India Needs a Ron Paul
by Bill Sardi
Recently by Bill Sardi: Today's Presidential Campaign Sounds Like a HorseRace
I'm writing from Kolkata (the old Calcutta) India where I have spent the past few days on a business trip. Upon landing here in this endless dirt city of 40 million people I was quick to check on the economic condition of this country and was unsurprised to find it too needs a Ron Paul to warn against the consequences of rising government debt spending and centralized banking with all of its trappings of fractional lending and fiat (unlimited) paper money printing which will doom India just like it has America. While most Indians see progress, the very seeds of civil unrest, re-povertization and war are being planted.
From the top to the bottom of the economic ladder, India has troubles. India's billionaires have shrunk by a third, from 60 to 40, in the past year while it is reported that 42 per cent of children under five were malnourished, and more than 60 per cent stunted in growth because of a shortage of food.
With a slowing rate of economic growth (down from 8.5% a year ago to an estimated 7.0% this year), India is now tempted to go the way of the USA and borrow or print more money to meet its government budget.
India's central bank prudently implemented 13 consecutive interest rate hikes to put the brakes to India's out of control growth and inflation. But economic and political winds are changing in India.
Rajesh Kumar Singh and John Chalmers, writing at Yahoo Finance India, claim this nation of 1-billion-plus humans "risks undermining the credibility of its economic outlook if it fails to reform its public finances." They say "… as the cash-strapped government gears for a dramatic widening of its fiscal deficit. With a slowing economy, a sharp decline in investment and high oil prices upsetting its budget calculations, the government is under growing pressure to curb spending as it heads into the 2012/13 fiscal year."
India is widely expected to miss its deficit target of 4.6 percent of GDP for the fiscal year that ends this March.
Some budget-sane authorities beg India to trim spending by putting a curb on oil and fertilizer subsidies. But imagine doing that and trying to get re-elected.
India buys a great deal of its oil from Iran and side-steps US sanctions by funneling payments through Turkey for the oil. India makes $1 billion in monthly payments to Turkish banks to acquire 370,000 barrels per day of crude oil from Iran.
But has any government on the planet taken timely action to curb spending? Will India simply dig itself into mounting debt and only stop when it can't pay interest to its debtors just as the US has done? Consider the US which has now accumulated $15 trillion of federal debt, which is higher than its entire annual gross domestic product (GDP). Just 5 more years of this deficit spending and America will owe $20-25 trillion of debt and meeting the interest payments on that debt will become the primary objective of government.
Ron Paul Cloned
In his warnings to India, Peter John Palms is as close to a clone of Ron Paul as can be found on this Asian continent.
John Peter Palms, writing in the SME TIMES, is trying to warn India of the economic minefields ahead. But who is reading Mr. Palms' news column in India? Some xx% of the Indian population is still illiterate and trusting authorities will make the right decisions regarding their economic future. But elected officials are playing games here, ordering pot holes in roads to be repaired just prior to elections.
A Failed America Is The Economic Standard For Developing Countries
Most East Indians would look to America as its standard of economic success. But Mr. Palms says by 2006 gross interest payments on the US national debt were running $406 billion per year or 17% of all federal revenue. The US has been running a false economy and maintaining an unsustainable standard of living for some time now.
Mr. Palms says this debt now represents the US government’s largest single expense; greater "than defense; larger than the combined cost of the departments of Agriculture, Education, Energy, Housing, and Urban Development, Interior, Justice, Labor, State, Transportation and Veterans affairs." Mr. Palms elaborates, says the cost of the US national debt is currently about $5,000 for each family of four. He says US households pay for the national debt through inflation rather than taxes as it political suicide to visibly increase payroll deductions. He says $5000 is extracted from American families "not to provide government services or even to pay off previous debt. Nothing is produced by it, not even roads or government buildings. No welfare or medical benefits come out of it. No salaries are paid by it. The nation's standard of living is not raised by it. It does nothing but pay interest." Mr. Palms says the interest on the national debt is compounded. This means, even if the government were to completely halt its deficit spending and adhere to a budget neutral policy from here forward, the total debt would continue to grow as a result of interest on that portion which already exists. He says in 2006 interest on the national debt was already consuming 39% of all the revenue collected by personal income taxes. The Inflation God
Which brings us back to India. Imagine living in a country like India where banks are now wooing savers to deposit money in their institutions at 10% interest. But unlike the US, which quotes a low 3% rate of inflation that is actually 7-10% if 1990 or 1980 methods are employed to calculate the "consumer price index," India is more transparent about the rising cost of living, citing a 10-14% rate of inflation. This means East Indians, like Americans, are losing big-time on their interest-bearing bank accounts.
The middle class in America is being demolished via inflation and there is no chance of an emerging middle class in India under such circumstances. Americans gain less than 1% yield on their banked money today, losing about 6-9% per annum in purchasing power. It never dawns on most Americans or East Indians to check on whether their banked money is gaining or losing value. According to a survey recently conducted here in India, most Indians have no idea of the interest rate their banked money is earning. Only 18% guessed right in a recent poll.
Where To Invest?
Dilip Maitra, writing in The Deccan Herald, says "With bad news all around on the economic front, Indian people today are confused and worried about where to invest their money and how to get a reasonably good return without the fear of losing it."
Join the modern world India. The wealthiest people on the planet don't know where to stash their money either. India is not a loner in this regard, though it holds an un-auspicious form of wealth that I will discuss below.
If you are a mutual fund fan, you will not be encouraged to invest in diversified funds in India where all 171 mutual funds here gave negative returns in 2011.
Mr. Palms s goes on to say: "central banks and fractional banking system are what cause depressions and inflation and ultimately collapse as the one in the US has done three times in the past." Is anybody listing to Mr. Palms in India?
In the US, Ron Paul has a large following of younger voters who are learning Austrian economics and of the follies of the Keynsian system of creating more debt to dig itself out of economic doldrums. But here in India, now armed with their cell phones and motorized cycles, young people only see rising opportunity.
As Mr. Palms warns: "India is different from the U.S. in many cultural and historical ways, but it is exactly in the same circumstance as the U.S. with respect to money as long as it participates in the same Central banking system and fractional banking which needs to be abolished if an economic meltdown is to be averted."
Age wise, India is a very young country. The streets of Calcutta are filled with the faces of young men and women who have no idea that the course now being taken by India could doom their futures. Printing money will buy votes in India, as it has in America, but this is just pushing the debt onto the next generation.
Of course, as Gary North asserts, this debt will be repudiated. Future generations will not pay it. There will be a default and a forced devaluation of currency, maybe 30-40-cents on every rupee vanishing in a looming bank holiday. Such an occurrence in India will trigger an uprising as many millions live on only a few rupees a day.
Rajhkumar K Shaaw, writing for BloombergNews, says the 2011 goal in India was to curb inflation whereas the 2012 goal may be to restore economic growth. With that will come the pressure for India's central bank to lower the cost of money by reducing the base interest rate banks pay to obtain money to lend. Why this sounds exactly like what the US Federal Reserve central bank did early in the past decade.
If there were only some god in the sky who would reach his hand down from heaven and stop the central bankers from creating cheap money and a boom-bust bubble economy in India. Actually Keynsian economists tend to nebulously treat boom-bust business cycles as if they are acts of god, rather than their own creation.
And like US banks, Indian banks are making a lot of bad loans, particularly to business enterprises rather than for home loans as the US did. One article says "Bad loans for Indian banks are popping up like toads after first rains."
The East Indian trump card is gold, lots of gold, owned and treasured by families in the form of jewelry. Indian gold is purer (24 carat) but softer. This yellow shiny metal yielded a 12% return in 2011, its 10th annual gain. "On the long run, gold is a sure winner and should you decide to invest in gold, buy coins rather than jewelry whose price includes making charges (approximately 15 per cent) that can't be recovered while selling" says Dilip Maitra.
But gold jewelry is not subject to government confiscation. It appears Indian banks are encouraging the masses to buy gold bars and coins. The State Bank of India is widely advertising on billboards throughout Calcutta that all 1100 branches of their bank offer 99.999% pure gold. But don't bet on Indians opting to buy gold coins over jewelry anytime soon.
India's households hold gold worth over $950 billion, mostly in the form of jewelry. Compare this figure against India's M3 money supply (currency and savings accounts) which amounts to $1.4 trillion. While East Indians aren't likely to part with their gold jewelry they can sure use it as collateral.
Imagine a scenario where the world's paper money is revealed for what it is — an IOU backed by nothing but the full faith and credit of flimsy governments and central banks. Imagine a currency crisis that is worldwide. Who would come out on top in such a scenario? Let's say gold rose to unprecedented highs, maybe $5000 an ounce. That would come to nearly $5 trillion in gold for India. India's family wealth could rise to where its jewelry gold could be used as collateral for building new homes, starting small business ventures, etc.
Seven percent of India’s $265 billion in total household savings is held in gold, 18 tons of it by weight. Indians are essentially serving as their own banks, carrying reserve wealth in their home jewelry closet rather than holding it in inflation diminished savings accounts in banks.
The Indian Reserve Bank is catching onto the idea and has purchased 200 tons of gold from the International Monetary Fund.
While Indian imports tons of gold, with a balance of trade that leans towards more imports and exports, current account deficits may pose problems like what occurred in 1991. Some 20 years ago India was forced to airlift 47 tons of gold to Europe as collateral for a loan to avert a sovereign default.