Chidambaram and Sharma’s US visit is a waste of time


The finance minister P Chidambaram is currently in the United States trying to solicit foreign direct investment(FDI) into India. This is one of the things that the government is trying to do in order to control the depreciation of the Indian rupee against the dollar.
Foreign investors wanting to start new industries and businesses in India bring in dollars through the FDI route. To do business in India the foreign investors need to exchange their dollars for Indian rupees. Hence they need to sell dollars and buy rupees. When this happens, there is a surfeit of dollars in the foreign exchange market, and this ensures that rupee gains value against the dollar.
At least, this is how it is supposed to work in theory. A big reason behind soliciting investment through the FDI route is that money brought in through this route cannot disappear overnight.
The question is will this work? Just inviting foreign investors to set up shop in India is not enough. The sales pitch needs to be followed up with a lot of serious background work. As Deepak Parekh, Chairman of HDFC, India’s biggest home finance company recently said “Look at our Foreign Direct Investment (FDI) policy. Ministers go all out to woo investors, but when investment proposals come, we cannot take decisions…Our policy on FDI is akin to inviting guests over to our house, but when they arrive, we refuse to open the door.”
The commerce minister Anand Sharma is also doing the rounds of foreign investors in the United States, along with Chidambaram. He cited some of the things that the Indian government had been doing to address complaints of foreign investors. One of the things that he talked about was the setting up of the Cabinet Committee on Investments (CCI) headed by the Prime Minister Manmohan Singh. The CCI was notified at the beginning of this year, on January 2, 2013, to ensure faster clearances for the implementation of major infrastructure projects.
But nothing of that sort seems to have happened. As 
The Economist points out in a recent article “a new committee headed by the prime minister, Manmohan Singh, has tried to push forward projects tangled in red tape…But the committee has not made a meaningful difference. On The Economist’s count, the fresh capital investment it has sanctioned (rather than discussed or delegated to other bodies) amounts to 0.4% of GDP, spread over several years.” The bottomline is that the ministers at least need to get their sales pitch right.
Foreign investors will not jump to set up shop in India just because a few ministers from India come calling. Any foreign investor will look at the ease of doing business along with the prospective returns that he can make, once he has got the business up and running.
Every year the World Bank puts out a ranking which measures the Ease of Doing Business across countries. In the 2013 ranking, India came in 132nd on the list. India’s ranking was the same in 2012 as well. When it comes to starting a business India is 173rd on the list. What this means is that foreign investors have an option of starting their business in a much easier way in 172 countries other than India.
When it comes to enforcement of contracts India is 184
th on the list. The broader point is that why will the investors come to India when they have better options available elsewhere? Also it is worth remembering that the Western world in general and the United States in particular is currently dealing with the aftermath of the financial crisis. There is great pressure on companies to set up new businesses or expand current ones in their home countries. In this scenario if they do decide to go abroad and set up new businesses, it needs to be a very good proposition for them.
Foreign investors can get money to set up businesses and industries in India, but some basic infrastructure like power, roads etc, needs to be provided to them. And that is missing in India. As 
Jean Drèze and Amartya Sen, who are seen as the intellectual gurus of the current Congress led UPA government, write in their new book An Uncertain Glory – India and Its Contradictions “There has been a sluggish response to the urgency of remedying India’s astonishingly underdeveloped social infrastructure and of building a functioning of accountability and collaboration for public services. To this can be added the neglect of physical infrastructure (power, water, roads, rails), which required both governmental and private initiatives. Large areas of what economists call ‘public goods’ have continued to be neglected.”
This is something that needs to be set right if the government wants foreign investors to set shop in India.
What also does not help Chidambram and Sharma’s sales pitch is the fact that Indian businessmen do not seem too keen to expand their businesses or set up new businesses in India. The investment by Indian businesses has fallen from 17% of GDP in 2008 to 13% in 2012.
As Ruchir Sharma points out in 
Breakout Nations “At a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 %, they are looking abroad. Overseas operations of Indian companies now account for more than 10% of overall corporate profitability, compared with 2% just five years ago. Given the potential of the Indian domestic market, Indian companies should not need to chase growth abroad.”
How will Messrs Chidambaram and Sharma ever be able to explain this dichotomy to the foreign investors?
Foreign investors are no fools and they have realised over the years that it is not easy to do business in India. The spate of scams from 2G to coalgate has also contributed to them staying away. FDI into India has fallen in the last three out of the four years. For 2012-2013(i.e. The period between April 1, 2012 and March 31,2013), FDI fell by 21% to $36.9 billion, as per government data. The United Nations Conference on Trade and Development (UNCTAD) in a recent release said that FDI inflows to India declined by 29 per cent to $26 billion in 2012.
In order to attract foreign investors to invest in India and set up new businesses, a lot needs to be set right. And that needs to be done in India. Ministers visiting the United States on junkets is no way to solve the issue.
The article originally appeared on on July 12, 2013.

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

A case for gold at $10,000 per ounce

goldVivek Kaul 
The funny thing is that the more I think I will not write on gold, the more I end up writing on it. So here we go with one more piece analysing the prospects of the yellow metal.
The recent past has seen a host of analysts and economists turn negative on gold. One of the reasons for this has been the feeling that the developed world (US, Europe and Japan i.e.) which had been reeling under the aftermath of the financial crisis since 2008 is now on a roadmap to sustainable recovery.
The irony is that analysts and economists jump at any opportunity to predict a recovery but are nowhere to be seen when a recession is looming. As Albert Edwards of Societe Generale writes in a report titled We still forecast 450 S&P, sub-1% US 10year yields, and gold above $10,000 released yesterday “There are some ever-present truths in this business. Economists usually forecast a return to trend growth and will never forecast a recession. Equity strategists tend to forecast the market will rise 10% each year and will never forecast bear markets.”
So dear readers this is an important fact to be kept in mind when reading any dire forecast on gold. As Edwards puts it “The late Margaret Thatcher had a strong view about consensus. She called it: “The process of abandoning all beliefs, principles, values, and policies in search of something in which no one believes, but to which no one objects.” The same applies to most market forecasts. With some rare exceptions…analysts don’t like to stand out from the crowd.”
And the consensus right now seems to be that gold is done with its upward journey. The logic being offered is that all the money printing that central banks around the world have indulged in since the end of 2008, has helped them repair their respective financial systems and economies. (To know why I don’t believe that is the case click here).
To achieve this economic stability a huge amount of money has been printed. As Gary Dorsch, an investment newsletter writer wrote in a recent column “So far, five central banks, – the Federal Reserve, the European Central Bank, Bank of England, the Bank of Japan and the Swiss National Bank have effectively created more than $6-trillion of new currency over the past four years, and have flooded the world money markets with excess liquidity. The size of their balance sheets has now reached a combined $9.5-trillion, compared with $3.5-trillion six years ago.”
While this money printing has ‘supposedly’ helped the countries in the developed world move towards economic stability, at the same time it has not led to any inflation, as it was expected to. And this is the main reason being cited by those who have turned bearish on gold.
Gold has always been bought as a hedge against the threat of high inflation. And if there is no inflation why buy gold is the argument being offered.
On the face of it this seems like a fair point to make. But lets try and understand why it doesn’t work. It is important to understand that free money does not and cannot exist. As Dylan Grice of Societe Generale wrote in a report titled The Market for honesty: is $10,000 gold fair value? released in September, 2011 “Since there can be no such thing as a government, or anyone else for that matter, raising revenue ‚at no cost‛ simple logic tells us that someone, somewhere has to pay.”
The point being that when the government finances itself by getting the central bank to print money, someone has to bear the cost.
The question is who is that someone. As Grice wrote “This is where the subtle dishonesty resides, because the answer is that no-one knows. If the money printing creates inflation in the product market, the consumers in that product market will pay. If the money printing creates inflation in asset markets, the purchaser of the more elevated asset price pays. Of course, if the printed money ends up in asset markets even less is known about who ultimately pays for the government’s ‘free lunch’…The ‘free lunch’ providers will be the late entrants into whatever asset-bubble or investment fad the money printing inflates.”
So how does this work in the current context? While the money printing hasn’t led to product inflation in the developed world, the stock markets in the developed world, particularly in the United States and Japan, have been rallying big time. Despite the fact that the respective economies are not in the best of shape. Hence, the money printing even though it hasn’t led to consumer price inflation, it has led to inflation in the stock market. And those investors who will enter these stock markets late, will ultimately bear the cost of all the money printing.
Money that leaves the printing presses of the government need not always end up with people, who use it to buy consumer products and thus push up their price. As Grice puts it “By now, some of you might feel this all to be irrelevant. Surely, you might be thinking, the plain fact is that there is no inflation. I disagree. To see why, think about what inflation is in the light of the above thinking. I know economists define it as changes in the price of a basket of consumer goods, the CPI(consumer price index). But why should that be the definitive measure, given that it’s only one of the many possible destinations in money’s Brownian journey from the printing presses? Why ignore other destinations, such as asset markets? Isn’t asset price inflation (or bubbles as they are more commonly known) more distortionary and economically inefficient than product price inflation?”
The consumer price index which measures inflation is looked at as a definitive measure by economists. But there are problems with the way it is constructed. As a recent report titled Gold Investor: Risk Management and Capital Preservation released by the World Gold Council points out “The weights that different goods and services have in the aforementioned indices do not always correspond to what a household may experience. For example, tuition has been one of the fastest growing expenses for US households but represents only 3% of CPI (consumer price index). In practice, tuition costs correspond to more than 10% of the annual income even for upper-middle American households – and a higher percentage of their consumption.”
This helps in understating the actual inflation number. There are other factors at play as well which work towards understating the actual inflation number. As the World Gold Council report points out “Consumer price baskets are frequently adjusted to incorporate the effect that advancement in technology (e.g. in computer hardware) have on prices paid. These so called hedonic adjustments can overstate reductions in price compared to what consumers pay in practice. For example, a new computer can have the same nominal price as it did five years ago, but adjusting for the processing speed and storage capacity it appears cheaper.”
Then there are also methodological changes that have been made to the consumer price index and the way it measures inflation over the years, which in practice do not always reflect the full erosion of the purchasing power of money.
The following chart shows that if inflation in the United States was still measured as it was in the 1980s would be now close to 10% instead of the official 2%.

The moral of the story is that the situation is not as simple as those who have turned bearish on gold are making it out to be


The moral of the story is that the situation is not as simple as those who have turned bearish on gold are making it out to be. Given that, how does one view the recent fall in prices of gold on the back of this evidence? As Edwards puts it “Gold corrected 47% from 1974-1976 before rising more than 8x to US$887/oz in 1980. A steep correction is normal before the parabolic move.”
Both Edwards and Grice expect gold to touch $10,000 per ounce (one troy ounce equals 31.1 grams). As I write this gold is currently quoting at $1460 per ounce, having risen from the low of $1350 per ounce that it touched sometime back.
Central banks around the world have tried to create economic growth by printing money. But their efforts to do so are likely to backfire. As Edwards writes “My working experience of the last 30 years has convinced me that policymakers’ efforts to manage the economic cycle have actually made things far more volatile. Their repeated interventions have, much to their surprise, blown up in their faces a few years later. The current round of QE will be no different. We have written previously, quoting Marc Faber, that “The Fed Will Destroy the World” through their money printing. Rapid inflation surely beckons.”
And that’s the point to remember: rapid inflation surely beckons. And to be prepared for that it is important to have investments in gold, the recent negativity around it notwithstanding.
To conclude let me again emphasise that this is how I feel about gold. I may be right. I may be wrong. That only time will tell. So please don’t bet your life on it and limit your exposure to gold to around 10% of your overall investment.
It is important to remember the first few lines of Ruchir Sharma’s Breakout Nations: “The old rule of forecasting was to make as many forecasts as possible and publicise the ones you got right. The new rule is to forecast so far into the future that no one will know you got it wrong.”

The article originally appeared on on April 26, 2013 

(Vivek Kaul is a writer. He tweets @kaul_vivek. He has investments in gold through the mutual fund route) 


With mai-baap sarkar, 8-9% GDP growth is a pipedream

Vivek Kaul
The economists are at it again. Doing what they are good at i.e. building castles in the air.
The Prime Minister’s Economic Advisory Council (EAC) headed by Dr C Rangarajan released their 
review of the economy in 2012/13, yesterday. One of the things that the Council points out in this report is “If we (i.e. India) grow at 8 to 9 % per annum, we will graduate to the level of a middle income country by 2025.It is once again a faster rate of growth which will enable us to meet many of our important socio-economic objectives.”
While 8-9% economic growth is a noble thought, what is the chance of it happening given the current state of affairs in the country? The answer is that the situation doesn’t look very good.
The EAC expects an economic growth of 6.4% in 2013-2014 (the period between April 1, 2013 and March 31, 2014).
Sustained long term economic growth is very rare. As Ruchir Sharma points out in 
Breakout Nations – In Pursuit of the Next Economic Miracles “Very few nations achieve long-term rapid growth. My own research shows that over the course of any given decade since 1950, only one-third of emerging markets have been able to grow at an annual rate of 5% or more. Less than one-fourth have kept that pace up for two decades, and one tenth for three decades. Just six countries (Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong) have maintained the rate of growth for four decades, and two (South Korea and Taiwan) have done so for five decades.”
In fact India and China which have been among the fastest growing countries over the last ten years are totally new to this class. “During the 1950s and the 1960s the biggest emerging markets – China and India – were struggling to grow at all. Nations like Iran, Iraq, and Yemen put together long strings of strong growth, but those strings came to a halt with the outbreak of war…In the 1960s, the Philippines, Sri Lanka, and Burma were billed as the next East Asian tigers, only to see their growth falter badly,” writes Sharma.
The point is that economic growth cannot be taken for granted. There is a lot that can go wrong and it does. In the Indian context that is already coming out to be true. The economic growth rate has fallen from 8-9% to the level of around 5% for the year 2012-2013 (the period between April 1, 2012 and March 31,2013). As the EAC report released yesterday points out “In August 2012, the EAC had projected a likely growth rate for the economy of 6.7 %…At the end of the fiscal year (i.e. as on March 31, 2013)…the actual growth rate at around 5% is much lower than what was projected.”
Different countries have followed different formulas for sustained economic growth at different points of time. But one thing that has almost always killed economic growth is the premature construction of a welfare state, which the Congress led United Progressive Alliance (UPA) government has at the top of its agenda.
As Sharma writes “It was easy enough for India to increase spending in the midst of a global boom, but the spending has continued to rise in the post-crisis period. Inspired by the popularity of the employment guarantees, the government now plans to spend the same amount extending food subsidies to the poor. If the government continues down this path, India may meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crowded out private investment, ending the country’s economic boom.”
Countries that now run big welfare states have done so after many years of high economic growth. As Gurucharan Das points out in 
India Grows at Night “India’s leaders did not modernise or expand the capability of its institutions. They forgot that western democracies had taken more than hundred years of economic growth and capacity building to achieve the welfare state.”
While extending subsidies to the poor is a noble idea, the thing is it does not work over a period of time. 
A recent discussion paper put out by the Commission for Agricultural Costs and Prices (CACP), Ministry of Agriculture, seems to suggest the same. The paper finds that real farm wages (i.e. growth in wages adjusted for inflation) grew by 3.7% per year in the 1990s. This growth fell to 2.1% per year in 2000s. “The results (of the analysis) points to the fact that a ‘pull strategy’ is more desirable than a ‘push strategy’, meaning growth-oriented investments are likely to be a better bet for raising rural wages and lowering poverty than the welfare-oriented MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme),” the paper pointed out.
The paper also suggests that growth oriented “investments would have raised the growth rates in these sectors, and ‘pulled’ the real farm wages through a natural process of development, whereby wages increase broadly in line with rising labour productivity.” So it is very clear that the governments much touted rural employment guarantee scheme is not really working. The incomes of farmers would have grown much faster had the government simply stayed away.
The other thing all these subsidies (which include oil subsidies which form the bulk of the total subsidies) have done is that it has pushed up government borrowing. “The total public-debt to GDP ratio is now 70% – among the highest for any major developing country,” writes Sharma. “The development of this habit – deficit spending in good times as well as bad – was a major contributor to the current debt problems in the United States and Western Europe, and India can ill afford it.” This is something that the politicians who run India seem to have totally forgotten about.
Increased government borrowing has also led to high interest rates. This has a huge impact on consumption as well as business expansion and in turn pulled down economic growth. The investment by Indian businesses has fallen from 17% of GDP in 2008 to 13% in 2012.
The media has recently been reporting about the finance minister P Chidambaram travelling to different parts of the world soliciting investors to put money in India. And this is happening at a time when more and more Indian companies are setting up businesses abroad. “At a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 %, they are looking abroad. Overseas operations of Indian companies now account for more than 10% of overall corporate profitability, compared with 2% just five years ago. Given the potential of the Indian domestic market, Indian companies should not need to chase growth abroad,” writes Sharma.
This makes one wonder that if Indian companies are not ready to invest in India, why would foreigners want to do the same? It need not be said that doing business in India has become more and more difficult over the years.
Gurucharan Das in 
India Grows at Night recounts the experience of a businessman friend of his Navin Parikh. “’Not a week goes by,’ Navin said, ‘without an inspector from some department or the other coming for his hafta vasooli, “weekly bribe”. Labour, excise, fire, police, octroi, sales tax, boilers and more – we have to keep them all happy. Otherwise, they make life hell. More than 10% of my costs are in “managing the system”.”
Given this it is not surprising that more and more Indian businesses are happy going abroad rather than investing in India. And if this continues to happen India’s economic growth will continue to flounder.
The Economic Survey points out that agriculture accounts for 58% of the employment in the country. But this 58% produces only 16% of the country’s GDP. So it is basically a no-brainer to suggest that India needs more industries and businesses, so that people can move out of agriculture. And that cannot happen without the government getting its act right. While a spate of economic reforms, from land to labour, are the need of the hour, but there is something which is more important than even that.
The government of India needs to limit its ambitions. As Sunil Khilnani writes in 
The idea of India “The state was enlarged, its ambitions inflated, and it was transformed from a distant alien object into one that aspired to infiltrate the everyday life of Indians, proclaiming itself responsible for everything they could desire.”
This anomaly needs to be corrected. The idea of 
mai-baap sarkar needs to go. Unless that happens, continuous 8-9% economic growth will continue to remain an idea in the heads of economists and politicians.

The article originally appeared on on April 25, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)

Japan is getting into money printing party too

mrs watanabe
Vivek Kaul
In India we have been dealing with very high rates of consumer price inflation in excess of 10%. On the other hand Japan has been dealing with exactly the opposite thing. The country has no inflation. During 2013, the average inflation has stood at -0.45%. This scenario where prices are falling is specifically referred to as deflation.
And this is not a recent phenomenon. In 2012, the average inflation for the year was 0%, which meant that prices neither rose nor they fell. In fact, in each of the three years for the period between 2009 and 2011, prices fell on the whole.
This has had a huge impact on the economic growth in Japan. For the period of three months ending December 2012, the Japanese economy grew by a minuscule 0.5%. In three out of the four years for the period between 2008 and 2011, the Japanese economy has contracted.
To get over this Japanese politicians have been wanting to create some inflation so that people will start spending again. The Bank of Japan, the Japanese central bank, in a statement released on April 4, 2013, said “The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years. It will double the monetary base.”
In simple English what the statement means is that the Bank of Japan will try and create an inflation of 2% in the earliest possible time with an overall limit of two years.
The question is how will this inflation be created? The Bank of Japan plans to print yen and double the money supply in the country. This money will be pumped into the financial system by the Bank of Japan buying various kinds of bonds including government bonds and exchange traded funds from Japanese banks and other financial institutions.
When the Bank of Japan buys bonds from banks it will pay for it in the newly printed yen. Thus newly printed yen will land up with banks. Banks can then go ahead and lend this money. As an increased amount of money chases the same amount of goods and services, the hope is that prices will rise and some inflation will be created. And this will put an end to the deflationary scenario that has prevailed over the last few years.
When prices are flat or are falling or are expected to fall, consumers generally tend to postpone consumption (i.e. buying goods and services) in the hope that they will get a better deal in the future. This impacts businesses as their earnings either remain flat or fall. This slows down economic growth.
On the other hand, if people see prices going up or expect prices to go up, they generally tend to start purchasing things to avoid paying more for them in the days to come. This helps businesses as well as the overall economy. So by trying to create some inflationary expectations in Japan the idea is to get consumption going again and help the country come out of a more than two decade old recession. With prices of things going up people are more likely to buy now than later and thus economic growth can be revived.
There is another angle to this entire idea of doubling money supply and that is to cheapen the yen against the dollar. 
The Japanese refer to a strong yen as Endaka. Hans Redeker, from Morgan Stanley told Ambrose Evans-Pritchard of The Daily Telegraph that the package was dramatic enough to break “Endaka” – strong yen – once and for all.
On April 3, 2013, one dollar was worth around 93 yen. As I write this piece on April 4, 2013, one dollar is now worth 95.5 yen. Hence for anyone looking to convert dollars into yen would have got more yen if he had converted on April 4 rather than April 3.
As the Bank of Japan starts printing yen to create inflation, there will be more yen in the market than before. And this will lead to a fall in the value of the yen against other currencies. That’s the theory behind the yen cheapening against the dollar.
But the market does not wait for things to happen it starts to react to things it expects to happen. Given this, the Japanese yen has been losing value against the dollar.
In early November 2012, one dollar was worth 79.4 yen and now it is worth around 95.5 yen. A cheaper yen will help Japanese exporters as it makes them more competitive in the international market.
Let us say a Japanese exporter sells a product at a price of $1million. Earlier when he converted dollars into yen he would have got 79.4 million yen. Now with the yen losing value against the dollar he will get 95.5 million yen. Since the exporter’s cost in yen remains the same, he makes a higher profit.
The exporter can also cut prices in dollar terms and thus make his product more competitive against competitors from other countries. If he cuts prices by 15% to $850,000 in the international market, he still makes around 81.2 million yen ($850,000 x 95.5 yen), which is better than the 79.4 million yen he was making when one dollar was worth 79.4 yen and the product cost $1 million. A greater price competitiveness will ensure that exports pick up and that in turn will help revive economic growth. At least that’s how things are supposed to work in theory.
In fact Germany, one of the world’s biggest exporters is already feeling the heat. One euro was worth around 101 yen in the second week of November. As I write this one euro is worth around 125 yen. This has made Japanese exports more competitive against that of Germany. 
And by wanting to double money supply by printing yen, the Bank of Japan is only doing what various other central banks around the world have already been up to. The Federal Reserve of United States has expanded its balance sheet by 220% since early 2008. The Bank of England has done even better at 350%. The European Central Bank came to the party a little late and has expanded its balance sheet by around 98%. The Bank of Japan has been rather subdued in its money printing efforts and has expanded its balance sheet only by 30% over the last four years.
But since late December 2012, Bank of Japan has also been getting ready to enter the money printing party. This was after Shinzo Abe took over as the Prime Minister of the country on December 26, 2012. He promised to end Japan’s more than two decade old recession by creating inflation and reviving economic growth. The new Bank of Japan governor Haruhiko Kuroda is only following the path that has already been laid up by Prime Minister Abe and other central banks all around the world.
The trouble is that central banks which have tried this path have managed to create very little inflation and economic growth The reason for it is simple. The western world is still feeling the negative effects of the borrowing binge it went into between the turn of the century and 2008. So people don’t want to borrow. The money that central banks have been printing is being borrowed by large institutional investors 
at close to zero percent interest rates and being invested in all kinds of assets all over the world.
With the Bank of Japan expected to buy all kinds of bonds from banks and other financial institutions, it means that the financial system will be flush with money. This along with a depreciating yen is expected to unleash a massive yen carry trade. “The blast of money is expected to reignite the yen “carry trade” and flood global markets with up to $2 trillion (£1.3 trillion) of pent-up savings, giving the entire world a shot in the arm,” writes Ambrose Evans-Pritchard.
Investors will borrow in yen at very low interest rates and invest it in various kinds of financial assets all over the world. This is called the carry trade because investors make the carry – i.e. the difference between the returns they make on their investment (in bonds or even in stocks for that matter) and the interest they pay on their borrowings in yen. This money will be invested in all kinds of financial assets around the world. Whether it will come to India, remains to be seen. (For a more detailed argument on the yen carry trade read Why Mrs Watanabe can now drive the Sensex higher.)

As Ruchir Sharma writes in Breakout Nations – In Pursuit of the Next Economic Miracles:
“What is apparent that central banks can print all the money they want, they can’t dictate where it goes. This time around, much of that money has flown into speculative oil futures, luxury real estate in major financial capitals, and other non productive investments…The hype has created a new industry that turns commodities into financial products that can be traded like stocks. Oil, wheat, and platinum used to be sold primarily as raw materials, and now they are sold largely as speculative investments.”
So the question is what stops all the money that will be printed in Japan from meeting the same fate, as the money that was printed by other central banks? Nothing.
The other thing that central bank governors haven’t been able to answer is what will they do once inflation does start to appear, which it eventually will. How will Haruhiko Kuroda ensure that all the money that he plans to print creates just 2% inflation and not more?
Also money printing is an idea which every country can implement. And with Japan betting big on it, other export oriented countries(like South Korea with which Japan primarily competes in automobiles and electronic exports) will also have to resort to it to protect their exports.
Central bank governors have used the excuse of money printing not leading to much inflation as an excuse for printing more and more money. Mervyn King, the Governor of the Bank of England, has said in the past that“those people who said that asset purchases would lead us down the path of Weimar Republic and Zimbabwe I think have been proved wrong ,” he has said. King implies that excess money printing will not lead to the kind of high inflation that it did in Germany in the early 1920s and Zimbabwe a few years back.
Just because money printing hasn’t led to inflation now, doesn’t mean that can be totally ruled out in the days to come. As Albert Edwards of Societe Generale writes in a report titled 
Is Mark Carney the next Alan Greenspan King’s assertion that because the quantitative easing(another term for money printing) to date has not yet produced rapid inflation must mean that it will never produce rapid inflation is just plain wrong. He simply cannot know.”
And that is something that every central bank governor who chooses to print money is ignoring right now. They really can’t know what the future holds.

The article originally appeared on on April 5, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)