, Europe and Japan were never a source (engine) of global economic and financial stability. Japan is in recession since last 20 plus years, United States government is the root cause of all these troubles which the world is facing today and the creation of EU and Euro sowed the seeds of sovereign debt mess we see there today. 

4. These developments are bound to have a negative impact on developing countries which also have to bear the additional burden of inflationary pressures.

Comment:  Developing countries are equally responsible for creating inflation in their local economies through reckless easy money policies. PM should refrain from blaming western world for his own mistakes. India can very well avoid inflation if they follow sound monetary policies.

5. Declining global demand and availability of capital, increasing barriers to free trade and mounting debt pose a threat to the international monetary and financial system. Questions are being asked about the efficacy of the Bretton Woods institutions.

Comment: I just wish Mr. PM read Henry Hazlitt's, From Bretton Woods to World Inflation.

6. The Palestinian question still remains unresolved and a source of great instability and violence. India is steadfast in its support for the Palestinian people's struggle for a sovereign, independent, viable and united state of Palestine with East Jerusalem as its capital, living within secure and recognizable borders side by side and at peace with Israel. We look forward to welcoming Palestine as an equal member of the United Nations.

Comment: My only suggestion to Mr. PM is to follow a 'Neutral' foreign policy. Meddling in foreign affairs will always ruin your country.

7. Terrorism continues to rear its ugly head and take a grievous toll of innocent lives.
  
Comment: He should ask himself a question that, what is the root cause of terrorism? If he will ask then he will find the answer in foreign occupation! Indian army is occupying Kashmiri peoples' land and this terrorism is just a blowback of that occupation.
 
8. Iniquitous growth, inadequate job and education opportunities and denial of basic human freedoms are leading to growing radicalization of the youth, intolerance and extremism 

Comment: His own government (and all governments basically) is also following these same policies. India is a socialist country where words like 'freedom' are alien. If he is so worried about basic freedom of people then why not stop meddling in Indian peoples' lives.  He should begin by abolishing income tax. Income tax is the fundamental attack on individual's private property and thus his freedom. Can he do it?

9. We have no choice but to meet these challenges. We will succeed if we adopt a cooperative rather than a confrontationist approach. We will succeed if we embrace once again the principles on which the United Nations was founded --internationalism and multilateralism.

Comment: UN was founded only to create Anglosphere power elite's One World Empire. Mr. PM should better know about this.

10. More importantly, we will succeed if our efforts have legitimacy and are pursued not just within the framework of law but also the spirit of the law. 

The observance of the rule of law is as important in international affairs as it is within countries. Societies cannot be reordered from outside through military force. People in all countries have the right to choose their own destiny and decide their own future. 

Comment: Mr. PM should know that only the Libertarian law will enable the world to be a peaceful, just, prosperous and civilized place.If he is really serious about law then he and his government should start implementing this law in his country. Mr. PM and his government should let Indian people choose their own destiny and decide their own future! He should put his money where his mouth is.

11. There are many other things that we can do. We must address the issue of the deficit in global governance. We need a stronger and more effective United Nations. We need a United Nations that is sensitive to the aspirations of everyone - rich or poor, big or small. For this the United Nations and its principal organs, the General Assembly and the Security Council, must be revitalized and reformed.

Comment: Well, he should better address the issue of deficits (here, here) of his own government.

12. The recent assassination of Professor Burhanuddin Rabbani in Kabul is a chilling reminder of the designs of the enemies of peace in Afghanistan. It is essential that the process of nation building and reconciliation in that country succeeds. This is vital for ensuring peace and security in the region.

Comment: Nation building succeed? In his speech he said we should not force countries from outside and now he is supporting nation building in Afghanistan! That's Orwellian doublethink.


Rest of his speech is full of contradictions just like the ones which I cited above. And in any case such talks hardly matters. What is important is these governments' actions against their people. And their actions of not allowing us to live freely speaks a lot about their intentions of never leaving their political powers voluntarily.

Thursday, September 8, 2011

Will the Indian Economy be overheated by 2012?


Recently the Business and Economy magazine which is published by IIPM asked me to write a column on Indian economy's future. They specifically wanted to know whether the Indian economy will overheat i.e., will it experience high rates of inflation or possible hyperinflation. Below I am reproducing my column which I wrote for IIPM. This will give an idea to all of you for what economic dangers we all are facing in coming future.

 

Will the Indian Economy be overheated by 2012?


By
Madhusudan Raj,
Alumnus, Ludwig von Mises Institute, Auburn, Alabama, U.S.A.

and

Visiting Lecturer in Economics, Department of Human Resource Development, Veer Narmad South Gujarat University, Surat, Gujarat, India.



If I reinterpret the economic meaning of this nonscientific Keynesian language of overheating[1] of the economy then the question is, whether the Indian economy will experience very high level of inflationary effects by 2012? Although we Austrian economist know about the dangers of making any precise prediction of the future state of the economy, but nonetheless based on theoretical and thymological knowledge it is possible to discuss some of the possible future scenarios. What is going to happen in future will mainly depend on what kind of economic - especially monetary - policies the Indian government is going to pursue in present. In the following paragraphs I analyze possible governmental economic policies and their consequences.

First and foremost, if you are reading everyday news headlines and doing daily shopping in the market then you must by now be knowing that the economy is already experiencing the harmful effects of high rate of inflation - which government has created by printing gigantic amount of money after the initiation of 2007 financial crisis - in the form of high prices of various goods and services. Apart from the present day inflationary situation in future mainly two things can happen:

  1. If the Indian government and RBI continue to follow their present day easy money policy of printing heaps of money out of thin air then inflation or possible hyperinflation is already created by them. If they print and spend this money now then its effect in the form of high prices of goods and services or alternatively and more accurately stated, the lower purchasing power of money will be seen in 2012 or possibly by the end of this year. Giving a precise date for such phenomena is impossible as well as not advisable because economy is very complex and there are many factors which can alter the situation very quickly e.g., a possible drought this monsoon combined with reckless easy money policy of government can result into very high prices even before 2012 or a sudden collapse of dollar, a possible break-up of EU and demise of Euro, or may be the collapse of unsustainable Chinese economy can also have a big impact on the Indian economy. In short, rupee will continue to lose its purchasing power as long as Indian government and RBI are running their money printing presses at full speed; and   
  2.  If they stop printing money then you will see a healthy liquidation of prior mal-investments and economy improving quickly through corrective recessionary phase. People need to understand that recession per se is not bad; what was bad was the prior artificial boom which was created by the central bank through its lackluster easy money policies. If there is no artificial boom to begin with then there won’t be any recession. During recession entrepreneurs adjust their actions according to the subjective time preferences of individual citizens by allocating resources where they are most urgently needed by them. So, if government stops printing truckload of money then economy will enter into a brief period of recession and then again start its normal course of action.

Now the question is - which one is the more likely scenario? The answer lies in historic and thymological knowledge. If history is our guide then all that the past tells us is, that all governments are inherently inflationary in nature. Human nature indicates that people like to recklessly spend others’ money or the money which they can create out of thin air without doing any productive work. Politicians and bureaucrats are precisely in this position. They don’t have to do any productive work in the market to earn their income; they just have to rob the tax payers through taxation and inflation to go on their spending spree in the name of growth and development.  The absurd Keynesian economics, which government policy makers love to follow, gives them the much needed excuse for their reckless spending. Not only it provides excuses, but it advises them to actually spend more money to get the economy out of recession viz., the so-called pump priming program. I fail to understand how a normal person can advise a policy of fiscal extravagance when our economic woes are result of precisely this same policy of reckless government spending in past. How can you solve a problem of debt by taking on more debt? Einstein defined insanity as, that tendency of human beings of doing the same thing over and over again and expecting different results!  

Actually the government policy makers have painted themselves in the corner. On one side if they stop printing money then the economy will enter in a short but painful recession which for them is politically incorrect policy. Most mainstream economists see price deflation as a bad economic phenomenon thus they advise governments to avoid it at any cost. For them price stabilization is the best policy, which actually is the cause of this economic mess. Thus, to avoid the correcting recession they are just going to print more and more money. And this money printing is going to create high rate of inflation or possible hyperinflation in the economy, which again will be politically dangerous for them. In either case they are going to collapse the economy. Most mainstream economists will say that this is an unavoidable trade-off between inflation and growth! But, this so-called trade-off between inflation and growth is a pure myth; an artifact of faulty economic reasoning. In reality there is no trade-off between inflation and growth. We can have growth without inflation[2], but such policies are anathema to the politicians who always want to cling to power by keeping the public weak and dependent.

Considering this theoretical and thymological knowledge it is pretty much sure that government officials will continue to print money; they voluntarily will never stop wrecking inflationary havoc in our lives. They will finally be compelled by the market forces - i.e., peoples’ actions - to stop their inflationary madness. Such inflationary policies cannot help for long because sooner or later such situation will go out of politicians’ control[3] and a crack-up boom will ultimately collapse the whole monetary system of fiat paper currency, as it happened a couple of years ago in Zimbabwe.

Looking at this dire future, everyone should prepare for the worst because we are entering very volatile phase of our time where inflation and depression (stagflation) can follow by a possible world war because this very Keynesian economists - e.g., Paul Krugman - wrongly believe that destruction in the form of war or natural disaster etc., is good for the health of an economy! They believe that 2nd World War brought the American economy out of great depression! I don’t want to scare people and play a role of a doomsayer but at the same time I cannot afford to keep my audience in dark about the realities of today’s world. These are all possibilities which any sane person cannot afford to ignore today. So, continue to accumulate real hard assets like gold and silver regularly and stay away from paper promises. Preserving our wealth in the form of real savings will help us all in seeing through the coming economic disaster.  








[1] Nonscientific because economy is not a car and consumption is not an engine of that car so that the economy will overheat! Comparing economy with a car is absurd. Making such false analogies is very dangerous for understanding the true nature of the economy. Use of such metaphors can guide as well as misguide us in our understanding. This is the reason why it is necessary to use the precise economic concepts while doing sound economic analysis.
[2] Because of space constraint I cannot elaborate this point here. Interested readers can find the detailed analysis of this in, Jesus Huerto De Soto, Money, Bank Credit, and Economic Cycles (Auburn, Alabama: Ludwig von Mises Institute, 2006).
[3] Indian Prime Minister Manmohan Singh already said that, the inflationary condition is out of his control! Instead of making such irresponsible statements he should read and understand Henry Hazlitt’s brilliant one page explanation of inflation, Henry Hazlitt, "Inflation in One Page," The Freeman 54, no. 9 (2004): 41. Understanding inflation correctly will help him stop it.