The economy behind the market

Reading for India · about 4 min

What this cluster is for

Most explanations of the economy teach you to follow the news. You finish able to repeat what the inflation rate was and what the central bank did, and you still cannot say what either one means for the money in your own account.

These 9 lessons are built the other way round. Every one of them ends with a calculation you run on your own bank statement, your own loan, or your own holdings. The definitions are here — you cannot skip them — but they exist to make the calculation possible, not the other way round.

By the end of this cluster you will be able to:

Calculate your own personal inflation rate, which is usually 1 to 3 percentage points away from the headline
Work out the real return on every rupee or dollar of cash you hold, after tax
Find the benchmark, the spread and the reset date on your own loan
Say whether policy in your country is currently loose or tight, from 2 published numbers and one subtraction
Read a central bank statement instead of the news coverage of it, and find the 3 things the coverage leaves out
Say which of your own holdings a falling currency helps and which it hurts
Explain why a rate decision moves some of your shares 5 times as much as others

Nothing here names a stock, a currency level or a rate to expect. Everything here should still work in 2036, in a country with a different governor and a different government.

The single most valuable idea in this cluster

The official inflation number is a weighted basket, and it is not your basket.

Food and beverages carry a weight of about 36.75% in India's consumer price index and about 13.70% in the American one. Almost nobody's actual spending matches either figure. Every plan you have ever built — a retirement number, a savings rate, a salary expectation — used a number describing a household that is not yours.

The first article shows you how to replace it with your own. It takes 5 minutes and you only ever have to do it once.

The reading order

The articles build on each other. Read them in order the first time. Articles 1 and 2 produce numbers that later articles use.

Prices

Inflation, and how it is measured — a weighted average of somebody else's shopping. Compute your own.
What happens when inflation rises too much — a transfer from lenders to borrowers, and you are always on one side of it.

The institution that responds

Central banks and interest rates — one benchmark rate sits underneath every rate you pay or receive.
Why high inflation makes central banks raise rates — rate rises do not lower prices. They lower demand until it fits supply.
Monetary policy, the meeting, and fiscal policy — the rate is priced in. The stance, the vote and the forecast are not.

Money itself

How much money can a country print? — most money is bank deposits created by lending, not notes.
What gives money value, and why the US dollar rules — nothing backs any major currency. Acceptance does all the work.
What decides a currency's exchange rate — a currency move is a transfer between your own holdings, not one event.

The whole chain

GDP, growth, and how it all connects to the market — 2 routes from a rate decision to a price: the discount rate, instantly, and profits, over 2 years.

The checklist

Every article ends in an action. Collected here, they are one long evening's work, and they are the most valuable thing in this cluster. Tick them off as you go.

Once, and then keep the answers

Your personal inflation weights, from 3 months of your own spending, in 7 buckets. (1)
Your personal inflation rate: your weights × each group's published inflation rate. (1)
The real return on every deposit you hold: rate, minus tax, minus your inflation. (2)
The total balance on which your real return is negative. (2)
Your loan's benchmark, your spread over it, and your reset date. (3)
Every holding sorted into exporter, importer, domestic, or foreign currency borrower. (8)
Unhedged foreign currency exposure, from the notes to the accounts, for every holding that has any. (8)
The share of your total wealth that depends on a single currency, against the currency of your 3 largest future payments. (7)

Every policy meeting, 6 to 8 times a year

Write down your expected decision and expected stance before the meeting. (5)
Read the statement itself, not the coverage. (5)
Find the vote split. Find the stance word. Find the forecast revision. (5)
Policy rate minus latest inflation = the real policy rate. Do it with headline and with core. (4)
Your loan rate minus your personal inflation = your real borrowing cost. (4)

Once a year

Broad money growth (M3 in India, M2 in the United States) over 5 years, against the growth in your own savings over the same 5 years. (6)
Your holdings ranked by debt and by how far away their profits are, checked against the last policy day's residual moves. (9)
Next year's policy meeting dates and, in India, the Union Budget date, in your calendar. (5)

India and the United States, equally

Every article covers both countries at the same depth, then says where they diverge and what the divergence tells you. In this cluster the divergences are unusually large, and 4 of them will change how you read almost any economic article written for the other market.

The basket. India's inflation target is on headline CPI, 36.75% of which is food. The Federal Reserve watches core PCE, which excludes food entirely. The same global food shock produces a policy response in one country and silence in the other.
The mandate. The RBI has one target, set by the government, in law, with a band and a written failure clause. The Fed has 2 goals set by Congress and a numerical target it chose itself.
The capital account. India runs a managed float with capital controls. The United States runs a free float with none. That single difference explains the rupee's suppressed volatility, its downward drift, and why it is not held as a reserve anywhere.
The reserve currency. Roughly 57% of the world's allocated reserves are in dollars. There is no Indian equivalent and there is not going to be one soon. It is why the United States can create money that India cannot.

A large amount of economic writing reaching Indian readers was produced for American conditions — a different basket, a different mandate, a different currency position, an inflation-linked bond an Indian saver cannot buy. Copied without translation, it quietly costs money. Those third sections are the translation.

What this cluster is not

It is not a forecast. Nothing here tells you where rates, inflation or the rupee are going, because nobody knows and the people who sound most certain have the worst records.

It is not a trading system. Reading a policy statement properly protects you from acting on a misleading headline. It does not by itself give you an edge.

And every current rate, band and target in these articles is marked with a , because they change constantly and a wrong number is worse than no number. The mechanisms will outlive all of them.

A note on what this is

These lessons are free and they will stay free. They are the text version of the ideas in our video course, written for anybody who cannot spend money on learning right now.

The goal is the same one it has always been: fewer people in the 95%.