India looking to the rain gods ... Despite growth in the services and manufacturing sector, the Indian economy is heavily reliant on the monsoon. Last year poor rainfall drove up food prices, which quickly moved into other sectors as well. The country's headline inflation rate, which was 10.6% in June, has been in the double-digits for five consecutive months (note: India is one of the few countries that continues to use the wholesale price index to measure inflation instead of the more common consumer price index). In response, the RBI has been on a rate-hike spree since January. Today, in its quarterly review, the bank raised rates more forcefully than expected as it continues to try to tamp down inflation. But rate increases may only provide short-term relief, as this recent episode with runaway prices has shown that the RBI isn't very serious about controlling prices. – The Economist
Dominant Social Theme: India needs to get its house in order.
Free-Market Analysis: Another day, another dry and witty Economist magazine article advising another large country on what its central bankers need to do. There is never any doubt within The Economist brain-trust that central banking is a necessary phenomenon, or that it merely needs to be done a little "better" to be effective. In this case, we are led to believe that India's ruling class simply needs to lurch into the 21st century and start taking central banking a little bit more seriously. Here's how the Economist puts it:
The Indian economy has one of the highest inflation rates among emerging market economies and is in danger of overheating. To get inflation back under control there is a case for redefining the role of the bank to focus on primarily on price stability. But for now the RBI thinks that rake hikes and reports of a good rainfall are enough to reign in prices.
We can see from this article any number of reasons why central banking itself is not at fault for a high inflation rate – the problem is simply in its application. The Economist writes, "Last year poor rainfall drove up food prices, which quickly moved into other sectors as well." This is nonsense. Price inflation is not some kind of mold that creeps from one sector to another. Price inflation is caused by monetary over-printing. But this apparently escapes The Economist.
The Economist also tells us that the Indian RBI is not charged with a clear mandate when it comes to "managing" the economy – neither managing inflation no unemployment. Even worse, the bank "targets multiple indicators that are known only to officials within the bank." We're puzzled however as to how exactly The Economist thinks things ought to be improved.
In fact, we would ask The Economist "newspaper" if we could: Where exactly has central banking succeeded? In the United States? In Britain (see other article in today's edition) or perhaps in Europe or China? China, as we have observed continuously and with increasing alarm, obviously has a price inflation problem as India does as well.
This has ramifications not merely from an economic point of view but also from a philosophical standpoint. We are told by various proponents of central banking that if central banks were only owned and operated by the state all would be well. People would have access to the money they needed and various procedures would be carried out that would sterilize the money circulating within the economy so as to avoid inflation.
But in the case of both China and India – where the state itself undoubtedly owns and operates the central bank (not some outside group of bankers) – we see inflationary problems presenting themselves nonetheless. It turns out perhaps that state-ownership is not such a panacea after all. Of course we are cognizant of (if not sympathetic too) the idea that neither China nor India are running their banks PROPERLY. This is in fact the thrust of The Economist article about India. In fact it is the thrust of most every Economist article of a certain type.
But it is impossible to manage money creation. The idea that central bankers can do so is merely a power-elite promotion, a dominant social theme. Bankers have no idea of how much money an economy needs, though are nonetheless driven to produce large quantities of money which are then driven into the economy by their commercial banking agents.
There is of course a great deal of talk about sterilization, quantitative easing, discount windows, etc. – all scientific soundings terms, which amount to nothing at all. Throughout the West, thousands of prestigious universities dump tens of thousands of trained economists on the world, each young person filled with the idea that it will be his or her mission to help "manage" money better, or at least comment learnedly on its management. Textbooks, journals and mainstream magazines are filled with this mumbo-jumbo. Turn on business channels and you will get a bellyful there a well.
Private or public, there are no forward-looking indicators that allow central bankers to anticipate where the economy is heading next. And even if there were, various political pressures make it all-but-impossible for central bankers to do much of anything but print money – and then after crack-up boom, print even more money. The idea that state-run banks can do a better job of running the money supply than private banks is evidently false as both China and India have significant inflationary problems.
Conclusion: There is no money but gold and silver. There is no way to manage monetary disbursement other than to let the market itself regulate the money supply. It is amazing that even within the blogosophere there are so few publications making the argument for a purely private gold and silver standard within a free-market environment that would allow for competing strategies and banking practices. This should be elemental stuff, and yet it is not even widely discussed. Everyone has a solution but few are willing to let the market decide. Too bad.
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