What is wrong with this analysis?

[gwho]

I came across this video on money.com regarding India's gold influx. I wanted some freedom-oriented analysis so I come to you guys.

http://money.cnn.com/video/news/2013/07/24/n-india-gold-imports.cnnmoney/index.html?iid=V_Taboola

 

I can't work through the steps of what she's saying. This leads me to think through them and verify them mentally myself. But I cannot do it. It also feels very wrong. This is one of those things where I know it's wrong, but cannot pinpoint or show it exactly. So I ask you for help.,
 

• 0:20 "The rupee is hovering at an all time low vs the dollar."
• 0:25 "Since India pays for gold in dollars, it puts a massive strain on its account deficit."
• 0:41 "To reduce gold imports, the finance minister doubled the tax on gold imports."
• 1:04 "If the people stop buying gold for ~1 year, the account deficit will improve and the stock markets would improve.

1) Milton Friedman explains the negative feedback on the value of currencies when you send them abroad. I'm not quite sure I understand Milton Friedman's scenario and dynamics fully, but maybe you guys can explain. Also note, Friedman's scenario is with both native currencis... whereas this Indian scenario is India buying gold (let's assume from America) with dollars... so we have to adjust our knowledge and approach a little bit, relative to Friendman's scenario with domestic currencies.

 

So here is an inconsistency I'm wondering about: Mainstream economists normally talk about currency wars, where each country prints more and depreciates the value of their nation's currency as if it were a good thing. So if the Rupee is low, aren't they winning the currency war naturally.... all the while getting ACTUAL PHYSICAL GOLD? sounds like a double win. So what is the reasoning behind this contradictory perspective? is it simply that the rupee is TOO low? if so, what is the criteria to to determine that?

 

2) So Friedman, as well as Bastiat, in his books, explains the fallacy of export-import = net foreign trade balance. I get this. The imported goods have an inherent value, so important doesn't necessarily mean a loss. so that equation is misleading. k.

 

3) So ofc raising import duties will reduce import volume. But is this good for the economy? The goal, supposedly is to raise the rupeand stock markets, assuming that importing gold with dollars is not good.

 

4) ok, if ppl stop buying gold... we hvae to work through all the mess of #1-3... but why would the stock markets improve???? and after we work through that one, why is that necessarily good, or better than getting gold?

[Guest Don C]

Hi. First off, let me say that I am not an expert in precious metals. (pm's)   However, I have been interested in the pm markets for a few years now, and I have found that most everything you hear about pm's in the mainstream media is outright false or highly misleading.  My main sources for information in pm's are: kingworldnews.com, jsmineset.com, and zerohedge.com.  You're going to have to dig through those sites yourself, I don't have links to specific articles.  There's a lot I could say about what I think is going on in the pm markets, but you're question is about a specific story on India, so let me give you my opinion, on what I think I know.   (1) 'Currency war'  India walks a fine line with the manipulation of the value of the Rupee. They import food and energy. If the rupee gets too low, people will begin to starve. In the very least they will vote out the current parliament in 2014. What else needs to be said about that?  (2) I would think exporting fiat for goods is a good deal, no matter the deficit, inflation aside.  (3)&(4)  When the stock market slides down, for what ever reason, people start to pull their money out of it.  The first thing people would probably do is hold cash.  But the rupee fell as well. So people look around for something else. Since the Indian people are not morons like most westerners, they already save in gold and silver.  Add to that a smash down in the pm prices (~$1200gold,$20silver), you set off a fury of pm buying.  Import duties mean nothing, especially since an arbitrage oppurtunity opens up for smugglers. ------ I think the analysis makes some sense on paper. The gov't thinks that they could slow down the importation and consumption of pm's.  Then the value of the rupee would rise, since they would no longer be exchanged for USD to import the pm's. The people would be happy because inflation would subside.  Then they would be confident enough to put their money back into the stock market. Happy days are here again! ----- Lastly, for now at least, why would the stock market rising be better than owning gold? Considering the fact that I believe the financial crises is not over, and that the nominal price of pm's will skyrocket, nothing could be better than owning pm's. But the gov't of India is only interested in holding power, and considering how corrupt they are, I'd say they don't give a you know what about the average poor person. Let alone the huge amount of pressure the US and GB puts on them to stem the import of physical pm's.