Close encounters of the cop kind

About 5 years ago, I had entered into a verbal contract to sell a flat owned by my sister, in Vasant Kunj. The prospective buyers, call them Gupta and Sharma, were real estate professionals, and insisted I take a ‘bayana’, a cash amount that was witness, as it were, to this contract. The money lay in my cupboard, so, when one of them phoned a few weeks later, to call off the contract, I asked him to come over and collect the amount.

No papers had been signed, so once I had handed over the cash, I expected them to leave. Instead, Gupta turned to Sharma, and asked, ‘Aur hamaari baat?’. Sharma responded aggressively, “Kaunsi baat?”. “Kaagaz pey sign kar.”

I wanted no part of this. “Dekhiye, aap log apni baat kahin aur keejiye. Mera aap se kaam khatam ho gaya hai”. But the testosterone levels had risen, and by now, so had Sharma. One bulky middle-aged broker reached across me to the other, and tried to haul him up. “Sign kartey ho ya nahin?”

 “Aap log yeh sab road pey kijiyega”, I tried to intervene.

They were deaf in their anger.  “Main nahin karta”.

Gupta reached for his phone, “Mein police ko bula raha hoon.” And dialled 100.

“Not from my house – I have nothing to do with this”. But Gupta had lodged his complaint, along with my address. Cowed, Sharma signed. Triumphant, Gupta got up to leave.

 “Hey, you can’t leave like that – you’ve sent for the police”.

 “I’ll tell them not to come”, said Gupta, and called the Police Control Room again.

15 minutes later, two cops arrived, one a lanky constable in his 20s, the other a 50-year old sub-inspector with a stout paunch and hennaed hair. “Aap ka complaint aaya tha.”

“Not exactly,” I tried to explain to him what had happened.

“Complaint to aap hi ne kiya.”

Of course I hadn’t complained, the complainant had withdrawn his complaint, and Gupta and Sharma had gone gruffly into the night. “And if you don’t believe me, you can compare my number with the one lodged at the PCR.”

Henna-hair winked at Lanky, and dismissed him. “Let me handle this”, his smarmy look said. Lanky slithered out and down the stairs.

With a grunt of satisfaction, henna-hair settled deeper into my sofa, crossed his arms, and declared, “To phir aapne apne kissi naukar se phone karaaya hoga.

Between Sharma, Gupta, and now henna-hair, I had had enough. “Main ne aap ko samjha diya, ki main ne PCR nahin phone kiya. Lekin kar sakta hoon. Aur is baar, complaint aap ke khilaaf hogi. Ki aap mujhe sataaney ki koshish kar rahe ho.”

“Nahin, nahin, yeh aap hya keh rahe hain. Main ne apni beti ki shaadi karni hai.” This was a different man, a different voice, and on his breath, there was more than a whiff of alcohol.

“And you’re drinking on duty?”

“Sirf ek shot, Sir!” Suddenly I was ‘Sir’!

“Subah bas se utartey vakht gir gayaa. Chot lag gayee. Bahut dard kar raha tha.”

He proffered his arm, and the wrist was red and swollen.

“Aap baithiye, main aa raha hoon”, I went into my bedroom to fetch him some pain-killing medication. By the time I had switched on the light, he was in my bed-room door. ”Sir, aisey mat karna, main aap ke paav padta hoon.” He staggered as he bent towards my feet, and it took me a couple of seconds to figure that he thought I had gone to make that phone call in private.

“Nahin! Main aap ke liye davai laa rahaa tha.”

“Main dava nahin leta hoon. Ek bhi tablet kha loon, to sar sunnn ho jaata hai”, he rolled his orange-topped head to emphasise the sensation.

“Din dahadey rum pee letey ho aur kucch nahin hota, lekin ek chhoti-si tablet se dartey ho? Le lo, dard kam ho jaayegi.” I escorted him to the door.

We can't control rapists, but we can control you

Hope springs eternal

Riding through the fog today, found traffic was halted just before the Golf Club, and I wondered whether protestors were being stopped 2 km. away from India Gate, and that at 7:30 a.m. No, it was the security cavalcade of a plutocrat entering the parking lot after escorting its charge to the 1st tee. Ample evidence that our security forces are busy protecting us.

We cyclists were allowed into the India Gate inner circle to stage our little protest, got our 15 seconds of fame with TV cameras looking for a different angle. We did 5 symbolic circles around the Amar Jawan Jyoti, then were whistled away by the cops.

Having breakfast at a cafe at 10, the TV informed me that protest in the area had since been declared illegal.

The plutocrats who weren't playing golf had woken up, and decided they need to take strong action.

Planning for growth

A Review of the Approach to the 12th Five Year Plan

India’s 12^th 5 year Plan is supposed to kick in this year, and aims for a growth of 9 to 9.5% per annum. Compared to a rate of just over 8% for the 11^th plan, which has just ended, this seems somewhat ambitious. With the markets on holiday, I spent Dussehra examining the 12^th Plan approach paper to see how realistic this 9% number is.

Aside from the heady experience of 10% growth during the global boom 5 years ago, the reason many believe we can expect high growth in India is our high rates of investment and private sector saving – respectively pegged at 36% and 34% of GDP by the Planning Commission. In projecting growth over the next 5 years, the plan requires these rates to rise further, with the investment rate for the entire 5 year period to hit 38.7%; to fund this, critically, it projects household savings rates to rise from 23 to 24%; corporate savings to go from 8.2 to 8.5%, and public savings to go from 2.5% to 3.7%. Also, it requires the capital account balance to go from 3.8 to 5%.

The current scenario suggests that each of these targets is a stretch. Household savings rates have been down for the last couple of years, and with much money going into gold, there is also the question of how the gold in our lockers and round our necks can be channelled into the financial system. Further, the plan also hopes for a tax to GDP ratio of 13% for the period, as compared to something like 10% for the whole 11^th Plan. The burden of extra taxes is bound to lower the potential for the private sector – whether households or businesses – to save. 

Meanwhile, to expect public savings to rise will require our government to forswear populism. With elections due in 2014, there seems little chance of that. And lastly, given the continued uncertainty in the global financial system, capital from abroad is likely to slow rather than grow, and expecting 5% of GDP to flow in from abroad is foolhardy.

All considered, my own sense is, the funds available for investment are going to be in the region of 5% less than the Planning Commission numbers.

The second issue in the chain of growth is how these funds convert into increased supply of goods and services. In studying this link, planners look at the number of rupees of investment required to generate 1 rupee of extra output in different sectors, a number called the sectoral ICOR (Incremental Capital Output Ratio). As should be expected, huge amounts of capital are required in building infrastructure in gas, electricity and water – sectoral ICOR of 16; transport – 12; and mining and quarrying – about 7. In contrast, for construction and finance, the numbers are vastly lower, 2 and 1 respectively.

Over the last 3-4 years, we have been hitting constraints in precisely the sectors with the highest  ICORs – most notably in transport and across the entire energy chain. This suggests that, if we are to achieve sustainable growth, these sectors must be built up; in the short-term, they will yield lower returns for the financial buck, and hence overall growth will be lower. Without infrastructure keeping up, the document recognises that, “There is no doubt that an effort to expand demand to push growth beyond the level consistent with the supply potential will lead to inflation”.

It is crucial to understand this last statement – inflation is too often reduced to a discussion of interest rates, and with PC back in the FM's chair, the level of 'policy' debate on this matter has hit a new low. However, price levels have a structural underpinning, in terms of the capacity to supply an economy. All the signs are that we have hit a wall here. 

In consequence, my own growth projection for the next 5 years is in the 5 to 6% range. 7% will  only happen if the global system reverts to the heady days of the 'Oughties - an optimism few will share, and one on which no responsible planner should base a major document. As for 9%... that's a pipe dream.

Stephen Roach on the US economy and the Fed

Stephen Roach is a sharp critic of the manner in which the US govt. is building up debt, and the US Fed printing cheap money:

http://www.project-syndicate.org/commentary/federal-reserve-quantitative-easing-ecb-emerging-economies-by-stephen-s--roach

His piece speaks for itself, so I don't know why I am putting extracts down on my site! Except that I have to say I agree, and would like to have it at hand whenever I need it again

"The convoluted logic behind this strategy is quite disturbing – not only for the US, but also for the global economy. There is nothing cyclical about the lasting aftershocks of a balance-sheet recession that have now been evident for nearly five years. Indeed, balance-sheet repair has barely begun for US households. The personal-saving rate stood at just 3.7% in August 2012 – up from the 1.5% low of 2005, but half the 7.5% average recorded in the last three decades of the twentieth century.

CommentsMoreover, the debt overhang remains massive. The overall level of household indebtedness stood at 113% of disposable personal income in mid-2012 – down 21 percentage points from its pre-crisis peak of 134% in 2007, but still well above the 1970-1999 norm of around 75%. In other words, Americans have much farther to go on the road to balance-sheet repair – which hardly suggests a temporary, or cyclical, shortfall in consumer demand."

In other words, the deleveraging by households is about 1/3rd of the way done, whereas this has resulted in govt debt shooting up to nearly 3 times GDP. Cheers! Wonderful for the dollar - once the world is done dealing with the Euro, and ends up with at least one new currency - the drachma or the D Mark. perhaps many more, as the Euro project is fried. Zen ze dollar will be fried, too.

And, just in case anyone believes that the current debt scenario was forced by the Recession, here is a note from Peter Singer, writing for Brookings:
"What makes the problem worse is the poor track record that both parties have at shrinking this debt. Over the last 50 years, the US has only run a budget surplus five total years."

And, on the connection between debt and inequality, here's what Keynes wrote,
"“By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some."

Read more: http://www.businessinsider.com/socgens-dylan-grice-is-more-worried-than-ever-2012-10#ixzz28CVU22tP

We the ordinary people.

In dispassionate prose, my dear friend Madhavan writes that public services will never improve unless our public masters are forced to use them: http://www.livemint.com/articles/2012/08/20195232/A-dictator-for-a-few-hours.html#.UDW7KZVJK60.twitter.

His comments seemed especially appropriate when I took my 90 year-old father to Max Clinic for emergency investigations at 9 this morning. While I dealt with valet parking and wheel-chair, I noticed a white Ambassador parked on the kerbside with its phalanx of self-important stickers, and the all-important orange beacon.

When I returned to the kerbside an hour later, the Ambassador was still there. "It will be here till 2 o'clock" - for instant service of one of our potentates. Meanwhile,this ordinary tax-payer waited on the kerbside with his 90 year-old father for the car to be ferried from parking half a kilometer away.

Oh, the arrogance, the hypocrisy, of our public servants, who have perfected a system that serves only themselves.

The OPM of the Masses

Government debt is the OPM of the Masses

Just like the NINJA borrowers of the US housing boom, governments have proved to be dishonest and imprudent borrowers.

In India, debt has been raised to pay black-marketers of kerosene, smugglers of PDS wheat, and cooks of public works books. In the US, it is paying the indigent to stay at home, and corporate jailors to house people for consuming and trading one of the most harmless intoxicants, marijuana. But even the largest public debt in the history of civilisation will be hugely inadequate to pay for the inflated medical bills and social security that the US citizenry have come to take as their birth-right. And I guess we better mention Greece, whose citizens have taken to calling German a Nazi nation because its government, whose officials work till 65, are asking their Greek counterparts, who retire at 60, to go easy on their entitlement programs.

This is a world gone crazy. And yet, it was entirely predictable. The phenomenon is called OPM, or ‘Other People’s Money’. Government funds are of course someone else’s money, and the millions of Someone Elses from whom the money is taxed are usually too disorganised to come together to protest. Even if they did, those from whom the bulk of money is taken are a much smaller number than those in whose name the money is spent, so in the rules of the electoral game, they count for little. This leaves those who seek office to compete with each other in promising to extract enough OPM to make the majority, and the most vocal minorities, better off. This process is the true OPM of the masses.

Increasingly, the tax collections of the world’s governments have not been able to keep pace with its spending ambitions. But heads of government would rather not let reality intrude on the OPM-fuelled promise that they can generate prosperity by redistribution. Increasingly, they have been funding their electoral promises by borrowing money. If money markets became tighter, they leaned on Central bankers to open up the money supply, and keep borrowing cheap. In the US, they succeeded; in Greece, since the central bank is shared with Angela Merkel, they got a ‘Nein’. Which is why the US government can borrow money for next to nothing, while the Greek leaders are having to deal with reality.

Reality, of course, has a way of catching up with dreams. If Merkel holds her stance, the European reality check will come this weekend, and this could mean that world markets hit a wall. If, on the other hand, she gives a little - which has been the story of the last couple of years - there will be a little more OPM available in Greece. And Spain. And tiny little Cyprus.

But, run out it will, in Europe to begin with, but also in India, in China, in Japan, in Argentina. Not to mention the US. For the time being, the world is largely ignoring the magnitude of US government debt, but Obama’s administration is the most egregious borrower of all. Any realistic price for US government borrowing will make its public finances completely unviable. When this reset happens, there will be a horrific fallout for the global economy, currently coasting on the illusion that the dollar is a safe haven. In the aftermath, there will be a demagogic deluge about the viciousness of markets.

Markets, of course, are only a forum for individuals to take the decisions they deem most rational at the time. And unlike the electoral process, which gives unbridled power to its periodic winners for long periods of time, financial markets are continuously dynamic; no individual player can hope to set, say, the yield for US debt, in the manner in which monopolistic central bankers routinely do.

It will take a while for our collective economic wisdom to understand the profound fallacy of allowing central bankers to fix the price of money, and yet talk of market failure. It will be convenient to demonise investment bankers when bankrupt governments can’t borrow more. And we may never be able to quantify the distortions introduced into societies spoiled by millions of perverse economic incentives introduced by government policy.

Nevertheless, when the OPM dream fades, we will all be in a cold sweat. It won’t be pleasant for anyone, but it is one more step on the painful path of realisation that centralised decision-making is hugely flawed and deeply demeaning. 

Final Act of the Greek Tragedy

Extend and Pretend is running out of time. Germany has made its intentions clear, as these two articles point out. What I can't figure is why the markets are not absorbing this fact. Time to buy some good 'fat-tail' options.

http://www.ft.com/intl/cms/s/0/3588be46-b8ab-11e1-a2d6-00144feabdc0.html#axzz1yI4pmKxL
http://www.ft.com/intl/cms/s/0/a438a8a6-b8ab-11e1-a2d6-00144feabdc0.html#axzz1yI4pmKxL

Hang On! This analysis shows that the 'half-life' of positive news flow is decaying fast. This would suggest that events could unwind very rapidly, very soon.

http://si.wsj.net/public/resources/images/OB-TK979_EUROHE_G_20120619151633.jpg

Imagining the future

http://www.thebaffler.com/past/of_flying_cars/print

An economic observatory?

From Paul Saffo in Foreign Policy

Imagine [...] an institution with the analytic resources of Wall Street players, the reach of Google, and the openness of Wikipedia. Such an observatory would leverage the capacities of cyberspace to become a global (and cost-effective) clearinghouse for economic information. Its scope would extend far beyond the data collected by established entities today, for example probing deep into the world’s illicit economies and exploring the market implications of rapidly spreading social media. And unlike those institutions, it would serve a purely informational role with no policy responsibilities.

Above all, this economic observatory would be open and independent, inviting the participation of crowds and encouraging the broadest possible research access to its data in the service of rethinking our global economic architecture. Funding is less of a hurdle than one might think. Such an observatory could be operated on a fraction of the 342 million-euro annual budget of the Organization for Economic Cooperation and Development. Moreover, its smaller budget would provide the flexibility required to preserve both the appearance and actuality of independence. It might even be possible to crowdsource the bulk of its budget over the Internet.

Gov. Subbarao fuelling a real estate bubble

When interest rates are negative in real terms, savers are forced to hunt for yield, creating ideal conditions for asset-price bubbles. On Tuesday, April 17, Mr. Subbarao, Governor of the Reserve Bank of India, topped up India’s inflation tanks at a time when they were just beginning to approach a balance with the reality of India’s economy.

While most observers were expecting the RBI to lower interest rates by 25 bps, the Governor cut 50 bps off the price banks pay to borrow money – all the while protesting that inflation was not yet licked. WTF?

The very next day, the consumer price index for March (new series) came in, registering a 9.45% inflation, year-on-year. The policy announcement and the price data were rather poorly coordinated – or perhaps they were well-coordinated! In follow-up meetings to his credit policy review, Mr. Subbarao kept all options open regarding future moves in interest rates, making for a rather quixotic situation.

One of the more significant developments in banking over the last year has been the slowdown in bank deposits. Since you can’t fool all the people all the time, Indians are gradually realising that bank deposits are a bum deal when you lose buying power by lending your money to a bank. If you are a tax-payer, the real loss is significant. The percentage of household putting their savings into equity is small, and diminishing. Aside from the perennial favourite, gold, that leaves real estate.

In South Delhi, real estate prices have moved up 30% over the last year, making it one of the most over-heated property markets in the world today. The March consumer price index reflected this, showing that housing costs are up 14% year-on-year. This is a huge number; with Mr. Subbarao pushing real interest rates deeper into negative territory, it’s going to get worse. The real estate bubble is getting bigger.

Pop! 

The motive force of the SP

Mr. Akhilesh Yadav is clear about the constituency to which he is catering - the MLA. And, like every good politician, he has his finger on their aspirations, in this case, a lumbering white SUV from which they can proudly let flutter the symbol of their party, which is ironically a cycle:
http://timesofindia.indiatimes.com/india/UP-MLAs-can-buy-cars-from-development-fund-Akhilesh-Yadav/articleshow/14640682.cms

The UP assembly elections were completed earlier this month, and Mulayam Singh Yadav’s party swept to a majority win, widely attributed to the appeal of Akhilesh Yadav, his son and political heir. Acknowledging that his party has allowed its goons to run riot in the past, the new Chief Minister has been keen to assure us that his SP will be a new dispensation, and will rein in its supporters.

It’s going to a slow and challenging process at best. Less than two weeks after the election results were announced, we were driving along NH 24, which connects Lucknow to Delhi, by way of Moradabad. Now that this highway has two channels, and we were returning home on a Sunday afternoon, we were expecting to make quick progress. Instead, as the road curved off the Moradabad bypass, and onto the long straight that crosses the Ganga at Garh Mukteshwar, the traffic deteriorated into a honking, chaotic melee of SUVs, cars, buses and open trailers. The cars which were honking in exasperation were clearly like me – Delhi drivers keen to get home. But another lot were blowing their horns in a distinctly different, defiant, attitude, which turned out to be one of celebration.

The green and red pennants that fluttered from their bonnets also carried the graphic of a cycle, the symbol of the victorious SP. A sticker on the back proclaimed their allegiance to Mehboob Ali, who had been elected MLA from Amroha. And the special occasion, it turned out, was the announcement that he had been appointed as a Minister to the UP Cabinet, for the third time. 

Every couple of kilometres, his supporters had formed knots of felicitation, each one marked by a banner, a garishly decorated carriage of the kind used to transport bridegrooms to their wedding, and crowds spilling on to the highway. The resultant funnelling of traffic slowed us to a crawl, and every time there was a gap in the divider, a few more drivers gave up on driving norms, and exited onto the wrong channel of the highway. At the 6^th or 7^th such gap, his supporters had decided that part of their show of strength consisted of purposively blocking the west-ward bound channel. I had spotted more than one police car in the celebratory convoy. Clearly, enforcing traffic rules was not part of their day’s duty.

One car from Mehboob Ali’s convoy stayed with us even as we finally exited the mess. At the next toll plaza, I was perfectly aligned to watch its driver as he refused to pay tax, and the toll booth attendant decided not to press the point.

The observed behaviour of Akhilesh’s followers underlines the mentality of those elected to power, and the more visible form of support they attract. Giving him the benefit of good intentions, it is clear he has an uphill struggle if he wants create a UP culture of good law and order.

Unfortunately, one of the first news items that caught my eye when I woke the next morning was that the CM has chosen ‘Raja Bhaiya’, arguably the most notorious of UP’s strongmen, to be Minister in charge of jails. I can think of two opposing ways to regard this development -  a strong signal to the ‘Liberals’ that he cares a snot for their values, or a maverick managerial move to hand significant responsibility to a person with hands-on experience of the sector.

I hope it’s the latter.

20.03.12:http://timesofindia.indiatimes.com/city/kanpur/Now-Samajwadi-Party-worker-beats-auto-driver-to-death-in-Kanpur-for-Rs-300/articleshow/12344918.cms

Punting on Pranab

BUDGET MUSINGS

2012

The first question regarding the Budget is whether the FM has decided to deal with the reality of his fiscal situation, or will project revenues based on a much higher growth rate than is likely. Ajay Shah’s tracking site,  http://www.mayin.org/cycle.in/tracking.html, correctly predicted the last number of 6.1%; it is now showing a GDP growth number of below 5%. There is no question of the FM registering this.

The lowest GDP growth number he is likely to bake in to his budget predictions is 7.5%; this will lead him to grossly over-estimate tax revenues; nevertheless, it will call on additional resource mobilisation, now that higher expenditure has been legislated via food, fertiliser, and NREGA spends; not to mention the refusal to hike diesel and kerosene prices.

So how will he mobilise these resources?

Firstly, I think he will raise the MAT (Minimum Alternative Tax), for which there is no longer any justification.

Second, I would believe he will add back some excise, in a (partial) reversal of the 2008 stimulus measures.

The coverage of service tax will pretty much certainly go up.

In addition, I am thinking he will come up with one or more of the following, or their variants:

-         - Some form of Voluntary Disclosure Scheme, to bring back money from abroad

-          - Some removal of exemption on long-term capital gains on equity investments

-         -  Enhancement of wealth tax/a new ‘Upper-Upper’ slab for Income tax on those with income above some level like 25 or 30 lakhs per annum. 

Gold and central banks

Robert Zoellick, Jr., outgoing World Bank chief,
" I've noticed that the price of gold has started to reflect some lack of confidence n national policies and central bankers."

That's very perspicacious of Mr. Zoellick. In terms of the path ahead,
"I do not mean to suggest a gold standard - in reality, I'm talking about flexible exchange rates. Therefore, I believe that gold should be used as an indicator, and information tool. It shouldn't be considered a formal anchor, but as a way of being a check on the checkers."


In the current situation, the degree of looseness of central banks is very relative, so the movement in exchange rates not very helpful. In this context, the moment you concede that gold should be used as an indicator, you are underlining how low the signalling value of the other currencies is.

At the 29th Annual Monetary Conference, held in Washington D.C. on November 16, 2011, Zoellick went on to say, " scholars have long pointed to the problems with the gold standard during the Great Depression. But sometimes, they then overreact against the idea that gold could ever play a role...sometimes scholars become captive to their own past analysis. They get so wedded to the beauty of their ideas that they ignore markets. I believe that is a mistake."


Here Zoellick is absolutely right, and I wish to expand on the issue of the gold standard. If one accepts that no monetary system is perfect, then the fact that the gold standard created problems in the past is a statement with little information content. The relevant questions are:
- whether the current fiat currency system works well
- whether a gold standard, which puts a brake on monetary expansion, better protects the interests of the economy at large - investors, households, and businesses, rather than just borrowers.

Steve Jobs, honesty, and high political office

The FBI file on Steve Jobs echoes the now wide perception of the Steve Jobs "distortion field", his ability to manipulate people and facts. I found one interviewee's remarks quite piquant, not just for what they say about Mr. Jobs, but also about high political office (highlighted)

The interviewee, whose name has been withheld from public record, worked with Steve Jobs, and :

-         -  Characterised Mr. Jobs as a deceptive individual, who is not completely forthright and honest.  He stated that Mr. Jobs will twist the truth and distort reality in order to achieve his goals.

-        -  Concluded the interview by stating that, even though he does not consider Mr. Jobs to be a friend, he (Mr. Jobs) has the qualities to assume a high level political position.

-         - It was (his) opinion that honesty and integrity are not required qualities to hold such a position. (He) recommended him (Mr. Jobs) for a position of trust and confidence with the government.

Reading Frau Merkel's lips

Wolfgang Munchau writes in the FT on 20the Feb that Mrs. Merkel is doing everything possible to force Greece's exit from the EU. Assisted suicide, he calls it:
http://www.ft.com/intl/cms/s/0/16f04ffa-5963-11e1-9153-00144feabdc0.html#axzz1moAdPAft.

And this is what I wrote on Feb 3rd, 17 days ago:

17 summits in the last 3 years. No, that’s not the track record of a mountaineer, but the number of meetings EU leaders have held in the effort to save the Euro.

Through the serial summits, German Chancellor, Angela Merkel, has made it clear that German purse-strings are going to be opened very cautiously; this is dictated by fiscal prudence, by the strictures of the German constitutional court, and above all by domestic German politics. In a situation where three-quarters of German voters do not want their government to aid Southern Europe, Chancellor Merkel would be irresponsible to go against the will of her people.

Economic commentators have been saying that the costs of saving the Euro go up with every week of delay, echoing Shakespeare’s Macbeth, “If it were done, ‘tis best it were done quickly”. I am sure Merkel has enough advisers for her to put pretty precise estimates on the cost of this delay. My sense, then, is that she has no intention to save the Euro by expanding her government’s guarantees for the debts of other nations.

The surest signal, to my mind, of her intention came from her recent demand that the Greek government hand over its budgetary process to German supervision. As a politician herself, Merkel would have known that no government can be seen to accept such a submission of its sovereignty, and certainly not one like Greece, where the political temperature is already high. I believe this was her way of telling Greece, “I want you to leave the Eurozone, but you won’t hear me saying it.” To ensure this, she made Greece a proposal that was politically unacceptable.

Under this scenario, Merkel is making a Greek debt default a virtual certainty; my sense is she is using this time to shore up German banks against the impact of such a collapse.  Of course, there will be many unpredictable outcomes of such a development, and she cannot guard against all of them. However, given the depth of the European debt crisis, there does not seem to be a good solution. Merkel has to choose what she thinks is the least bad solution.

If she does allow a Greek default, risk will switch off like a 1970s Delhi black-out. 

The cost of law and order

Huge swathes of our country are ungoverned. Or, to be accurate, let's say that the definition of governance standards is set so low that criminal activities are not seen as being remarkable. The fact that such norms do not disturb us should be a reason to be disturbed!

Business friends of mine recently established a factory in Mayawati's newly colonised Greater Noida. As the plant neared completion, the local village 'leaders' offered factory management their services for transport of finished goods from the plant. A couple of weeks later, they returned to remind the plant manager; he said he would talk to Head Office. The would-be transporter left behind his rate-card. Turned out that the transport charges on offer were 40% higher than prevailing rates.

Discussing this with me, the CEO felt that plant management should find a way to work with local people, and believed the transporters would come around to rates which were on par with the market. This was clearly not the intention - within a couple of days, they had parked some 70 trucks around the factory, and sent word that this was a gentle reminder of the services on offer.

Plant management inter-acted with other manufacturing facilities in the area, and were told that prices were not negotiable, and that the attempt was to create a monopoly on out-bound trucking; the only exit route that would work was to say that the plant had decided to deploy its own trucks.

This is what was done; my friends bought a fleet of trucks, and used them to ship finished goods to a sister plant in Ghaziabad, about 50 km. away. A reliable network of transporters trans-ship the goods onto onward vehicles. The cost of this exercise? Rs. 15 lakhs per month.

One medium-sized factory that won't show up as a blip on any industrial statistics for India. One bunch of local operators, whom many Indians wouldn't even classify as thugs. Jack the numbers up by several orders of magnitude to get a sense of the scale of moral depravity in our country. And then try to get a sense of the waste generated because our leaders are not concerned with law, order, and justice, but with power, lobbies and re-election.

The Price of Uncertainty

“People with MBAs”, it used to be said, “know the price of everything, but the value of nothing.”

As an investor, price is the starting point of any decision. Value (though of a different kind from the moral content of the MBA put-down), too is critical: it is when you find a gap between current prices and the fair value of an asset that you make an investment decision. When you have a major disturbance in financial markets, huge price adjustments are required for a new equilibrium to be reached. Unfortunately, these price adjustments throw up many losers, and can lead to massive after-shocks. In order to contain the damage, governments around the world moved rapidly in 2008 to buffer asset prices. There was a certain pragmatic value to this buffering; at the same time, it is delaying recovery.

By their actions following 2008, governments have populated the financial world with fake prices. In our own economy, we don’t know where buyers and sellers would set bond-yields, as the RBI has bought a record volume of bonds from the market, artificially inflating bond prices, and depressing their yields. We don’t know how the market is pricing the rupee vs. the dollar, as the RBI has been selling dollars. We don’t know how demand and supply would price diesel, because the government sets the price. And we don’t have an accurate picture of bank balance sheets, because of the shifting guidelines with regard to Non- Performing Assets.

Last week, Ben Bernanke, Chair of the the US Federal Reserve trumped Indian financial managers, by fixing the world’s single most important price for the next 3 years, namely the interest rate at which his institution will make funds available to US banks. In effect, Ben Bernanke is banker to the world’s banks. He has now committed to a Zero Rate Interest Rate Policy (ZIRP), for the next 3 years, effectively saying that he will flood the world with cash through the end of 2014.

The immediate impact of the extended ZIRP was on gold prices, which soared almost 5% in the wake of his policy statement. That apart, it makes me wonder about the nature of what I would call a ‘Fake Certainty.’ Imagine a scenario in which inflation re-entered the US economy. Since the Fed is committed to holding the annual rate of US price increases to around 2%, higher price rises would force the bank’s hand into lowering interest rates. In that case, the Certainty of ZIRP would have to be abandoned, and I would be justified in calling it fake.

Could this happen? I think so. Consider the following scenario in Europe: the peripheral countries, like Greece and Portugal, realise that their austerity program is not working, and that a German-led Europe is not going to extend them unlimited financial aid; as a result, they take the time-honoured path of deeply indebted nations, which is to devalue their currency. In this case, this means exiting the Euro. If this were to happen (quite apart from the losses to banks, etc.), a Euro without the peripheral nations would suddenly be a very attractive currency, and would get bid up hugely. Commodity prices would rise, and the dollar would come under attack. This would make it very difficult for producers to hold prices in the US, and for the government to borrow funds at its current all-time lows. The certainty the Fed is trying to inject into the system would be out the window. Banks would be hurt, bond-holders would get hurt, and the US government's own deficit would swell.

The underlying point here is that the more artificial price fixes you have in a system, the more prone it is to a brittle collapse. Market players know this, which is why, for example, trading volumes on the New York Stock Exchange are lower than they have been in over a decade.

The present cheery recovery is built on this assembly of rigged prices, fake certainty and poor conviction. Reminds me of Bob Dylan – “something is happening, but you don’t know what it is…”