‘The choice is between democracy and the gold standard’

vivek 2Author Vivek Kaul tells Sanjitha Rao Chaini that his book ‘Easy Money’ is an outcome of how money and the financial system have evolved over a very long period of time.

Why this book? How did the idea of writing this book come to you? 

The book was essentially an evolution of the writing that I do to make a living. I first started writing on the financial crisis after the investment bank Lehman Brothers went bust. The idea was to explain to the readers what is happening in the world. The Indian media (or even the world media) at that point of time had turned into a jargon spewing monster. Terms like sub-prime, securitization, Alt-A, CDOs etc were being bandied around. So, I started writing a series of pieces explaining these terms and the impact they were having on the world at large.

Over a period of time I came to the realization that what is happening now is not just because of things that have happened over the last few years or even decades. It is an outcome of how money and the financial system have evolved over a very long period of time. It has all come together to cause the current financial crisis. Easy Money was an outcome of that realization.

What kind of research did you put into this book?

The research has been extensive. Even before I decided to write the book I had read some 75-80 books on money and the financial system as they had evolved. As I wrote, I read a lot of research papers and historical documents that were written over the past 300 years. These research papers were a storehouse of information. Interestingly, with the advent of the internet a lot of historical material is available at the click of a button. What also helped was the fact that websites like Infibeam.com source second hand books, which are not easily available otherwise, from the United States. I don’t think I would have managed to write the book that I have, 10 years back, sitting in Mumbai. I would have probably managed to do if I had access to a library at a good American university.

You write… “as we have seen throughout history money printing has never ended well. But the same mistake continues to be made.” Why do you think that we haven’t learnt the lesson?

I wish I had an answer for that. I can only make a guess. In every era people who make economic decisions feel that “this time it’s different”. The tragedy is that it is never really different. And hence, the lessons are never really learnt. The same mistakes are made. Money printing never ends well that is a something that the world refuses to learn.

Do you think we would have been better off in any way if we had stuck to the gold standard as a store of value of money?

When I started writing Easy Money , in late 2011, I thought that the gold standard is the answer. During the process of writing the book that idea evolved. The thing with the gold standard is that it limits the amount of money that can be put into the financial system. Ultimately, it becomes a function of the amount of gold being dug up from the earth and that is what makes it work as well. But this is something that no politician is comfortable with. And politicians are essential for democracy.

In fact, I spoke to Russell Napier, a financial historian who works for CLSA, sometime in 2012. And he made a very important point which changed my thinking on the gold standard. “The history of the paper currency system or the fiat currency system is really the history of democracy,” he told me during the conversation. “Within the metal currency there was very limited ability for the elected governments to manipulate that currency. And I know this is why people with savings and people with money like the gold standard. They like it because it reduces the ability of politicians to play around with the quantity of money. But we have to remember that most people don’t have savings. They don’t have capital. And that’s why we got the paper currency in the first place. It was to allow the democracies. Democracy will always turn towards paper currency and unless you see the destruction of democracy in the developed world and I do not see that we will stay with paper currencies and not return to metallic currencies or metallic based currencies,” he added.

So, in a way, the choice is between democracy and the gold standard. In fact, the era of the classical gold standard which started in the 1870s and survived till around the time of the First World War, was an era of limited democracy even in most of what is now known as the developed world.

There are contrary views on usage of bitcoins. Recently RBI even said it has no plans to regulate Bitcoins. Do you see a hard-landing for bitcoins? Do you think that central bankers will be able to regulate, and if not, what are the concerns?

That is a very difficult question to answer. One school of thought is that the Federal Reserve regularly lends out its gold to bullion banks, so that they can short-sell it and ensure that the price of gold does not rise beyond a point. Whether they will be able to crack the bitcoin system as well, in the days to come, I really don’t know.

How can policymakers make use of this book?

Policy makers don’t need any books. They do what they feel like doing. Given that, I don’t think this book or any book can be of much help to them. As the German philosopher Georg Hegel once said “What experience and history teach is this —that nations and governments have never learned anything from history, or acted on principles deduced from it.” And why should this time be any different?

What are you reading at the moment?

I have this habit of reading multiple books at the same time. So I read a few pages, drop that book and move onto something else. This loop keeps repeating. Right now I am reading Alan S Blinder’s After the Music Stopped. Blinder is a professor of economics at the Princeton University. He was also the vice chairman of the Federal Reserve of United States, between 1994 and 1996, under Alan Greenspan. His book is by far the best book I have read on the current the financial crisis. Excellent research presented in very simple English.

I am also reading The Bankers’ New Clothes by Anant Admati and Martin Hellwig. The fundamental point they make in their book is that if we need to make the financial system safer, banks need to have much more capital on their books than they currently have. This is one of the points I make in Easy Money as well. As Walter Bagehot, the great editor of The Economist once said more than 100 years back, “the main source of profitableness of established banking is the smallness of requisite capital.” This is something that needs to be set right.
As far as fiction goes I am currently reading a Swedish thriller titled Never Screw Up by Jens Lapidus. It is a sequel to a book which was also titled Easy Money. Ruskin Bond’s Tales of Fosterganj has just arrived and that is what I am looking forward to reading next weekend.

E-books or paper format ?

Paper totally. And there is a practical reason for it. I keep making notes on the edges (horrible habit some might say) as I read. This is a great help when one wants to write something and needs to revisit a book. You don’t have to bang your head against the wall at that point of time, thinking, where did I read that? So this ‘bad’ habit ensures that research and reading happen at the same time.

When and where do you write? And what’s the hardest thing about being a writer? 

Living in Mumbai means that one really does not have much choice about where to write. Also, having worked in extremely noisy newspaper offices, I can write almost anywhere. The place doesn’t really matter, as long as I have a computer and an internet connection.

Most of my writing happens between 11AM to 5PM. Having said that, some of my best writing has happened post midnight. The one time I hate writing is early in the morning between 7 to 10 AM.
I recently finished reading this book titled The Infatuations by the Spanish author Javier Marias. In this book Marias writes “You have to be slightly abnormal to sit down and work on something without being told to.” That is the toughest thing about being a writer. It needs a lot of self discipline and self motivation, knowing fully well that the money you make from your writing will most likely never compensate you for the opportunity cost that comes with it.

What next?

Easy Money is a trilogy. The first book ends around the time of the First World War. The second book starts from there and goes on till the time of the dot-com bubble burst. The third one deals with the current financial crisis. I have just finished the final edit of the second book, which should be out very soon. In about a week’s time I will get back to the third book. I had last looked at it in January 2013. So to give the readers a complete perspective the third book needs to be updated because a lot has happened in the last one year.

The interview originally appeared in the Business World

US govt reduced to live on borrowed time

3D chrome Dollar symbolVivek Kaul
Governments spend more money than they earn and finance the difference through borrowing. The government of United States(US) is no different on this front. The trouble is that it cannot borrow beyond a certain limit. This limit, known as the debt ceiling, was set at $16.69 trillion.
This ceiling should have been breached in May 2013, a little earlier this year. Since then, Jack Lew, the American treasury secretary, has taken a number of extraordinary measures like delaying public employee pension fund payments, in order to ensure that the government expenditure remains under control. Lesser expenditure meant lesser borrowing and hence, the government managed to keep its total borrowing below $16.69 trillion.
Today i.e. October 17, 2013, the government would have run out of the extraordinary measures that it has been taking. Given this, the treasury department would have exhausted its borrowing authority.
Hours before this would have happened, the leaders of the Democratic Party and the Republican Party in the American Senate stuck a deal, suspending the debt ceiling. This will allow the US government to borrow beyond $16.69 trillion, till February 7, next year. The will also end the current government shut-down in the US and keep the government running along till January 15, 2014.
This is not the first time that the US government came close to its borrowing limit, given that the debt ceiling has been in place since 1939. Since 1960, the debt ceiling has been raised 78 times by the American Congress. But this time around the Democrats and the Republicans left it too late, each waiting for the other to blink first.
If the ceiling had not been extended the short-term repercussions would have been terrible. The treasury secretary Lew had said in early October that the US government “will be left…with only approximately $30bn” come October 17. This would not be enough to meet the expenditure of the government, which can be as high as $60 billion on some days, Lew had pointed out.
Interest payments of around $6 billion are due on US government bonds before the end of this month. Along with that, bonds worth between $90 to $93 billion need to be repaid between October 24 and October 31 (Source: www.thefinancialist.com) Governments issue bonds to borrow money.
The US government has reached a stage wherein it does not earn enough to repay the money it has already borrowed by issuing bonds. Hence, it has borrow more money by issuing fresh bonds to pay off the older bonds. If the debt ceiling had not been extended, it would have become very difficult for the US government to repay the money it had already borrowed.
More importantly, the US government bonds are deemed to be the safest financial security in the world. If the US government defaulted on paying interest on its bonds or repaying the principal, there would have been mayhem in financial markets, all over the world, including India. It has even been suggested that the crisis that could have unfolded would have been bigger than the crisis that followed the bankruptcy of Lehman Brothers in September 2008. Investors would have sold out of US government bonds driving up global interest rates.
The US government would also have had to prioritise its expenditure. Does it make pension payments? Does it pay its employees and contractors? Does it pay interest on its bonds? Does it repay maturing bonds? These are the questions it would have had to address. Also, there are no legal provisions guiding the government on who to pay first. Hence, any prioritisation of payments could have led to a slew of lawsuits against the US government.
Given the negative repercussions of the debt ceiling not being extended, the markets were positive that a deal reached would be reached. Stock and bond markets around the world have been stable. And gold, looked at as a safe haven, is quoting at levels of around $1280 per ounce (one troy ounce equals 31.1grams).
The trouble is that the US government will cross its debt ceiling level again in February, 2014. What happens then? How long can the American Congress keep increasing the debt ceiling? The basic problem is that the US government has borrowed too much money, and continues to do so, and if it doesn’t default today, it will default in the years to come.
The article originally appeared in the Daily News and Analysis dated October 17, 2013
(Vivek Kaul is the author of Easy Money. He can be reached at [email protected]

Is Rajan trying to do what Paul Volcker did in the US ?

ARTS RAJANVivek Kaul  
Going against market expectations Raghuram Rajan, the governor of the Reserve Bank of India(RBI), raised the repo rate yesterday by 25 basis points (one basis point is one hundreth of a percentage) to 7.5%. Repo rate is the interest rate at which RBI lends to banks.
It was widely expected that Rajan will cut the repo rate. But that did not turn out to be the case. In his statement Rajan explained that he was worried about inflation. As he said “recognizing that inflationary pressures are mounting and determined to establish a nominal anchor which will allow us to preserve the internal value of the rupee, we have raised the repo rate by 25 basis points.”
The RBI’s Mid-Quarter Monetary Policy Review echoed a similar sentiment. “What is equally worrisome is that inflation at the retail level, measured by the CPI, has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence. Although better prospects of a robust 
kharif harvest will lead to some moderation in CPI inflation, there is no room for complacency,” the statement pointed out.
as I explained yesterday, believes in first controlling inflation, instead of being all over the place and trying to do too many things at once. As Rajan wrote in a 2008 article (along with Eswar Prasad) “The RBI already has a medium-term inflation objective of 5 per cent…But the central bank is also held responsible, in political and public circles, for a stable exchange rate. The RBI has gamely taken on this additional objective but with essentially one instrument, the interest rate, at its disposal, it performs a high-wire balancing act.”
And given this the RBI ends up being neither here nor there. As Rajan put it “What is wrong with this? Simple that by trying to do too many things at once, the RBI risks doing none of them well.”
Hence, Rajan felt that the RBI should ‘just’focus on controlling inflation. As he wrote in the 2008 
Report of the Committee on Financial Sector Reforms “The RBI can best serve the cause of growth by focusing on controlling inflation and intervening in currency markets only to limit excessive volatility…an exchange rate that reflects fundamentals tends not to move sharply, and serves the cause of stability.”
Given this, Rajan’s strategy seems to be similar to what Paul Volcker did, as the Chairman of the Federal Reserve, to kill inflation in the United States, in the late 1970s and early 1980s. On August 6,1979, Volcker took over as the Chairman of the Federal Reserve of United States .
When Volcker took office, things were looking bad for the United States on the inflation front. The rate of inflation was at 12%
. In fact, the inflation in the United States had steadily been going up over the years. Between 1964 and 1968, the inflation had averaged 2.6% per year. This had almost doubled to 5% over the next five years i.e. 1969 to 1973. And it had increased to 8%, for the period between 1973 and 1978. In the first nine months of 1979, inflation had averaged at 10.75%. Such high inflation during a period of peace had not been experienced before. As inflation was high people bought gold. On August 6, 1979, the day Volcker had started with his new job, the price of gold had stood at $282.7 per ounce. On August 31, 1979, gold was at $315.1 per ounce. By the end of September 1979, gold was quoting at $397.25 per ounce having gone up by 26% in almost one month.
On January 21, 1980, five and a half months after Volcker had taken over as the Chairman of the Federal Reserve of United States, the price of gold touched a then all time high of $850 per ounce.
In a period of five and a half months, the price of gold, had risen by an astonishing 200%. What was looked at as a mania for buying gold was essentially a mass decision to get out of the dollar. Given this, lack of stability of the dollar, Volcker had to act fast.
After he took over, the first meeting of the Federal Open Market Committee (FOMC) was held on August 14,1979. FOMC is a committee within the Federal Reserve, the American central bank, which decides on the interest rate. The members of the committee expressed concern about inflation but they seemed uncertain on how to address it.  In September 1979, the FOMC raised interest rates. But it was split vote of 4:3 within the seven member committee, with Volcker casting a vote in favour of raising interest rates. Volcker clearly wasn’t going to sit around doing nothing and came out all guns blazing to kill inflation, which by March 1980 had touched a high of 15%. He ] kept increasing the interest rate till it had touched 20% by January 1981. This had an impact on inflation and it fell to below 10% in May and June 1981. 
The prime lending rate or the rate, at which banks lend to their best customers, had been greater than 20% for most of 1981. 
Increasing interest rates did have a negative impact on economic growth and led to a recession. In 1982, unemployment rate crossed 10%, the highest it had reached since 1940 and nearly 12 million Americans lost their jobs. During the course of the same year nearly 66,000 companies filed for bankruptcy, which was the highest since the Great Depression.
And between 1981 and 1983, the economy lost $570 billion of output. 
But the inflation was finally brought under control. By July 1982, it had more than halved from its high of 15% in March 1980. The steps taken by Paul Volcker ensured that the inflation fell to 3.2% by 1983.
By continuously raising interest rates, Volcker finally managed to kill inflation. This ensured that the confidence in the dollar also came back. By doing what he did Volcker established was that he was an independent man and was unlike the previous Chairmen of the Federal Reserve, who largely did what the President wanted them to do.
In fact, when Arthur Burns was appointed as the Chairman of the Federal Reserve on January 30, 1970, Richard Nixon, the President of United States, had remarked that “I respect his independence. However, I hope that independently he will conclude that my views are the ones that should be followed.”
The feeling in the political class of India is along similar lines. The finance minister expects the governor of the RBI to bat for the government. But that hasn’t turned out to the case. The last few RBI governors (YV Reddy, D Subbarau) have clearly had a mind of their own. And Raghuram Rajan is no different on this front. His decision to raise interest rates in order to rein inflation is a clear signal of that.
But the question is can the RBI do much when it comes to controlling consumer price inflation(CPI)? Can Rajan like Volcker did, bring inflation under control by raising interest rates? Or can he just keep sending signals to the government by raising interest rates to get its house in order, so that inflation can be brought under control?
In India, much of the consumer price inflation is due to food inflation, which currently stands at 18.8%. While overall food prices have risen by 18.8%, vegetable prices have risen by 78% over the last one year. As a 
discussion paper titled Taming Food Inflation in India released by Commission for Agricultural Costs and Prices (CACP) in April 2013 points out, “Food inflation in India has been a major challenge to policy makers, more so during recent years when it has averaged 10% during 2008-09 to December 2012. Given that an average household in India still spends almost half of its expenditure on food, and poor around 60 percent (NSSO, 2011), and that poor cannot easily hedge against inflation, high food inflation inflicts a strong ‘hidden tax’ on the poor…In the last five years, post 2008, food inflation contributed to over 41% to the overall inflation in the country.”
The government procures rice and wheat from farmers all over the country at assured prices referred to as the minimum support price. This gives an incentive to farmers to produce more rice and wheat for which they have an assured customer, vis a vis vegetables.
As a discussion paper titled 
National Food Security Bill: Challenges and Options released by CACP points out “Assured procurement gives an incentive for farmers to produce cereals rather than diversify the production-basket…Vegetable production too may be affected – pushing food inflation further.”
There is not much that the RBI can do about this. As Sonal Varma of Nomura Securities puts it in a report titled RBI Policy – A Regime Shift “Inflationary expectations are elevated primarily due to supply-side driven food inflation. In the absence of a supply-side response, severe demand destruction may become necessary to lower inflationary expectations.” Hence, it remains to be seen how successful the Rajan led RBI will be at controlling inflation.
The article originally appeared on www.firstpost.com on Septmber 21, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Try Again. Fail again. Fail better – Disaster formula of US Federal Reserve

Bernanke-BubbleVivek Kaul
Now we know better. If we learn from experience, history need not repeat itself,” wrote economists George Akerlof and Paul Romer, in a research paper titled Looting: The Economic Underworld of Bankruptcy for Profit.
But that doesn’t seem to be the case with the Federal Reserve of United States, which seems to be making the same mistakes that led to the financial crisis in the first place. Take its decision to continue printing money, in order to revive the American economy.
In a press conference to explain the logic behind the decision, Ben Bernanke, the Chairman of the Federal Reserve of United States, said “
we should be very reluctant to raise rates if inflation remains persistently below target, and that’s one of the reasons that I think we can be very patient in raising the federal funds rate since we have not seen any inflation pressure.”
The Federal Reserve of United States prints $85 billion every month. It puts this money into the financial system by buying bonds. With all this money going around interest rates continue to remain low. And at low interest rates the hope is that people will borrow and spend more money.
As people spend more money, a greater amount of money will chase the same number of goods, and this will lead to inflation. Once a reasonable amount of inflation or expectations of inflation set in, people will start altering their spending plans. They will buy things sooner rather than later, given that with inflation things will become more expensive in the days to come. This will help businesses and thus revive economic growth.
The Federal Reserve has an inflation target of 2%. Inflation remains well below this level. As
Michael S. Derby writes in the Wall Street Journal As of the most recent reading in July, the Fed’s favoured inflation gauge, the personal consumption expenditures price index, was up 1.4% from a year ago.”
So, given that inflation is lower than the Fed target, interest rates need to continue to be low, and hence, money printing needs to continue. That is what Bernanke was basically saying.
Inflation targeting has been a favourite policy of central banks all over the world. This strategy essentially involves a central bank estimating and projecting an inflation target and then using interest rates and other monetary tools to steer the economy towards the projected inflation target. The trouble here is that inflation-targeting by the Federal Reserve and other central banks around the world had led to the real estate bubble a few years back. The current financial crisis is the end result of that bubble.
Stephen D King, Group Chief Economist of HSBC makes this point When the Money Runs Out. As he writes “the pursuit of inflation-targetting…may have contributed to the West’s financial downfall.”
King writes about the United Kingdom to make his point. “Take, for example, inflation targeting in the UK. In the early years of the new millennium, inflation had a tendency to drop too low, thanks to the deflationary effects on manufactured goods prices of low-cost producers in China and elsewhere in the emerging world. To keep inflation close to target, the Bank of England loosened monetary policy with the intention of delivering higher ‘domestically generated’ inflation. In other words, credit conditions domestically became excessive loose…The inflation target was hit only by allowing domestic imbalances to arise: too much consumption, too much consumer indebtedness, too much leverage within the financial system and too little policy-making wisdom.”
What this means is that the Bank of England(as well as other central banks like the Federal Reserve) kept interest rates too low for too long because inflation was at very low levels.
Low interest rates did not lead to inflation, with people borrowing and spending more, primarily because of low cost producers in China and other parts of the emerging world.
Niall Ferguson makes this point in
The Ascent of Money – A Financial History of the World in the context of the United States. As he writes Chinese imports kept down US inflation. Chinese savings kept down US interest rates. Chinese labour kept down US wage costs. As a result, it was remarkably cheap to borrow money and remarkably profitable to run a corporation.”
The same stood true for the United Kingdom and large parts of the Western World. With interest rates being low banks were falling over one another to lend money to anyone who was willing to borrow. And this gradually led to a fall in lending standards.
People who did not have the ability to repay were also being given loans. As King writes “With the UK financial system now awash with liquidity, lending increased rapidly both within the financial system and to other parts of the economy that, frankly, didn’t need any refreshing. In particular, the property sector boomed thanks to an abundance of credit and a gradual reduction in lending standards.” What followed was a big bubble, which finally burst and its aftermath is still being felt more than five years later.
As newsletter write Gary Dorsch writes in a recent column “Asset bubbles often arise when consumer prices are low, which is a problem for central banks who solely target inflation and thereby overlook the risks of bubbles, while appearing to be doing a good job.”
A lot of the money printed by the Federal Reserve over the last few years has landed up in all parts of the world, from the stock markets in the United States to the property market in Africa, and driven prices to very high levels. At low interest rates it has been easy for speculators to borrow and invest money, wherever they think they can make some returns.
Given this argument, it was believed that the Federal Reserve will go slow on money printing in the time to come and hence, allow interest rates to rise (This writer had also argued
something along similar lines). But, alas, that doesn’t seem to be the case.
As Claudio Borio and Philip Lowe wrote in 
the BIS working paper titled Asset prices, financial and monetary stability: exploring the nexus (the same paper that Dorsch talks about) “lowering rates or providing ample liquidity when problems materialise but not raising rates as imbalances build up, can be rather insidious in the longer run.”
Once these new round of bubbles start to burst, there will be more economic pain. The Irish author Samuel Beckett explained this tendency to not learn from one’s mistakes beautifully. As he wrote “Ever tried. Ever failed. No matter. Try Again. Fail again. Fail better.”
The Federal Reserve seems to be working along those lines.
The article originally appeared on www.firstpost.com on September 20, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why the Federal Reserve wants to continue blowing bubbles

Bernanke-BubbleVivek Kaul 

The decision of the Federal Reserve of United States to continue printing money to revive the American economy, has gone against what most experts and analysts had been predicting. The Federal Reserve had also been saying that it plans to start going slow on money printing sooner, rather than later. But that hasn’t turned out to be the case. So what happened there?
When in doubt I like to quote John Maynard Keynes. As Keynes once said “Both when they are right and when they are wrong, the ideas of economists and political philosophers are more powerful than is commonly understood. Indeed, the world is ruled by little else.” The current generation of economists in the United States and other parts of the world are heavily influenced by Milton Friedman and his thinking on the Great Depression. 
Ben Bernanke, the current Chairman of the Federal Reserve of United States is no exception to this. He is acknowledged as one of the leading experts of the world on the Great Depression that hit the United States in 1929 and then spread to other parts of the world. 
In 1963, Milton Friedman along with Anna J. Schwartz, wrote A Monetary History of United States, 1867-1960. What Friedman and Schwartz basically argued was that the Federal Reserve System ensured that what was just a stock market crash became the Great Depression. 
Between 1929 and 1933 more than 7,500 banks with deposits amounting to nearly $5.7billion went bankruptWith banks going bankrupt, the depositors money was either stuck or totally gone. Under this situation, they cut down on their expenditure further, to try and build their savings again. 
If the Federal Reserve had pumped more money into the banking system at that point of time, enough confidence would have been created among the depositors who had lost their money and the Great Depression could have been avoided. 
This thinking on the Great Depression came to dominate the American economic establishment over the years. In fact, such has been Friedman’s influence on the prevailing economic thinking that Ben Bernanke said the following at a conference to mark the ninetieth birthday celebrations of Friedman in 2002. “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
At that point of time Bernanke was a member of the board of governors of the Federal Reserve System. What Bernanke was effectively saying was that in the days and years to come, at the slightest sign of trouble, the Federal Reserve of United States would flood the financial system with money, as Friedman had suggested. That is precisely what Bernanke and the American government did once the financial crisis broke out in late 2008. And they have continued to do so ever since. Hence, their decision to continue with it shouldn’t come as a surprise because by doing what they are, the thinking is that they are trying avoid another Great Depression like situation.
Currently, the Federal Reserve prints $85 billion every month. It pumps this money into the financial system by buying government bonds and mortgage backed securities. The idea is that by flooding the financial system with money, the Federal Reserve will ensure that interest rates will continue to remain low. And at lower interest rates people are more likely to borrow and spend. When people spend more money, businesses are likely to benefit and this will help economic growth. 
The risk is that with so much money going around in the financial system, it could lead to high inflation, as history has shown time and again. To guard against this risk the Federal Reserve has been talking about slowing down its money printing (or what it calls tapering) in the days to come.

Ben Bernanke, the Chairman of the Federal Reserve, first hinted about it in a testimony to the Joint Economic Committee of the American Congress on May 23, 2013.
As he said “if we see continued improvement and we have confidence that that is going to be sustained, then we could in — in the next few meetings — we could take a step down in our pace of purchases.” As explained earlier, the Federal Reserve puts money into the financial system by buying bonds (or what Bernanke calls purchases in the above statement). 
Bernanke had hinted at the same again while 
speaking to the media on June 19, 2013, Bernanke said “If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year…And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”
Given this, the market was expecting that the Federal Reserve will start to go slow on money printing, sooner rather than later. But that hasn’t happened. The consensus was that the Federal Reserve will start by cutting down around $10 billion of money printing i.e. reduce the money it prints every month to around $75 billion from the current $85 billion.
So why has the Federal Reserve decided to continue to print as much money as it had in the past, despite hinting against it in the past? Bernanke in a press conference yesterday said that conditions in the job market where still far from the Federal Reserve would like to see. The Federal Reserve was also concerned that if it goes slow on money printing it could have the effect of slowing growth. “In light of these uncertainties, the committee decided to await more evidence that the recovery’s progress will be sustained before adjusting the pace of asset purchases,” Bernanke said.
Let’s try and understand this in a little more detail. Federal Reserve’s one big bet to get the American economy up and running again has been in trying to revive the real estate sector which has suffered big time in the aftermath of the financial crisis.
This is one of the major reasons why the Federal Reserve has been printing money to keep interest rates low. But home loan(or mortgages as they are called in the US) interest rates have been going up since Bernanke talked about going slow on money printing. 
As the CS Monitor points out “Since Fed Chairman Ben Bernanke first mentioned the possibility of scaling back the Fed’s purchases this past June, the average rate for a 30-year fixed rate mortgage has surged over 100 basis points –sitting at 4.6 percent as of last week – and certain market indicators are showing signs of slowdown.” This has led to the number of applications for home loans falling in recent weeks. 
Also, as interest rates have gone up some have EMIs. 
As an article in the USA today points out “after a mere hint of new policy spiked mortgage rates enough to add $120 a month, or 16%, to the monthly payment on the median-priced U.S. House.” 
Higher interest rates leading to higher EMIs on home loans, obviously jeopardises the entire idea of trying to revive the real estate sector. New home sales in the United States dropped 13% in July. And this doesn’t help job creation. As the USA Today points out “At more than 4 jobs per new single-family home, that means a normal recovery in housing — not a 2005-like bubble — would add 3 million jobs…Moody’s Analytics says. Quick arithmetic tells you that 3 million new jobs would take 1.9 percentage points off the unemployment rate.”
And that is the real reason why the Federal Reserve has decided to continue printing $85 billion every month. Of course, one side effect of this is that a lot of this money will find its way into financial and other asset markets all around the world.
Investors addicted to “easy money” will continue to borrow money available at very low interest rates and invest in financial and other markets around the world. So the big bubbles will only get bigger. 
As economist Bill Bonner writes in a recent column “Works of art are selling for astronomical prices. High-end palaces and antique cars are setting new records. Is this reckless money hitting the stock market too?”
Or as a global fund manager told me recently “
If you look at Sotheby’s and Christie’s, in the art market, they are doing extremely well. The same is true about the property market. Prices have gone up to $100,000 in places which are in the middle of a jungle in Africa. Why? There is no communication. No power lines there.” 
The answer is very simple. The “easy money” being provided by the Federal Reserve will continue showing up in all kinds of places.

The article originally appeared on www.firstpost.com on September 19, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)