We no longer believe what we believe - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
We no longer believe what we believe हिंदी | A  A  A

Everywhere, our beliefs are being challenged.
What we hold to be true is no longer true - in fact, it can be an outright lie.

It began with Britney Spears.
Motherhood was no longer the ability to mind the children, but - as Britney redefined it - the ability to go out and live a single's life and leave the children at home.

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Alan Greenspan - given an honorary knighthood by the Queen in September 2002, cannot officially use the title "Sir" since he is not British but he can use the initials KBE after his name - changed the definition of central bankers. Once thought to be dull deliverers of convoluted speeches that no one understood, the central bankers are still thought to be dull and deliverers of convoluted speeches that no one understands - but speeches which leave no doubt that the big and the powerful will be rescued. They will be rescued with tax payer money. Yes, the fat cats of the financial services industry will continue to get large salaries and bonuses for little contribution to mankind. And you will pay the bill.

Ben Bernanke, who has followed in the footsteps of the Grand Maestro Greenspan, has disproved the theory that a chela can do no more than mere chamchagiri. He has taken monetary policy of the loose kind to a (literally) higher level by agreeing to drop dollar notes from a helicopter perched in the sky each time the economy looks like it is ready to stall.

Fidel Castro, the Cuban leader, reportedly said "the Cuban model doesn't even work for us anymore". He was referring to the model of government ownership that accounts for over 90% of Cuba's GDP.

President Obama, poor man, is devoid of beliefs so he does not know what truths to turn away from. He came to power promising change. And then he had to redefine change to mean "change requires consensus". Imagine, Mahatma Gandhi waiting for a consensus to change the attitude of the whites to the blacks and browns in South Africa. Or for the British to agree to consider giving India independence before the Mahatma should be allowed to ask for it. So much for the change and revolution that President Obama promised. In his most recent confusion, President Obama - the leader of a country that champions free trade at least on paper - is not sure whether giving tax breaks to companies that create jobs outside the US is a good idea.

Back home, Finance Minister Pranab Mukherjee is struggling with his beliefs. At a recent meeting of the Calcutta Chamber of Commerce the Business Standard quoted him as saying "Earlier we believe in the trickle down theory that if growth takes place, the effects will reach the base of the pyramid. Today, we don't believe it. We believe people must be empowered with legal enactments like the 100-day job scheme."

Quite a confession. The Congress has gone from a government-knows-all policy of the 1970's and 1980's (where the government nationalised airlines, banks, insurance, and even the bread company) to the IMF-induced reforms of 1991 where the Congress-led coalition let private sector take over the reigns of the economy at the cost of the PSUs (so Jet flies and Indian Airlines limps, Bharti thrived and MTNL died), and now this new "belief": Private sector growth will not be sufficient; the government must step back in.

And legendary scientist Stephen Hawking, author of the just-released "The Grand Design" threw a big one when he said on CNN that "God may exist, but science can explain the universe without the need for a creator." It would be interesting to see the reactions of the leaders of various religions to this new assault on the very premise that God is the reason we exist. "Gravity and quantum theory cause universes to be created spontaneously out of nothing." The world began with a bang, then, not by the power of sacred chants?

How beliefs hold firm - and are then denounced
Britney Spears had a belief that doing outlandish and shocking things was important. That was then. She now seems to believe that spending time with her children is important. Something must have happened to make her change her belief of "going out like a single" to "being mommy". The good news is that whatever her beliefs may be, it is a private affair and does not really affect public policy.

Stephen Hawking uses the "proof" of science and scientific models to put forth his claims and his theories. It is there for you to dispute or believe in. The impact of his beliefs will be limited to coffee table talks - and some book burning exercises. Hawking's views will be conveniently discarded by many.

But Greenspan's belief - or Bernanke's conviction - that central banks are there to print money and save the financial firms have global ramifications.
Serious ramifications.
It questions the very basis of all paper currencies.
If a central bank that runs a printing press has no regard for the value of the currency it is empowered to print, that is not good news. That is why I recommend that investors should have 10% to 20% of their total savings and investments in gold and to buy gold - even at this price.

Greenspan and Bernanke belong to a league of economic theoreticians who are - and have been - given power and are being used by the powerful. Their theory suits the practice that is required by the powerful - so the powerful allow them to remain as the head central bankers of the Fed. If the head of the Fed did what Paul Volcker did in 1980-1982 and allowed financial firms to collapse and interest rates to surge, he would have been kicked out pretty quickly. Allowing financial firms to fail would not please the powerful and they would act. On a side note, I doubt Greenspan or Bernanke would ever be appointed as the governor of the Reserve Bank of India, so hang on to your Indian Rupees!

Castro has a right to change his opinion without heading to any cabinet or committee. He runs the country and is not really answerable to anyone under the Cuban system. He had a belief that the Soviets were his friends and their economic model the most lasting. Well, at a time when his enemy the US is actually moving more towards a Cuban style of economy (the US government owns the housing finance market, the largest banks, the largest insurance company, and the largest car company), Castro is moving towards capitalism. The Cuban model, he admits, does not work. So, he will turn to the more capitalist countries for help. The US meanwhile will emulate the Soviets and the Cubans.

President Obama, meanwhile, continues to be the President who makes the most use of the tele-prompter as he moves his head from left to right to left to right "engaging" the audience with eye contact but also ensuring that he can read the tele-prompters. His actions and policies of making the government bigger are frightening. Own US government bonds at your own risk. From being the "safe haven" of the world financial system, the US may well be the basket case of the fragile world financial system. The fall of the US from a safe haven will be a major shake of faith; a foundation pillar of modern finance will come crashing down. How it will end, I don't know - but do own some gold.

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The Indian dilemma
As Finance Minister Pranab Mukerjeee pointed out: the trickle-down theory does not work.
Frankly, it cannot - as long as you have leaks and corruption and unfair advantages.
What we adopted was not a trickle down economic policy but a massive fatten-your-wallet policy geared for the few. Sure, a few crumbs have come the way of everyone else. To keep us happy - and quiet.

Take the case of the Noida land along the Agra highway. The Business Standard reports that land was bought from farmers at Rs 50 to 300 per square metre nine years ago to connect Noida to Greater Noida. Now that land is being sold for Rs 15,000 per square metre by the Jaypee Group (builders of the Yamuna Expressway) as part of a Sports City complex.

There was a trickle-down effect for sure, actually a flood-my-pocket effect. The government encouraged the building of a highway with the stated view that the area will see all round job creation and economic growth. Well, a chunk of the prosperity is in the pockets of the folks who bought the land from the farmer. The "correct" and fair model would have been to ensure that the farmers and the original owners of the land along the highway remained as owners and collected a rent in perpetuity.

Like these highway robbery projects, the SEZ policy was also flawed in that it transferred an important resource (land) from the poor to the rich without the poor really realising what they were being asked to surrender. There was an information disadvantage - an imperfect market that led to extra profits of 5,000% trickling down to the contractors and the owners of the SEZ lands. The belief in trickle-down is not to be questioned; the fact that the government has sponsored theft needs to be questioned. And, before anyone goes into any NDA bashing, this is probably true of all political parties across municipal and state governments!

But how can the Finance Minister be so sure that the correct answer to empowerment is the job reservation policy? Does all the money reach the people who sign up for jobs? Or is there a leakage along the way? Are politically well-connected syndicates getting thumb impressions for a "profit spread"? Is there a leak in the job reservation programme that will cause another future Finance Minister to cry in anguish in the future: Government creations of jobs does not work. Let's move back to trickle down economics"?

No, we no longer believe what we used to believe.
This lack of faith is not an overnight shift.
Britney took many small steps and years of newspaper headlines to defy the concepts of motherhood.
Sir Alan and Helicopter Ben have been busy debunking the faith in central banks and the US Dollar since 1998, when the Fed rescued hedge fund LTCM and saved all its creditors from potential bankruptcy.
Stephen Hawking has long maintained that the universe is driven by the laws of physics.
President Obama continues the tradition of debasing the role of a President as the leader of an increasingly immoral USA.
And, of course, the TV channels continue to swing between buy and sell depending on what catches their fancy at that point in time.

No, we no longer believe what we used to believe.
And where there is void, there is scope for revolution.

Against the US Dollar.
Or against governments that have failed to deliver what they promised.
As the market celebrates, be wary of the underlying problems that stem from a lack of faith.

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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.

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30 Responses to "We no longer believe what we believe"

Dr Malpani, MD

Sep 22, 2010

Actually, there's a good reason why central banks print more money.

I feel that to think about the value of a currency in terms of how much gold is buried in the vaults of the country's central bank is archaic.

As the number of people on this planet increase; and as the number of goods we produce for them rises, we will need more money to buy and sell these goods ! Where will this money come from unless central banks print more of it ?

Dr Malpani, MD



Sep 21, 2010

Great article, and quite a thought provoking one! Enjoyed reading this one.

Enjoyed reading the hindi one also. Well done - and do keep this going. Kaafi achchi koshish he...



Sep 21, 2010

Good to see a good article after long time a welcome change from Mutual fund bashing.


Mahesh Pareek

Sep 20, 2010

Great Starting, Now Equity Master is going to become Super Hit.


surajit som

Sep 20, 2010

the article is simply briliant. facts speak for themselves. it is nice to hear dissenting voice even it is solitary.

the world's financial system has gone mad. west is terrified of a double dip and they know it is coming. they (and we !!! ) just dont know when . they are like the german generals in the final days of stalingrad. greenspan is the hitler of the system and has become insane.he repeatedly talks of proping up markets by any mean. he said that even on an indian TV channel.


shamji bhuva

Sep 19, 2010

hindi ma apo chho saru parntu gujrati ma pan apo ne larg cap mid cap small cap tips hindi ma ane gujrati ma apavanu chalu karo to tamaro abhar



Sep 19, 2010

Gold has intrinsic value only if everyone agrees to it. The moment several countries, especially the US, moved away from the gold standard, it seems to have lost its value. If there is a breakdown of the financial system, as it increasingly appears with the Americans printing money at will, I doubt gold will be worth much. I see a move towards barter trade in event of a financial collapse.
Regards - Achar



Sep 19, 2010



Vinod Saini

Sep 19, 2010

Dear Ajit,

A very thought provoking article & perhaps your best todate.



Sep 18, 2010


You have bought in too much of Bill Bonner and his doomsday theories. Some of it is right, but balance it with Krugman, Brad Delong and Mark Thoma !!

I am a long time subscriber to Equitymaster, and have followed both Krugman and Bill Bonner for a number of years. Reflecting very closely on their arguments, as with most other things in economics Krugman is closer to truth. Very few indeed macroeconomics as he does. It may seem paradoxical and against common sense that how can you solve the problems of debt by more debt, but on closer examanination Krugman is on very strong foundations. If I have sufficient blog space on Equitymaster I can clarify it more completely !!

Lastly I do not write down United States so easily. They will sure have to share more space with others in future. But it is a country which has very strong institutional foundations. It is not a trivial task to build a society where there is very little corruption at the lowest level, where you do not dare bribe a policeman !!


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