Comments on: RBI in inflation fighting mode

By: Arvind

Arvind — Tue, 12 Sep 2006 10:37:34 +0000

The fundamental question is not whether the RBI needs to tweak money supply or interest rates. We need to abolish the central banking system, which is drowning us in debt. Here is how:

The fundamental issue is a flaw int the way money comes into circulation.

Money comes into circulation as DEBT issued by banks to producers. When production is consumed the money must be returned to the banks ALONG WITH INTEREST. This interest must come out of the money supply, thereby creating a demand for more bank debt. This is an unending cycle - condemning productive societies to ever-expanding debt.

Read in more detail about this here: http://dkd.net/davekidd/politics/moneyapo.html

By: Vivek G

Vivek G — Sun, 30 Oct 2005 02:53:06 +0000

Another reason for targeting interest rates is their transparency to the markets, helping markets to react and adjust efficiently.

By: Deep

Deep — Fri, 28 Oct 2005 04:46:02 +0000

seven_times_six,
The most direct way to reduce inflationary pressures is to reduce aggregate demand. The most direct way to reduce aggregate demand is to increase interest rates. This would reduce both consumption and investment. An increase in interest rates could be engineered through a decrease in the growth rate of the money stock, but _that_ would be an indirect mechanism (and given the instability of money demand, subject to considerable error). In the 70s, there was a minor debate about whether to target interest rates or the money supply, but that debate died long ago once central bankers found out that in practice, tinkering with money supply led to far more uncertainty (about policy outcomes) than tinkering with interest rates. And, I dont quite follow your Japan example. For the last two decades, the Japanese story has been one of persistent deflation rather than inflation. Am I missing something?

By: seven_times_six

seven_times_six — Fri, 28 Oct 2005 00:33:06 +0000

Deep, that does not make much sense.
Mahalanobis and yourself are basically saying that money demand is difficult to estimate.
Maybe.
But GIVEN that you have inflation, and that you want to reduce it, you’re basically *agreeing* upon a particular facet of money supply situation: that it is too much and that you want to reduce it.

Now, GIVEN that you want to reduce money supply, why not reduce fresh money creation?
Japan did precisely that when they got a double-digit inflation and they were rewarded by a singular reduction in inflation. Interest rates should be an effect, it is not clear to me why, esp. in the face of empirical success of Japan, central banks should try roundabaout techniques that are not even clear.

By: Deep

Deep — Thu, 27 Oct 2005 15:39:00 +0000

seven_times_six
The main reason that central banks use the interest rate rather than money supply, is that money demand is extremely unstable, and difficult to estimate. India is not unique in this respect.

By: seven_times_six

seven_times_six — Thu, 27 Oct 2005 03:59:55 +0000

Mahalanobis just seems to be saying that a systematic money creation policy is not a simple thing. Perhaps. But it is not clear to me why the much simpler thing of tweaking fresh money creation is not the answer as opposed to tweaking the interest rates.

By: Reuben Abraham

Reuben Abraham — Wed, 26 Oct 2005 21:56:06 +0000

And here is Mahalanobis disagreeing with Cafe Hayek’s monetarism.

By: seven_times_six

seven_times_six — Wed, 26 Oct 2005 21:31:43 +0000

Cafe hayek says it best on all this talk of “fighting” inflation. Akin to socialism, our “smart” central bankers end up bravely “fighting” problems entirely of their own making. I suppose it is a childish fascination to press buttons and the like which makes Central Banks so infatuated with tweaking interest rates as opposed to having a more systematic and less wanton creation of money.