High inflation in India - Explained

In the past, there were many assets which were bought on loan.
These loans were under-written by big investment banks and were sold after being packaged as hot cakes.
Later it was understood that the asstes were unrecoverable. So, they had to write down their assets.
This led to the scrutiny of different banks and it was discovered that almost all US banks were a victm of this.
Everybody were afraid to lend because they were afraid that it will only add to the write-downs.


If no one come forward to lend, the growth stalls because for any economic activity there is a need for capital.
In most of the cases it will be borrowed capital. This made the economists to think of a selfish plan.
They thought if they bail out these banks which are in distress by printing more money they will be able to overcome this hurdle.
But they had one big problem. Simply printing money will make it loose the value relative to other currencies.
So, they made a plan to elevate the money levels in almost all countries thereby degrading all currencies w.r.t other. With this they could ensure that USD never suffered w.r.t other currencies in the world.


Those countries which were genuinely affected by the credit crisis, were benefitted and they were able to come back to +ve growth levels.
But those who were never troubled were left with the big problem of inflation. You can now see why India is troubled with inflation.
People in economics always wonder as to why did the world unite to solve the problem of a few countries.
The answer to this is the political, military and economic strength of a few troubled nations was so immense that they were able to dictate term even while in trouble.


This raises questions on the independence of the Federal bank (RBI in India) and the Government.
The Government had all signals that they will see this sky high inflation figures. But luckily for them, the inflation aggravated after the General elections.
What were the economic advisors doing when they knew the consequence of printing more money?


Everyone knew that if the country's inflation is under control and when the employment was at the natural levels, increasing money supply will directly lead to price-rise.


After all these the PM issuing a statement saying, rising income levels leads to increasing demand for food and hence the country was unable to tackle inflation is simply immature.


When you know that there will be problems in future, you could have made arrangements to channelize the funds to the agri sector and a few other growth sectors in the budget of the prior years.
Due the greed of parliamentary powers, the men (and women) in power accepted to any demands of the world financial powers.
Is it warranted to put your own people into suffering to help the rest of the world?

Big Bank Theory

Recent announcement by the US president to put a cap on the size of the bank to avoid any more financial meltdowns

What has happened in the past?

The banks had entered into high risk market.

The bad debts rose and as a result there were many write-offs.

To prevent a meltdown of the financial system, the US Government decided to help these banks by giving them financial aid to recover.

In simple terms, the US Fed printed more money and also asked the entire world to do so. (This is a big debate by itself)

This move by the Fed lifted the money that is floating in the market, but this time keeping a strict vigilance on the banks (as to how credit worthy were the lenders).

What is the US proposing now to control such financial meltdowns in future?

It is planning to limit the size of the bank not to grow too big so that it starts to take too much risk to become more profitable.

This move is in fact a very good move because of the following reasons:

1. The risk appetite of the financial giants might go unnoticed when the size is too big. Now with smaller market cap it can be monitored and regulated effectively.

2. Smaller the upper limit more will be the participants and more will be the competition. This will benefit the end user, the borrower in terms of lower rates.

3. When the banks/financial institution have an upper threshold in size, it will be made to disintegrate into different units in the long run. In the process, the non-performing entities are closed down right at the initial stage instead of letting it grow into a monster. This will lead to more merger and acquisitions and at the same time healthier disintegration (re-organization) after the size has achieved the threshold.

4. Supervision and control becomes easier when the size is small.

Any such action might also have some disadvantages:

1. There can be too much competition that the profit margins start to decline. This will have a big impact on the big packet salaries of the investment managers.

2. There can be too much lobbying to favor a restructuring for certain firms that the others stand to loose.

I am not successful in listing the disadvantages for this well intended step, but what I feel is that the market is just offering resistance to any change which is an immature reaction. I am surprised to see fundamentalists outnumbered by technical traders.