Easy Money

It doesn’t make any sense to hand over your gold to the govt

gold

The Prime Minister Narendra Modi launched the gold monetisation scheme as well as sovereign gold bonds, yesterday. The scheme and the bonds try to address India’s obsession with gold and the macroeconomic fall out of that obsession.

While nobody really knows how much gold is owned by Indian households, various estimates keep popping up. The estimates that I have seen in the recent past put India’s household gold hoard at 20,000-22,000 tonnes (Don’t ask me how these estimates are arrived at. I have no idea).

In this column I will just concentrate on the gold monetisation scheme and leave the analysis of the sovereign gold bonds for Monday’s column (November 9, 2015). I will also discuss the macroeconmic fall out of India’s obsession with gold on Monday.

The idea behind the gold monetisation scheme is to put India’s idle gold hoard to some use. Under this scheme, you can deposit gold with the bank and earn an interest on it. The Reserve Bank of India (RBI) issued a notification on November 3, 2015, which said that the banks would pay an interest of 2.25% if the gold is deposited for the medium term and 2.5%, if the gold is deposited for the long term. The medium term is a period of five to seven years whereas the long term is a period of 12 to 15 years. (For those interested in knowing the entire process of how to go about it, can click here).

Also, as the RBI notification issued on October 22, 2015, points out: “The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit (STBD) as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes. While the former will be accepted by banks on their own account, the latter will be on behalf of Government of India.”

What this means is that individual banks are free to decide on the interest that they will offer on the gold they collect in the short-term for a period of one to three years.

So, the question is will this scheme succeed in getting India’s hoard of gold out from homes and into the banks? The first thing we need to look at is the existing gold deposit scheme which was launched in 1999. The RBI notification issued in October 1999 states that “individual banks will be free to fix the interest rates in tune with their costing considerations. Interest will be payable in cash at fixed intervals or at maturity as decided by the bank.”

Under this scheme the State Bank of India allowed people to deposit gold for three, four or five years. The interest paid on gold was 0.75% for three years and 1% for four and five years, respectively. The minimum deposit had to be 500 hundred grams of gold.

The scheme did not manage to collect much gold. An article in The Financial Express points out: “The existing scheme, introduced 16 years ago, mobilised only 15 tonnes of gold—as the minimum deposit was 500 grams and the interest rate was a mere 0.75% for a three-year deposit.” There was no upper limit to the amount of gold that could be deposited.

As I pointed out earlier in this column, estimates suggest that India has around 20,000 tonnes of gold. When compared to that fifteen tonnes is not even a drop in the ocean.

Further, October 22, 2015 RBI notification on the new gold monetisation scheme clearly states that: “The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under the scheme.”

So the minimum amount of gold that can be deposited under the new scheme is just 30 grams in comparison to the earlier 500 grams. Over and above this, the gold can be deposited up to a period of 15 years in comparison to the earlier five. Further, the rate of interest on offer is either 2.25% or 2.5%, which is higher than the earlier 0.75-1%.

On all these counts the new gold monetisation scheme is a significant improvement on the gold deposit scheme. Given this, will gold move from Indian homes to banks (and indirectly to the government, given that banks are running a major part of the scheme on behalf of the government)?

Before answering this, it is worth asking here, why do Indians buy gold? It is a part of our tradition and culture is the simple answer. What does that basically mean? It means we buy gold because our ancestors used to buy gold as well. We also buy gold because it is easy to sell during times of emergency. We are emotionally attached to the gold we buy and like seeing it in the physical form. This makes it highly unlikely that the gold monetisation scheme will be a smashing success.

Any more reasons? Gold is a very easy way to hide black money (essentially money which has been earned and on which tax has not been paid). A lot of black money can be stored by buying just a few bars of gold. People who have invested their black money in gold are not going to come forward with it and deposit it in banks. That is really a no-brainer.

Further, the customer agreeing to deposit the gold the bank will “have to fill-up a Bank/KYC form and give his consent for melting the gold.” The gold will be melted in order to test its purity. Also, the “the gold ornament will then be cleaned of its dirt, studs, meena etc.”

The question is how many women would like to see their gold jewellery melted so that they can earn a return of a little more than 2% per year on it? I don’t think I need to answer that question.

These reasons best explain why the gold deposit scheme launched in 1999 has been a huge failure. And they also explain why the current gold monetisation scheme is unlikely to lead to any major shift of gold from homes to the government.

This brings me to the question whether you should be depositing your gold with the banks (and essentially the government)? One reason why people buy gold is because they believe that it acts as a hedge against inflation. The evidence on whether gold acts as a hedge against inflation is not so straightforward.

As John Plender writes in Capitalism—Money, Morals and Markets: “In real terms, the price of gold in 2012 was similar to the prevailing price in 1265.” So doesn’t that mean that gold has acted as a store of value over the last 1000 years? Not really. As Plender writes: “Over much of that time, though, the yellow metal failed to live up to its reputation as a solid store of value.”

Why does Plender say that? Dylan Grice, who used to work for Societe Generale explains this. As Grice writes: “A fifteenth-century gold bug who’d stored all his wealth in bullion, bequeathed it to his children and required them to do the same would be more than a little miffed when gazing down from his celestial place of rest to see the real wealth of his lineage decline by nearly 90 per cent over the next 500 years.”

In fact, even those who had bought gold at the peak of the 1971-1981 bull market in gold would have lost around 80% of their investment in real terms, over the next two decades.

Nevertheless, if you believe that gold acts as a hedge against inflation, should you hand over your gold to the government? Inflation more often than not is due to the “easy money” policies run by the government. This could mean inflation created through money printing or keeping interest rates too low for too long.

When gold and silver were money, the governments destroyed money by debasing it, i.e., lowering the content of precious met­als in the coins they issued.

When paper money replaced precious metals as money, the governments destroyed it by simply printing more and more of it. Now they create money digitally.

So the last thing you should do is hand over gold to the government. The reason you are holding gold is because you don’t trust the government to do a good job of managing the value of money. And given that, it’s best that the hedge (i.e. gold) be with you. If that means losing out on interest of 2.25-2.5% per year, then so be it.

Postscript: On Monday (Nov 9, 2015) I will be analysing the sovereign gold bonds which have been launched as well. Look out for that.

The column originally appeared on The Daily Reckoning on Nov 6, 2015

Phillip’s curve: The economic theory that Janet Yellen is stuck with

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The interest rate setters at the Federal Reserve of the United States, the American central bank, have decided not to raise the federal funds rate, for the time being. The federal funds rate is the interest rate at which one bank lends funds maintained at the Federal Reserve to another bank on an overnight basis. It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans.

The federal funds rate has been maintained in the range of zero to 0.25% in the aftermath of the financial crisis which started in September 2008. The Federal Reserve has been aiming for an inflation of 2%.

The measure of inflation that the Fed looks at is the core personal consumption expenditure (PCE) deflator. The deflator in July 2015 was at 1.2% in comparison to a year earlier, which is significantly lower than the 2% rate of inflation that the Federal Reserve is aiming for.

The statement released by the Federal Reserve on Sep 17, 2015 said: “Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports…Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability…The Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further.”

Before getting into analysing this statement, I would like to go back into history and talk about something known as the Phillips curve. The Phillips curve was the work of an economist called William Phillips. Phillips was a New Zealander by birth. At the end of the Second World War, he landed at the London School of Economics (LSE).

As Tim Harford writes in The Undercover Economist Strikes Back — How to Run — Or Ruin — An Economy: “As a part of his work on economic dynamics, Phillips gathered data on nominal wages (a good proxy for inflation) and unemployment, and plotted the data on a graph. He found a strong and surprisingly precise empirical relationship between the two; when nominal wages were rising strongly, unemployment would tend to be low. When nominal wages were falling or stagnant, unemployment would be high.”

There was great pressure on Phillips to publish something so that he could be offered a professorial chair at the LSE. As Harford points out: “So Phillips, under pressure from his colleagues to publish something, dusted off his weekend’s work and turned it into a paper. He was unimpressed with his own work, later describing it as ‘a rushed job’. [His] colleagues, ever eager to help his career along, got the paper published in LSE’s journal Economica, under the title ‘The

Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861-1957.’”

The research paper was published in 1958 and “became the most cited academic paper in the history of macroeconomics”. The inverse relationship between unemployment and wages was explained by the fact that during periods of low unemployment, companies would have to offer higher wages in order to attract prospective employees. And higher salaries would mean higher wage inflation.

Over the years, the phrase wage inflation was replaced by simply inflation, even though they are not exactly the same. Hence, during the period of the low unemployment, inflation is high and vice versa, is something that many economists came to believe.

The Phillips curve became extremely popular over the years. As Harford writes: “The reason the ‘Phillips curve’ became so popular is that other economists – notably Paul Samuelson – championed the idea that policymakers could pick a point on the curve to aim for. If they want wanted to reduce unemployment, they’d have to tolerate higher inflation; if they wanted to get inflation down, they’d have to accept higher unemployment.”

But that is not how things always work. Over the last few years, the official rate of unemployment in the United States has come down. As of July 2015 it stood at 5.3% of the total civilian labour force. In July 2014, the number had stood at 6.2%. Even though the unemployment data for August 2015 is available I have considered July 2015 data simply because the inflation data for August 2015 is not available as yet.

What has happened on the inflation front? In July 2015, the core PCE deflator was at 1.2 %. In comparison in July 2014, the core PC deflator was at 1.7%. Hence, what is happening here is the exact opposite of what the Phillips curve predicts.

As official unemployment has fallen, the inflation instead of going up, has fallen as well. Nevertheless, the faith in the Phillips curve still remains high. As Yellen said on Thursday: “We would like to bolster our confidence that inflation will move back to 2%. And of course a further improvement in the labor market does serve that purpose.”

This is nothing but a restatement of the Phillips curve—as the rate of unemployment falls further, the rate of inflation will move towards 2%. The question is will that happen? From the way things have gone up until now, the answer is no.

The Harvard economist Larry Summers in a recent blog explains why the Phillips curve does not work. As he writes: “The Phillips curve is so unstable that it provides little basis for predicting inflation acceleration.  To take just two examples — first, unemployment among college graduates is 2.5 percent yet there is no evidence that their wages are accelerating. And unemployment in Nebraska has been below 4 percent for the last 3 years and growth in average hourly earnings has been basically constant at the national average level.”

Also, if Yellen continues to believe in the Phillips curve, there is no way she can be raising the federal funds rate, any time soon.

Further, the Federal Reserve is now worried about how things are panning out in China as well. As Yellen said: “The outlook abroad appears to have become more uncertain of late. And…heightened concerns about growth in China and other emerging market economies have led to volatility in financial markets.”

What this means is that Yellen feels that China is likely to devalue its currency more in the time to come to fire up its exports. A further devalued yuan will allow Chinese exporters to cut prices of the goods that they export to the United States.

These cheaper imports into the United States are likely to push down the rate of inflation further. This means that the rate of inflation is unlikely to get anywhere near the Federal Reserve’s 2% target anytime soon. Also, it will take time for the Federal Reserve (as well as others operating in the financial markets) to figure out the extent of China’s economic problem. Given this, I don’t see the Federal Reserve raising interest rates, any time soon. At least, not during the course of this year.

In the Daily Reckoning dated March 20, 2015, I had said Janet Yellen’s excuses for not raising interest rates will keep coming. I don’t see that changing anytime soon.

The column originally appeared in The Daily Reckoning on Sep 19, 2015

Does Janet Yellen know Bahl and Bansal of Indian ecommerce?

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On August 31, 2015, The Economic Times, the largest read business newspaper in the country carried an interview with Kunal Bahl, the chief executive officer of Snapdeal. In this interview Bahl claimed that: “The one thing I am very , very clear about right now is that I think we’re going to be No. 1 (in terms of sales) by March 2016….I think we’re going to beat Flipkart by then.”

Two days later on September 2, 2015 (i.e. yesterday), Mukesh Bansal, the head of commerce at Flipkart, responded in the same paper by saying: “Flipkart will sell goods worth $10 billion (Rs 65,000 crore) during fiscal 2016, and “nobody will be even half of that”…There is not a shred of doubt based on all the market numbers we have today.”

When was the last time you saw a CEO or a CXO of a brick and mortar company talk like this? Where does this confidence of Bahl and Bansal come from?
There is a basic advantage that ecommerce companies have, which the brick and mortar crowd does not. Consumers can buy many things through a single transaction. I can buy a geyser, a book case and several books, all at the same time and pay for it all at once sitting at home (or in office for that matter). I don’t have to visit different shops to buy these things.

As economist Alvin E. Roth writes in Who Gets What and Why—The Hidden World of Matchmaking and Market Design: “It looks to me like a single transaction, even though I may have bought each item from a different seller that subscribes to Amazon’s marketplace services.” Now replace the word Amazon with Flipkart or Snapdeal and the logic remains the same.

Plus, there is something called “thickness” at work here as well. As Roth writes: “The thickness of the Amazon marketplace—the ready availability of so many buyers and sellers—is self-reinforcing. More sellers will be attracted by all those potential buyers, and more buyers will come to this market place because of ever-expanding variety of sellers.”

And as I said earlier, what works in case of Amazon in the United States, also works in case of Flipkart and Snapdeal. But there is also something else that needs to be pointed out here.

Typically, the tendency is to look at India as one big market given the huge population of more than 120 crore people. But the more important question is –how many people are digitally proficient to be able to carry out ecommerce transactions on computers as well as smart phones.

And this is where things get interesting. Analyst Akhilesh Tilotia of Kotak Institutional Equities in a recent research report titled How many internet literates in India?  points out some very interesting data based on the 71st round of the National Sample Survey Organization (NSSO).

As Tilotia writes: “We note that 48.9% of the youth in urban India in the age range of 14-29 can operate a computer; this proportion falls to 18.3% in rural India. We also note that digital literacy among women trails men’s by 10 percentage-points. Even more interesting, only a quarter of those in urban Indian in the age range of 30-45 years can operate a computer, this percentage is 4% in rural India.”

It needs to be pointed out that in the NSSO survey on which this data is based, “any of the devices such as desktops, laptops, notebooks, netbooks, palmtops, smartphones, etc. were considered as computers.”

In fact, digital proficiency is significantly lower than digital literacy. As Tilotia writes: “Only around one in seven Indians can do any meaningful activity with their computers/smartphones. Urban India is better off with between a fourth and a third of its populace having dexterity to work on their digital devices; less than one in 12 rural Indians have such skills. It is quite possible to be communicative on social media without having email-writing skills or Googling skills.”

This is not the kind of data which the Indian e-commerce companies would want to take a look at.

The NSSO survey on which these numbers are based was carried out between January and June 2014. While things would have definitely improved on the digital proficiency front since then, the improvement couldn’t have been very significant.

So, given this low level of digital proficiency among Indians there has to be a limit to the size of the ecommerce market in India. But individuals who run these companies clearly don’t think that way. As Bansal of Flipkart told The Economic Times: “Flipkart is aiming to sell goods worth $100 billion in 5-7 years.”

The way things are currently going, the kind of valuations the ecommerce companies seem are getting, leads one to conclude that the investors who invest in these companies believe that Indian ecommerce companies will continue to grow at a rapid rate in the time to come.

There are regular news-reports on the front pages of business newspapers of millions of dollars of investment going into Indian ecommerce companies. But none of these news-reports ever seems to talk about the profitability of these companies.

As I have written in the past, almost all the Indian ecommerce companies are losing money big time. Most of these companies have been able to attract buyers by offering discounts on products that they sell. The only thing that has kept them going in spite of making massive losses, is the endless rounds funding that keep coming in, from venture capital and private equity firms, as well as hedge funds. And with every round of funding, the valuation of these firms also goes up.

All this money coming into Indian ecommerce is essentially because of extremely low interest rates that prevail through much of the Western world. In the aftermath of the financial crisis that started in September 2008, the Western central banks started to print money and drove interest rates to very low levels, in the hope of initiating an economic recovery. Leading the way was Ben Bernanke, the Chairman of the Federal Reserve of the United States, the American central bank. He was succeeded by Janet Yellen in 2014.

The private equity and the venture capital firms have borrowed and invested this money into Indian ecommerce companies. And it is this “easy money” from the West that has kept the loss making Indian e-commerce companies selling things on discounts, going.

The question is till when will this money keep coming in? Until very recently most economists were of the opinion that the Federal Reserve would raise interest rates from September 2015 on. Now with the massive fall in stock markets all over the world that seems unlikely.

Nevertheless, the Indian ecommerce companies are totally dependent on this “easy money” borrowed at very low interest rates. And it is this money that has kept them going. And it is this money that will keep them going. In fact, I am even tempted to ask, does Janet Yellen know Bahl and Bansal of Indian ecommerce?

The column appeared originally in The Daily Reckoning on Sep 3, 2015

The Chinese are discovering that the stock market falls as well

chinaThe Shanghai Stock Exchange Composite Index is one of the premier stock market indices in China, like the Bombay Stock Exchange Sensex is in India. And it is not having a good time of late.

Between August 20, 2015, and today, the index has fallen by 21.8%. On August 20, the stock market opened at 3744.25 points. As of close today, it was down to 2927.29 points.

In the aftermath of the financial crisis which started in September 2008, the Chinese government resorted to bubbles to keep the economy growing. First there was an infrastructure bubble, which was followed by a property bubble and then a stock market bubble.

Between June 2013 and June 12, 2015, the Shanghai Composite Index rose 153.5%. The government successfully managed to divert a part of around $20 trillion savings into the stock market, and pushed it to astronomical levels. This was just as the property bubble was starting to burst. Since peaking in June 2015, the stock market has fallen by 43%, wiping off a major portion of the gains (as the old adage goes, a 50% fall, wipes a 100% gain). In order to prevent the fall, the Chinese government has done many things.

It has pushed big government financial institutions (or their equivalents of Life Insurance Corporation of India) to buy shares in the stock market. Investors who own more than 5% of shareholding in any company have been banned from selling these shares for a period of six months. Initial public offerings have been banned as well, so that investors invest only in the shares that are already listed and this pushes up the stock market. Many shares have not been allowed to trade at various points of time, as well.

Further, continuing with these measures, the People’s Bank of China, the Chinese central bank unleashed another round of easy money, yesterday. It cut the reserve ratio requirement (RRR or what we call cash reserve ratio or CRR in India) by 50 basis points (one basis point is one hundredth of a percentage) to 18% for most big banks.

This cut will be effective as of September 6, 2015, and is expected to add 700 billion yuan (or around $109 billion at today’s exchange rate of one dollar equals 6.42 yuan). Over and above this, the one year deposit and lending rates were cut by 25 basis points, to their lowest level ever.

The idea is to flood the financial system with “easy money”, and hope that some of it goes into the stock market and the market rallies all over again. The trouble is that Chinese politicians are not democratically elected and in order to appear credible they need to ensure that the Chinese economic growth story continues, as it has all these years.

As John Plender writes in Capitalism: Money, Morals and Markets:  “Unelected Chinese politicians may put the interests of the Communist Party elite before those of the nations. Their legitimacy, after all, rests chiefly on the continuation of high rates of economic growth.” Ensuring that bubbles continue are an important part of this story. Any bubble burst will drive down economic growth. The economic growth has already fallen from more than 10% to around an “official” rate of 7%.

What has helped the Chinese government up until now, is the belief among the Chinese that the government can engineer any economic outcome that it wants. And it is this belief that has allowed the Chinese government to engineer the economic outcome that it wants. Nevertheless, in the process it has ended up with big bubbles—be it in the stock market, the property market, infrastructure, or total amount of debt in the financial system.

The interesting bit is that the Shanghai Composite Index barely responded to yesterday’s decision of the People’s Bank of China to cut the reserve ratio requirement. The index fell by 1.27% during the course of the day today. Of course, if the reserve ratio requirement had not been cut, the market would have fallen more.

The point is that the Chinese over the last one week have discovered that the stock market does not always go where the government wants it to go. And it can have a mind of its own. The market simply does not keep going up, it falls as well.

The situation is a tad similar to what happened when the erstwhile Soviet Union was just coming out of communism and its people were essentially shocked at encountering a system that functioned according to a completely different set of rules.

This is best explained by a question that the British economist Paul Seabright was asked by the director of bread production of the city of St. Petersburg. This gentleman was trying to understand how the new system (which wasn’t like the old system) worked.

As Felix Martin writes in Money—The Unauthorised Biography, the director of bread production asked Seabright, “Please understand that we are keen to move toward a market system … but we need to understand how such a system works. Tell me, for example who is in charge of the supply of bread to the population of London?”

In this context, the point is that the Chinese government would like its people to believe that it is in-charge of the stock market, but it seems to be gradually losing control over it. And that can’t possibly be a good thing for either the Chinese or the world at large.

The column originally appeared on Firstpost on August 26, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Down 1600 points: Why the Sensex is on a free-fall

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As I write this, I am listening to one of my favourite songs, “Free Fallin’”, sung by Tom Petty and the Heartbreakers.

And it is indeed heart-breaking to see the BSE Sensex go on a free-fall today. It fell by 1624.51 points during the course of the day to close at 25,741.56 points.
In absolute terms it is the biggest single day fall ever. But that is not the right way of looking at it (though that is how much of the media will report it).

In percentage terms, the Sensex fell by 5.94% during the course of the day. This is the 29th biggest fall ever. Given this, the Sensex fall today is a big fall, but it is not as big as it will be made out to be.

Much analysis has happened around the fall and various reasons have been offered on why the stock market is on a free-fall.
A major reason that has been offered is that the Chinese stock market has fallen by around 8.5% today. The Shanghai Composite Index is quoting at around 3,210 points, down 298 points from Friday’s close. And given that the Chinese market has fallen, the contagion has spread to other stock markets as global investors try and limit their losses by selling out.

But this is only partly true. The thing is that the Chinese stock market has been going down for a while now. Here is a column I wrote on July 9, 2015, trying to explain why the Chinese stock market has fallen. It has been more than six weeks since then.

Hence, the question to ask is why has it taken so long for the Indian stock market to react to the Chinese fall? Why has the contagion taken so long to spread?
The answer is not as simple as it is being made out to be. Until August 11, 2015, one dollar was worth 6.2 yuan. The People’s Bank of China, the Chinese central bank, over the years, has maintained a stable value of the dollar against the yuan. This has essentially been done to help Chinese exporters. By ensuring the yuan had a fixed value against the dollar, the Chinese central bank took this variable out of the Chinese exporters’ equation totally. This helped Chinese exports and exporters flourish and has been a very important part of the Chinese economic miracle.

Between August 11 and August 14, 2015, the Chinese central bank devalued the value of the yuan against the dollar and pushed down its value to around 6.39 yuan to a dollar. This was the biggest devaluation of the yuan against the dollar in nearly two decades.

A major reason for the same was the fact that Chinese exports for the month of July 2015 had fallen by 8.3% in comparison to June 2014. Even in June 2015, the Chinese exports went up by only 2.8%, in comparison to a year earlier.

But all that happened nearly 10 days back, why is all hell breaking lose now? On August 21, 2015, data pertaining to the Chinese factory sector was released. It showed that the Chinese factory sector had shrunk to its lowest level since January to March 2009.

This data point led to stock markets around the Western world falling. The Dow Jones Industrial Average, one of the premier stock market indices in the United States, fell by around 531 points or 3.12% to close at around 16,460 points. The FTSE 100 Index of the London Stock Exchange fell by 2.8%.

Why were these markets reacting to negative Chinese factory data? The simple answer lies in the fact that a shrinking factory sector is a reflection of weak Chinese exports. And what this means is that the People’s Bank of China is likely to devalue the yuan more in the days to come.

If that were to be the case, it would give Chinese exporters some leeway to cut their prices in order to get their exports growing again. And this will lead to imports prices of Chinese goods coming into the United States, Europe and other parts of the world, falling.

As Albert Edwards of Societe Generale wrote in a recent research note: “This move will transform perceptions about the resilience of the US economy… Up until now Japanese yen devaluation has been the main driver of falling US import prices.” Now the devaluation of the Chinese yuan (i.e. if it continues) will add to falling import prices in the United States.

What this means is that the local goods being produced in the US and Europe will also have to cut prices in order to compete with cheaper Chinese imports. And that can’t be good for the economy.

This is precisely the reason why stock markets through much of the Western world fell on Friday. These stock markets close a few hours after the Indian stock market had closed. The BSE Sensex had gone up marginally on Friday.

So, when it opened today, the BSE Sensex had to adjust to a new level and the possibility of the Chinese authorities devaluing the yuan further. If the yuan is devalued further, it would mean cheaper Chinese goods hitting all parts of the world (not that they are not already). In the process China would end up exporting deflation (lower prices) to large parts of the world.

Lower prices would mean that the economies will not grow at the same pace as they were in the past. And that is a possibility that the stock market needs to adjust to. Further, as markets fall, selling leads to more selling.

To conclude, since I started with a Tom Petty song, I will end with one as well: “Coming down is the hardest thing”. Hope this helps, dear reader. Happy listening!

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column appeared originally on Firstpost on August 24, 2015