Vicious cycle -Prabhat Patnaik

-The Telegraph

A system without any steering control

An essential characteristic of modern capitalism is that the living conditions of millions of people are determined by the whims and caprices of a handful of financial speculators; indeed, that is what ‘leaving things to the market’ really entails. Consider what is happening in India today. There is a massive outflow of finance from the country because of which the rupee is depreciating  vis-à-vis the dollar. It has already fallen by more than 10% since February even though the Reserve Bank of India has spent over $100 billion, almost a sixth of the country’s foreign exchange reserves, to prevent such a fall, and even though it has been raising the interest rate almost in tandem with the rise in the United States of America to discourage such an outflow.

The depreciation of the rupee is exacerbating the inflationary process by raising the cost of imported goods, including essential goods like oil; inflation, in turn, is creating expectations of a further depreciation of the exchange rate  that become self-fulfilling: they encourage a further outflow of finance and cause  a further depreciation of the rupee. So the spiral of depreciation-inflation-depreciation goes on, fed by the rush of speculators away from the rupee.

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