There is nothing sadder in this world than a wasted crisis. There is so much to learn and so much to understand from it. To repeat an oft repeated cliché – history repeats itself and those who don’t learn from it are condemned to repeat it. the last few years we have seen the best of crisis hit us. There has been so much to learn from it. A lot of free time is also spent learning and understanding.
The last time (2008) the crisis hit I was hooked on to the RSS feeds. They saved me and my brains from entropy. I read every day and I blogged every single day. Learning and creative wise they have been the best of times. A crisis is much too important an event to be wasted. These times are no different. We seemed to have gone out of the crisis we thought we were getting into and jumped right into another one. I always wondered how the dam euro worked with different countries. I thought – hey that’s a swell idea. I am sure the euro would be managed by one central authority and I thought there would be an amazing fiscal consolidation with all the Euro zone members coming together as one central banking authority. Only the present crisis helped me explain what now seems like a dam stupid idea. You have a monetary consolidation but not a fiscal consolidation. Are you like… nuts? How the hell can you do that? Only an idiot would agree to it. I clearly remember the launch of the Euro on TV. I think it was covered on a program called the world this week. There was plenty of hype and euphoria. But sure, in hindsight vision is always 20-20. These very same critics remained blissfully silent all through these years.
But coming back – this time around I have discovered podcasts. Economic podcasts that explain the situation, explain the issues at hand, possible solutions, historical background, et all. Along with listening to them I have been reading the Economist. A lot of it then begins to make sense. I just can take my mind off the Keynes versus Hayek podcast. Man. All our lives we understood the Keynesian theory and the idea that we must spend our way out of trouble, while Hayek kept reminding us of the issues that we would face with loose money. They also pointed to the rap videos that sought to explain the two theories in direct contrast with each other makes for interesting learning.
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V2
I must admit that I first saw the video while the first crisis was in full effect and at the time I don’t think couldn’t fully grasp the strength of the Hayek idea. Loose monetary policy will result in misplaced investments and a bad hangover with inflation coming knocking at your door, sooner or later. I think that is precisely the reason why Keynes is an easy policy to digest for the politician. It shows action – one must do something about the crisis now! To rephrase Keynes – in the long run… every politician is dead. Hayek on the other hand possibly tells us to sit tight and bear the pain. Pain is essential but only the tough will survive. Otherwise you will get misallocated funds, inflation and an attempt to prop up the weak, that should have died in any case. Today I see it very clear. Hayek seems right. India followed a loose monetary policy as a knee jerk reaction to the global crisis. We wanted to be seen as a government ready to fight the recession and protect growth at all costs. I too believed in it. What is life without growth after all? So in effect we attacked degrowth when there was none at all. What only happened was that we grew at a lesser pace than before. Which is a natural thing. It is a natural response to the economic situation. But if our FM wouldn’t have done anything, he would have been pillared for twiddling his thumbs. Also the argument could also be that inflation is a lesser pain than unemployment. So possibly Keynesian policy is possibly the right way to go.
Then you add the NREGA effect to this. The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is an Indian job guarantee scheme, enacted by legislation on August 25, 2005. The scheme provides a legal guarantee for one hundred days of employment in every financial year to adult members of any rural household willing to do public work-related unskilled manual work at the statutory minimum wage of 120 (US$2.43) per day in 2009 prices.
When the Congress government kept announcing schemes to promote the socialist agenda, I was the lone dissenter. WTF. We can’t ensure we get any public distribution right, and none of the schemes really work , so why should we support these budgets and call them great budgets. The markets loved them and all was forgotten. Some even attributed some the victory to the NREGA program – read this http://imaginingindia.com/2009/05/28/after-the-election/ . Interesting.
So now you have a lot of money being pumped into the economy. More money and my daughter will tell you – inflation follows. And it does. So we have inflation with prices rising. So now the government tries to control inflation by raising interest rates and attempts to suck out liquidity. It is squeezing our stomach while tightening our belts. Can I hear Hayek laughing?
After all this I was wondering why we never learnt Hayek in economics while we heard of Keynes. A chance encounter with my economic teacher and I got the answer. Keynes is taught at graduate level while Hayek is taught at post grad level. Oh Stupid stupid idiots who set the curriculum. Most of us are going to go through life with a graduate degree. So now we know what to do without understanding eth consequences of what we do. So year after year you will have students who understand that governments must interfere must have not been taught what happens when you do interfere. Oh this is such a wonderful example of our education system. Most of us are graduates with some exposure in economics before we move on to our other streams, possibly management and go through life not knowing about the other side. Sheesh.
Forget it. I am getting too depressed. But here, while we are swimming in different theories, here is one more. I think the reason you will see inflation is because the RBI wants us to see inflation. Economics is nothing but a game that is being played in our minds. Recession happens when we feel not so confident about the future, growth is when we feel better about it, inflation happens when we feel that we have more money and want to spend more to get a good. Economics works in the collective and indivual minds of the people, and our country is not all educated. I am sure not a large percentage of the population has anything to do with economic theory. They behave in tune with what they see. They don’t understand inflation and sentiment. They care if Greece is going nutty printing money. They react to what they see. And the Government or the RBI is telling them in their face that the RUPEE IS DEVALUING. The RBI is taking extra care to ensure it happens. How is that?
Well its simple. They are now telling you that the rupee is now worth a lot less. In fact through a very powerful visual it is telling the population that the rupee is now almost half of what it used to be, sometime back. Don’t believe me? See this… the old rupee and new one rupee coin.
the date on the big one is at the back -2010 and the new one is dated 2011.
Now any illiterate person looking at the coins will also tell you that the rupee is not the same anymore. It has shrunk. And hence now you require twice as much material to be worth the old rupee. In effect the new rupee is half the old one. INFLATION!
I know it’s a corny idea, but I firmly believe that symbolism matters. We decide a lot on the basis of what we see and interact with. Surely the shrinking of the rupee is not just because we shrunk the size, but this is a clear admission of the fact that it has shrunk so those who don’t believe in it, kindly start now.
the Hayek versus Keynes podcast can be accessed here -http://www.npr.org/blogs/money/2011/10/28/141802704/the-friday-podcast-keynes-vs-hayek Listen to it. its fun.
