Thursday, January 5, 2017

India's Supreme Court rulings

Recently, there have been a couple of rulings from India’s apex court that should trouble or atleast make every Indian citizen ponder on the effects of these rulings. Before I say anything, I must admit that I have tremendous respect for the Supreme Court of India, a court whose rulings in the past have inspired ethical judgments not just in India but outside its borders too. That being said, I am sad to say that some of their recent rulings have caused a concern as to whether they are going beyond their powers and jurisdiction and functioning with a parental touch rather than as the dispenser of justice and upholder of the constitution in a country of more than a billion individuals.

The first ruling, in hearing a petition filed by an individual, by a single judge in the apex court, mandating cinema theatre owners all across the country to play the national anthem before the movie starts and mandating the movie-goers to stand when the national anthem is played with the theatre doors closed (unlocked) is frankly a ridiculous ruling. The ruling, among others, read – “Be it stated, the time has come, the citizens of the country realize that they live in a nation and are duty bound to show respect to the national anthem,”. Now, frankly, this is a mockery of intelligence and spirit of the citizens of the country. As far as I know, there is no law that mandates this, nor is there a violation of any fundamental right enshrined in the constitution when a theatre doesn’t play the national anthem. For me, personally, this issue goes beyond that – the idea that the apex court of the country thought that it was necessary to instill patriotism, through whatever means it may be, on its citizens, is an issue of serious concern to me. Because anytime we talk about “patriotism”, it borders on “nationalism”. And to me, nationalism is the enemy of humanity. We have seen repeatedly in history that whenever the concept of nationalism is trumped up, it leads to a violation of individual rights – which is what I believe is happening here too. By ordering when to play the national anthem and how its citizens should respond to it, the Supreme Court of India has strayed too far away from its powers and authority, and frankly, has behaved in a dictatorial way.

The other ruling that had come out just this week, by a panel of seven judges in the apex court, with four of them ruling, on the basis of the secular nature of the Indian constitution, to ban all political parties and persons seeking to occupy a public office from using religion, race, caste and language to seek votes during election campaigns, is an issue that I invite all Indian citizens to ponder carefully. On the surface, this ruling must look like something we all should welcome. After all, we dream for a secular society where religious, caste and linguistic based lines are erased and people unite as humans who care for each other and live an ethical life. But sadly, that is still a dream, and the reality is far different. And hence, unfortunately, in this case, I might have to side with the other three judges in the panel who voted against this ruling by citing that this ruling would violate the free speech right enshrined in the constitution. And I agree with them. Many social progresses in the country have come by mobilizing people on these grounds. Yes, I do feel awkward to say this because I am well aware of the fact that many social backwardness have also resulted in the country by mobilizing people on these grounds, but that’s not to say that we could take away a tool that can be used and has been used to make social progress and correct historic injustices in the country.

If such a ruling existed in the 1950s and 1960s, then the people of the state of Tamil Nadu might have not been able to understand the negative implications of the attempt to impose the Hindi language on them by the central government during that time. Politicians and political parties mobilized people on linguistic basis to stop the domestic colonial attempts of giving unwarranted extra-importance to Hindi in a state that has spoken Tamil for millennia. Or take this case - The man who is credited to writing the secular Indian constitution, Dr. Ambedkar, had raised genuine issues during his time surrounding the plight of Dalits, the lowest-caste society or the “untouchables”, a caste group to which he himself belonged. If he contested today for election by mobilizing people of his caste on some of the injustices that still seem to occur to Dalits, would he disbarred from contesting or would his election be disqualified by the Supreme Court of India? And today, in Tamil Nadu and many other parts of the country, there are genuine social issues and problems faced by the “Brahmin” or the upper-caste society members. So would it be wrong for someone from that society to contest for office and speak publicly about those problems or promise to correct them if he/she is elected to the office?  Would the Supreme Court void his/her election for speaking the truth?

Whether we like it or not, India is a country that is rooted in diversity – diversity in religion, race, caste, language etc. And what unites all these people is the ability and the inherent culture to speak freely, debate freely, and in the process evolve into a continuously tolerant and accepting society by embracing all these differences and diversity. Curtailing that free speech, however good that intention may be, will not give us anything other than piled up anger and frustration. Allowing to speak freely, though at times may annoy and even harm us, will ultimately be more beneficial to all individuals living in the society. And lastly, the Supreme Court can leave this matter to the intelligence of the people of this country rather than taking it in their own hands, because it is in that country, where religion-based and caste-based parties are repeatedly defeated in elections. One just has to look at the last election, both at the state and at the national level, in the state of Tamil Nadu, where even in constituencies where their religion or caste were the majority, the parties and politicians who campaigned on them, were handsomely defeated. They won less than 2% of the votes in some instances and less than 10% of the seats in total. What more evidence do you need, honorable judges of the Supreme Court? Let the free-speaking and free-thinking people take up this matter. Leave it to them!

Friday, December 30, 2016

What the!!!! 'Terror' tax!!?? Really!!??

One of the weirdest news headlines I came across today was – “France raises ‘terror tax’ to support victims of attacks”. The Associated Press news article further read – “French citizens will contribute an extra 1.60 euros ($1.67) on their property insurance policies to help finance a fund for victims of the extremist attacks that have recently hit the country.” (here is the link to the article). I mean, I don’t think I have to write a blog post on how stupid this sounds. If anything, it is the responsibility of the government to prevent terror attacks on its citizens. Failing to do so should result in holding the government accountable and not in punishment for the citizens who have entrusted the government to keep them safe from such attacks. Moreover, how can a government raise such a tax that sounds and looks like a permanent or long term policy? Is this like France acknowledging – oh, we are going to have attacks every year from now on, so let’s raise taxes and setup a fund to pay the victims on a regular basis? Sigh! Frankly, it is disgusting! Instead, how about every time a terrorist attack happens in France, a thousand euros is automatically deducted from the monthly pay check of all federal lawmakers in that country and that money goes into the fund that helps the victims?  

Thursday, December 8, 2016

India's cash ban: A royal intention, a reckless move

As many who follow international news would know by now, the Indian government recently banned all 500 rupee and 1000 rupee notes that were in circulation (these notes constituted 86% of the total cash that was in circulation in the economy). I had been trying to not comment on this for sometime because there are clearly pros and cons to this – and I was waiting to see which will outweigh the other. And to be frank, I am still waiting to see how this plays out, but in the meantime, I just couldn’t stop myself from commenting on what seems to be, in my opinion, a grand move with goddamn repurcussions for the most honest, hard working people in the country, who frankly built that country despite the government and not because of it.

First of all, let’s take the pros of this sudden action by the central (federal) government. India is one of the most corrupt countries in the world. Period. No ifs. No buts. And this action of banning or making the 500 and 1000 rupee notes invalid has basically made all that corrupt money to become worthless – well, atleast the ones that were held as cash. Putting aside the fine points of the economic arguments aside for a minute, this is a huge positive to the quality of life for the Indians in the long run – because all the corrupt money (or illegally obtained money) that was in the economy was the root cause of various law & order issues – including growth of land mafia, gangsters related to political parties and so many more illegal activities across the country. And to make things worse, these illegal activities were becoming a business where younger generation Indians found a way to make money rather than confront it. So in other words, all this corrupt money was changing the culture of the country itself. So rooting out this gives a fresh opening to make things better in a country that has so high potential with a billion plus individuals. 

But what are the cons? Well, consider this: how would it be if in order to confront an illegal activity going on in a house in the street, the entire street is destroyed? That is how this sudden policy action seems to be. And in that same street where the illegal activity was taking place, poor farmers were residing, migrant construction workers who buy their lunch with the money they earned that morning were residing, rural women entrepreneurs who learnt a skill through a cash based micro-finance loan and were giving their best to escape poverty were residing, older generation of grandparents who thought that the most responsible thing they did for their future generation was saving and hoarding cash that they earned so hard throughout their life were residing, children whose parents have never even seen the gates of a school but were ambitious enough to get a school or college degree through a loan or their parents savings were residing, patients who have saved every paise (penny) their entire life in order to finally have their life-saving surgery were residing, small business owners who have risen through decades despite the government policies and not because of them were residing, and so many other innocent, hardworking, wonderful people were residing.  In other words, more than 90% of India was residing in the same street.

Why did the government had to do such a drastic move? Well, they provided two reasons and I don’t buy both of them. Here they are:

1.      National Security concerns due to the prevalence of fake/counterfeit currency flooded in by foreign countries (a.k.a Pakistan) to destabilize India: Well, I am not a national security expert and let us assume (and most likely) this is true. But, common sense says, this amount, if anything, has to be so minimal relative to the overall huge Indian economy and the cash that was in circulation that it doesn’t warrant destroying the entire street (like I mentioned above). Moreover, fake currency doesn’t cross borders itself. Someone is bringing it in. So a responsible government would try to identify the source through which the counterfeit currency travels and would work on preventing it instead of…again, what is it? – that’s right! – destroying the entire street.

2.      Unearthing black money: So the money that was legally or illegally earned but haven’t been reported and paid taxes on is called black money. Again, it is legally or illegally. Considering just the legally earned portion for now, for some reason, in a country like India, the officials fail to understand the concept that black money is not fake money. When we pay taxes, the government collects it as revenue and spends it back in the economy. When we don’t pay taxes, the individuals who have been hoarding that cash spend it back in the economy. Was that clear? In both ways, the money comes back to the economy. Now, I strongly believe we all should pay taxes so that we can build a safer and equitable society that covers all sections of the population. But in a country like India, where governments have either been inefficient or corrupt since independence, people have accustomed to under-reporting their income or have accustomed to not understanding the benefits of paying taxes. And this is 99% India. I re-iterate and I am not exaggerating – this is 99% India. So, in a country where tax revenues have been slowly going up every year, tax-base widened every year through gradual policy changes (like increasing the bond paper value on real estate transactions, mandatory income tax reporting on gold purchases above a certain amount at the time of purchase, or on other expensive transactions, or bringing more and more sectors into formal category through globalization and opening up to foreign investments), why on earth, in the name of “I know better, so I want to spend your money”, would the government disrupt and…..what is it again? right, right – destroy the entire street where more than 90% of Indians live?

So as good as the intentions are, as bad are the repercussions of such a drastic move in a country where billionaires and below-poverty-liners live side by side. At a time when tax revenues were going up, fiscal deficit was coming down, global crude oil prices down, gold imports shrinking, tax base widening, rupee being one of the weakest currencies in Asia (second weakest after the Malaysian Ringgit), and foreign investors once again eyeing and salivating to pour money into the country, why on earth would the central government decide to make such a bold, irrational move is beyond me. I really, really don’t understand because the timing of this move is terrible. Well wait, not just the timing, but the move itself seems to be terrible – like reaching for a fantasy in a country where people die in hunger because they didn’t get to work in the fields that week.   


But now that this disastrous move has been done, what next? Well, it all depends on what kind of fiscal policies the government comes up with? And the fiscal policy I would like to see and recommend is a tax holiday for a significant amount of time for all income below 50 lakh rupees (approximately $ 80,000) annually. And a moderate tax on the next 50 lakh earned.  Income beyond that could be taxed at regular rates. With all the extra revenue that the government has obtained with the unearthed black money, this shouldn’t be a problem for the government to do. But it is extremely important for people to start generating and accumulating wealth again (legally). Without accumulation of wealth, because of this drastic move, the psychological damage that will be incurred by the sudden reduction in the monetary value of all currently held wealth will significantly dent demand growth for years to come. Without demand growth, local and foreign investments will slow – thereby resulting in further rupee weakness and inflation – which will once again hurt the poorest of the poor much and will suffocate them beyond what they can bear. The middle class will also shrink significantly while the rich will start to park and grow their money abroad. So a major policy, this time not just a bold one, but also a rational one, is urgently needed on the fiscal front. And I sincerely hope that the government uses tax-holiday as that fiscal weapon instead of government spending. There is never a time in today’s world where a government can better spend people’s money than people themselves. Governments can only facilitate growth, but ultimately growth itself has to come from people. 

The government has been royal in their intentions, but reckless in their moves. It’s time for the government to correct that mistake – by first acknowledging the problem and the work before it, and stop being cocky, and build the street back up again! 


Monday, December 5, 2016

A daughter to two, a mother to millions

Today marks an end of an era in the politics of the great state of Tamil Nadu in India.  Jayalalithaa Jayaram (or more popularly called as ‘Amma’ (Mother) by the millions in that state), a leader of a major political party, and the current chief minister of Tamil Nadu has passed away at the age of 68 following a cardiac arrest. When I heard the news this afternoon, there were no mixed feelings. Instead, I had just one feeling – a feeling of sadness. Or more appropriately, a feeling of loss.


I don’t associate myself with any political party in any part of the world and I frankly am not a fan of any politician. And when it comes to Indian politics, it can be written in stone that almost every politician in India is corrupt in one form or the other. Jayalalithaa was not an exception. I have lived under her administration in Tamil Nadu and things were not always clean (though under these circumstances one cannot say for sure if anything directly relates to her. She was convicted of corruption in some court cases, acquitted in many, and acquitted in few through appeals and some cases and appeals still pending before the courts). That being said, one also cannot deny the fact that she has been a force – of some good and some bad – in the lives of nearly 70 million Tamils who live in that state. She entered politics in early 1980s and has administered that state for nearly 15 years in four different terms (sworn 5 times as Chief Minister (akin to a Governor in the United States)).


Of the nearly 70 million people in Tamil Nadu, there will not be a single person who wasn’t affected by her or influenced by her. Affected – by the various policies she put forth during the many years of her administration; Influenced – by the courage, perseverance, grit and political calculation she displayed over the course of her lifetime. 


For all the court cases before her, and for all the judgments against her, people continued to elect her to represent them as the top elected official of the state – as recently as 2016 when she beat the anti-incumbency wave and rode to electoral victory for a second consecutive term in the state (the only politician in the state to have done that in 30+ years). She had a mass following. She was looked upon with awe and inspiration by her followers, and with fear by people who stood opposite to her. Even her arch political enemies have at times praised her courage and boldness with which she carried on her government. 


This is not to say that I liked everything about her. In fact, I hated so much about her. Corruption was still rife in the society and government under her administration. Work and progress in the state was slow at times because of the iron grip she had on all sections of the government. The ministers who worked under her were terrified of her. So terrified that they would literally fall at her feet and get her blessings when they see her. It was frankly disgusting to watch. But at the same time, the same iron grip quality of her is the quality that maintained law and order in the state far better than many other administrations. The courage she displayed was the quality that made her make bold political calculations where today 37 seats in the Indian parliament, the second largest by a single party in the whole of India, are being held by her party. And this came at a time when the nation was swept by the ‘Modi’ wave (when Mr. Modi became the prime minister of India).  The grit that seemed like an inborn quality of her was the quality that made her daringly take neighboring state governments of Kerala and Karnataka to courts to make sure that the people of Tamil Nadu get their fair share of water from various water and dam treaties. The boldness that radiated from her like a light from the sun is the quality that made her the strongest voice of the time against the plight of the innocent Tamil civilian population in Srilanka at the height of the final civil war there.


Yes, she had her flaws. She was no more than a shrewd politician. Every policy she put forth had an electoral calculation in her mind. But that’s not to say that many of her policies – though politically calculated they might be – hadn't actually helped the people who needed help the most.  Take the ‘Amma canteen’ policy for example that she implemented few years back. On one hand, it was a huge waste of tax payers’ money because it provided subsidized meals to all people of Tamil Nadu in various canteens setup across the state. But on the other, in a state where millions go hungry everyday, it was a Godsend. This policy literally eliminated hunger in the state. 


Or take the fact that under her administration, Tamil Nadu, which was an electricity deficit state, turned into a surplus state. Or the fact that in 2016, under her administration, Tamil Nadu exceeded the ‘Renewable Purchase Obligation’ target from the central government, and was looking for ways to sell surplus wind power to other states where they haven’t met the requirements. At a time of rising nationalism in India, she pushed against the ‘Sanskrit week’ initiative by the central government, and strongly voiced against the central government directive that called for the compulsory use of Hindi in twitter by all central government officials - a group that included officials from Tamil Nadu and other non-Hindi speaking regions.  


And when many people and frankly many leaders across the country were busy trying to (or not) understand the details and complexities behind the bills like the anti-corruption ‘Lokpal’ bill, she displayed her brilliance by calling for an exclusion of the office of the Prime Minister in the Lokpal bill, even when she was in the opposition to the then prime minister's party, citing reasons of dangers involved in foreign powers using such a national law to undermine the office of the Prime Minister at critical times. Or when the entire country stood behind the recently passed Goods and Services tax bill, that completely revamped India’s age-old tax system, she displayed her courage and brilliance by being the sole voice in opposing some fine sections of the bill – by citing the disadvantages and potential loss of revenue and state autonomy in fiscal policies that she considered her state, which she rightly pointed out as a ‘producer’ or ‘manufacturing state’, would incur due to the fact that Tamil Nadu consumes less than what it manufactures. And as much as her political life was filled with complaints of corruption and what-not, it was equally filled with many such brilliant endeavors. 


Jayalalithaa was born to an actress, she herself was an actress, never married, spoke six languages, was a topper in her school, well-read, a lady of immense knowledge on various state and global matters, a ‘lioness’ to her opponents, an ‘Iron Lady’ to her supporters, ‘Amma’ to her followers, and a stateswoman to many people, including me, who saw her objectively within the Indian context. Given the times, it is a huge loss to Tamil Nadu and frankly to India itself.  


She will be missed. May her soul rest in peace. 


Further references:

1.      http://indianexpress.com/article/entertainment/regional/jayalalithaa-passes-away-tamil-nadu-chief-minister-biography-see-pics-3059429/

2.      http://indianexpress.com/article/india/jayalalithaa-dead-heart-attack-amma-tamil-nadu-4412542/



Friday, June 17, 2016

The Charge of the Light Brigade

When I see the world’s central banks misdiagnosing the root causes of the anemic global growth today and treat the problem with a heavy dose of poisonous zero interest rate policy (ZIRP) and negative interest rate policy (NIRP), with a heavy bias toward increasing the dosage at all costs if the not-so-sick patient (global economy) doesn’t recover as they expect it to, I just couldn’t help myself from remembering the narrative poem written by Lord Alfred Tennyson in 1854, which I had to memorize and write in my English class exam when I was in the middle school –

From Wikipedia: Lord Alfred “Tennyson's poem written on December 2, 1854, published December 9, 1854 in The Examiner, praises the Brigade, "When can their glory fade? O the wild charge they made!", while mourning the appalling futility of the charge: "Not tho' the soldier knew / Some one had blunder'd.

Half a league, half a league, Half a league onward, (anemic global growth)
All in the valley of Death (global deflation)
    Rode the six hundred. (global middle class)
"Forward, the Light Brigade!
"Charge for the guns!" he said: (global central banks)
Into the valley of Death
    Rode the six hundred.
.
.
.
.

When can their glory fade?
O the wild charge they made!
    All the world wondered.
Honour the charge they made,
Honour the Light Brigade,
    Noble six hundred.

Friday, June 10, 2016

To my friends in Britain...

My dear British friends,

I am writing this blog post sitting thousands of miles away from your beautiful island at a time of increased uncertainty concerning your decision on whether or not you would like to stay in the European Union. I am not a European. And I am not British. But that doesn’t matter – in the sense that the world is so interconnected today that everything has a ripple effect. And those ripples go back and forth. It affects us all. Positively or negatively. We are living in a world of increased financial uncertainty. We all fell together in 2008 during the onset of the recession. And nothing should stop us from getting up and marching together as we build a financially secure world for every good human being on this planet. 

Over the weekend, I met an elderly couple from Scotland. I asked them how they would vote in the upcoming referendum. They said that they will vote to leave the EU. And when I asked them why, they gave me two reasons – 1. Homelessness is on the rise in Aberdeen and other places in Scotland. 2. They want to use this opportunity to send a message to the elites, bankers and financial markets about how angry and disappointed they are with the status quo. I felt their genuine frustration. And there was validity in the concerns that they expressed. The National Health Services (NHS) is under stress; the housing markets are over-priced due to the influx of foreign money; public services are under stress due to a surge in immigrants. 

And here I am telling you the same thing that I tried to tell them - that leaving the EU will not really solve any of these problems. Voting to leave will not affect the elites or the bankers. The elites and the bankers make money when the world is great; they also make money when the world is not great. But you leaving the EU will affect the rest of us all. I respect that it is your sovereignty. And it is your decision. But undoubtedly, a Brexit will cause ripple effects that will be far reaching - ripples that will only be exacerbated and intensified by the very financial markets that have let you down in the past…and that will let us down again.   

There is too much uncertainty here. No one really knows how the day after the Brexit will look like. But I cannot imagine that some of you think that you would be able to get full benefits of the single EU market even without being in the EU and by not allowing the free movement of people. Though your argument that EU will need the British market as much as the British need the EU market might be true, think for a second why would the EU members accept any proposal that will benefit the U.K more by staying out of the EU than in the EU?  Why would the EU volunteer itself for its disintegration? - because that is what will happen if the U.K. gets sweet deals after deciding to opt out of the EU. Every other member of the EU would then be tempted to ask for such sweet deals. So however economically punishing it might be, EU countries, especially Germany and France will have every motive to bear their economic pain in order to stop that temptation by causing economic pain to the U.K. Doesn’t matter how severe that pain is, but it will undoubtedly hurt. And when it hurts, who do you think it will hurt more? I am afraid it is not the elites. Nor is it the bankers. But the very working people of your country. That will have economic consequences that will send ripples across your shores – the ripples that will tear into the heart of the global financial system and can jeopardize any progress we have made since the financial crisis caused by the bankers and the financial engineers.   

In my humble opinion, considering how the world’s future is shaping out to be, the U.K. would be stronger in the EU than outside the EU. In a world where China is five times the size of your economy and India’s total output is almost the same as yours, size matters - the size of the nation; and the size of the market. For all its flaws, EU is still a formidable single market. It is the world’s largest free trade zone. It is a market which everyone wants a share of – China, India, the US and all other nations. It is a market which produces some of the best and brightest talent and technology. 

I want a German car; a French designer clothing; and may be a Nobel prize in Sweden :). But to even dream of success, I still would want to be able to access the London financial services. So please Britain, stay in the EU. As an English speaking country, we want you as the gateway into Europe and all that excellent opportunities that Europe provides. In this small planet, we are all in this together…and let us continue to be in this together. Let our theme be better integration and not disintegration. 

Sincerely,
A common citizen, a Commonwealth citizen, a global citizen. 

Wednesday, June 8, 2016

The Fed is making a grave mistake! ... again!

For the last two years, the Federal Reserve officials are all over the place. Now their jumps across the walls have suddenly become very intense starting from this year. One month, there are some officials of the central bank talking in one direction. Within a matter of weeks, they do an about-turn and speak in the other direction (i.e. hawkish vs. dovish).

And with regard to the fed funds rates, the Fed should have raised them by 25 basis points in March. But they missed it. Not only did they miss it, but they started speaking in extreme dovish voice. And they claimed that none of their fundamental analysis of the economy has changed and that they were merely being cautious. That is baloney. Last September, when they should have raised the rates, they feared the stock market crash in China and held back, only to move further in December to raise rates. And then in January, a devaluation of renminbi along with Japan going into negative interest rate territory caused financial market volatility. They again got scared. This is getting tiresome. If they are going to expect a smooth financial market without any volatility before they can raise rates, then they are never going to get that. 

Then one might ask – why the hurry in raising rates? We don’t even have enough inflation, right? Well, because the global economy is no more about just maintaining price stability in goods and services. It is also about maintaining price stability in assets. And more importantly, it is also about preventing misallocation of capital across assets. And when you keep interest rates at zero for so long, it seriously messes up with the loan-to-savings ratio and savings-to-investments ratio. The deposits in banks are going down globally. And productive loans (where a loan is used to create a good or service) has been going down as well and instead is used in share buy-backs and refinancing/servicing debt.

It’s not even just about all the above. We have actually come to a point where monetary policy is becoming ineffective by the day. In the US, for example, cheaper interest rates have already made many Americans to buy houses and cars. Beyond that, however cheap the interest rate on a loan is, what do you expect them to buy with a loan? Furniture? Well they won’t!  Why would they? Their incomes haven’t gone up; they don’t get any interest on any form of savings anymore. So without that additional income, why would they take a loan and buy something that will not appreciate in value in the future? This is scaring the heck out of them regarding their future financial stability (a.k.a future financial obligations). This in turn makes people want to save for their future rather than spend. And they are saving it in the form of hard cash. And the experts wonder why people aren’t spending? And they wonder why we have a deflation scenario? And they try to fight this deflation by further lowering rates (even negative in some countries). 

Folks – there is a floor to how low you can take the interest rates? Up to a point in the downward direction, a lower interest rate is inflationary/reflationary. Beyond that point, it triggers disinflation/deflation. 

The other argument that lower interest rates will help corporations to borrow and invest is another baloney. Corporations have a lot of cash.  The only reason that they aren’t spending is because they don’t see enough demand – or more importantly, they don’t see a reason to invest when there is such a skewed monetary and fiscal policy that is deflationary rather than inflationary (especially when the demand is looked from the consumer side).

Sorry to say, but the current Federal Reserve members seem so weak to me with regards to taking the tough decision. They are following the financial markets in whatever direction they take them. This is totally skewed. An interest rate increase at this point when the US economy is doing relatively well will bring back many sections of the economy that has been built over decades and that are totally out of whack now. For example: the insurance and pension sectors are suffering from the low interest rates; seniors are suffering from the low interest rates; savers are suffering from the low interest rates; banks are suffering from the low interest rates. Misallocation in search of higher yields is becoming a common phenomenon all across the globe. And with every misallocation, the risk of a bubble burst or crash in the future increases. 

In my view, an equilibrium fed funds rate in not one common point, but rather a range. And few 25 basis point increases this year should not impede the mortgage loan growth or vehicle loan growth or corporate debt servicing. The effects on this front should be minimal and manageable. Instead, majority of the poor and middle-income consumers who aren’t in the financial markets but are instead dependent on fixed income with an anticipated reward for savings will be benefited directly through additional income through their fixed income investments, including any savings. And these are the people we depend upon for demand growth. Once we have more demand, then we should see more corporate spending in the form of capital investments – which is what is lacking today and is the main reason for the weak growth worldwide.

So you want to fight weak inflation or deflation? – increase the fed funds rate. On the fiscal front – address the excessive debt with a long term strategy and reform taxes to put more money in the hands of the poor and middle income people. Without these two changes, we will just keep chugging along with a very weak growth worldwide and wondering why people aren’t spending. Extreme low interest rates = deflation (beyond a point). Negative interest rates = Deflation (immediately).