The Hindu Business Line : Where are you Roger Bootle?

Roger Bootle’s Death of Inflation was a best seller in the mid-90s. His argument about the reality of zero inflation eras was both provocative and persuasive. It was a Goldilocks background at that point in time — witness to economic expansion and at the same time, low interest rates. He claimed that inflation is dead for good and in fact the danger was of central bankers causing deflation.

Now, nearly two-third of the world population is reeling under inflation. There is double-digit inflation in many countries. Even in the Euro zone, the inflation level is at a 16-year high. This burst of inflation reminds us of Mark Twain’s famous words ‘The reports of my death are greatly exaggerated’.

Those were the days when the fashionable distinction between ‘headline’ and ‘core’ inflation gained popular currency. A theory even goes that what ever central bankers could not control was not ‘core’ for the common man and, therefore, kept out of the measure. .

It looked as though it was gay abandon so far as monetary discipline is concerned, particularly in the US and much of developed world. What ensued was a regime of low interest rates and the gasoline (monetary looseness) was sprayed in abundance all over the place. There was a rush of institutional finance and funds of all names and kinds to commodities. Everything was an asset class, if not an alternate ass(et) class. The gap between measured (official) inflation and inflation suffered by the housewife went on widening. It was not just price elevation, but fear elevation as well bordering on schizophrenic.

Given the pace of globalisation, it is fast download. Indulgent monetary policies have blurred the distinction between growth and bubble. Market fashions on relationship between values and wealth are undergoing rapid changes.

Manpower shortage

There is this conventional debate as to whether inflation is caused by demand factors or supply factors. In the new economy, knowledge is the capital and there is huge shortage of this capital leading to high wage spiral. The shortage of not merely top talent, but even middle management level, is itself exacerbating shortages in the real economy. There is not one industry and not one country that do not complain of shortage of manpower. This is accentuating demand-supply gap in other sectors. Can this supply shortage lend itself for treatment by conventional monetary policy? Do we have new age monetary policy to tackle the burgeoning demand for manpower?

In another era, inflation expectations led to wage increase demands. But in the new economy, inflation or no inflation, the wage inflation feeds forward — not feeds back — into the real economy.

Swollen by dollars, many countries imagined that they can buy their shortage through imports. Given the herd instinct there are stampedes.

The US probably is the only country that majorly prints its way not merely fiscal deficit but also trade deficit. Dollar, dollar everywhere, commodity prices anywhere, anywhere. This limits efficacy of domestic monetary policies. Earn dollars or perish was the theme that was played to the hilt by emerging economies and ably dollar printed by the US. This is an idea that is past due date. It is said that achieving growth is about technical competence and ushering in progress is about vision thing backed up and not bent by political will.

Insulation from inflation

How can governments insulate populations from inflation? In China, which has reserve ratios of over 17 per cent (more than double of ours), the interest rate on deposits is about 1.5 per cent and loan rates are about 5-6 per cent? Can the Chinese puzzle do an Indian rope trick?

They appear to have unique monetary transmission mechanism. Governments in many developing countries are anesthetising people by blocking pass through. This state of denial can make future crisis costly. The elevated prices convey message. How do we cushion the impact of sudden surges and at the same time avoid anaesthetising?

Everyone wants the price of what he/she owns or produces to go up but whatever he/she consumes to go down. What else explains riots/protests for lower food prices on one hand and suicides and riots by farmers for higher prices on the other? Do we have right economics/politics to balance this contradiction so that fear and greed do not overwhelm us? Do we need folk wisdom?

Are we hitting the limits to growth-Rome roundtable version or otherwise? Can we really say that, when over 400 million people are still suffering from poverty? The growth models we are adopting and at times imitating, at least in some sectors, could only worsen the problem. The increase in airport miles (location of new airports), increase in food miles (organised retail) , increase in office miles, increase in sleep mile etc. would only serve to make us more oil dependent.

Can this be addressed by monetary policy? The reduction in these miles would require a change in our fundamental behaviour and way of living & working. Simple living has become complex and complexity has become the norm. This complexity has been fed on energy. We are embracing energy guzzling life and work style. Mass transportation needs acceleration.

Carbon neutral — not just reduction — and even water neutral by some beverage companies — are not mere catch phrases but are central sustainable development strategies. Some reports indicate that if sustainability model is neglected, two-thirdof the global population would face water shortage in not too distant future. Half the world population is anesthetised by fuel subsidies. There is no place to hide from high energy and food prices except green. Let us start counting green jobs. Why not start from diapers? A few countries like Iceland are striving for carbon neutrality, and not just reduction. We cannot achieve real and sustainable progress without giving up oil addiction and move towards environment neutrality.

Before I could finish reading Stephen Leeb’s The Coming Economic Collapse: How You Can thrive When Oil Costs $200 a Barrel, comes the warning by Gazprom of $250.

IMF’s clarification on inflation: even if the inflation is not going to deepen, it would be protracted. If it was hard enough, read Greenspan.

To be fair to Roger Bootle, his discussion was about perpetual inflation.

To be precise, by zero inflation he meant alternate periods of low inflation and deflation. Moral of the story — the challenge of inflation, like many other challenges, would never be solved in a lasting manner.

Let us hope that inflation would be reined in. But hope is not policy.

(The author is the Chairman and Managing Director of Corporation Bank)

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