Investing in India... - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 3 December 2010
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Mumbai, India

What a tangled web we weave
When first we practice to deceive

"The trouble with the today's financial system," we told a Bloomberg reporter, "is that it is based on fraud.

"At the bottom of it is paper money - itself a kind of deception. It pretends to be real money. And it is real money - in the sense that you can use it to buy things. But it is prone to lie. All the feds have to do is to turn on the printing press and it will tell you that you are a lot richer than you really are.

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"This sort of flimflam has been going on ever since the end of WWII. The feds systematically increased the amount of paper money...leading people to think they had more purchasing power than they really had. Today, a dollar is worth only about 3% as much as it was 100 years ago.

"But that's just the beginning of the scam. They also systematically under-priced credit - in the belief that the key to prosperity is consumer credit and spending, rather than saving and production.

"The system has its architects and its operators - all quacks and mountebanks. They pretend that they can manage the currency and manage the economy. Yet they misunderstand the most basic elements of how a real economy works. Wealth does not come from consuming...it comes from producing.

"The managers claim to be able to manipulate the economy so well that they can actually improve its performance...that is, they say they can make the economy perform better than it would on its own...better than it has naturally for the past two thousand years. By eliminating the cyclical downturns, the feds told us that they would we all be richer...and free from the volatility that plagued us theretofore.

"So they fiddle and fake it...improvising...and making it up as they go along. The raise interest rates...and then they reduce them. They introducing more paper money when it suits them and change banking rules as their theories suggest.

"When anything ‘bad' happens, defined as something they don't like, they rush to fix it. But what can they fix it with? A little duct tape of monetary policy. A little fiscal baler twine too.

Their fixes are not completely random or haphazard. They have a bias - towards more credit, more spending, more cash, and more speculation. If they tighten rates one month, they loosen them for two months. If they run a surplus in the federal accounts one year, they run deficits for the next five.

"Gradually, more and more debt, mistakes, bad judgments and cockamamie speculations build up. And then, the authorities are under pressure...running from one crisis to another...providing credit to one zombie...and bailout to another...and raw meat to a third.

"And then suddenly, the discipline and self-restraints that held them back gives way like a frayed old rope. Then the central banks and Treasury authorities are running free...abandoning themselves to the trickery and fraud inherent in their profession. The European Central Bank says it will provide "unlimited liquidity" to those who need it, in order to fend off a debt crisis in the Old World. In the New World, the Bank of Ben Bernanke is already bailing out big banks in North America as well as those of Europe. And everywhere, the feds are ready to support one another...and bankroll the IMF...with more paper money and more credit...

"...all of them desperate to hold the system together."

And now they link arms - the Fed, the ECB, the EU and the US...and don't forget Japan and the BOJ. And off they march - right off a cliff.

*** What about investing in India?

"The Sensex seems much too high to us," we replied. "Then again, there are a lot of companies that are little researched that are cheap...and growing fast.

"What I like about the Indian economy is that it seems to grow no matter what happens. Boom, bust, assassination, tsunami, riot - it doesn't care.

"And it grows in spite of what the government does. There is some rule of nature, as yet unidentified: all governments do stupid things. But the more mature the government, the more stupid things it does.

"It is probably because mature governments have more money - at least in the rich countries. So, they subsidize everybody. The old. The young. The halt. The lame. The farmers. France even subsidizes the press.

"As the tide of subsidies washes in, the incentive to work hard ebbs away. People become used to getting by without doing very much. They get used to conniving with the feds, rather than engaging in difficult and uncertain businesses.

"You don't have that problem in India. There is plenty of corruption, but it is limited to the powerful groups that control the legislature and the government. The middle and lower classes do not expect much in the way of handouts; there hasn't been enough money available.

"So, the economy is still fairly light on its feet. Wages are low. People are getting rich fast. Government tries to stifle progress and make sure wealth gets funneled to cronies and apparatchiks, but the economy is largely out of control. The politicians pass new legislation every day. And the economy grows at night.

"And right now there are too many people earning too much money. They can't be stopped. They won't allow government to hold them back. Instead, the regional governments will begin to compete with each other to offer infrastructure and lifestyle improvements. Politicians will get out of the way, for fear they will be booted out of office if they prevent people from getting the wealth they feel is within their grasp.

"India looks good. Maybe not next year. Maybe not the year after. And maybe not the leading companies. But I would like to make an investment in India, go away for twenty years, and see what it was worth when I came back.

"Of course, twenty years from now...I'll be happy to be able to come back at all."

*** How ‘bout that Obama! He's put on the imperial purple:

"He stayed at your hotel, the Oberoi," said a colleague.

"His team took up the whole hotel. It was unbelievable. They took up the hotel next door, too. There were helicopters overhead all the time. And US warships had been sent to block the harbor to make sure terrorists didn't run up onto the beach in small boats, like they did the last time.

"We've never seen anything like it in India.

"One of the local papers computed the cost of the visit at something like $100 million. The report got picked up by the US press. Then the White House denied it and then said it wouldn't give the real figure for national security reasons. Ha ha...

"A hundred million was probably about right..."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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3 Responses to "Investing in India..."

bairava

Dec 3, 2010

isnt it simple to root out corruption.

Just ban 1000, 500 and 100 Rs notes.

But the politicians wont do it because they need it.

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Jayvanthy

Dec 3, 2010

I liked the fearless frankness of the writeup and more than that I liked the Analysis of the Indian growth Story. India has been a mystery for a long long perod of Time & will remain one as long as it does not try to Ape the West.

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jayarama

Dec 3, 2010

A practical observation and this is the fact of Indian paper money.
Thanks

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