don’t argue

An inflation-targeted central bank must keep the intrinsic value of a currency broadly constant in terms of its purchasing power. But what about its external value? While an exchange rate is determined by demand and supply in the foreign exchange market, as shaped by trade and capital flows, the core value of a currency over time also tracks inflation for conversion. Weakness, after all, transcends economic boundaries. In older times, it referred to a literal mixing of gold or silver coins with base metals to produce the “money illusion”. The modern-day counterpart is wealth creation far beyond production expansion, usually carried out by a currency issuer who is threatened by a large spending government. Since the effects have included increased budgets that let leaders claim leniency and reduced debt burdens that favor the indebted, the infirm who opt out of a real crisis hedge – when the real need of a cash injection In need – there remains an upside temptation for the mighty. Thus, it is even more important for a monetary authority to assert its control should there be a huge jump in prices. The US Fed is under surveillance. And let’s not pretend the Reserve Bank of India is not an exception.