The Inflation Rate in India is Running About 12%

Monday, the Dow dropped 239 points. Oil rose $1.46. Gold remains at $927. And the yield on a 10-year Treasury note is barely above 4%.

It’s that last item that puzzles us.

People are buying Treasuries for safety. Money markets, which hold short-term Treasury bills, are at record levels. We understand why you might want to have money in a money market fund…but where’s the margin of safety in a 10-year note paying less than the rate of consumer price inflation? Even in the money market funds, you’ll lose money when the dollar goes down – whether it goes down against other currencies or against consumer items. And what do you get in exchange for the risk? Not much. The 91-day T-bill rate is only 1.66%.

Currently the inflation rate – according to official statistics – is near 5%. Buying a 10-year note at a full percentage point lower is not a safe investment – it is a speculation, a bet on the direction of rates in the future. If they go…the value of the T-notes goes down.

Lately, that’s begun to look like a reasonable bet.

“Falling prices ease worries about stagflation,” says a headline in the International Herald Tribune . Oil is down about 15% from its peak. Food has fallen a similar amount. Could it be that inflation has topped out? Could it be that the “civil war” between inflation and deflation is finally reaching a conclusion…with deflation the clear winner?

Could be. Then again, it could not be.

“The question for investors is whether the slump in oil and commodity prices will last or is simply a temporary retreat brought on by overstretched increases,” continues the IHT . If the increase in prices won’t last, we can all forget about girding our loins for the fight against inflation. We can simply buy Treasury notes and wait for the current downturn to pass, right?

Maybe. Maybe not.

Inflation is at about two and half times the Fed’s key lending rate. Overseas, many countries are facing much higher rates. Russia has an inflation rate of 14%. China’s rate is over 7%. Inflation in India is running about 12%. And Dubai has inflation at 22%. Dubai, by the way, is a bubble. It has only .02% of the globe’s population. But it is home to 10% of the world’s construction cranes and seems hell-bent to prove to the world that there are bigger fools than Americans – as if that needed proving. It now has the world’s only 7-star hotel…and the world’s tallest building too. In the harbor, it’s building a series of artificial islands in the shape of a map of the world.

The gods must be watching…and getting ready to teach Dubai a lesson. What would it take to kick Dubai in the pants? A lower oil price…

For the last few weeks, oil has been going down…and the news has been overwhelmingly deflationary. The S&P is down 14% for the year. The credit crunch continues to pinch businesses and investors. This morning, we got news that Merrill Lynch announced $5.7 billion in write-downs. Wall Street will hand out an estimated $10 billion less in bonuses this year. Mortgage-backed securities are selling at only one-fifth the rate of a year ago. And the IMF says there is “no end in sight for the credit crisis.”

Now, it’s beginning to hit the wealthy, too, says the Financial Times. Prime mortgage delinquency rates are increasing. So are late payments among the best credit card customers. AMEX, which targets good-quality borrowers, saw its earnings fall 37% in the second quarter.

Meanwhile, investors are selling stocks short at record levels. The pros think stocks are a bad bet. This puts the stock market under a lot of tension. A rally to the upside can be explosive, as the shorts need to buy in order to cover their positions. On the other hand, the pros may be right; deflation is a big threat to stocks. The amateurs may be right too – they’re moving to cash and bonds.

Cash is probably a good move. You’re protected against defaults and write-downs. And you can take cover if inflation gets worse. Moving to bonds is another matter. They are a leveraged bet against inflation. And yes, for all we know inflation is dead forever. But we wouldn’t want to bet on it.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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5 Comments on "The Inflation Rate in India is Running About 12%"

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Syed Zahid Ahamd
RBI is increasing inflation instead of controlling it! The action taken by RBI to control inflation is not admirable. The tool of interest is spoiling our nation. Every time attempt to control inflation through altering interest rate is easy for RBI, but disastrous for the economy. RBI should revisit the decisions taken up to control inflation. Interest can affect liquidity and control inflation for time being by curbing the demands but cannot control ultimate inflation as the higher deposits at banks will yield higher interest expended over those deposits which in turn enhance the purchasing power of the depositors with… Read more »

An Islamic bank that doesn’t charge interest ?
I read about their inception into the U.K banking market and offering mortgages. All it seemed to me was a re-wording of terms. The customer still payed house price plus to the bank at a rate equal to standard interest repayments. Sorry Syed, more education (and convincing) for me please.

Coffee Addict
Syed. I’m a bit rusty on some of the principles here but I’ll do some more digging. Excess money printing, risking energy, resource and food prices (externally driven) leads to inflation which leads to the neccessity for exorbitently high interest rates which (in an Indian context) leads to a high impact on the poor and the the lower middle classes. And as credit dries up, the less wealthy are tempted to the borrow from the type of loan sharks that were observed (and proscribed) by the Prophet. My understanding is that classical Islamic banking principles included something of a call… Read more »
Syed Zahid Ahamd
I wish to add some more contents as desired by Joe to convince him how RBI or intrerest based banking system is inflation indian Economy. This interest based system has already spoiled the most advanced nations like USA and UK; and now we are marching towrads desaster. Just read my edited version of what I wrote earlier. RBI is inflating the Indian economy Syed Zahid Ahmad The present trend of recession in US and prevailed uncertainty in petroleum nations had provided an opportunity for India to pull capital resources from US and Gulf countries, but the practical approach of RBI… Read more »
Syed Zahid Ahmad

I wish to withdraw the follwoing words from my comemnts.
Our net real term GDP growth rate (= GDP growth rate at factor cost – rate of inflation) has considerably declined from 5.2% in 2005-06 to 2.9% by 2006-07 and fell down to1.6% by 2007-08. As the interest increases the cost of credit and output, even the GDP value is inflated through interest. Thus the higher GDP growth rate like 9% just reflects 1.6% real term GDP growth rate if inflation rate is 7.4%.

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