RBI MPC, Consumption and Yuval Hariri

After writing extensively about the Fed's FOMC last week, this week the attention will shift to RBI's MPC meeting. Apart from RBI, BOE will also come up with its policy recommendations. The expected common thread will be that the accommodative stance needs to continue till the economy stabilizes. This will be the base case until the market decides to accord more than needed attention to dissenting hawkish voices.

Readers would note that my general and oft repeated reading of central banks remains that they will be very cautious in any retraction of policy measures. Let me try to?give you?a very long winding reasoning on why this remains the most probable case. Think of any action on accommodation?as a struggle between the borrowers (who want low rates) and savers (who want high rates). Now these two constituencies are at odds and want the rate levels as per their benefits. Savers obviously want a positive and handsome real rate of return without taking too much risk. Borrowers on the other hand want low rates so that they can take more risks. But think of these two groups in terms of the modern economy and its underlying ethos. The purport of my message will then get clear.

The central deity of modern economic religion is consumption. So think of it, saver is someone who postpones consumption and borrower is someone who prepones consumption. The modern economy is running itself because people consume which encourages producers to produce more. This ubiquitous consumption creates demand and grows the economy. From this lens it gets clear that the saver community is somewhat of a heretic in the modern economic set up. The risk free return is not a right which he or she can demand. The most important benchmark of economic progress that is the GDP and its growth is dependent on people consuming more, not less. The austerity medicine which gets prescribed by IMF in some special cases like in the case of Greece and southern europe during the european sovereign debt crisis some years back, has been recognised as a self defeating measure. In crisis, consume more, not less. The central banks hence are trying to aid consumption in whatever way they can.

Author and modern great, Yuval Hariri writes about the modern fascination with consumption in great detail in his book Homo Deus. He writes that the fascination with unbridled consumption and GDP growth is a relatively recent concept but this phenomenon has actually resulted in improving the living standards for the entire planet (this obviously is in relative terms, there remains a huge consumption disparity between people. A Delhi slum dweller and a New York banker,?don't consume the same level of resources). He writes about the positives of chasing this growth but then turns sober to ask whether this growth be extended indefinitely as it depends on resource exploitation. He opines that the fallout of indiscriminate?resource usage falls differently on the different strata of society which inturn can lead to very unpredictable outcomes.

Readers can see the crux and the drift of the argument. The lopsided growth fuelled by unchecked consumption can give rise to sudden developments (read shocks) in political and social space. The economy?and its theories in such case?become more of a collateral damage. The example can be a sudden shift towards socialism or some other seemingly more equitable set ups. The change of guard in many South American countries can be traced to this phenomenon. The?current crackdown in China on edtech companies can also be seen as part of the same thread, somewhat of a preemptive measure before unrest.

However we will pause here and stop the philosophical digression and comeback to markets roundup. The markets are feeling good today, Hang Seng and Nikkei are firmly in green. NSE nifty is also 100 points up. Dollar Index is down and US 10 year yield is trending lower. It currently trades at 1.22. The core PCE inflation data for US which was released on Friday came at 3.5% on YOY?basis. The high reading has not been able to dent the market sentiment, it knows that any high reading can be dubbed as "transitory". The saver regime needs to wait for some more time to earn a risk free real return.