Tuesday, May 29, 2012

What's wrong with the Indian Rupee?

The rupee is in a free fall against US dollar since last September. It has tanked from its high of 44 INR:1 USD to 55INR:1USD in the month of May; that's 25% decline in 9 months time. Indian rupee is the worst performing currency in the Asian region.

US Dollar v/s Indian Rupee


Everybody is concerned about it and, as usually, everyone is (wrongly) looking at the government and its central bank RBI for the rescue work. Business world wants RBI to take very proactive steps to stem the fall of rupee against dollar. Finance minister pranab mukherjee said, "It is a matter of great concern. We are watching the situation. The Centre is not (sitting) idle. We are trying to resolve (the issue)." And after that he, again as usually, blamed external forces for the weakness of rupee; he said, "This is due to the Eurozone crisis." 

Of course, finance minister is lying or is ignorant of economic laws. The exchange rate of rupee versus any other currency is determined by the demand for and supply of, both, rupee on one side and the other foreign currency on the other side. For example, ceteris paribus, if the demand for rupee increases, then, that will result in the appreciation of rupee against other foreign currency under consideration and if the supply of rupee increases, then, rupee will depreciate; and, if demand for rupee declines, then, rupee will depreciate and if its supply decreases, then, it will appreciate. On the other hand, if the demand for foreign currency increases, then, rupee will depreciate and if its supply increases, then, rupee will appreciate. If demand for foreign currency declines, then, rupee will appreciate and if its supply declines, then, rupee will depreciate.

Now we only have to see which factors are affecting rupee's depreciation in present. The fall of rupee is mainly due to the increased supply of rupee - due to RBI printing currency out of thin air. For these phenomenon, Indian government and RBI is entirely responsible. First of all, RBI's relentless printing of rupee is debasing the currency. Secondly, foreign investors are withdrawing their investment from India because the fragile hollow Indian economy is bursting after experiencing a prior artificial boom which was created by RBI by printing truck load of rupees; The growth rates are decelerating and the rampant inflation is not abating. On the other side, the politicians are making the investment environment in the country highly uncertain and unprofitable for the companies. Every now and then the government is announcing new regulations only to backtrack after few days e.g., the retail sector was initially opened for foreign investors and later was suspended. Finance Minister also declared that he and his government will not let India become a tax haven for the foreign companies e.g., they want to retrospectively amend the tax codes so as to mulct Vodafone company. These kind of lunatic legislation are creating total lawlessness in India which is scaring the companies. Moreover, one after another cases of political corruption is damaging the image of this country amongst the big investors e.g., Jim Rogers in an interview recently said that India is a good country for few days trip but is not suitable for long term investment because the government and people over there don't like rich people.

As we can see, the Euro zone crisis has nothing to do with the depreciation of rupee against other foreing currencies. In fact, in such crisis time in western world, if Indian economy was not hollow and Indian markets were free from the government interventions coupled with a monetary Gold standard (rupee defined in terms of underlying unit weight of Gold), then, rupee would have maintained its purchasing power without depreciating and in such a case foreign investors would've surely flock to Indian markets demanding rupee and in turn further strengthening it against other currencies.

Sunday, May 20, 2012

The Indian Real Estate Bubble: Signs from Surat City

Indian central bank RBI is fueling the real estate bubble since many years by keeping the rate of interest artificially below the natural rate of interest, which is determined by the societal time preference. When RBI keeps the rate of interest artificially lower, it induces or encourages entrepreneurs to borrow huge amount of money from banks to start lengthy projects which uses more roundabout methods of production. They are fooled by RBI in thinking that the supply of real savings is increasing which is lowering the rate of interest. In reality it is just RBI's money printing and creating money out of thin air process that is keeping the rate of interest lower. This results into mal-investment in those lengthy projects which are unsustainable in the long-run because the real saving is not forthcoming. RBI money printing finally results into inflation which forces the authorities to increase the rate of interest and this is the beginning of the bust of the prior artificial unsustainable boom. We call this bust, recession. The projects which were started by entrepreneurs are no longer feasible and so they are stopped totally or plans are changed to make them shorter. Economy starts to liquidate prior mal-investments which results into unemployment for those people who were employed in those lengthy projects. If the central bank and government don't interfere in this correcting recessionary process, then, economy soon recovers and healthy sustainable progress resumes. But, if they do intervene - as it always happens - via their monetary and fiscal policy, then, it exacerbates the problem and the mild recession turns into deep depression.

As I said above, RBI and the Indian government is fueling a real estate bubble which will soon bust. The artificial high prices of apartment homes are unsustainable and the correction finally will arrive. Recently I shot a short film capturing the evidences of this real estate bubble in Surat city, my home town. Below is that film. You will see the North West (Athwa) zone of Surat city in this film. The housing boom is clearly visible. This boom is not limited to Surat; it is visible in all major urban areas of India. Recent news are suggesting that the real estate bubble in Ahmadabad has already started to pop (see here). As I said, the Indian real estate bubble is heading for a crash. 





Thursday, May 17, 2012

RTE: Right to Education is WRONG!

Recently the supreme court of the political boundaries called India upheld the constitutionally "legal" nature and "rightness" of State rulers' so-called Right to Education Bill (see here). Under this legislation, State officials have made it compulsory for the on-paper private schools to keep 25% quota reserved for students of lower strata of society. Private schools challenged this ruling in the supreme court thinking that they will get the justice!

Well, what more can you expect from the judges who are selected by the State officials themselves? They are all part and parcel of the same thug system of State. The independence of the judiciary system is an illusion. It is a joke on the intellect of the populace. The major issue of concern here is, whether someone has a right to education? and more fundamentally,what is a human right? Without understanding the concept of human right, and its negation, human wrong, it is impossible to discuss such issues let alone passing judgements on them by the supreme court judges.

What is a 'human right'? 

To understand what is right and what is wrong for humans we must first understand the basic human nature in context of which these rights and wrongs are defined and discussed.

Every living human being on this planet has one overriding goal in his life of survival. For most people this goal is actually ancillary to the goal of gene propagation i.e., of passing his genes successfully to the next generation. The selfish genes, who are using human body for perpetual survival of almost immortality, propel human beings for instinctive survival. Now, survival in this complex , and most importantly a world ridden of scarcity, necessitates the use of various means to further the ultimate goal (or we can say, an end) of survival (Btw, even to commit suicide i.e., to end ones' life means are necessary). These means ranged from basic needs of food, water, shelter to luxuries such as internet, iPad, TV, car etc. These means are necessarily scarce, as I have already mentioned above. Scarcity is the condition of human life which we can not overcome by some magic. We have to deal with it head on. The means of food, water and shelter are not available for free in nature. Humans will have to first produce them in order to consume them later. For example, lonely Robinson Crusoe on an island economy will have to use his hands (labor) and beach (land) for catching fish from the sea before he can eat it. This is a very primitive form of production - but production nonetheless - with the use of original factors of production land and labor. Only after Robinson successfully catches his fish, he can consume it to survive. 

Further, - and this is more important for our discussion of human right and wrong - to use these means every individual human being must have freedom and an exclusive control - i.e., ownership - over the use his body and the unowned scarce physical resources which he first appropriates by using his body. This prerequisite freedom and the exclusive control over his body and scarce resources - technically known as, private property - is what is the fundamental human right. The ownership and control of this private property is what helps an individual to survive and that is why it is 'right'. Ownership of private property is pro-life and so it is 'human right'. Contrary to that, if Robinson is not free to use his property, then, he will die and that is surely 'wrong'. Thus, stopping someone forcefully from using his private property according to his subjective wishes is a 'human wrong'. Hence, private property right is the fundamental human right. There are no other 'human rights'. All other so-called rights are subsidiary to this fundamental right of private property. As Hans Hermann Hoppe says, private property rights are prerequisite of argumentation, which is necessary to make the decision of 'human right' and 'human wrong'. Humans can only decide whether something is right or wrong on the basis of argumentation. This 'a priory of argumentation' is the axiomatic basis of all human ethics.

Against this background we now have to judge whether a child - or for that matter anyone else - has a right to education. First off, as I said above, only those individuals can have rights who can argue for their rights. Without the process of argumentation, there are no other ways of deciding whether something is right or wrong. Physical fight or threat of such physical force can never decide anything because that will defeat the whole purpose of defining ethical (and moral) values for humans. The role of ethics in human society is to facilitate peaceful human interaction and cooperation. If people will start using physical force to decide what is right and wrong, then, there won't be any difference between a beast and human being. This implies that, animals don't have any rights because they can not argue for their rights with us! Animal owners do have rights and they can fight for their pet's right in the court through argumentation. Similarly, children also do not have any rights as long as they are not in a position to argue about it. The moment they start arguing for what is right and wrong for them and based on that they start making independent decisions, they acquire those rights. As with the case of animals, children's rights are taken care by their trusties i.e., their parents. Parents are the real owner of their children; children is parents' property (and not State officials', society's or nation's!!!). Actually, parents' role is that of a trusty. They are care-taker of their children till the time children mature and start taking their own decisions. All these means that, the right of taking a decision re whether a child will go to school or no lies exclusively with his parent. State officials have no say whatsoever in this decision making process. This fact in and itself explodes the bogusness and absurdity of government's RTE bill. State officials can never force parents to send their children to school against their wishes. The whole notion of compulsory schooling is an oxymoron. Schooling can never be compulsory; in fact, no decision can be compulsory. A child who is compulsorily attending school is a prisoner and his school is a jail, which is a fact re today's public compulsory schools (see this comparison between schools and prisons). Also, we all need to understand the distinction between schooling and education. Just by attending formal school classes, one is not going to become educated. In fact, the history of education tells that, those who escaped public schooling classes were truly able to educate themselves on their own e.g., see this. As great H L Mencken said, “The most erroneous assumption is to the effect that the aim of public education is to fill the young of the species with knowledge and awaken their intelligence, and so make them fit to discharge the duties of citizenship in an enlightened and independent manner. Nothing could be further from the truth. The aim of public education is not to spread enlightenment at all; it is simply to reduce as many individuals as possible to the same safe level, to breed and train a standardized citizenry, to put down dissent and originality. That is its aim in the United States, whatever the pretensions of politicians, pedagogues and other such mountebanks, and that is its aim everywhere else".

On the other hand, if a child wants to go to school but his parent are unable to send him, may be because they are poor (which mostly is the excuse cited for State intervention in education system), then, still that doesn't mean that education should be provided by the State officials by looting innocent tax payers. Poverty of others can never be an excuse for stealing other peoples' wealth. More importantly, we need to examine the root causes of this poverty, which is hindering parents from sending their children to school. If we dig deeper into the root causes of poverty, then, we will find that State itself is responsible for it. State officials create poverty first and then under the guise of removing this poverty, they loot tax payers. Actually, ground level evidences suggest that even the most poor of the poorest parents are saving money from their meager income and sending their children to low cost private schools which are providing far better quality education to their children compared to costly public schooling system (see here).

Above all, we need to understand that the free market is very well capable of providing high quality education to every children at the lowest possible price only if government allow it to function freely. As is always the case, because of government monopoly in the education sector, there is a huge lack of supply of private educational institutions. The demand for education is never a problem. Demand actually is never a problem in the economy. The problem always is with the supply. The goals of education can very well be accomplish if we abolish the government monopoly in education sector and allow free market to flourish again. Once the supply constraint is gone, there will spring all kinds of schools run by competent educator entrepreneurs catering all the strata of society. Increased supply will reduce the price of education and market competition will improve the quality.

These kinds of insane legislation will only increase the problems of education sector, just like any other government intervention in the market economy. Private schools will suffer heavily because they will have to bear higher cost now. Many schools will shutdown creating  more pressure on supply. That will further increase the cost of education.                

We all must clearly understand that, by passing such ludicrous legislation no one can educate the society. If just by passing such legislation one can solve society's problems, then, we all would've been living in a Garden of Eden long ago!

Monday, May 14, 2012

Socialism and the Corruption of Character

The debilitating effect of Socialism on peoples' characters is on full display in the series of election defeat of various incumbent pro-austerity governments in Europe. People in Greece, France and Germany have rejected the tough stance - which was just on the surface because in reality none of these governments actually lowered their spending even under the so-called austerity measures (see here) - of political leaders of suddenly stopping the political largess spigot aka free handout of money in the form of pensions, lower retirement age, government jobs, unemployment insurance etc.

As brilliantly analyzed by the German sociologist Franz Oppenheimer in his book The State, there are only two ways of ekeouting one's survival. One, through hard work producing valuable economic goods and selling them in the market receiving in return your own bread & butter i.e., money; Oppenheimer called this way the use of 'economic means', and second, stealing others' hard earned money for your survival, which Oppenheimer labelled as the use of 'political means'. As Mises, Rothbard, Hoppe and others have analyzed in their works, Socialism is a system which transfers (or redistributes) the income from the productive and propertied class of the society to the non-productive and propertyless class. And, government is the main vehicle on whose back socialism rides. Whether the government is of a Monarchical king or queen or it is of popular democratic parliament or outright totalitarian dictatorship, the underlying system of redistribution of property from tax paying class to tax consuming class remains the same.

Combined with this fact of the true nature of Socialism in its various guise, there is that selfish human nature. It is highly likely that given the option, most people on this planet would like to receive their income without doing any kind of (hard) work i.e., they will use 'political means'. Most people love free things. And, once they are habituated of receiving these free gifts from the Socialist governments, it is very difficult - if not impossible as we will see in a while - to take them off these free gifts; it is tough to change their habits very quickly in a generation or two.

On the other side, there are natural limits to any government largess because the system of transfer of income from the productive class to non-productive class results into, first, productive class losing their zeal of working hard because they know that if they earn more, government will steal that money, and second, more and more people receive incentive to jump onto government's free money band-wagon seeing it pays more not to be honest and hard working. This way the productive class - which is supporting the non-productive class - shrinks and the non-productive parasite class swells. This can go on only for sometime because as the parasite gets bigger and bigger the host slowly dies. And when the host is dead, the parasite is also dead. That means, when there is no tax paying class left to loot from, the tax consuming class also starts to die off. Sooner or later governments will have to stop their redistribution schemes and allow people to enjoy the fruits of their hard work. That means, the role of government must shrink and that of market economy must increase. This process of change can take place before it becomes too late for the society to stop the final wreckage in the form of hyperinflation or super depression if people understand the need of the hour and decide to let go the free money. But, as I said above, the spoiled habits are not that easy to correct in a generation or two. As the events are showing, it is highly likely that people will continue to vote for the Socialist redistributive governments as long as the whole economy is not wrecked. And that is where the whole world is headed now. And once the system is broke, people will be forced by the circumstances to change their habits.