Threshold in Economics

Actually, reviewing monetary policy every six-week is not a good idea. In the first instance what comes to mind, leave aside inflation and mathematical figures, that economy is not stable and the growth prospects are bleak if it does not add to some positive expectation either for consumers or producers. As an example, it is possible to have both kind of expectation, positive and negative from a rise in interest rate. A rise in interest rate can produce negative-expectations in producers’ mind as we all know it increases the cost loan-able funds, and at the same time it can produce a positive-expectation in consumers’/savers’ mind that his savings are going to earn higher rate of interest-income. But as far as, any Central-Bank all-over the world is concerned they are unable to foster positive-expectations either in form of lower interest rate or higher interest rate. Economics is a material science which starts with assumptions and ends with mathematical-equations; I mean it’s so scientific.

We have all heard about economic-stimulus but we hardly discuss economic-responses as economic-responses, the jargon. You know stimulus is a term in Psychology and its pair is response but a response can only be produced if the stimulus has a particular threshold value. It’s like voltage, below which your refrigerator will not work and at the proper voltage everything is all right and frequent changes in voltage can disturb the system of your refrigerator. The RBI must think to intervene every six-months or greater. I think that’s enough to make my point.

To be quantitative. As far as inflation is concerned, 15% is a high inflation-rate and to cool down the prices the average of the interest rates on savings should be around 6-7% for a deposit of six-months, a guess after looking at interest rate on savings for different terms. Savings are a type of postponed consumption. Therefore, instead of curbing demand altogether we can choose to postpone consumption by increasing interest rate on short-term savings. And, as fa asr interest-rate on investment is concerned we may choose them at level of 12-13% per-annum where necessary to postpone production without resorting to layoffs. This was all i could guess. (Used Bank of Baroda schemes)

An inflation rate of 10% is enough for policy action because not every body’s incomes rise every year, especially, the labor-class. Labour-class wages tend to be sticky at their current levels and a large chunk goes to feeding their stomach, and the opposition in the labour market has a better negotiating power. Inflation is a great concern for unorganized-labour. Inflation is not a problem for those with savings above a particular value, but those below that value can do nothing or loses their savings.The RBI can do nothing because it controls not prices, which can largely be attributed to structural-problems and need direct government intervention by fostering the supply chain. The RBI can only help in postponing consumption but only with limits and those who save not enough to even reach banks will not be profited by RBIs moves.

Kapitalism

Kapitalism comes with an in-built self-correcting mechanism, may be not that self-correcting, or, may be correcting, but, at a cost. Consciously or un-consciously, it produces trade-cycles. Individuals may not realize it, but, it’s a possibility, that some school of thought may realize that "Kapitalism comes at a cost, and sometimes it exploits."

You know, trade-cycles are nothing but a condition of prices. Sometimes inflated and sometimes deflated, and in prosperity they are just prices. And, employment/unemployment comes as a by-product. As long as, we will rely on nominal to deal with the real variable, we will be the loop called trade-cycles.

Can anybody tell me how inflation and deflation are possible in Barter-Economy?

The situation is, price of 1 unit of same good of a company equals the price of 1 unit of good of other company, or, say both products (same but produced by different companies, just to be clear) can fetch you 4 units of a good. The only assumption being that there are no qualitative differences in same goods.

Let us be full of hope!!!!!!!!!!!!!!!!!!!!!!!!

WHILE COMPARING GROWTH RATES

The comparison, that’s actually in vogue, is between a normal base period and periods of high inflation, in case of inflation. And, in case when we are comparing economic-growth, it is the mathematical-figures like 2% or 5% or 8%, just for example, which are point of discussion rather than the rate of inflation, and, the text-books says periods of high rate of economic growth are characterized by high rate of inflation and low interest rates. But, even when it comes to the comparison of rates of economic growth, periods with low and stable inflation, with high rate of economic-growth seems more meaningful than periods with high inflation and high/low rate of economic-growth, interest rate being decided by the Central-Bank. The point remains same, choose a good base year. Or, you can extrapolate a base year, too.

The kind of capacity, here, is a kind of savings. Part of income not spent, certainly not the one that goes to debt-repayment, advance commitment for savings and goes either for investment or purchase. There is a difference; actual savings are not swept by inflation, but commitment is, if income does not rise. Particularly for those who do not have houses and borrow from banks. Productive capacity on producers side can grow but if it does not add or match to the consumptive capacity on consumers’ side, without relying too much on borrowed money, production will not grow optimum, unemployment at 5% (frictional), as Keynes said may be. Here, where the where Keynes-Ramsey rule intervenes which says, the economy should choose a capital- labor-ratio that maximizes present level of consumption. They did not say anything about borrowed money, but they discussed tax-ratio, as far as I can remember. It’s a golden rule, i think. Boosting consumption with borrowed money is a clear bad-idea, recession teaches well.

So, for measuring capacity in a period, too, period with low and stable inflation, with high rate of economic-growth is not a bad idea and bubbles drive demand, then inflation, then interest-rate, and then a little savings (consumptive capacity),and, in the next period interest rate is, again, driven down, there is whole chain-reaction that starts. The point is, we can not restrict our attention to a particular period while deciding for policies, and, it culminates in our discussion of static and dynamic, and taking into account the past 15, 20 years as base or basic for our learning and innovating from our success and failures is better than 5, 10 years.

Another major point is, fix money supply and interest rates for 15-20 years, and let the expectations work, and, then watch how market dances for fulfill our redistribution goals against the policy of maintaining a class at the bottom, a conspi…. the… of economics of Capitalism. I have an idea!!! How many graduate per year in our economy? Book them for two years in social services.

LET’S BE HOPEFULL!!!!!!!!!!!!!!!

The Elasticity of Demand for Money

To understand the comment below understanding of the article at the following link is a requisite,

http://economictimes.indiatimes.com/Opinion/Columnists/Mythili-Bhusnurmath/Dont-take-savers-for-granted/articleshow/6185385.cms?curpg=1

Of course, the assumption is non-behavioral and incomplete for inflation is a major concern, before the Central-bank, while deciding for interest-rates, besides demand for investment and supply of savings. Savings mainly come from middle-class and above and the demand for investment largely comes from upper-class and little from middle-class and the lower-class, the majority in India, rely on their piggy-banks and hardly goes to bank for interest income. The reason being, the cost of reaching banks and/or the banks reaching the cost. And, to mobilize savings for investment purposes, the cost of reaching banks to keep the demand for investment matched with supply of savings, it is good for the banks to bear the cost of reaching banks. The case here for lower class is same as in the Great-Depression of 1930s, when interest-rates were at their institutional minimum or close to zero or economy experiencing a liquidity-trap, and, nobody bothered to incur the cost of reaching banks and neither banks cared for reaching the public. If banks would have cared to reach the public in form of higher interest-rates, the public would have saved and the economy had recovered sooner than it took. The point is that the marginal changes in interest-rates should be sufficient to change the economy’s demand for money as a whole and the demand for low, middle and, high classes in particular, and only then we can expect to determine a relationship between rate of interest and savings for partial equilibrium of different classes. Here the elasticity of demand for money for different classes could be a factor in determining the relationship mentioned above. The cause mainly responsible for decline in rate of savings can be attributed to rate of inflation and the growth rate we realized in the past decade, 8-9%, which are often associated with the same factor, inflation. Higher growth rates are a result of high demand and high inflation-targets and low interest rates and vice-versa.

KEEP THE VALUE OF MONEY INTACT!!!!

The mismatch of ideas and its causes, between Obama and Congress, are hard to guess. But any way, we can expect them either to be political or related with economics, which together become Political-Economy, not a very popular term in an economy like India, but, can be found in text-books. Political because any issue in Congress has a bearing on the vast issue of being elected as Government, next-time, and, Economy or Economics because it affects variables like income, interest-rate, employment, inflation, etc., etc.. And collectively concentrates on the economic well-being of the masses.

But, our main concerns are the levels of inflation and employment, and interest rates, short-term (less than 5 years) and long term (more than 5 yeras), decided by Central-Bank, are often influenced by the policies a Government decides to pursue. Here, a definition of short-term and long-term interest-rates depends upon the time-period for which a government is elected, generally 5-years. But, if the system, mainly Central-Bank, is sure that the same government has a fair-chance of being elected next-time, as well, then the bank can also decide for long-term interest-rates.

The relationship between inflation and employment found by Phillips in his famous curve theory is a positive one and the other thing he found, as far as I can remember, that with a 5% increase in employment inflation also increase by 5%. Therefore, if we generalize his findings a 3% increase in employment is likely to produce 3% of inflation and if we want to grow employment by 10% we will have to choose an inflation rate near to 10%.

It’s kind of same thing we do in our growth-models and theories. For instance, the rate of growth of capital stock = to the rate of growth of labour stock = to the rate of growth. Or, more precisely the actual growth rate must be = to desired rate of growth. So, in a nutshell, we try to equate one mathematical figure with the other. They are all out of 100%. But, of course, units are different. I’m a Harrod-Domar fan.

And, here is some personal thinking. You know in any Congress there are those who are in power and the other in opposition. So, the opposition will shout inflation! inflation!!. And, inflation as we all know need cushions, a capacity to absorb price increase, and everybody is not well-equipped, we also know that. Therefore, a food/inflation-cess to keep a dollar a dollar and to facilitate real-supply of food-items, may be 10% of the food-basket for all income groups is not a bad idea. The idea is to keep the value of money intact and then addressing the distribution issues. “KEEP THE VALUE OF MONEY INTACT!!!!”

LET’S BE HOPEFULL!

Our Questions and Reluctance

The choice of a single right question is what matters for an understanding of our-selves and our surroundings. One single question is what makes all the difference between right and wrong, and, good and bad. We live in a world full of questions unanswered and we are often praised for not questioning for it makes the others around feel uncomfortable and sometimes for the sake of the assumptions, common in material sciences. Gazing empty skies above our head to a simple walk over the earth’s surface can take you in a big-bang of the questions enough to take your lifetime and yet will be carried over for coming generations with many past generations of poverty in a major part of the world. Taking into turn all the trades of knowledge, including religion, for most of their parts are equipments and instruments to earn the economic merits. It is what makes the world go around and the principle underlying the reality we live in. And, is also true to the same degree for those who live on their crude labor, but the underlying reality remain same: the economic benefits of spending time in a productive way.

We live in an age where we are tuned by the clocks in our living- rooms so mechanically that we don not have time for our surroundings. We hardly care that what questions are needed to be answered to be approached. We are not only confined physically, but mentally, as well, so as to result in a consciousness so limited which is so a insignificant part of a greater reality which is broken not just in one or two parts but in millions and billions. The question of identity and individuality is so dear that we very often end up demanding something better and/or more overriding the underlying spirit of equality as humans. The purpose here is not preaching but to cast some light on some of the issues that have dominated the history of mankind and are yet standing as they were. The right to subsistence from the state is one of them whose economic benefits also cannot be ignored. It does not encircle the right to subsistence as the most important of all the rights but as a requisite to concentrate on the work we have chosen to devote time at.

Every body tries to avoid inconvenience. A little avoidance of inconvenience can land the whole economy into a neck-deep trouble just like as the case with our voting rights and is true to the same extent for most of our economic problems. A classic example can be the problem liquidity-trap popular in economics, which says that when interest rates are at there minimum or zero people just do not care to deposit their savings in banks just to avoid the pain of reaching to the banks because they think its not worth taking and no body could imagine the startling consequences except who really know. It would turn the whole economy upside down reducing the economic activity from top to bottom leading to an economic chaos. Among the common one it just could be the reluctance in inquiries regarding small increases in prices at our local grocery shop and when we look back in nostalgia we could hardly believe at the cumulative effect. Some could say that income too has risen but very few will question the unnecessary calls for adjustments in which it is the price which increases first and not the income. Any deviation from equilibrium commonly called the point of stability is not welcomed in economics and in our daily lives but when it comes to pin pointing the causes they are always deducted to some kind of insecurity in some cases and in most it ends just with increasing scores.

China and The United States

I do not know why we are giving so much importance to China’s illegitimate moves on the currency front. Economics and any other stream of knowledge do not talk about absolute actions because they are not simply of any use. For instance, if there would be only one country in this world its decisions would not affect the others, simply because there is no other country. It is the relative significance of actions that matters in any realm of knowledge and Economics is no exception. No single country in this World can dictate the terms to others and exploit Economics to feed its ambitions, without their consent. And, i’am sure it is not possible. I can not believe an economy like States that has almost ruled the modern World, most of its part, is so frightened by China. China’s history is full is currency redenomination to balance inflation and there is no doubt that it has resorted heavily to it, throughout its history. The Chinese currency manipulation can be, simply, offset by retaliatory adjustments in exchange–rates, and affecting money supply and inflation is not just the single way of doing it. It can easily be done on the paper; means America can deliberately depreciate its currency without affecting its credibility, too much. It will certainly augment it productivity and competitiveness, and the ones that are holding its currency in the expectations of profit, may not profit from a stronger currency, but the quantity they will be getting will be sufficient, at least we can expect that. But, i’am nearly sure it will emerge as a stronger currency, later too, if we rely on economic fundamentals, that follow a process. But, if not controlled another 2008 is not too far. This time i expect a food-grain market kind of control for the money-market.

Central-Bank, and, Inflation and Employment

Central Banks has been provided with the most important job of deciding between the rate of inflation, and, the rate economic-growth and employment, and their relationship is a positive one. The rate of growth involves the rate of un/employment of resources, both that are scarce and that which are not. To keep it simple, we can take only labor and capital, where capital is scarce and labor is not that scarce, at all, in an economy like India. And, when the level of investment decreases the worst thing that comes into play is the fall in the level of employment and in India to a greater extent. Any change in the prevailing rate of interest results in a corresponding change in the supply of credited along the length and breadth of the economy, which is a very direct kind of control and gives result in just a matter of days since it is just a matter of liquidity, upward movements may be sticky because organizing business takes more time. The situation is more or less just like a stock-market, and changes in variables are very prompt. But, when it comes to control wages and consumption and thereby prices, all these variables are flexible upwards and their downward movement is often painful - unemployment and decreased wages, except prices (food-inflation) when they go down it is a moment of relief for the majority, but that seldom happens, moreover the case remains the same, when prices reach a level they provide a floor, itself, for future upward movements, which provides an important insight for long-run trend of prices and their control, for essential commodities. But, in case of wages, even though they are flexible upwards they are also sticky to their current level. However, its control is not that direct and is only through credit-control and investment. Therefore, results, to obtain, like lowering wages, consumption, and prices- which has to be actually affected, in the very short-period of time with an indirect mechanism is a difficult task and can be obtained easily and in lesser time by more direct price controls, price-control, itself.

And, i do think it can be justified on the same ground as the control in credit, investment, employment, wages, consumption and savings, and then prices. This is no different than a more direct price-control. Both are equally painful but the merit with direct price-control is that it doesn’t affect the industrial out-put and economic-growth and, can rather be expected to complement it. The process will not be that painful.

GLOBALIZATION, A GOOD SERVANT, BUT, A BAD MASTER

Actually, it’s, now, been almost three-decades since the process of liberalization started in the year 1990-91 and our departure from our Hindu-growth-rate of 2-3% to 8-9% in the past decade, is a testimony to the hypothesis that “liberalization pays better than other forms of growth-models” mainly the closed ones with an emphasis to rely on augmenting domestic consumptions level and capital-formation rather than on foreign demand. Both, the level of consumption and the rate of capital-formation are more or less interdependent but the process starts with a certain level of demand for the mechanism to work and here the foreign demand steps-in. To be clearer, an entrepreneur, as against a social-entrepreneur, only takes risk of investment only when he thinks that there is a demand for his investment and that he is going to make profit from, either, just form supplying his good/service or by sharpening the competition.

The problem before the year 1991 was mainly low levels of domestic-demand, so, the initiative to cash foreign demand, as against, the former, was not a bad idea, anyway, and we can clearly compare the results before and after. Reduction in the level of poverty and employment-scores may not at their maximum, but they are satisfactory. Atleast, we started realizing it. And, again, since we did not have a strong domestic-demand, therefore, the supply of foreign goods/services has never been an issue except foreign currency, capital or investment, which kept pouring in since the process started and India’s huge foreign exchange reserves and its ability to pay for food-security, a pre-condition for economic-growth, is commendable and can not be underestimated.

But, as with any stream of thinking, Globalization, still incomplete in concepts, is not different form Free-Market and Lassiez-Fare ideology. Both support free-movement of labour, capital, and goods, and production-functions. Even the preliminary models, advocating International-Trade and specialization, did not assume shifts in production-functions and relied on domestic capital-labour ratios very different from the profit ideology of entrepreneurs, which believe in exploiting the best conditions of investment. Capital-labour ratio is the equivalent of the ratio of cost of labour and cost of investment. But, another type of cost, and an important one comes-in, the transport cost, which is important in international-trade-settings and is the base of our purchasing-power-parity theory. It says, transport-cost is an important factor in determining the purchasing-power of our respective currencies.

But, the transport-cost in the long-run, 10-15 years, becomes a sunk-cost when compared to the cost of setting-up of production of normal goods/services, especially in case of venture-capital and Franchise-models. Moreover, erasing poverty, generation of employment, and capital formation, all culminates in a higher domestic rate of growth. The purpose of the discussion, just above, is to discriminate between liquid and illiquid investments crossing national boundaries. Liquid investments and mainly the ones in a stock-market lack the content of stability not only because it is liquid but also because it depends upon domestic environment –policies and prospects of growth. A policy conducive to growth will attract inflow of capital and vice versa. Moreover, they also depend upon political and domestic-weather conditions, and inflation, which retard the growth of investment. Liquid investments are easy to withdraw as against to illiquid and makes an already deteriorating system more unstable as a result of domestic changes, whatsoever.  

Therefore, a short-term liquid investment does not make a case for Globalization because liquid and speculative investment, just for profits and not betting on the long-run growth and development prospects of a region, is not very reliable, especially in case of developing economies but may support the idea of Globalization in developed-economies with infrastructure for economic-activities. And, in between there may be varying cases that may or may not to support the concept. But, the one thing to keep in mind is that, “short-term liquid/speculative kind of investments will always add to the instability of a system.”

I would like to point out a difference between the ideas of “liberalization” and “globalization”, based on terminologies. The path of liberalization, on which India embarked almost three decades ago, believes in lowest possible tariff-barriers and not the removal of them, altogether, as evident. But, the concept of globalization would support tariffs, as tariffs, i’m not sure. In form of taxes or some other kind of levies it may be, because even regional-governments can not do away with taxes and revenues, in case of public-goods. The case of Corporate-Governance is better untouched here, because it is also a hypothetical concept like Globalization and is still in the making, as well.

To conclude, may be too early, we can say that; “The idea of Globalization is still evolving and is more appropriate in the sense of globalization of welfare and localization of in-stability. A globe without boundaries is not conceivable. May be regions with more manageable, in economics optimal, sizes seem to be more logical. Only optimal families, societies, workplaces and production functions, and governance will be conducive for optimal environment, whatsoever.”