Durable solution to the problem of inflation

Prices rise when the supply is being outstripped by demand. Or when there is an expectation of a supply constraint in comparison to the impending demand. Or when there is an oversupply of money...

The 'theory' concocted by the government that the current bout of inflation is an 'imported’ one, due to high oil and commodity import prices is a bogus one. The government has been pumping the economy with liquidity in the form of various dole outs to different constituencies in the form of Rural Employment Guarantee, Urban Renewal, Loan Waivers, Pay Revisions, Purchase of Dollars (to suppress the Rupee for the benefit of exporters), Infrastructure Spending etc.; while the society has drifted towards unbridled consumption patterns.

Inflation today is largely because of high labor cost (with low capability) and poor improvement in productivity (in all sectors of the economy). The government has done precious little to improve these supply side constraints. Education has been a fiefdom of the politicians for far too long. Reforms necessary to blast productivity bottlenecks have been stalled for years.

The only durable answer is to consume less and to become more productive (i.e. produce the right things with the least amount of waste).

Financial Innovations are Not Enough

Risk capital in all forms(from joint stock companies to venture capital) have made it possible for people to undertake much bigger enterprises. (Though whether it is all good certainly can be questioned). Surely a lot of innovation and productivity improvement has been fueled by financial instruments. Surely money is a lubricant for the economic activities. No question.

The debate is about what money instruments are applied for. Money employed for productivity improvements versus money employed to fuel (support) consumption. One creates wealth the other creates poverty.

Now one can argue that there are secondary benefits to consumption leading to innovation and all that. But the question is, where is capital best deployed? Shouldn't it have been e.g. deployed into developing alternative energy, into developing cheaper and more sustainable homes, into improving agricultural productivity and so on? Wouldn't that be a better surer way to tackling poverty (and spreading prosperity)? Wouldn't that mean real creation of wealth?

Financial systems are a necessary but not sufficient condition for economic progress. In the absence of productivity improvement and innovation, financial innovation will end up in inflation and worse.

And unless there is a change in the physical reality through productivity improvement and innovation, money market innovations will ultimately prove ineffectual.

Growing Green Wealth

I think green businesses are the big opportunity for the next 25 years.

Today to be green is expensive. But over the next 10-25 years as commodities and natural material, resource become scares, it will be cheaper to be green. Leading to a large scale adoption of greener products and services.

Increasing government regulations, public opinion, consumer behavior, and competitive pressure will all lead to an accelerated development and adoption of greener products and services.

Companies with special green technologies will do better. Surely, greener companies are likely to do better from a profitability and sustainability point of view.

A lot of money has been made on scarcity of natural resources. There was a time when people who could mine and trade in natural resources made a lot of money. Then they profited from scarcity of these resource (in comparison to the demand) with inflated prices. People have (and continue to make) a lot of money on scarcity of a natural resources (such as land, oil, metals..).

Perhaps their profits will continue to swell for a while. But the resultant inflation on the consumer end will drive consumers towards green technologies. That's where we're likely to find the - 5X-10X-20X growth in profits and asset values. It's still benefiting from the scarcity of resources but the shift is towards efficient use (so it is a not-so-Demonic way to make money). Already greener car companies like Toyota that make efficient use of resource are more profitable.

I think there could be an opportunity to make a lot of money and because of it and besides it, a lot of good can be done on the way.

We are most certainly positioning my own company for this kind of scenario.

'Greater Common Good' the New Economic Driver

Investment in the infrastucture - not private (as in homes) but public(shared) infrastucture - like education, health, power, connectivity, travel & transportation, public utilities (water, garbage recycling, playground, parks, spiritual destinations...) are likely to become the prime drivers for the economy in the foreseeable future.

We are likely to move towards a new model of economic growth - one that is driven by spreading the access to better quality of life for more people, replacing an economic model that has persisted through the last three decades in which higher levels of consumption and convenience per person were the dominant themes.

Not so much by collective resolve

We are an entrepreneurial economy, not driven so much by collective resolve and discipline as by the will and geniuses of individuals.

Reforms first

Uncertainities on the revenue side had forced the government to not do too much of medelling when it sought the last vote-on-account. My feeling is that the new government will be tempted to take the easier option of throwing money at the problem. The Government is unlikley to easily find the money it can throw around without further damaging its finances. Such easy options are gone. A period of high growth has been wasted - all the goverenment spending of the last five years has created little by way of assets. 

Now it must take reforms first, to rejuvinate the economy and life in general in our country. 

As far as the economy is concerened, the reforms must be around broadening the support for people enterprise as against crony capitalism practiced in the last 5 years.

The reforms must lead to good governance as against merely expanding governmental interventions and spending.