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It was the best of times; it was the worst of times. It was the age of prosperity; it was the age of inflation. It was the epoch of globalization; it was the epoch of kleptocracy. It was the springtime of emerging economies; it was the summer of discontent in the West.

Once, there were two central banks. Each was the member of a secret society, an exclusive club known only to outsiders as the 'BRICs.' While each of these CBs represented a different constituency with very different strengths and weaknesses, they fought against a common opponent: inflation.

In India, the central bank faced a sharp rise in inflation which hit poor rural workers the hardest. Economic (8.8% y/y) and money supply (M3 21.4% y/y) growth were robust, prompting the central bank to tighten reserve requirements and raise interest rates. However, because of the country's current account deficit, the currency faced pressure- causing the central bank to defend the rupee at a level of 43.00 to the $. Eventually, however, the weight of money seeking to leave India forced a rearguard action, and yesterday the RBI pulled its offer, which will no doubt reappear at higher levels. Despite the RBI's efforts, the outcome is likely to be higher inflation.

In Russia, the central bank faced a sharp rise in inflation which hit poor rural workers the hardest. Economic (8.1% y/y) and money supply (M2 28.3% y/y) growth were robust, prompting the central bank to proclaim that it would really like inflation to be lower. Because of the country's current account surplus, the currency faced upward pressure - which should have been a use weapon in the inflation-fighting arsenal.

Eventually, however, the weight of money looking to enter Russia so infuriated the central bank, that it decided that it would be more socially useful to try and screw speculators than to fight the inflation problem. And so, in the name of "introducing volatility" in the exchange rate, it intervened to weaken the currency yesterday - only slightly, but hey: it's the thought that counts! Because of the CBR's efforts, the outcome is likely to be higher inflation.

While it is perhaps churlish to wish hyperinflation on any country, or any other economic development that reduces living standards, one can't help but think that if there is such a thing as karma, it will come back to bite the CBR, who seem intent on snatching economic defeat from the jaws of victory in the name of a misguided attempt to screw foreigners.

Elsewhere, it was interesting to observe that the Russell 2000 put in a howler Monday. As one poster observed, Friday was an index reweighting day in the Russell universe, when natural selection hit the R2k with a ton of bricks. Leaving the index were a number of high-flying energy companies, which had grown too big for the small cap index. Entering were dross like Ambac (ABK) and MBIA (NYSE:MBI), companies whose share prices may well be headed towards zero in the not-too-distant future.

After a torrid May and June, perhaps small cap shorts will finally have their day?

Source: A Tale of Two Central Banks