Follow the Musketeers: One for all and all for one.

Yesterday the Reserve Bank kept interest rate unchanged at 6.50%, which had been expected by experts. In India low interest rates, regardless of retail inflation, is seen as a panacea for all economic problems, from low growth to low private sector investment. However, there is a fierce debate outside India about the cost-benefit ratio of low interest rates. The former Governor of the Bank of England has written that low interest rates borrow growth from the future by increasing short term spending but the effect is short term and results in low growth in the long term. Markets are focused on short term gains at the cost of long term growth, so take greater debt to buy assets. The crisis in 2008 was created by the then Federal Reserve Chairman, Alan Greenspan who kept interest rates low for too long, resulting in a real estate bubble. The subprime crisis was the result of the bubble collapsing. Perhaps Greenspan was lulled by low inflation because of cheap imports from China, which kept its currency weak by buying dollars, building up foreign currency reserves of over $4 trillion. Greenspan now says that western countries are stuck in low growth because of low productivity. It may not be that human beings are genetically hunter-gatherers, who are only concerned about instant gratification. That is there but it maybe because of different cycles. Ordinary people think in terms of decades. For example, saving for retirement, for buying a house or for children's education. Politicians think in terms of electoral cycles, lasting 4-5 years, while employees of financial firms think in terms of financial quarters, to increase their bonuses. Politicians are the most powerful because they set policies, central banks and markets react to those policies. Germany has been implacable with Greece for incurring excessive debts. Greece is having to borrow to pay back its loans, while the severe recession, with unemployment at 25%, means that its revenues are not enough to pay back the loans, which will keep on growing. Germany, on the other hand, is benefiting from negative interest rates, so that the government and businesses are getting paid for borrowing. Low interest rates allow the wealthy to borrow cheap to buy more assets, so that they are getting richer. The total value of all the real estate in the world is $217 trillion which is 2.5 times the total GDP of the world at $80 trillion. Which means that for the first time since 1880 more young people in the US are living with their parents than independently. The OECD has criticised governments for depending on central banks for growth and getting permanently trapped into a low-growth trajectory. Trouble is that politicians have to win elections, which means they are trying to increase growth in their own countries at the expense of others. In a globalised world that is causing low growth for everyone. Tough.