Comment

“But wouldn’t all this money printing be disastrous?”

“Over a period of time? Yes. But right now, the impact of this has been extremely benign. See, the idea was that increased money in the economy will make people spend more and that in turn will lead to people spending more. But right now, people are tired of spending and not in the mood to spend. That cannot continue forever, and as and when they do start spending again, too much money will chase too few goods and inflation will start showing its ugly head.”

“I recently read an interview of Ben Bernanke, where he said, “When the economy begins to recover, that will be the time that we need to unwind those programmes, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.””

“At the cost of repeating myself, economics is not an exact science and I am sure Bernanke also knows that, notwithstanding what he said in that interview. So assume prices start rising in the US and the US government along with the Federal Reserve to start reducing money supply. The simplest way to do it would be to start selling the financial securities they have been buying these days. Once they start doing that, they will be able to suck out money from the market, at least theoretically. But imagine what impact that would have. The biggest buyer of these financial securities would suddenly turn into the biggest seller. Given that, at that point of time, will there be enough buyers of these securities? The prices of these financial securities will crash, as there would be very few buyers at that point of time. Also, as inflation rises, investors who have bought these financial securities would want to sell out.”

“Why would they want to sell out?”

“Inflation reduces the value of the money and given that expectation, investors would want to get out and spend that money. All this will lead to the price of these financial securities crashing. And that will also lead to the US dollar crashing because countries like China, Japan and Saudi Arabia own most of these financial securities. Once they have sold off these securities, they would want to convert the dollars they have got selling these securities into their own currencies. A spate of dollar sales is likely to hit the market, and that in turn will lead to the value of the dollar crashing against other currencies.”

“And when will this happen? she asked.

“I wish I knew. But as renowned economist Nouriel Roubini, who predicted this crash, recently said, “This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades, America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable,” I said.

There was a tap on my shoulder. “Last stop,” the conductor said, asking us to get down.

“So where are we?” she asked.

“Goregaon,” I said, looking around. “Now that we are here, let us find a coffee shop first.”

(The example is hypothetical)