The Gold Standard | Month-end lipstick effect

In the famous Tamil film, ‘Indian’ that was released in the 1990s, actor Kamal Hassan played the role of an aging ex-freedom fighter who kills corrupt officials and government servants.  In the movie, he chooses to kill a government doctor who would refuse to treat his daughter with third-degree burns unless he was ‘taken care of’. ‘Kamal’ would keep brandishing the knife in front of the doctor and the doctor would offer to pay him something to let him go. That would settle the issue. The ‘Indian’ would kill the doctor noting that these guys never change.

I was reminded of that scene when I saw a short message on my mobile phone that global central bankers had co-ordinated a cut in the dollar swap rates.

It is the last business day of the month. It helps to put a lipstick on the pig’s face.

Just in the evening, a good friend working for an internationally well-known global macro hedge fund was trying to convince me that even if the European Central Bank bought up all bonds of peripheral European countries printing Euros, it need not be necessarily inflationary as was the case when the Federal Reserve did that in 2009-10. He said that the crucial difference between then and now was that China had unleashed a credit boom and was buying up commodities needed for its infrastructure rollout and manufacturing sector. Now, China had no more credit bullets left and hence, ECB money printing would not have to be inflationary.

He made me pause and think but left me unconvinced. Absence of bullets does not mean that the gunmen would refrain from shooting. Witness what they did today. Further, if there is no China to stoke the commodities fire, there was no Arab spring then and nor was there a Iranian takeover of the British Embassy.

In any case, China too joined the lipstick party by cutting reserve requirements on banks with effect from December 5. The other central banks had also announced that their swap rate cut would take effect from December 5th. What a coincidence!

Financial speculation had not gone away. So, if the ECB printed, the price of crude oil might not double in price as it did from September 2008 to September 2009 but it could add at least ten dollars. Bank of Japan has published important pieces of research to that effect.

I hope my friend re-examines his logic after seeing the central banks’ brazen action aimed at month-end asset prices and the Pavlovian crazy reaction in financial markets to that lipstick measure of global central banks.

He should remember that some people never change. They are either removed from the scene or they continue to harm. They never reform.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.