Inflation Tolerances, Expectations and Socio-Political Strategies

Inflation Tolerances, Expectations and Socio-Political Strategies

Ganga Prasad Rao

Energy, Environmental and Mineral Economist

gangaprasad.rao@gmail.com

gprasadrao@hotmail.com

Disclaimer: The Author makes no claims to the factuality of the content, or the outcomes indicated in the designs proposed hereinunder.

In the long run, inflation is my Dad,.......... even Mom!

Introduction

Inflation is in the news.... yet again! This time, it is the right-leaning BJP-led government making a compact with the RBI to manage inflation within a broad-band. Sounds quite fair and uncomplicated. After all, it is the Government's business to make decisions that concern the fisc, and the Central bank's mandate to manage monetary policy, including inflation, in a manner consistent with the Government's short- and intermediate-term macroeconomic plans. But look deeper......and ask what if the RBI does not get it right?

It is universally known among Monetary economists that inflation, as a macro-phenomenon, bears an intimate relation to many fiscal and monetary variables, particularly the growth rate of the economy, M2 infusions, FX, Government spending, aggregate (product) inventories, budget- and trade-deficits, gold prices, as well as inflows and outflows of domestic and foreign capital – long and short-term. At a micro-level, inflation is determined by domestic- and foreign competition, raw-material prices and inventories, labor wages, capital rents, and technology in the various sectors of the economy, and by household-spending, -savings and investment decisions. Does the RBI, by its acquiescence to the inflation compact with an avowedly right-leaning political party, claim to be aware, monitoring and manage all these diverse endogenous and exogenous, micro- and macro-, domestic and global variables? Or, does it to adjust its M2 infusions and repo rates in balance against an aggregated 'rest-of-the-inflation-world' variable to ensure short-term price stability? Can we afford a subsidy-laden economy with run-away inflation, or just as ominously, an economy comprised of a large blue-collar segment that slips in to recession? One that falls out of step with the global monetary system due a politically-motivated and artificially strong or weak currency? Or, one that permits mismatches in wages and DA/COLA adjustments and risk popular protests? Even ill-deserved returns in Gold and IIBs to the ill-deserving, but foresighted and strategic (global) investor?

Given expectations in political circles and among capitalists is, de-facto, the target inflation rate, one asks the further question, to what extent are these targets, presumed predicated on M2 supply, cognizant and accommodative of product-quality related-, and competition-attenuated/-engendered inflation? Is it (short-run) inflation targeting exploiting FX reserves, and tight-rope repo rate balancing?, (intermediate-run) inflation management with M2 infusions?, or (long-run) inflation-assurances built around IPNs issued abroad? Besides, given politicians and capitalists conspire even as opposites, the effectiveness of inflation-hedging mechanisms, such as the IIBs, in curtailing inflation is called into question. These hedging instruments, rather than serve as an inflation-abating mechanism, instead facilitate the 'heads-I-win, tails-you-win' volatility designs of those conspirators whose inflation expectations are de-facto, endogenous inflation targets. Does the short-run political management of inflation by the RBI anticipate the overt and covert conflicts of interests that are endemic to the Bond market, the IIBs and the FX market? Is NGDP targeting by a Government following a Populist-PV-Nominal paradigm even consistent with the RBI's short-term inflation targeting? How might we model such dual-targeting in the economy? These are weighty issues on their own, but the focus, here, is not as much on challenging the existing inflation policy, as it is on exploring an alternative socio-political paradigm to manage inflation tolerances and expectations in the short-, intermediate- and long-run.

Inflation Expectations........But what about Tolerances?

Inflation plays a central role in any modern economy built around Capitalist PV-economics that follows a 'Nominal-PV-Populist' growth-oriented paradigm, and which enlarges by adopting new, productivity-enhancing technologies. Symptomatic of capacity-constraints, production- (and environmental) inefficiency on the supply-side and/or an unsustainable pace of lifestyle expansion on the demand-, inflation is also a monetary phenomenon resulting from the sub-optimal, short-term monetary and fiscal policies that accompany a 'growth-oriented' Populist-Nominal paradigm within a technology-constrained, 'open-cycle' economy. (A Closed-cycle economy would sustain an economic boom longer without inflation than would an open-cycle economy).

Post-Keynesian neoclassical economics has stressed the importance of uncertainty and expectations to model inflation. Expectations generally involve a look-ahead period consistent with the term of various short- and intermediate- financial and monetary instruments. Pertaining to a group, they are revised continually- those revisions could be rational, adaptive, historically-projected, or, stationary. Tolerances, in the context of monetary and financial variables, represent a personal or entity-specific concept distinct from expectations relevant to the group. They represent the compromise accepted by the particular entity, group or class given FV-, PV- and BV/EV-trade-offs. One could define tolerances with respect to different variables for different entities and groups – consistent with their ideological- or functional role, monetary stakes, and/or financial investments. Thus, one may examine tolerances for inflation in the context of the variation of Gold prices, prices of goods and services, FX, interest rates, prices-, yields- and returns to various assets and monetary instruments, with inflation, for different classes of stakeholders (as beneficiaries or impacted).

Individuals, groups and political/financial/corporate entities have expectations and tolerances. One could define inflation expectations to be either exogenous or endogenous - the former implying lack of control over its formation (analogous to price-taking behavior), and the latter, self-determined expectations or implied control upon it (implying either a conflict of interest, or, the power to influence it due size or authority). In fact, endogenous inflation expectations are tantamount either to the political or monetary significance of the expectations-forming entity. Inflation Tolerances, are, by definition, always endogenous since they are 'self-centered', and hence represent constrained optimization post evaluation of trade-offs for that particular entity or social class.

Tolerances generally pertain to the current period (though future tolerances too may be elicited) and are contingent upon entity-specific trade-offs, ie, upon the set of prices, returns and incomes of the period and other exogenous factors that impinge upon the rising-, and the falling-arm of the inflation trade-off. An important question involves how inflation tolerances of the present modify into expectations for the future. Given PV tolerances are obtained as the intersection of PV streams, one could posit the existence of FV-Tolerance and FV-Expectations distinct from PV-Expectations. A high PV-tolerance generally implies acceptance of high PV-inflation and FV-expectations of more of the same. A low PV-tolerance for inflation need not correlate either with FV-tolerance, or with FV inflation expectations. It is also germane to indicate that entities for whom inflation is a primary and critical concern – whether for political, monetary, fiscal, or social reasons – anticipate it in FV streams (such as Futures, Forwards and Perpendicular instruments). Inflation is a PV-concern for those whose utility or bottom-line is impacted negatively in the present. Elsewhere, inflation is secondary to various priorities; such entities only monitor inflation in BV-streams.

The nature of averting and mitigating behavior to inflation is revealing and relevant to the elicitation of tolerances. When the Rich have a Tolerance-Expectation difference, they pre-empt and avert that difference with hedges in financial markets by way of IIBs, equities, investment re-allocations, and FX-moves. Their lifestyle is largely unaffected. The rest, may be classified into those with savings and livelihood (the Middle-class), and those without (The Poor). The former, given their investments in Gold, seek the permanent income lifestyle, and save less in inflationary times. Thus, they display minimal aversion and do not actively mitigate inflationary impacts. The Poor represent the most affected group. The subsidized among them would be expected to display less elasticity to inflation than those un-subsidized. The latter are most sensitive to inflation in Essentials, and the group that displays the most significant political reaction. If inflation tolerances are determined by trade-offs relevant to the various inflation stakeholders/social classes/economic entities, the same are influenced by hedging mechanisms such as the IIBs. Access to IIBs, at virtually zero-transaction cost, implies easy and universal hedging of inflation expectations in the society. While the specifics might vary, the general expectation is that a zero-cost hedging mechanism permits various entities to accept inflation and hold higher inflation tolerances.

Inflation tolerances may be characterized contextually as financially-, monetarily-, socially (cross-sectionally/inter-generationally)-, politically-, and family-tolerated inflation. The underlying basis for these expectations and tolerances vary across inflation-classes. Whereas the financially-empowered capitalists are rationally-informed of inflation for reasons their wealth at stake, their up-to-date knowledge and tracking of macro variables, and because their views carry weight with policy makers, members of the unsubsidized middle-class base their expectations on retail prices and hard-to-change political and social/street views. Thus, while tolerances closely track expectations for the Rich, and imply a narrow differential, that differential is larger for the middle- and subsidized-classes and converges conditionally upon an improvement in their financial security over time.

The differential between group expectation and entity-specific tolerances may further be explained by socio-economic, financial and monetary variables. Now, the Ruling party, as the ultimate public authority, has both, a tolerance and an endogenous expectation. That tolerance is the equilibrium between a (political) cost of inflation curve and benefits of inflating curve. While the costs are evident in public disaffection and FX losses, the benefits are largely shared alpha rents from the PV capital market and gains in term negotiated, SWF-issued, FV-instruments. Similarly, the financial markets, bankers and capitalists, with substantial ability to anticipate and hedge against inflation, do not mind high inflation; ie, their tolerance is high because they share in the alpha rents of inflationary policies, but pay in a diffused manner in bond returns. Their expectations, too, are highly correlated with monetary and political authorities. In a sense, this class is never surprised. Insurance Houses and Infrastructure firms represent an exception, an outlier in inflation expectations. Their interests are best served in a low-inflation LQ-economy. The middle class, with no control on inflation, has both an expectation and a tolerance; they hedge for inflation in Gold and pay for it in their savings. The Subsidized Employed, strange bedfellows with Employer-Capitalists as concerns inflation, have a tolerance influenced by family welfare and expectations tied to the fate of the economy. Self-employed Farmers resemble domestic firms that seek a divergent inflationary regime characterized by externality-suppressed, low input inflation, but (lack of) competition-abetted, high product inflation. Their tolerances are evident in their farming choices. Finally, the subsidized, poor class (whose votes are contingent upon survival, short of exploitation) has neither a stake in forming expectations nor tolerances, but have the numbers to force political parties to take cognizance should they feel the pinch in unsubsidized essentials and switch their faith mid-term.

Whereas intra-group/tier divergence of expectations from tolerances imply a sectoral/functional concern, the expansion (or shrinking) of that divergence across inflation classes and tiers could be symptomatic of structural inefficiencies in the economy that might express themselves in, lower, unbalanced growth, accompanied with political- and social-instability and financial volatility.

Implications

There are potentially profound and multifarious implications of the distinction between inflation-tolerances and -expectations. Setting monetary policy around endogenous expectations of the wealthier and politically-empowered sections of the society, that are very different from constraint-optimized endogenous tolerances of the rest of society, is ethically-, morally- and theoretically-flawed. The existence of endogenous expectations immediately raises questions of propriety and conflict of interest in the Bond market and in markets that trade inflation-hedging instruments, such as the IIBs and FX, and in matters involving various monetary and financial policy parameters and variables, as for example, M2 infusions, repo rate, bond issuance, budget deficits, FX-intervention, or the Subsidy budget. Elsewhere, the distinction is crucial to union wage negotiations, price-determination for utility services, and COLA/DA and the indexation of loans, whether to business or consumer. Given inflation figures in the determination of real rates and discount rates, an improper PV measure of inflation implies biased, if not invalid measures of real discount rates as well.

Inflation Tiers and the Socio-Polito-Economic Context

Now consider a hierarchical dis-aggregation of inflation to accommodate the realities of socio-economic stratification in a Populist-PV-Economy. Toward this design, consider the 'LokPal-SWF-Lokpal Opposite' Inflation-Trio monitoring and participating in the oversight and management of five hierarchical inflation aggregates:

- the 'Ivory Tower' comprises of the Ruling party, the SWF, and the Opposition, whose goal is Private FV Wealth creation. The SWF, as the protector and guarantor of national wealth, holds a significant capital market portfolio, issues infrastructure bonds, and transmits a 'Perpendicular-100% FV' abroad toward the issue of Land-Realty FV-based promissories. Political parties, beyond maximizing their vote share (the Ruling party) and overall voter participation in elections (the Opposition), are known to hold their reserves in $/R (and -GETFs), and move them between the two for investing in capital markets, as part of their 'patriotic and strategic term negotiations' with the nation's SWF. These parties seek an inflation rate consistent with their electoral objectives, their SWF-term-negotiated and hedged monetary-stake, and an FX that obtains them the largest gain given their respective stakes within an inflationary Populist, PV-hastening, nominal regime. This tier, due its legislative power, and SWF-pre-negotiated term hedges and/or financial clout, is notable for its endogenous inflation expectations that are anticipated in to their PV-inflation tolerances.

- the 'Economy Circle' comprised of Insurance Houses-Infrastructure Firms-Product Quality-Lifestyle Quality, PQLQ Bankers. This tier seeks PV-FV Sustainable Growth. In this tier, Insurance Houses set their FV-PV-BV inflation tolerances in future-FV returns from Domestic Bonds, current and competitive returns from R-IPNs, and trailing returns in domestic equity-BV contexts. Insurance Houses, unlike Green-EO-Subsidy Financier, GEOSF Bankers, seek to maximize the return from their SWF-issued R-Bond portfolio (as obtains when the Bond spread is minimized) and simultaneously, secure their $-IPN Perpetuity abroad by shrinking R-$ FX volatility. These moves are conducive with a sustainable, low-inflation economy. They also participate in the SWF-operated Infrastructure Bond market against GEOSF and Product Quality-Lifestyle Quality, PQLQ Banks. Public Infrastructure Firms operate between FV-Asset creation and PV-Asset utilization. Infra-firms, known to leverage political connections, seek to modify inflation politically in both FV- and PV contexts. Infrastructure firms must necessarily match Gold in both PV- and FV contexts. Hence, they seek an inter-temporal inflation profile conducive to their outlook. Capitalist-PQLQ Bankers play a PV-Bet against the threshold of short-run Gold-ETF returns, but seek to equal it in the Long. PQLQ Bankers are FV-PV Bankers seeking to aggrandize from a FV Product-Quality, PV-LQ -oriented economy/society. They exploit PV-Inflation in their current business and anticipate FV-Inflation into their hedging and investing strategies.

- the 'Public-Capital market tier' comprising of Quality-Conscious Cost-Competitive, QCCE Firms partnering Long Institutional Investor, LII, in the opposite of Non-QCCE Firms partnering short-sighted Retail Investors. This aggregate seeks, both, PQLQ- & Subsidy-maximizing FV-PV Public Wealth creation. Whereas the LII and QCCE firms are FV-focused and protect themselves from Non-QCCE firms with an aural-(Bond) benchmark, Retail Investors/Non-QCCE firms rely squarely on PV streams originating in PQ-infra- and Subsidy-economy to determine their inflation tolerances.

- the 'Subsidy tier', represented by SU – SEF:GEOSF Bank – SE, where SU represents the Subsidized-Unemployed, SEF the Self-employed Farmers, GEOSF the Green-EO-Subsidy Financiers, GEOSF Bank and SE, the Subsidized-Employed. The Subsidized Employed, whose wages are tied to working hours, and who park their savings in FDs of various terms, seek an inflation rate that balances incremental workplace risks from extended work hours against increasing demands on their leisure time. The Subsidized Unemployed must contend with the pressures of inflation to the extent they consume non-subsidized essentials, goods and services that are demanded by the middle classes as well. The Subsidized Unemployed set their tolerances entirely with BV lines and flows. Between the two live Self-employed Farmers who sell their produce (essential perishables) through the Subsidized Unemployed, and either substitute, or work for the Subsidized Employed. The GEOSF Bankers, overseen by the Lokpal, employ a 'Bakey Resource Monetize' strategy to pursue a 'PV-BV-EV' Social-Security and Subsidy-intensive, per-capita, nominal economy. GEOSF Bankers, whose business it is to secure profits from sustainably financing EO-subsidies, position themselves between the two subsidized sub-groups, and trade across IIBs, (infra) Bonds and FX, to support EO-subsidies with funds obtained from attenuating inflation in the IIB market, sub-aural appreciation from the (infra-) Bond market, and irrational FX-volatility. They are hedged cross-sectionally in PV between IIBs and the FX market, but across the BV-PV-FV divide temporally in (infra) Bonds of various tenures.

- the 'Private tier' represented by the 'Consumerists - Lokpal Opposite – Middle Class Households', seek a stable society comprised of upwardly-mobile FV-sustainable families. While Households seek an inflation rate that balances long, FV gain in Realty against short-term, PV gains in their gold savings, Consumerists seek a high lifestyle supported by Dividend-income, low-prices and access to easy credit. The Lokpal Opposite, nominally the Rich Representative, ensures against the undue pampering of middle-class families by politicians following Nominal-PV-Populist policies.

With the above inflation tiers in place, it is opportune to consider, beyond the SWF, two public entities: the Lokpal and the Lokpal-Opposite in a transparent public design that serves as parallel fences on the economy to exclude, both, boom-time inflationary excesses and recessionary anxieties. The Lokpal, who serves as the 'Public Opposite' of elected representatives, is a public authority who stands for the social, political and economic rights of the masses, particularly the disenfranchised. As part of his jurisdiction, the Lokpal enforces his will upon the economy to avoid irreversible-hurt to members of his constituency. The Lokpal-Opposite, a representative of the Rich, protects his constituency from the left-leaning populist-pressures in a nominal economy. In the context of the socio-political entities that exist within a Nominal-PV-Populist economy, the SWF, which seeks to insure a sustainable future for the entire nation, strategically partners the Lokpal (and his Opposite), Insurance Houses and Infrastructure firms, to institute a market-based mechanism to monitor, manage, and if necessary, interrupt the inflation-exacerbating economic boom, and force an inflation compromise that obtains an inter-temporally just solution for the lower and middle-classes, and a peaceful, law-abiding society for the Rich. Toward this design, let's first examine the behavior of the various stakeholders in some detail.

The following examines tier-specific incentives and the logic underlying their decisions in greater detail:

For reasons of power, authority and conflicts of interest that pervade parliamentary governance, it is prudent to distance the Ruling Party from the Opposition by wedging-in the SWF. The SWF, as the nation's economic institution with an eye on the long future of the economy, seeks not a monetary profit, but the long-run economic development of the nation secured by balanced, PQ- and LQ-enhancing growth (that is perpetuated intergenerationally in to another macro-prudential cycle by EO-subsidies). Post democratic elections, the SWF enters in to term-negotiations with the Ruling Party and the Opposition as concerns long-run PGDP and FX, and enters in to a 'compact' with them. At the start of a new term, the SWF assigns its equity- and bond portfolios to the newly-elected House, and recovers them post settlement as per the Compact at the end of the regime Since its patriotic interventions in the economy and the capital markets aggrandizes the Rich over the Poor, the SWF measures the success of its objectives not in $-GETFs or, IMF-sponsored $-ILPs, but in the strength of the Rupee-FV and R-IPN PV. It issues tranches of Real-FV Infrastructure Bonds of various tenures at home (to PQLQ- & GEOSF Banks and Insurance), R-IPNs abroad (to Insurance), and holds futures/hedged positions in Rupee, Land-Perpetuity/Realty-ETFs and, R-GETFs. Since the strength of the Rupee is determined by many influences, in particular, the strength of the economy, monetary infusions and FX – all of which influence inflation, the SWF joins, on hand with the Ruling Party, the Lokpal, his Opposite, the Opposition, and on the other, with Insurance Houses and Infrastructure firms, to seek a sustainability-ensuring, growth-assuring, politically-astute and PV-enriching, FV-prudent inflation rate. The Lokpal, himself a Subsidy Financier in GEOSF, distances the SWF, beset with political conflicts of interest, from the 'too-big-to-fail' Insurance Houses, and holds opposing positions to the latter's inflation-attenuating investments. Thus positioned, the Lokpal could, if he cared, partner his Opposite and ride the macro- inflation-interest rate cycles to his advantage. The 'Lokpal-Opposite – Private Nominee– Rich Representative', positions himself to exploit, both, the gold- and realty appreciation-seeking middle-class households, and the inflation-inimical Consumerists. He is long on (infra) Bonds (in the opposite of GEOSF Bankers), short on Gold, and takes an inflation-friendly, long stake in IIBs.

Politicians have different incentives depending on which side of the bench they are on despite the fact both share, if asymmetrically, in the gains/losses in the SWF Equity & Bond portfolio. In determining its inflation tolerances and expectations, the Ruling Party seeks to maximize its term-end $ FV balances as determined by its economic stakes and monetary hedges in the SWF term-negotiations and the post-term FX at which it moves its gains abroad. It accepts a 'Gold Boo Oo FV' benchmark to claim the right to apportion a 'Bankers ZS 2 PV Volatility' line (a line offered by Bankers to recognize the business created by politicians leveraging their legislative prerogatives) in the Capital markets, and trades-off a rising with-inflation 'Private Gain 2 PV – Public Capital Appreciation (B)Oo Mirror FV' in the SWF-Equity portfolio against a rising, 'Private FV Loss' (SWF's Real FV Infra-Bonds) to set its inflation tolerance at their intersection. (The nominal Capital Appreciation, CA, obtained on SWF's Equity portfolio serves as the cross-sectional PV-Hedge against losses in Real infra bonds). On the other side of the Bench, 'patriotic' Opposition parties employ a similar strategy to obtain their inflation tolerances. They equate at the margin a falling ('Public (L)Ookey FV - SWF CA Ookey BV - Private Boo P/Gain PV') against a rising 'Private Ookey FV Losses - SWF Lesson FV - Public Foo BV' expressed in (depreciating) R-Forwards. (Notably, whereas the Ruling Party limits its capital appreciation gains to Gold-justified inflation ('CA Oo 2'), the Opposition, impenured post its election losses, seeks gold-unjustified, unsustainable inflation ('CA Ookey') for its BV-gains, albeit risking public backlash at the next elections).

Members of the Parliament trade-off their prospective constituency vote-shares (that fall with inflation) against their FV-slice in the 'Lokpal Public Land Appreciation Perpendicular-SWF Perpendicular Public Political Endowment, PPPE $ 2', that rises with inflation (and which feeds the 'SWF Private ZS Public FV Line'), thus determining an optimum, if MP/Constituency-specific inflation tolerance. The Ruling party and the Opposition MPs therefore prefer different inflation rates consistent with the share of public- and private land in their constituency, constituency-specific voter socio-economic characteristics, their issue-salience, and the magnitude of their FV-slice. Their differences drive the intra- and inter-party policy debate in the Parliament as concerns inflation within the context of it's influence on broader fiscal and monetary policies.

The Patriot Circle comprises of Insurance Houses, Infrastructure Firms and PQLQ Banks. Insurance Houses are overt advocates and enforcers of sustainable, low-inflation policies. In the financial markets, they seek shrinking spreads, low bond yields, and high returns. Due their portfolio weight in the capital market, their private tolerances, de-facto, carry into their market/public expectations as well. Known to induce conflicts of interests in the Bond market, Insurance Houses are invested in bonds of various tenures including SWF-issued real-infra bond tranches, domestic equities, and in SWF-issued Public R-IPNs and in IMF-sponsored Private $-ILPs ('IMF Land Perpetuity') abroad. The latter two are SWF-sponsored, Land-Realty 'Mirror-Perpendicular-100%FV' lines issued by the nation abroad; they are quality-differentiated land/realty-backed, rolling promissories that enable owners to seek funds to which they might apply the 100% FV to, (albeit, over variable periods of time).

As shown in the schematic, the issue of WB-sponsored R-IPNS and IMF-sponsored $-ILPs, upon quality-differentiated 'SWF-Mirror-Perpendicular Land/Realty-100%FV' Promissories', to domestic Insurance Houses abroad, permits the further issue, on one hand, of domestic, IMF-sponsored Bear-Bull SGDP-Hedge Bonds and a 'WB MPs Constituency ZS Fund', and on the other, WB-sponsored 'Public Perpendicular Political Endowment, PPPE 2 $', and 'WB Private Land Appreciation Perpendicular FV key', plus an 'WB SGDP Perpetuity 2 – IMF Insurance Mirror E'. The R-IPNs and $-ILPs – papers that leverage the SWF-100%FV to promise a 100% appreciation on fresh investment - when purchased by domestic Insurance Houses abroad, serve as a securitizing counterweight to their domestic portfolio of (Macro-cycle) 'Lokpal-Callable Bear-EO R-Bonds', and 'LokPal Opposite-Putable Long EO-Bull R-Bonds'. The issue of these SGDP-hedging, Bear-Bull bonds obtain the SWF, the 'ILP $ FV - Macro(cycle) 2 key' line - a line stripped by the SWF off Insurance Houses that are the recipients of the 'WB SGDP Perpetuity 2 key-IMF Lokpal PPPE Mirror-LO Macro-cycle E' line (thus and in effect, stripping Insurance Houses of the 2'). The 'ILP $ FV- Macro 2 key' is IMF's favor granted in return for the 'Land-Realty Mirror Perpendicular 100%FV' vested with it, which it leverages to secure its not insubstantial Gold (and Gold-monetized Gold-ETF holdings.)

An increase in inflation, that causes equities (and long bonds) to plateau if not fall, (short) Bonds to rise, rupee to fall, but R-denominated Realty to rise, reflects in a higher $-ILP (and net R-IPN) portfolio worth. Insurance Houses, that exit equities and move from long bonds into shorter Bond tenures domestically, anticipate the fall in Rupee to upscale their R-IPN Bond counterweight into $-ILPs abroad, and overcome the negative macro-cycle impacts of a Populist-PV-Nominal economy. Thus hedged inter-temporally and cross-sectionally, Insurance Houses pay to overcome their conflicts of interest in the Bond market, exclude Bonds from the determination of their inflation tolerance, and instead equilibrate at the margin the 'Equity (Futures) Appreciation FV 2' (a line that falls with inflation, and which they may or may not partake of) against an 'IMF Lokpal PPPE Mirror-WB SGDP Perpetuity 2 key-LO Macro-cycle E' that rises with (PQLQ) inflation, to set their inflation tolerance in the short-run.

With their political influence and social clout, the Nation's Rich Capitalists, who own PQLQ Banks, are paired in the opposite of the Nation's Infrastructure firms tied to the long-term development of the nation, for which reason and against whom they are hedged in complements. PQLQ Bankers participate in the SWF-operated Infrastructure Bond market to lay claim to, and exploit the positive FV-externalities associated with infra projects for which the Bonds raise resources. PQLQ Bankers, who operate under an 'Exceed-PV: Meet-FV' Aural-benchmark, anticipatorily invest in sectors indicated to benefit from positive externalities engendered by Infrastructural investment ahead of the market. They are also known-supporters of an inflationary, transaction-maximizing nominal regime. While they benefit from a 'Transaction PV 2- M2 2 FV' in such regimes, PQLQ Bankers must also bear an 'IIP Boo FV - Gold-ETF Inflation Hedge 2 PV Pay' for overt and active participation in the inflationary, nominal economy. Their inflation-tolerance is the intersection of the two rising FV-PV curves in the Returns-Inflation space. It may well be termed the 'nominal equilibrium rate of inflation', an upper bound to inflation expectations in the economy.

Infrastructure firms have an interest in the construction and operation of public infrastructural assets and facilities; ie, they operate in both PV- and FV-contexts. Due their nation-building and public-FV nature, the SWF steps in to underwrite resources for the construction of these assets and facilities with, both, short-run, PV-Nominal Working capital funds, and Long-run, Real-FV Infrastructure Bonds – the former sourced in the volatility in the latter, and the volatility itself sourced in perceptions and expectations held by Infra-Bond market participants - PQLQ Bankers and Insurance Houses, around positive- and negative externalities - the volatility gains to the former justified as the monetization of the conflict of interest the latter cause in the Bond market. Infrastructure firms bid for SWF-sanctioned infra projects with the auctioned proceeds from the placement of SWF-issued, inflation-hedged, Real-FV Infrastructure bonds in PQLQ-, and GEOSF Banks and Insurance Houses. The (pre-tax) cost of capital of Infra bond proceeds is the bond yield discounted by time-varying volatility gains/losses (that could be generated/motivated as squared deviations around expected positive and negative externalities that accompany prospective infrastructure development). While the SWF has a time- and volatility-dependant upward-sloping supply curve for infra-bond-sourced, public infrastructure resources, infra firms have different demand curves for those funds as determined by the projects on hand, or those bid for, their capital-intensiveness, and inflation-sensitivity over time (a function of how raw-material-intensive, wage-intensive, and time-consuming the projects are). Thus, the SWF disburses infra-bond-sourced resources to bidding infrastructure firms for public infrastructure projects by issuing them with incrementally-higher cost funds by descending magnitude of 'net externality benefits' (ie, positive externalities net of the negative) unmindful of project size. The supply of working capital for infrastructure projects, generated by net/combined externality-linked volatility in infra bonds, may be disbursed by favoring infra projects by descending project size subject to passing a net positive externalities threshold. (In turn, the larger public infra projects await, even seek, induce and permit, a period of bond-volatility in order to access volatility-discounted, lower cost of capital, government resources, and further maximize positive spillovers, while pre-emptively anticipating and minimizing negative externalities).

The PV-focus of public infra firms originates in the fact wages (and raw materials) constitute a significant share of short-run PV-costs and -inflation. Further, in the short-run, inflation determines, both, their nominal cost of PV-working capital funds, and the Marginal Return on ('owned') Assets, MROA. Whereas the (nominal, PV-) cost of working capital increases with inflation, the MROA declines when inflation reduces the intensity of use of existing infrastructural assets constructed and operated by them - thus, and post normalizing them to a common denominator, permitting the elicitation of PV-inflation tolerance as the intersection of the rising marginal rate of working capital funds and the falling MROA. In the long-run, Infra firms that operate with SWF-issued inflation-protected, Infrastructure Real-FV bond funds, nonetheless vary their level of activity to equalize cross-period (nominal) marginal costs (wages and non-material costs not borne by the Government), and prefer an inflation rate consistent with that strategy (This follows from the inflation-related conflict of interest of their benefactor, the SWF – it both authorizes inflation-engendering infrastructural projects, and issues inflation-hedged Real-FV Infrastructure bonds to avoid them – that is passed on to them). By reallocating activity across periods, Infra firms succeed in holding down wage and raw-material inflation; this strategy permits them to bid aggressively in the allocation of working capital funds, and maximize their inter-temporal business growth and profits. In the long-run, Infra firms may be conceived of, given their freedom to vary activity rates across periods, as seeking a temporal inflation rate profile that equates their expected (real) marginal costs toward their SWF-underwritten material and equipment costs. Thus, infra firms seek one PV, and two FV inflation trade-offs: they seek an infrastructure-user (PV-Consumerist) inflation tolerance that maximizes the current period intensity of use of existing infrastructure assets, and simultaneously, minimizes their costs of PV Working-capital funds; they also set their expectations of future (FV) inflation two ways – they seek a levelized nominal marginal cost across periods for SWF-unsupported wage and other non-material expenditures, while also equalizing real, inter-temporal marginal costs (toward material and equipment expenditures) by redistributing activity level across periods. Thus, infra firms display, beyond a tolerance for PV-inflation a lower bound FV inflation-tolerance for SWF-unsupported expenditures, and an upper-bound FV inflation-tolerance as concerns SWF-underwritten material and equipment expenditures. These FV-PV equilibrations and derived tolerances obtain a firm-specific and implicit real discount/interest rate that they leverage to benchmark various potential investments (and, price tolls). While the former amounts to preferring a PV-Consumer inflation that maximizes current period revenue function, the FV tolerances generate inter-temporally optimal cost-minimizing producer inflation expectations that are thence transmitted to the political powers ruling the nation for appropriate cognizance. Given infrastructural activity is capital-, raw-material- and labor-intensive, and has a substantial gestation period, the business interests of infra firms are best served with minimal-PV, and minimal-FV inflation. This two FV-rates may well be termed the 'Real, bounded, equilibrium rate of Inflation'.

Moving on to the Public tier, while QCCE firms, partner offshore, long institutional investors, LIIs, aligned with international business and industrial standards, to promote a PQ-LQ economy, Non-QCCE firms, pressured by retail investors, RI, seek short-term profit maximization. (This 'LII-RI' face-off in the equity market as concerns sustainable-capital appreciation to ensure valuation-sustainability, or in its opposite, rapid-capital appreciation to assuage EO-constituencies, in the general case of RI-impatience and short-sightedness, causes an 'Axe-End-Volatility key' to trigger with a market crash. In such instances, the LII takes the Axe, the GEOSF Bankers the End, while the Infrastructure Bond market participants, favored with the Volatility key, exploit the same, judge the face-off, and transmit their observations in to political circles.) The LII and QCCE Firms (the latter, likely, also Exporters), whose revenues (and equity returns) correlate with inflation, share in the Equity market 'Capital Appreciation, CA 2 FV', park their gains in $-GETFs, offer an 'LQ Oo FV' to the Ruling party, an 'LQ Bakey BV' to the RI, a 'PQ 2 FV' to PQLQ Bankers, who strip the 2 and pass the FV key to the Ruling party, a 'PQ FV Oo(key) Bakey' to the Opposition parties as appropriate to its strength and leanings, and a 'PQ BV' to Non-QCCE firms whose top line is hurt due falling sales in inflationary periods. They must also issue a 'PQ Inflation Hedge 2' line to monetary authorities (the Bakey of which channels to Commodity markets and Commerce?), who hedge PQ-linked inflation in IIBs. Together, and at a macro-scale, the LIIs and QCCE firms prefer an inflation rate that equates, at the margin, returns from a rising 'LQ CA 2 FV' as expressed in 'Realty ETF PV', (Realty being the repository of FV-sustainable gains), and a rising $GETF PV, the global store of high-quality capital, thus and in effect, trading-off and transferring domestic FV potential against, and in to the global ocean of fungible capital, $-GETFs. As concerns Retail Investors and (domestic) Non-QCCE firms, they set their macro/aggregate inflation tolerances by equating at the margin, a rising 'R-GETF PV', against a falling 'Equity 2 PV'.

(On a micro scale, both QCCE firms and Non-QCCE firms are permitted a modicum of pollution in the boom phase of a nominal economy due production inefficiency justified by social equity pressures. While the former trade-off a rising 'IIB Oo FV-PQ Efficiency 2 FV' against a falling 'PQ EO Pollution Oo-(Env) Sustainability Bond A – LQ Social Sustainability Bond B FV', the latter choose to operate at an inflation as obtains from the intersection of the rising 'EO Pollution Ookey-PQ Ookey-SSB Ookey' and a rising ''IIB Boo-PQ Efficiency Boo-EnvSB Boo Bakey PV'. In bust however, QCCE firms receive an 'IIB Sustainability Ookey-PQ Efficiency Boo FV- LQ Env SB B' line that shrinks(?) with inflation in the opposite of a) a 'Bakey BV' portion from PQLQ ESH-line that rises with inflation for the ESH- unsustainability it covers, b) a 'Bakey (Raw Material) Inventory Monetize' line - an unused Inventory working capital line that also rises with inflation, and which PQLQ Bankers transfer to other sectors of the economy, and c) a 'Bakey Profit-Bond Return SV Match' line to Bond-hedged Capitalists to dissuade them from exiting equities. In Bust times, PQ-deficient firms are sufficed with a shrinking portion from 'PQ Bakey BV, whereas less cost-competitive firms are squeezed with a rising 'CC Merge Boo - LQ EV'. The equilibrium between the two lines obtains the inflation tolerance for the aggregate of Non-QCCE firms, and conceivably, signals firms at risk of closure as well.)

Green-EO-Subsidy Financiers, GEOSF Bankers, favored with EO lines from virtually every quarter, whether SWF, Lokpal, Insurance, Infrastructure, even LII and political parties, are positioned opposite Self-employed Farmers and between the Subsidized Employed, SE, and the Subsidized Unemployed, SU. They participate in financial markets, albeit with non-monetary objectives. Employing an R-GETF medium-cum-benchmark, they arbitrage IIBs against Infra bonds, trade (Infra) bonds of various tenures across the Yield-curve, and pit Infra bonds against Rupee-PV in the FX market, to determine their inflation tolerances. In times of inflation, unlike PQLQ Bankers who move in to short Bonds, GEOSF Bankers exit short Bonds two ways: to both extend and gain from the appreciation in IIBs, and to harvest gains from volatility induced in Long Infra Bonds upon exit by Insurance. They also exit the FX market with R-PV Gains and enter the Long Infra-Bond market to exploit the same in volatility. In non-inflationary times, GEOSF Bankers exit IIBs (and Long Infra Bonds in favor of Insurance) to enter short Bonds and shore up the Rupee-PV. (One could propose that Infrastructure Bond returns correlate with the perceived nature and magnitude of externality associated with infra-projects; infra-bonds with net positive externalities would trade at a premium, and those with net negative externalities at a discount. GEOSF Bankers would exploit volatility generated between the PQLQ Bankers' search for infra bonds associated with positive externalities, and in their opposite, Insurance Houses seeking to jettison infra bonds associated with negative externalities). By converting the arbitrage between inflation-gauging IIBs and competitiveness-gauging FX in to gold/externality-benchmarked trades across infra bonds of different tenures, GEOSF Bankers ensure current EO-subsidies exploit short- and long-run sustainability excesses and deficiencies in other sectors of the economy, simultaneously turn the subsidy-regime sustainable and perpetual, and further ensure that the society pays a 'subsidy-tax' that is in fact their profit for financing and, de-facto, administering the system. GEOSF Bankers could set their inflation tolerances in multiple ways: for instance, they might choose to operate at the intersection of the rising 'IIB Subsidy Inflation 2 BV' and a falling 'Rupee FX PV' in inflationary periods, or, a rising Long Infra-Bond Return FV' in dis-inflationary times.

Turning to the Private tier, and as indicated earlier, Middle-class households, HH, trade-off inflation-stoked FV gains in Realty that compete against Gold PV gains. Realty appreciates in sustainable booms as consolidation of equity gains, while Gold, representing asset-insurance against risks to sustainability, gains in unsustainable inflationary periods and in recessions. Thus, in sustainable boom times characterized by low inflation, Households equate, at the margin, a rising 'Realty Appreciation FV 2 – SWF Infra BV - Banker PV 2' against a rising PQ-LQ FV-PV Hedge-line, 'Consumerist PQ Oo Pay FV - HH Group Aural IIB FV-ZS-PV Hedge - Banker LQ Ookey PV' to obtain their equilibrium inflation tolerance. In unsustainable, inflationary booms, Households trade-off their 'Gold Boo 2 Gain PV' against a rising 'IIB Oo - PQ Return – LQ U' that they must offer to the inflation-hedged/disadvantaged to set their tolerances. In recessionary, or non-inflationary times, Households, who invest regularly in Gold, and save residually post living expenses, harvest a 'Household Group Gold 2 Gain FV' with inflation, albeit post offering an LQ-Aural-PQ line, 'Banker LQ Public Boo BV-Household Aural Oo PV-Consumerist PQ Private Oo FV' to the Equity market, where it transforms, post an Aural-Moulin Long Investor Criterion-Benchmark, in to a 'PQ Oo' line that upgrades select product quality-progressive (QCCE) equities, a 'PQ Ookey-Short/Rich Investor ZS-LQ Boo' to PQ-laggards, and an 'LQ Aural Oo FV Return' to long-term equity investors. A supplementary 'Group PQ Oo Bakey-LQ Silver' Line to the Ruling party nudges them to follow nominal policies that raise the return on Gold, albeit for a further price of volunteering a 'PQ Bakey Gold return' volatility-line to the Bond market that, so to say, reveals and signals thru volatility, the inefficiencies resulting from investors choosing to put their EO-FV earnings away in Gold rather than in productive, supra-gold social and economic opportunities. The inflation rate households tolerate in such periods is but the intersection of the rising 'Gold 2 Gain FV' line with the aggregate of the LQ-Aural-PQ line, 'Group PQ Oo Bakey-LQ Silver' ('Group Private Silver') and the 'Group PQ Bakey Gold Return' (equal, or de facto, 'Cause Bond OB Lesser 2-Group Public 2 – Cause Volatility 2') lines – all three PQ lines representing a distributed-, and hence a negligible cost, that nonetheless rise with inflation. Thus defined, Households seek an inflation bounded by the boom-time, unsustainable upper-bound for inflation tolerance, a corresponding lower-bound tolerance in recessions, and a sustainable inflation rate in betwixt that accompanies prudent SGDP growth.

Consumerists, in the opposite of Households, issue an inflation-enlarging 'PQ E - ESH Ookey E – LQ Oo Bakey' to the Subsidized-employed class in inflationary times that suffers PQ- and ESH-externalities for their consumption excesses, (and which expresses as ESH-insurance payouts?) and an inflation-expanding 'PQ B - (ESH Group-Judge I) - LQ Bakey Oo' to gold-hoarding Households; they also issue a rising 'COLA Due - Inflation Boo' line to their middle-class counterparts (who, in turn, forward the same, either to their employers for COLA raises, to Income funds that trigger EO-Dividends with it, or, to send a message to the very political parties they favored with 'Group PQ Bakey Gold Return' volatility line), while exploiting an 'Inflation Due Bakey FV - COLA Bakey FV- Consumer Surplus 2 Oo FV' that shrinks with inflation. Pinched in inflationary times, they also resort to other means of fulfilling their urges, in particular drugs, vice and crime, that are contra-priced to consumer goods. The Subsidized-unemployed sub-group, recipients of a 'PQ Buy - ESH Pee- LQ Ookey' line from the Consumerists, returns their favor by offering an 'Immoral Boo Excuse' (as opposed to 'Immoral Due Pay') against the immoralities they are pre-empted from due the 'PQ-ESH-LQ' line. Consumerists trade-off their 'CS 2 FV' against the two lines issued to the Subsidized (Un/)Employed, and the ESH Group Judge line-cum-COLA Due-Boo to LQ-conserving Households, to choose an inflation optimal to their lifestyles.

Positioned between the Households and Consumerists in the Private tier, is the Lokpal Opposite – Rich Representative, LORR. The LORR pursues the strategic objectives of the Rich who choose the pace of innovation, competition, and technology penetration, and bankroll private employment for the middle-classes. He seeks an inflation rate and, implicitly, a pace of innovation and competition consistent with capital market expectations and realities, productivity-related wage gains, employment-stability and lifestyle-driven demands of the middle- and subsidized classes. That choice further ensures the middle-class neither enriches inordinately with gold appreciation, lurches toward unsustainability and encroaches upon subsidies meant for the poor, nor seeks an ultra-right, populist-pv-nominal economy that artificially inflates wages and labor income. The LORR, he may be likened to an oppressive 'Technology-Manager - Nominal Economy Administrator' who endogenously influences the pace of innovation, technology choices and productivity gains to manage wages and price-inflation (and Aggregate Household Demand) in a manner that aggrandizes the Rich while holding the Households, Consumerists (and the Subsidized masses) at bay. Thus, the LORR interrupts the 'aural-centric' designs of Households and the consumption/immoral excesses of Consumerists, with the intent realty appreciation and aural gains from unjustified inflation (and Consumer surplus from low inflation) are more incident upon the Rich Capitalists – PQLQ Bankers than upon immediate members of the tier. Put another way, the LORR seeks a pace of (biased) technological innovation that manages wage/earnings gains, and aggregate employment in this class consistent with aggregate demand projections in the economy, maximizes rupee volatility induced by unjustified, inflation-linked appreciation in gold (in the opposite of Insurance Houses who seek to minimize it), and which limits consumer-surplus gains to Consumerists to PQ-embodied goods and services. In this manner, the LORR attenuates, if not neutralizes the power of the Lokpal to influence the macro-economic environment of the nation.

As concerns the Poor Subsidized-Employed, an exacerbation of inflation, though helpful in raising living standards that obtain from higher hours of work and overtime pay, extracts a cost on their health, safety and leisure. Though ESH-risks are priced in to their wages (saving which in FDs obtains them a 'Nominal Kamkey') and the Subsidized-Employed are favored with an ESH-Bakey, consider the Leisure shadow value, reflecting how much the Subsidized-Employed value their off-work time. That SV increases with work hours, thus permitting the elicitation of an equilibrium tolerance for this group as that inflation where the marginal (falling) tolerance for incremental ESH-risks (equivalently, an increasing WTP to avoid them, and which is equivalent incremental overtime pay less monetized discounted(?) probabilistic irreversible incremental personal damages net of the ESH Bakey and Nominal-Kamkey adjustments?) equals the marginal (rising) shadow value for Leisure. Members of this sub-group also offer a 'Bakey Profit' in non-inflationary times to shareholders (albeit, post a share price 'PQ Volatility Boo', standing which further entitles shareholders to a 'Moulin Long-Investor Kamkey'), and claim a 'Producer Surplus Bakey Slice' as a 'Vacation key' sponsored by their unemployed/farmer brethren (post the partaking of the same by the Firm Management).

Members of Subsidized-unemployed poor group are sensitive to inflation in Essentials bid up by the less-sensitive middle class. They band together lest they be forced to compromise on morality and ethics when subsidies are squeezed and temporary incomes turn uncertain. The subsidized-unemployed group may justifiably lay claim to the Bakey of the 'EO ESH Ookey' issued by Capitalists on behalf the LORR to cooperative Unions, and which, logically, should expand with inflation. They set their inflation tolerance by the intersection of the rising 'EO ESH-Ookey Bakey-Moulin Daily Monetize' against the shrinking 'Group Daily Charity' they offer from their pocket money to their Gods. (In turn, the prescient Gods alert the Lokpal to the condition of his very poor via the 'Altar Net'). This sub-group either spearheads protests by the 'Constituency Public' against essentials-inflation politically, or suffers 'private' losses to family status from resort to less-defensible practices (including, but not limited to, child labor).

Between the Subsidized-Employed and the Subsidized-Unemployed are positioned Self-employed Farmers. Farmers seeks an inflation rate conducive to their vocation. Thus, their interest in inflation is dichotomous. They seek low prices and low-inflation for farm inputs, but predictable, volatility-minimized price gains for their (perishable) output. In the output space, farmers trade-off a rising 'Commodity PQ Volatility U - LQ EV' line against a falling 'Commodity PQ Appreciation BV' line to obtain their optimum desired output inflation. In the input space however, farmers rely on the participation of GEOSF Bankers and PQLQ Bankers – the former seeking to support an important constituency in the Subsidy economy, and the latter geared to advance the PQ economy among farmers. While the former offer an 'GEOSF Banker Subsidy Bakey PQ' line – a line that suggests farmers desist from buying in to PQ-related input price hikes that inflate the subsidy bill (and which rises with inflation) - the latter are more accommodative of PQ-inflation with a 'PQLQ Banker PQ FV' line, a line that funds technology-/product quality-incremented agriculture inputs and which rises(?) with inflation. Implicitly, partaking the 'PQ FV line' offered by PQLQ Bankers obtains farmers an 'LQ BV' post the harvesting of an 'LQ 2' by Rich Capitalists (and Gold-endowed middle-class). The intersection of the 'PQ FV' and the 'LQ BV' defines the optimum inflation PQ-oriented Self-employed farmers seek in the input space. GEOSF-oriented farmers determine their inflation tolerance at the intersection of the 'Subsidy Bakey PQ' line and the 'GEOSF Banker EO Boo' line, the former rising, and the latter falling with inflation. Thus, self-employed farmers have a choice of leaning left and preferring low-input inflation, and low-output inflation (accompanied by a large 'LQ Bakey' usurped by the GEOSF Banker) – that imply, both, a large subsidy economy and expanding social inequity, or, preferring an innovation-driven regime in which PQ-driven input inflation obtains them higher output price realization, albeit a lower LQ Bakey in a more equitable society. Thus, the Subsidy tier is characterized by inflation trade-offs within – the inflation sought by the Subsidized Employed being at odds with the welfare of the Subsidized Unemployed, even as the Self-employed Farmers seek a polar input-ouput inflation regime.

Given the multiple tiers, intra- and inter-tier relationships, their FV-outlook, PV constraints, BV-worries and EV-threats, and the particular subset of the inflation universe that concerns members in each, differences in inflation tolerance/outlook reflect more than a dissonance between patriotic-, public, political-, business- or group-perspectives on inflation. Macro-economists may gauge performance of the economy by the differentials in inflation tolerances across these sections of the society, and undertake anticipatory-structural, coincident-reactive, and retrospective-compensatory policies, as they concern significant sections of society and the economy. While these intra- and inter-tier differentials in inflation tolerances are, and will always be a reality, large and expanding differentials, on one hand between FV-, PV-, and BV-inflationary returns, and on the other, inflation diffferentials within and across tiers, could well be symptomatic of unbalanced 'growth' (even 'de-growth'). It is in the interest of members of each tier, and the interest of various tiers to seek a compromise that ensures dynamic quasi-equilibrium in the monetary and fiscal space, and preserves mutual advantage in a growth-oriented, populist-pv-nominal economy.

Beware the Shifters !

The various classes of inflation-impacted/stakeholders, as elucidated above, have different tolerances defined by their specific 'inflation-cross'. The limbs of these inflation-crosses are themselves further influenced by economic, financial, monetary, perhaps even social variables that shift them up or down, thus and in turn, modifying equilibrium inflation tolerances. An example is appropriate. Recall PQLQ Bankers set their inflation tolerance by the intersection of the 'Transaction 2 PV- M2 2 FV' and 'IIP Boo FV - Gold-ETF Inflation Hedge 2 PV Pay', both rising with inflation. Any variable that shifted the positively-sloped relationship between Transactions and Inflation, such as a fall in the rate of consumer credit, would impact on equilibrium inflation tolerances (in this case, the Transaction Curve would shift up in the Inflation-Transaction space and, given a positively-sloped and convex 'Hedge 2 PV Pay', imply a higher inflation tolerance. See Figure 1). Simultaneously, practically any significant monetary variable, such as for example, the FX, that would shift the Inflation-Hedge PV line, would also move the equilibrium tolerance. Acting on both lines of the 'Inflation Tolerance Cross', these shifters could potentially be just as significant as primary variables in the Inflation cross, and would hence be specified in any econometric exercise seeking to elicit tolerances in the various inflation-tiers.

Figure 1

The Battle Royale !

Now, and as indicated earlier, the SWF, sponsorer of the Land-Realty Mirror Perpendicular-100% FV, that underlies the issue of R-IPNs (and $-ILPs), to domestic Insurance Houses abroad, is empowered by that sponsorship to issue Callable Bear-EO Bonds and, in its opposite, Putable EO-Bull Bonds (See Figure 2). Together, these Bear-Bull bonds could well be interpreted as the two-part decomposition of 'Sustainable GDP Trend Bond' sought by the SWF that seeks a sustainable, if lower growth, 'hedge-floor' against PGDP-oriented nominal economic policies of the Ruling party. These bonds obtain their highest return when their pre-indicated GDP growth rate is achieved, and return lower for under- or over-shooting them. The Bear-Bull Bonds are issued along with WB MPs Constituency ZS FV Fund, and in the opposite of, the 'PPPE $-FV Pot', the 'WB/SWF Private Land Appreciation Perpendicular Key' and the 'WB SGDP Perpetuity 2-IMF PPPE Mirror E' issued to Insurance Houses (who forward an R-GETF-denominated(?) 'IMF $ FV 2 key' to the SWF. (See Schematic) The 'MPs ZS Constituency FV Fund' is administered in 1-0 manner across federal electoral constituencies to incentivize administrative efficiency, voter diligence, and to foster competition & FV-efficiency in funding constituency development proposals. The relative magnitudes of the Bear-Bull bonds, the Political Endowment FV pot, and the Constituency ZS Fund reveal, respectively, the relative probabilities of bull and bear phases, the strength of the democracy, and the degree of competition among constituencies to attract funding for FV-consistent development projects.

Figure 2

Now, and at the start of the Bull phase of a new economic cycle under a Populist-PV-Nominal paradigm, the SWF (ring)fences the capital market with 'Putable EO-Bull Bonds' and 'Callable Bear-EO Bonds' issued, respectively, to the 'LokPal Opposite – Ruling Party KG – Rich Ombudsman', and the 'Lokpal-Impenured Group Ombudsman-Moulin Societal KG' – Naxalite Representative' (with a free float among non-insurance bond investors- possibly infra firms, PQLQ- and GEOSF Bankers in the market). The SWF claims the 'IMF $ FV 2key' from Insurance Houses as proceeds from issue of these bonds. First, consider a bull run. When a raging bull fuels (Essentials) inflation, hurts savings by the Middle-class households and injures the subsidized-unemployed, when the blue-collared suffer, both, the loss of family-time and an exacerbation of workplace risks, when Consumerists choose to indulge in sin and vice than exploit the infrastructural conveniences available to them outdoors, and the society up in arms against an economy commandeered by the PV-focussed Rich, the anxious Lokpal Opposite, fearing damage to the 'Private Cause' due an exacerbation of workplace risks such as union action and accidents, or social tensions and riots that might result from extreme income-inequity, interrupts the bull by triggering the Put on the Long EO-Bull Bonds trading at a high, and parks the bond-put proceeds away. The reduction in liquidity in the Bond market due the Put on the EO-Bull Bond, forces bond yields to rise ahead of interest rate hikes meant to dampen accelerating inflation (infact, even signals it; further, it triggers the graduated exit of SWF-monies from equities). Now, Insurance firms, as guardians, trustees and managers of 'EO Diamond Society – House/R-IPN Aural Mirror Perpetuity - Capital market EO Per-capita FV 2', (that represent a counterweight to their infra-bond holdings, and which are denominated in R-GETFs, reversible to unmonetized TTC-Gold), anticipating a withdrawal from Equity market due economic unsustainability, and fearing a market crash due public angst, riots, agitations, extremist events and immoralities that might occur in such times if they don't, follow the Lokpal Opposite and pull out of the Equity markets, divest of longer infra-bonds and shrink the average tenure of their holdings, even as they act abroad to upgrade the R-IPNs issued to them by the SWF to $ or $-ILPs ahead of currency depreciation, and further, bank the R-GETFs (that turn superfluous for the divesting of long infra-bonds) as TTC-Gold via the RBI that runs an anti-inflation, 'de-monetization counter' to its M2-infusion policies. Thus, the Lokpal Opposite in coordination with (the Lokpal,) Insurance houses effectively limits inflation rate in the economy with his tolerances and triggers, and successfully tempers an unsustainable boom, the exploitation of the working-, middle- and subsidized classes, and secures the Private Cause of the Rich.

Next, and when the economy falters due the inability to sustain Aggregate Demand and due loss of export markets (when Bear-EO Bonds expand in NAV), the Lokpal, fearing his enslaved, if not impenured constituency might not withstand a prolonged and deep recession, triggers the Call on the Bear-EO Bonds. Bound to follow, the SWF recalls the Callable Bear-EO Bonds and returns proceeds of the foreclosed bonds to the Lokpal. The Lokpal, anxious to protect his constituency, invests his proceeds to compensate the aggrieved and re-stimulate the economy. He compensates the Subsidized Unemployed thru Unions and the Subsidized Unemployed thru NGOs with an 'EO ESH 2 Bakey' from the previous cycle, and suggests them to cooperate with the Capitalists in wage negotiations for the next cycle. Prior to the next cycle, the Lokpal negotitates a new 'SGDP-Normal' as well as Bear-Bull twinned Hedge-bond trends and returns with the IMF-WB, the SWF and the LO. Thus prepared, he applies his bond-call proceeds to stimulate AD by channeling a portion of his Bear-EO Bond-Call proceeds as 'Call 2' to Gold markets for Households to harvest unjustified gains and exploit the same in AD-stimulating purchases. Simultaneously, the Lokpal also leverages another portion of the Bond-Call proceeds in a simple FX-ZS strategy in which he buys into $-GETFs even as the SWF dumps Rupees to jump-start the export economy with a weaker-than-normal currency (that reverts to a stronger-than-normal currency with the reversal of the earlier moves when the bull is well-established). He flushes the productive sectors of the economy with low-cost working capital through PQLQ/GEOSF Banks, enters equities at a low and triggers a 'Confidence bull' in the equity market. Insurance Houses, on assurances from the Lokpal, Capitalists and Unions, and observing, both, a robust AD and an uptick in export orders, follow and sustain the bull with their 'Long FV' investments. Thus, the Lokpal, 'times' the Bull with his pro-active intervention in the economy, and protects his constituency from prolonged economic misery.

Do we care? Are we ready?

It is cliche that inflation is endemic to emerging economies. The resort to Populist-PV-Nominal policies, policies conduce to equity markets, Transactions volume-based GDP and banking, and the existence of low-cost inflation hedging instruments, all stimulate an inflation-exacerbating economic regime. The various hedges in IIBs, FX and Gold-ETFs, beyond strategic political alignments, are inflation-rewarding, as is Inflation-engendered volatility in Bond and FX markets. Further, the term-strategies of political parties centered around a perpetually-weakening rupee, and the preference for labor-intensive, export-led growth-economy facilitated by a weak currency, are exploited to perpetuate inflation at unsustainable levels. Thus, it is amply clear that inflation, far from being suppressed as a scourge that weakens the nation, is instead 'managed' so it serves the many purposes of political, economic, even social entities and classes. The losers in this game are unsubsidized and salary-limited lower middle-class families, and, the subsidized class - particularly the unemployed.....and indeed, the Nation (it's SWF). Compounding the above problem, the existing monetary policy is centered around Inflation targeting at the aggregate, thru the control of interest rates, M2 infusions and repo rates. It largely ignores the socio-political underlying dynamics of inflation generation, the formation-, and the endogeneity/exogeneity of its tolerances and expectations. More significantly, the monetary rule-based inflation policy ignores the self-interest of various social and economic sub-groups, and the conflicts of interest that characterize involvement of political parties, the Rich, Insurance Houses and Infrastructure firms in policy- making.

In contrast, the proposed system, albeit yet in its conceptual stages, may be expanded upon, both, to generate class-specific tolerances and expectations that a) provide the basis for a more focused and differentiated inflation policy that explicitly recognizes the context around equilibrium inflation tolerances of tier-members, and their FV/PV/BV endogeneity/exogeneity, b) provide a basis for eliciting tier-specific and intra-tier discount rates, and most importantly c) offer a socio-political strategy to justify inflation-management within a populist-pv-nominal macro-cycle paradigm that limits the Central Bank's role to short-term inflation management, and d) provides for a self-balancing policy paradigm that straddles the domestic-global financial system, and which operates across FV/PV/BV divides, and even provides for concurrent demonetization as a natural means to anticipate inflationary unsustainability. The proposed system enlarges the role of the Lokpal, his Opposite, and Insurance in determining societal tolerances toward inflation. The socio-political paradigm elaborated here provides for an alternative, parallel approach to manage inflation leveraging market-based instruments that simultaneously anticipate the PV-hastening inherent to nominal PGDP-maximizing strategies of electoral politics and Populist-PV-Nominal regimes. It permits non-political control of inflation in the economy by bestowing non-political entities with control of SGDP-centered, Bear-Bull bonds. These twinned bonds ensure the economy does not stray beyond the socio-political limits on inequity and environmental sustainability. It is proposed as a credible, macro-cycle alternative to the traditional system of M2-based, short-term inflation management by the Nation's Central Banker.