Column

There are three kinds of people in the world: Those who take a problem head on and tackle it, those who make peace with it and those who run away from it. I belong to the third kind.

Around a week back, I had woken up with absolutely no feelings for her. Like life was a clean slate, and I was ready to start all over again. And now I did not have the guts to tell her.

So my bags were packed and I was ready to leave, while waiting for her to fall asleep so that I could make a quite exit in the dead of the night. She wasn’t in the mood to sleep and wanted to have a conversation.

“Just happened to read such beautiful lines,” she said, putting aside the novel The English Patient written by Michael Ondaatje and breaking my thought process.
“Hmmm. Let me hear those lines,” I said.
“A love story is not about those who lose their heart but about those who find that sullen inhabitant who, when it is stumbled upon, means the body can fool no one, can fool nothing — not the wisdom of the sleep or the habit of social graces. It is a consuming of oneself and the past,” she said reading from the book.
“Very interesting,” I replied feebly.
“You have been rather dull over the last one week. Let’s have a discussion. That should perk you up a bit. The price of gold has crossed $1,300 per ounce (one ounce = 31.1 grams). Even in India, it has been going at around Rs 19,000 per 10 grams. I was thinking of selling out my investments in gold. What do you suggest?”

I wasn’t in any mood to have a conversation, but I thought let me just give in to her. One last time.
“Well the answer, like most of my answers, is not a straight yes or no. So allow me to go into some detail,” I said.
“Yes of course, my dear.”

“The Federal Reserve, the US central bank, met a couple of weeks back and put out a statement at the end of the meeting. The said “Measures of inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” The statement also said “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.””

“Now what does that mean?” she asked.
“Hold on. I was just coming to it. As I have told you in the past, central banks and central bankers never speak in a straightforward language. You have to learn to read between the lines. What they effectively meant was that they fear deflation and will go to any extent to stop it. Deflation is the opposite of inflation, and is an environment where prices are falling. When prices fall, consumers put of purchases in the hope of getting further low prices. This in turn puts pressure on sales and thus, the profits of companies. This in turn means companies get around to firing employees to control costs, which in turn means higher unemployment and a higher fear of being unemployed. All this in turns leads to further postponement of purchases and consumption. And all this adds up to a moribund economy.”
“Hmmm. This I understand. So how will the US government prevent the deflation that it fears.”

“The only way governments seem to have to fight deflation is through quantitative easing.”
“Quantitative easing?” she interrupted.
“Well that’s a technical term for the government printing money through the central bank and then trying to inject it into the economy. As John Mauldin, a hedge fund manager writes in a recent column “Anyway, the Fed seems to be setting us up for another round of quantitative easing. That is Fedspeak for buying a few trillion or so dollars of government debt and injecting the said cash into the economy.””

“I did not quite understand the part about the Fed buying trillions of dollars of government debt.”

“Well, how does any government pump money into the economy? It cannot disburse money from a helicopter like stuff is disbursed to flood victims. So what does it do? It prints money. And then uses that money to buy financial securities it had issued to finance its fiscal deficit — the difference between the amount of money the government spends and the amount it earns. The deficit is financed by issuing financial securities to investors like banks.

When the government wants to pump money into the economy, it buys these securities back. In doing so, it pays investors money and then hopes these investors will pump that money into the economy by lending it. In the recent past, governments have bought out assets like home loans from banks to pump money into the economy.”
“That’s interesting.”

“Yeah, but it doesn’t seem to be working. As Mauldin writes “The Fed purchased $1.25 trillion in mortgage assets (home loans) last year. The theory was that injecting money into the economy would cause banks to take that money and lend it, jump-starting the economy and bringing us back into a normal recovery.” But that did not happen. The banks essentially were once bitten and twice shy and did not want to lend out money to people to buy new homes because it was all the new-home buying that had caused the crisis in the first place. So they let the government buy out their home loans and used that money to invest in financial securities issued by the government and the central bank. This essentially led to the money that was supposed to be pumped into the economy going back to the government,” I said.