President Bush in his irrepressible way spoke out about the Indian middle class emerging as meaningful consumers and hence being at least partly responsible for the global rise in prices. This has come in handy for xenophobic politicians in our country (and we have many of those) crying themselves hoarse. Can diverting attention to imaginary foreign bullies help our government in dealing with the public clamour about prices of food-grains? It is always easier to blame others rather than face up to our own shortcomings. No government likes to see a rise in food prices. The Roman Emperor Diocletian discovered centuries ago that high food prices can be hazardous even to the unshakeable imperial throne. He experimented with price controls and as is inevitable when you ignore the rudimentary laws of economics, he failed. High prices overall are rarely an outcome of supply-side problems; inflation is always and everywhere a monetary phenomenon.

If we have global inflation today, it is because Mr Greenspan kept pumping up the money supply too much and for too long. He tried among other things to help President Bush fight a war without bearing its fiscal consequences. When money grows too fast, prices rise just as night must follow day. His successor, the intelligent and well-meaning Bernanke, has been forced to continue with easy money in order to save the financial system and prevent a Depression like that of the ’30s or a decade of de-growth as Japan has witnessed in recent times. The net result is that the inflation genie is out of its post-Volckerian bottle. The dollar is weak, aggravating the seeming price rise of commodities where international prices are quoted in dollars. As an aside, inflation is not that high in euro or Swiss franc terms. Despite our trading patterns (largely dollar-denominated), the monetary authorities in India have in fact reduced the dollar’s impact by strengthening the rupee quite a bit. But there is a limit to which they can hold inflation.

... contd.