Alan Greenspan: Gold better currency than Dollar(or Rupee)

Now this man, Alan Greenspan is a former US Fed chairman and if anything, he certainly would know about money more than a lot of other people. And this is what he said few days back in a meeting in Council on Foreign Relations with Gillian Tett of Financial Times.

"Look, remember what we're looking at. Gold is a currency. It is still by all evidences the premier currency where no fiat currency, including the dollar, can match it. And so that the issue is, if you're looking at a question of turmoil, you will find, as we always have in the past, it moves into the gold price.

Intrinsic currencies like gold and silver, for example, are acceptable without a third party guarantee. "

I can't agree with him more. Gold is not an investment. It is money itself. So don't compare gold to stocks, real estate or bonds. But compare it to other currencies like Dollar, Euro, Yuan or Rupee.


Fiat currencies like Rupee have no intrinsic value. They are trusted by people because of the monopolistic power on violence by government. When govt. ceases to exist, the only thing you can use or store your wealth is in gold and silver.


If you think govt. ceasing to exist is almost impossible, just look at Syria, Iraq, Ukraine, Somalia etc. now.

Not only that, gold and silver saves you not only when govt does not exist, but it also saves you when govt does exist and has gone mad. Look at Zimbabwe or Argentina.


Here is the link to the CFR trascript.

RBI says no rate reduction soon. But what if they do reduce?

Like I was guessing earlier, RBI Deputy Governor came out today and said that the decline in inflation doesn't seem like a long term thing instead is likely to go up in near future and so rates may not come down soon.

The fall in price of crude oil and other commodities is beneficial to the Indian economy, but policy makers cannot jump to the conclusion that the trend was firmly established. "Inflation still has a long way to go," the deputy governor told the audience at a chief financial officers' summit organised by industry body CII.

There is a fight going between deflation and inflation. Most developed economies are deflating and they are printing currencies and trying to encourage more debt creation there to fight it. While emerging economies like India are having inflation because all that easy money from developed economies are actually coming here.

But what happens when RBI does reduce rates? If they reduce by 1% and you are a retired person living with say 20 lakh savings, then your annual income falls by Rs 20000. So your monthly income falls from Rs15000(assuming 9% interest) by about Rs 1600.

But where does all that money go that so many interest earning retires lose due to interest rate reduction? It goes as interest rate savings to the pockets of younger people who have home loans, car loans etc. It also spurs new borrowing by people who could not afford loans due to higher rates.

Rate reduction is essentially a wealth distribution from the savers who did a life time of work and saved for retirement into the the pockets of new borrowers in economy.

Do the retired people agree to give up their income? No, they have no say in this. Govts and Central Banks will decide how much money they need from you and take it, whether you like it or not.

On top of that, a lower rate will increase inflation and you lose about 7% or more of your savings that way too, whether you like it or not.

Rising Rupee

For last 1 year, due to high interest rates of RBI to fight inflation and loose monetary policy of other central banks around the globe, Indian Rupee has been rising against a whole bunch of currencies.

Here are some charts for 1 year against some.

INR/Canadian Dollar

INR/Euro

INR/Japanese Yen

INR/IMF Special Drawing Rights

INR/US Dollar

With all the talk of rising dollar after the QE3 end by the US Fed, even though dollar went up, we see rupee is slightly up against even mighty US dollar in 1 year period.

Even though we have a current account deficit and a bad fiscal deficit, this is due to the low rates abroad of almost zero in the West while we have around 8% rates.

With commodity prices like Oil also down a lot, inflation is going down in India. Recent citibank report showed that we are one of the few countries in Asia with positive real interest rate which is nominal rate adjusted for inflation.

Will RBI cut our rates now that inflation is down and rupee is up and the rising rupee might hurt exporters? Probably not in near future unless consumer inflation falls below 7%. But if this continues there will be pressure from govt on RBI to cut rates to boost growth.

This also explains why Gold is down in terms of rupee.

21st century worldwide financial experiments on the way.

October 2014 issue of Foreign Affairs magazine, published by Council on Foreign Relations(CFR), calls for a bold new financial experiment. CFR is the premier political think tank in US and where anybody who is somebody in the western world is a member including Federal Reserve chairs as well as high ranking politicians. Even our PM Modi gave a speech there during last visit to the US.

It basically says the money printing bond buying program of central banks since 2008 financial crisis hasn't been effective. This has created income inequality and banks who received the new money aren't loaning it out.

We now have slowing growth in EU, USA, Japan and even China.

So this is what the authors of the article suggest.

"Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality."

This seems not like a radically new idea. In history many empires have tried this before to grow by printing more money. I wonder if govts could print money and give it to the people, and everybody becomes well off, what would be the need to do any work? Anyway, here is what FA goes on to say further.

"Ideology aside, the main barriers to implementing this policy are surmountable. And the time is long past for this kind of innovation. Central banks are now trying to run twenty-first-century economies with a set of policy tools invented over a century ago. By relying too heavily on those tactics, they have ended up embracing policies with perverse consequences and poor payoffs. All it will take to change course is the courage, brains, and leadership to try something new."

If you understand how important CFR is, you would know what is coming in future.

Here is the full article.

US Fed ends QE3. Effects on India

1. Dollar rises and rupee falls.
2. FII money slows down in India. Growth in stock prices in India may be limited.
3. Gold price may not fall much in rupee terms as both rupee and gold fall in terms of dollar.
4. RBI may not reduce interest rates to avoid rupee falling further.
5. Due to global slowdown, oil prices may stay low and with our 8% interest rate in India, inflation may fall or not go up.
6. When Fed talks of raising rates in US in 2015, rupee may fall even further and our FM Mr Jaitley may stop asking RBI to lower rates to avoid fall in rupee further.
7. Stock market volatility will increase. With already low central bank cheap money and high valuations in stocks, we may see lot of swings. If Fed does decide to raise rates in 2015, we may even see dramatic collapse in stock market.
8. If you are a retired person with fixed return investments, it will be good for you. If you are younger and are in stocks, then not so good.

But, I doubt Fed and other Central Planners can really allow stocks to fall badly. They may then reduce the rates again or announce another bond buying program or QE4. We will see.

Taking advantage of India's credit fuelled growth.

Here is India's interest rate chart from 1978. As you see, from around 1991 till today we have had a generally declining interest rate. I remember 20 years back, we heard about govt deposit schemes like Indira Vikash Patra that doubled money in 5 years which means they had 15% annual rate.

Low interest rates spur burrowing by businesses and individuals. 20-25 years back the loan industry(home, car, personal etc) wasn't as big as it is today. Considering that each rupee comes to life as debt, more rupees have come to life hand in hand with burrowing. Following is the India M3 money supply chart.

Since 1991, as shown above, M3 money supply has grown exponentially. Assuming the year 1991 value from above as 2000, so far M3 money supply as grown 100000/2000 = 50 times.

Now lets see how far our per capita GDP has grown since 1991.

Assuming 1991 value from above as 1800 and 2014 value as 5300, growth is 5300/1800 = 2.94 times. If you consider salary/wage growth as keeping pace with per capital gdp growth, we see that when money supply has grown 50 times, wealth of individual people has grown only 2.9 times.

We certainly have more millionaires and billionaires now than before but income inequality has increased hugely in India. The reason for that is that the credit growth or loans have gone to people who know how to make more money out of cheap money such as businessmen who are well connected with politicians and can get large loans. Also we have been great rise in asset prices due to large money supply which basically devalues rupee. Such assets are house, land, consumer prices, stocks, gold etc.

It would seem that we are growing by depreciating rupee. However, the rupee depreciation or money supply is far ahead of gdp or wealth growth. Part of the difference goes to asset price increase as well. People who get the initial injection of money or loan are ahead of the curve in acquiring assets.

If you are a poor person with bad credit, no access to loans or uses loans to spend consumer goods rather than acquiring assets then you will fall further and further behind.