Of Printing Money or delivering value

The Satyam saga, just as the Madoff scandal and the Enron collapse is a case of simple greed. No more, no less. And yet the timing is so unfortunate that all of us suffer more than we thought we would. It deepens the current crisis, undeniably. There is even less trust than there was previously. And of all the things that has dried up the fastest, it is trust.

 

For credit is nothing but trust that the money that you are handing over to the other person will be repaid. These days people have stopped talking about return on capital and are more concerned about return of capital! I wonder how long it will take for us to take it one step forward to currency. Again, currency is nothing more than a promissory note from the Central Bank of each country. It used to be backed up by real gold reserves but not any more.

From lack of trust in our biggest retail banks to lack of trust in governments and the central banks is not a very big step. Especially when governments seem to have tried and failed in almost all their moves. Interest rates are at their lowest in the UK for 300 years. The rest of the capitalistic west is not faring much better. Nor are their bread and widget baskets – China and India. Western governments are larger than before, thanks to the crises, but so very much weaker under the burden of almost unserviceable debt, despite the low interest rates. So, what is next? Printing notes?

 

Sure, already been announced. Being done too. What does that do to the situation? It does provide temporary relief but will leave us with long term problems, if history is to be believed. Yes, the governments have the money to repay their debts. But they got this fresh hot money by borrowing from their own central banks. See the irony?  (Here is the brainteaser – how many layers of irony can you see?)

It is a terrible situation for these governments to be in – damned both ways, for their currency loses trust and therefore value in both situations. If they do not print money: they cannot repay their debts, they lose credibility and their currency becomes worthless. If they do print money, they release the inflationary monster and their currency slowly becomes worthless. Which one would you choose? Jhatka or Halaal?  The swift chop or buy yourself time to fix the mess?

 

And how will this mess be fixed?

Let me tell you a tale, a parable if you will. There was a merchant in distant Rambopur. He had a business trading goods. One day his customers realised that his goods were not too good, so they stopped trusting him. What can he do to rebuild this trust?

He went to his business guru, fell at his feet and said: Please help be build credibility again.

The Guru smiled kindly and said: For that you have to return what you have stolen. You promised them value, but delivered less than what you promised them. It is now time to show them some value.

And this time, you will have to invest – give them more value than you promise, give them value for free to reddress the balance. For a balanced world will spin towards equilibrium.

And the merchant understood.

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