Fiat currency, inflation and morality

I recently came across a bill of 1971, for 2 masala dosas and 2 coffees partaken at Moti Mahal Restaurant in New Delhi. Each cost ₹1, for a total of ₹2. Tax at 8 per cent made it ₹2.16. If one assumes a price of ₹60 for a dosa today, the intervening 47 years have seen inflation at a CAGR of over 10 per cent.

Prior to that, I recall my grandfather telling me that he, as a school boy, got 1 paisa every day from his father. This was perhaps 120 years ago. The paisa was, in those days, divided into 4 pies. That was sufficient money to go by tram to school and back, to have 1 pie worth of midday snack and to save 1 pie (1/400th of a rupee).

Back then money had value, and people had morals.

It had value because nations had to back their money supply with gold. It was in 1971 that Richard (“I am not a crook”) Nixon decoupled the US $ from gold, paving the way for countries to print currency unbacked by gold. All other countries followed suit. So, whenever there was a crisis, instead of tackling it at the root, the quick fix solution lay in cranking up the printing press.

When irresponsible Governments lose all sense of proportion, hyper inflation occurs. It is expected to hit 10-lakh per cent in Venezuela this year. One cannot imagine the sorry plight of its citizens. And this is a country which has the world’s largest reserves of crude oil; it ought, with good management, be richer than Saudi Arabia, instead of being bankrupt.

Not by printing alone

Not only have all governments printed money ceaselessly, they have also borrowed. Today, the total debt of the world (Government, corporates and households) is $ 237 trillion. This is more than three times global GDP. How can this ever be repaid?

Why, by printing more money!

So where does morality come in?

When citizens can’t, thanks to inflation caused by wanton debasement of currency, make ends meet, they try to make money by hook or by crook. The latter seems to be winning.

Declining morality!

Government owned banks (PSU banks) control 70 per cent of deposits and have been the most susceptible, due to their size, to non-performing loans (although several private sector banks have also got NPA issues). These banks were nationalised earlier, through legislation. In order to stanch the continuing flow of tax payer money to these failed banks, Government contemplated sale of some of them. However, this requires legislation (Parliamentary approval) again. The Financial Resolution & Deposit Insurance Bill (FRDI) was supposed to be the legislation, but, strangely, has been scrapped.

In short, tax payers will continue to fund banks which fund crooked businessmen who loot and scoot.

Declining morality!

Indian Stock markets are sustaining due to changed method of household saving in favour of mutual funds. Should that change, for whatever reason, the market would fall; foreign investors have been pulling out.

It is a pipe dream, of course, to hope that the world stops fiat currency and returns to a period when moral standards were higher. That would be a pipe dream. Sadly, with a 290 per cent tax on pipe tobacco, even a pipe dream becomes unaffordable.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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