Some food for thought
"Nobody wants to kiss
when they are hungry."
—Dorothy Dix (American
Journalist, 1861-1951)
Word for the day
Henchman (n)
A trusted follower
First random thought this morning
"The bad stuff is easier to believe. You ever notice
that?" —Pretty Woman (1990)
Every evening, while reviewing my day in retrospect, I find
myself, and most of the people around me, growing increasingly cynical (for
lack of a better word).
The most intriguing thing about this generic negativity is that
I am unable to find any genuine reason to support it. No one is starving. No
one is living on road. Everyone has a storage problem in managing the mostly
unnecessary shopping done on their multiple vacation trips. The diseases are
mostly self acquired or self assumed, hence mostly curable.
The notion of happiness has become totally abstract and is
mostly thought in relative terms. It's like a race with no finish line. All
appear running fast, just to reach nowhere.
On a wider canvass, I see there is lot of incentive on cynicism.
The mainstream media mostly highlights the unfortunate things happening in society.
Obviously because these things get them higher TRP. Things are not too
different on social media. The negative thoughts, criticism, sycophancy,
ridicule, abuses, etc. get you maximum response (likes and re-tweet etc.) The
worst part is that since many political and even commercial institutions assign
significant weightage to the responses earned on social media, there is an
incentive to indulge in mudslinging. Unfortunately, many leaders are leading
from the front at least in this context!
I resolve every evening to avoid negativity and focus only on
positive thing in life. The resolve does work for few hours in the morning. But
by the time cows come home, I am bedrabbled in the muck, with everybody around
me.
Nonetheless, I am not giving up so easily. At least, I did sleep
well last night and feeling positive this glorious morning.
Chart of the
day
Vanity of monetary policy
Fayaz Shah wrote in one of his blogposts:
"Many people confuse end goals with means goals. End goals
define outcomes where you’re unwilling to compromise — they describe exactly
what you want. Means goals, on the other hand, define one of many paths to
reach your end goals.
Here’s a simple example:
Let’s say you want to see your favorite music group perform live
in concert. That’s an end goal — it defines your outcome. You want to be there
in person and enjoy that particular experience. It’s not a stepping stone to
anything greater, and no substitute experience would produce the same result.
Now suppose a radio station is having a contest where the prize
is two tickets to that concert, and you decide you want to win that contest.
That’s a means goal. Winning the contest is not the final outcome you’re after.
It’s only one of many ways that could lead to you sitting at that concert.
But if you don’t win those tickets and fail at your means goal,
you may still be able to achieve your end goal. You just need to find another
way to get to that concert.
Sometimes we get blocked on the path to our goals. But many
times it’s just the means goals that trap us, and if we stay flexible, we can
plot an alternative route to the same ends."
But, as Swami Jagadatmananda said "Sincerity and honesty of
the means to achieve a goal is equally important as the goal itself." —Learn
to Live, Published in 2000
The monetary policy of RBI, sometimes gives an impression that
the regulator is not only mistaking means for the goal, it is also not fully
honest about the means used to achieve its goal.
The Monetary Policy Committee of RBI defines, "Price
stability" as its primary goal. It however, fails in convincing why
"price stability" is an objective in itself, and not a means to
achieve a greater objective, i.e., socio-economic equality and sustainable
growth & development.
To explain my point, I would like to go back to elementary
lessons in economics. With the help of Saint Google and blessings of many who
share their wisdom freely on the internet, I could collect the following
lessons:
Inflation could rise in an economy due to many reasons. The most
common factors causing inflation could be listed as follows:
1. Pricing power of
suppliers where supply of a commodity or service could be controlled or
manipulated. For example, the episodes of higher prices of pulses and onions in
past two years. Higher interest rates and restriction in credit flow actually
helps the controlling suppliers and thus results in even higher inflation. To
control this kind of inflation monetary policy is mostly ineffective. This can
be controlled with proper fiscal policy and regulatory regime only. Police is
usually more effective than RBI in most such cases.
2. Increase in wages
due to policy action, technological changes, labor shortages or sudden spurt in
labor demand. Higher wages are invariably compensated by hiking the price of
the goods or services. Moreover, higher wages also lead to higher demand for
goods and services supporting the higher prices. Monetary tools like interest
rates and restricted credit flow is least effective in this case also. To the
contrary, these measures can actually disrupt supply and lead to even higher
inflation.
3. Demand exceeding
supply. Except for seasonal factors, this occurs when the economy reaches its
full production capacity and excess demand cannot be matched with increase in
supply (popularly referred to as Full Employment). This situation can be
corrected either by (a) demand disruption due to material rise in prices
bringing the demand-supply equilibrium lower; or (b) material capex for
creating additional capacities.
The dilemma is that there would be a significant time lag in
building new capacities. If the regulator tries to disrupt the demand in the
interim period through higher rates and curtailed credit, the capex may suffer
or may not happen at all, as the higher cost of capital makes the future
profitability less attractive.
The monetary policy in this case would need to be supplemented
by the fiscal incentives to producers to annul the restrictions imposed by
tighter monetary policy.
4. Sometimes
inflation occurs due to higher capex in the economy. The higher capex activity
produces larger demand for factors of production, especially labor, land and
capital. Hence the cost of resources goes up leaving more money in the hands of
suppliers of these factors. However, since this capex does not produces any
consumption goods during the construction phase, the prices for consumer goods
tend to rise.
Monetary policy cannot control these price hikes without
impacting the capex. If it is attempted, the project cost may rise, resulting
in structurally higher prices in the future.
In this case also fiscal policy has a larger role to play in
controlling inflation (present and future) than the monetary policy.
In a growing economy like India, monetary policy controlling
inflation without disrupting the growth is extremely difficult.
The point therefore is for what purpose we need "price
stability".
As I mentioned yesterday (see
here), the problem today is "unaffordable absolute prices" and
not the annual rise (or decrease) in prices. There are many essential goods and
services that have become unaffordable for common man due to (a) sustained rise
in prices over years due to supply shortages and/or higher costs; and (b)
stagnant (or declining) real wages over past many years for private and farm
sector workers.
RBI therefore needs to work in tandem with the government to
achieve the larger objective of equitable and sustainable growth, rather than
insisting on the vanity of monetary policy.
The autonomy of monetary policy, in a country like India, may be
untenable and undesirable. However, the autonomy of RBI in its banking
regulator function is a totally different subject.
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