Let’s Rout Out Outdated Opinions
Gopalan Ramachandran
CreaSakti is an ally of the Indian economy. Building the five-trillion-dollar economy is our focus.
India, Thursday, May 28, 2020. It is Day 11 of the fourth tranche of India’s COVID-19 lockdown. India’s fight against the economic impact of SARS-CoV-2 should neither be hampered nor be impaired by outdated opinions on money, gold, currency reserves, monetary freedoms and monetary tools.
Our fight against the economic impact of SARS-CoV-2 needs a better and a more contemporary understanding of money, monetary freedoms and monetary tools. We need more clarity, optimism and front-footedness. Our team of engineers, accountants, digital designers and economists had foreseen the need for this. We urge you to read our articles published on LinkedIn since March 16, 2020.
Our economy, our needs
Hence, we chose to write about the gold standard and its welcome death. The gold standard died on August 15, 1971. August 15 is India’s independence day. August 15, 1971 is the world’s day of deliverance and independence from the gory and the inglorious gold standard.
We were forthright in our presentation of the freedoms and the responsibilities of the Reserve Bank of India (RBI). The RBI and the other central banks are all equals. We used the canteen in our college – the 225-yearold College of Engineering Guindy (CEG) – to show how money supply is a function of economic activity.
Let me write that again: money supply is a function of economic activity. Money supply is not a function of gold. Money supply is not a function of reserves of foreign currencies such as the United States dollar (USD). The USD is issued by the United States of America (USA or US). We wrote irreverently about the irrelevance of foreign exchange reserves. We went far enough to assert that nations – including India – first issue their sovereign currency and then build foreign currency and gold reserves.
If we had imagined that a nation has to have foreign currency reserves and gold reserves before it can issue its currency, we would belong to an elite club of the ill-informed. We hold an outdated opinion. We have to rout it out – now. Else, people will find out that we hold an outdated opinion.
INR: our sovereign currency
The RBI neither needs gold nor USD to issue the Indian rupee (INR). The INR is our sovereign currency. We have the unconditional freedom to issue it.
The CEG canteen makes dosa. The number of blue tokens it has to have in circulation is a function of two parameters. First, the number should support the kitchen’s hourly output of dosas. Second, the number should reckon with the time in hours it takes for the token to go from the cashier’s counter – the RBI performs this role – to the kitchen and then return to the cashier’s counter.
In the context of the INR, the first parameter corresponds to the gross domestic product (GDP) or economic activity. The second parameter corresponds to the velocity of money. If we circulate too few tokens, we will wilfully suppress the output of our canteen. We will have the infamous black markets. If we circulate too many tokens, we will callously trigger inflation.
There is no room for lazy and ill-informed decision-making. The risks, the rewards and the penalties for correct-issuance, under-issuance and over-issuance are ours. The freedom is ours. If we fail to use our freedoms, we will have only ourselves to blame.
Freedom to exercise freedom
Since August 15, 1971, all nations in the world have the freedom to exercise their freedom from the now-defunct gold standard. We may think there is a tautology here. Freedom is one thing. It is different from exercising freedom.
Freedom means nothing if we do not wish to exercise freedom. Freedom means nothing if we do not know how to exercise freedom. Freedom means nothing if we think we are not free. The third is the worst form of ignorance and slavish surrender.
There is no such thing as the gold standard. There is no need to hold reserves of the USD. President Richard Nixon pulled the plug on these when I was in school. We wrote about this with gratitude and admiration on April 21, 2020.
Both India and the USA can issue their respective currencies in whatever quantity they wish. They will reap the rewards and penalties from their own economies. But there are no police constables – not even the International Monetary Fund (IMF).
The IMF became an effete institution on August 15, 1971. It has no teeth. It has no influence. Is it an institutionalised redundancy? Is it a redundant institution? Let us think about that.
Its activities can be replicated by one or two dealers from one of India’s securities firms, one dedicated custodian and the software that runs the Depository Trust and Clearing Corporation (DTCC). But we should remember to run the DTCC software very, very, very slowly because that is the flow of real work at the IMF.
India has chained itself
The news of the death of the gold standard in 1971 and the meaninglessness of USD reserves may be travelling very slowly to India. There is no such thing as the gold standard. It died a long while ago. If we think it lives, then we need to wake up now. We have to wake up now and read our articles.
We – CreaSakti – opened ourselves up to scrutiny and utility. We are sincere in our willingness, commitment and ability to help India through the COVID-19 crisis. We ask not what India can do for us. We seek your permission to help India through the CIVID-19 economic downturn.
We think the 48-yearold news may not have reached the eyes and the ears of Mr. Rajiv Kumar, the vice chairman of India’s NITI Aayog. NITI stands for National Institution for Transforming India. He concurrently serves as the government of India’s nominee and independent director on the RBI’s central board. This is what the website of the NITI Aayog says.
We think the 48-yearold news may not have reached the eyes and the ears of Mr. Swaminathan Gurumurthy. Mr. S Gurumurthy is a chartered accountant, and a corporate and legal adviser of high standing. This is what the website of the RBI says. Mr. Gurumurthy was appointed to the RBI board.
One shaky story; two pegs
Mr. Rajiv Kumar is an economist. He has expressed his despair that India does not have the same resources and luxury that the USA has. The vice chairman of India’s NITI Aayog expressed his despair in his column in The Hindu on May 26, 2020: A well-balanced stimulus package.
https://www.thehindu.com/opinion/op-ed/a-well-balanced-stimulus-package/article31673510.ece/amp/
His prefatory paragraph preceded his analysis and defence of the economic stimulus package. In the main, the vice chairman of the NITI Aayog explains why India has had to cut its coat according to the cloth. He regrets that India could not do as well as its citizens expected because we do not have the same or as many degrees of freedom that the USA has.
The vice chairman of the NITI Aayog hangs his story on two pegs. First, the USA can issue any amount of debt without giving a thought to the consequences. Second, the US enjoys the luxury of having the USD as the global reserve currency.
Not to fund a deficit
We disagree wholly. The RBI and the US Federal Reserve Board (US Fed) have the same freedoms. The flaws in Mr. Rajiv Kumar’s assertions are obvious and deep-seated.
The US and the US Fed know the meaningfulness of issuing the USD. Mr. Jerome Powell, the chair of the US Fed, does not issue the USD as a means to finance a fiscal deficit. The purpose of issuing the USD is wholly unrelated to financing fiscal deficits. They are two different uses.
When the US Fed issues the USD, it addresses (1) the deficiencies in the velocity of money and (2) the deficiencies in the USD Treasury yield curve. It is a curve ball; it is a banana kick; it is a carom ball.
Blood money
The US enjoys the luxury of having the USD as the global reserve currency because other nations are diffident. The US enjoys the luxury of having the USD as the global reserve currency because other nations are cowardly and crafty. These nations – including India – issue their sovereign currencies and then buy the USD.
First, by issuing their sovereign currencies, these nations – including India – deprive their citizens of a better purchasing power with respect to imports. They weaken the home or domestic currency. They trigger inflation. They make their exports attractive.
Second, central banks – including the RBI – then export the USD they buy in order to weaken the home or domestic currency. These central banks buy US Treasurys. They fund some part of the USA’s fiscal deficit.
This is the equivalent of blood money. Think about it. The USA does not demand any of these steps. Unsure and/or crafty nations do these with the belief that there is something to gain. The USD says, “In God We Trust.” We say, “In The USA We Trust.”
Stop that now
Why cannot India say, “In India We Trust.”? Let us do that from today. Let us do that from now. Let us rout out our false trust in the USD. Let us come to terms with the death of both gold and USD as monetary bases. Let us engineer a better economy and then account for our actions.
The USA is a self-driven and self-confident nation. It has been that for long. India has a lot in common with the USA. India’s purchasing-power-adjusted GDP is close to that of the USA, Japan and China. This is the time to shed our weaknesses and our meekness. We can be as self-driven and as self-confident as the USA, China and Japan. We can do better than wringing our hands. We have to. We have to stop wringing our hands.
One more wringer
Mr. Gurumurthy has defended the COVID-19 package in his column in The New Indian Express on May 27, 2020: COVID-19 package – World and India.
He begins by describing economics as a dismal science. That is perfectly acceptable. Economists get cheered by that. Then he writes and writes to say that there are two classes of countries: (1) those that can print money for themselves and (2) those that cannot print money for themselves – India and China.
Mr. Gurumurthy writes all of these – the outdated and incorrect things – to say that India’s COVID-19 package is good. He then gives us the data. First, as share of GDP, Japan’s stimulus package is at 21 percent and the US’s is at 10 percent. Second, France is at 5 percent and Germany is at 4.9 percent. Third, China is at 2.5 percent.
What Mr. Gurumurthy does not say is that Japan, the USA, China and India have the same liberties to print their sovereign currencies. What Mr. Gurumurthy does not say is that France and Germany are encumbered and constrained by the European Central Bank (ECB).
France and Germany have willingly sacrificed their sovereign right to print a common currency – the euro (EUR) – since the time they killed their own French franc and the Deutsche mark. France and Germany do not have monetary independence.
India and China have monetary independence. India and China have the right to issue the INR and the Chinese yuan (CNY) without informing Uncle Sam and the effete IMF. Mr. Gurumurthy does not tell us whether he knows about the freedoms of the RBI. Perhaps, we should tell him. Perhaps, we should not. Mr. Gurumurthy is an RBI director.
The freedom to be free
India has for long been a victim of its false beliefs. These false beliefs have created big hurdles. There is an overload of outdated opinion. There is an overload of regulatory colonialism, supervisory colonialism, monetary colonialism and fiscal colonialism. The vice chairman of the NITI Aayog and a director of the RBI are victims of monetary colonialism and fiscal colonialism. To get some things wrong after 48 years is grossly gory. To get some things wrong after 48 years is cruelly colossal.
President Nixon thoughtfully freed the USA from gold. President Nixon then thoughtfully freed the rest of the world from the USD. He chose our August 15 in 1971 to do these. It is up to us to be free.
Freedom means nothing if we do not wish to exercise freedom. Freedom means nothing if we do not know how to exercise freedom. Freedom means nothing if we think we are not free. The third is the worst form of ignorance and slavish surrender.
We can definitely print money. But it would reduce our bond status, and our cost of borrowing. What is required in such a situation would be to lay out a plan over several years, that would allow us to reduce the deficit funding. Printing has an inflationary effect - which is what seems to be the RBI's concern, However, given that what we are undergoing is a demand contraction - printing money is the only way to ensure that our deficit is met. The mechanism for transfer of money would have to be cutting direct and indirect taxes and levies for the next two years.
Writer
4 年A central bank of any country, in India’s case the RBI; can never go bankrupt in its own currency. Your article is “Real Swadeshi Thought “.