SOUNDS...: November 2010

Friday, November 26, 2010

Concluding Notes on the Social Philosophy Towards which the General Theory Might Lead: John Maynard Keynes

I read it and liked very much, so i think i should share,

http://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/chapter24.html

Sunday, November 21, 2010

Dr. Krugman

In response to,

http://krugman.blogs.nytimes.com/2010/11/18/debt-deleveraging-and-the-liquidity-trap/

Dr. Kn.,

Deleveraging shock is quite understandable and is close to the situation, we are in. Advocating fiscal policy to offset liquidity-tarp and reduction in private spending is a common Keynesian solution. The problem is how we are going to finance this spending? The Government is already running a budget deficit. It is already in debt. I think which why they say debt is no solution to debt. But, i agree there is a difference between a Government debt and a private debt, same as public and private, and Government has ways to finance its expenditure. What are those ways?

As far as deflation is concerned, it sets in when aggregate supply exceeds aggregate demand. If that is the situation can we expect that there is an excess of supply of goods in the economy as a result of very low interest rates in the pre-recession period? And, are the businesses are waiting to let the excess stock finish so that they can resume their spending later? Do not we need a policy, like increasing minimum income (wages/salaries), here?

No doubt deficient demand, either because of deleveraging shock or because of high unemployment, is the real problem.

The model, though suggests fiscal policy to escalate demand, it is mute on the account of softening the deleveraging shock. Can’t we extend the loan repayment time to protect the economy against stagnant demand? Like the same as the Federal Reserves unconventional move to purchase bonds and reduce long-term interest rate.

Wednesday, November 17, 2010

Let US be Hopeful !!!!

The issues endangering the present economic recovery of the United States also raise serious questions about the way policy-makers conducted their policies in the pre-crisis. And, the most important question is that what objectives the Federal Reserve had in its mind when it decided to not to intervene in a situation when home loans were distributed so cheap, that landed the economy in a recession that has made its own core policies so ineffective that the Federal Reserve lost the control of the economy? Or, the Federal had some other objectives in its mind, like it wanted everybody to have a home? (in best spirits…)Or, Political-Economy?

We know that a Central-bank is entrusted with the task of minimizing inflation and maximizing employment. But recently I read somewhere that unemployment is not its concern and rather it should concentrate on price-stability. I think he was a politician, some Republican. So does he mean that unemployment is a Governments’ concern. By the way it is around 9.5, up by 5 percentage points. Why it should be at 5 percent? ? Keynes said “equilibrium is established with employment at 95% because other 5 percent is busy in swapping between jobs”. He must have a plan, especially for employment. Because, Americans need a plan. He was opposing QE2 and was expecting inflation, later. I mean later. I found this on the web,

Data Source: US Bureau of Labor Statistics CPI-U
FOR CENTRAL BANK:
It did not respond to the rising inflation between Oct-Nov 2006 to Oct-Nov 2008. A period in which inflation rose from 1.3-1.4 to 5.6 percent. Two years and 4 percent

FOR THE THEN GOVERNMENT
Then Republicans were in power. Even they did not realize.

HOPE
Inflation is an indicator of the level of economic activity and thereby employment. Every time economy adds people in its workforce it generates additional income and this increase finds space in markets and generates demand, and drive up prices. Sometimes there is a capacity and prices do not respond, good for Growth and Employment………….

That is why i thought HE must have a solution.

Friday, November 12, 2010

Indian Policies are Aiming in Different Directions...

The Central Banks effort to contain inflation which stands at 12.30 percent is not consistent with the policy in the foreign exchange market which does not show any such commitment towards inflation; neither has it showed any commitment to the deficit in the Balance of Payment situation by not responding to a strengthening Rupee. The pour of foreign capital in Indian economy as a result of quantitative easing, by the US’ apex bank has reduced long term interest rates and has decided to buy bonds worth $600 billion has made INDIA a hot place for foreign investors where interest rates are higher as compared to the US.

Both the policies – foreign-exchange policy and domestic monetary policy – are aiming in different directions. The domestic monetary policy is aiming at inflation by increasing interest rates and curbing investment, and the foreign exchange policy is of the type of promoting investment by not doing anything, not even a bit, as if they are handling two different economies.

This is going to retard the BOP situation, too. A rising rupee will increase the purchasing power of the importer and he is going to import more. The same, i mean a bad thing, is going to happen with exports it will make the Indian products costlier, abroad, which mean a diminished demand for our products.

Domestic policy and foreign policy should be tailored to work for a common goal and these goals have best found their places in the famous Philips’ Curve which is said to be the starting point of the modern macro-economic thinking. The Philips’ curve tells us that growth rates of an economy are nothing but the result of a trade-off between inflation and employment, and, the Central Bank moves interest rates up and down to decide between inflation and employment. When inflation is too high the central bank chooses to increase interest rates and when inflation is low it decides for lower interest rate. In this way it affects the total availability of goods and services in the economy which has a direct bearing on the welfare objects, an economy entails. Their availability increases welfare and vice versa. Economics says the competition between sellers to sell their products results in reduced prices. Availability of goods and services reduces the upward pressure on prices to rise. But, this welfare has limitations because as availability increases it increases employment of labor and scarce resources. As a result income in the economy as a whole increase and the demand for goods and services increase simultaneously, but, if the stock of goods and services do not support the level of demand it results in higher prices or inflation.

Inflow of Dollar in Indian Economy means increased demand of Rupee to give better returns on investment. Here, institutional arrangement to invest in Indian economy and Rupee is worth noting. If investors buy Rupee in foreign-exchange-market, that would increase the demand of Rupee and would drive exchange rate for Rupee up. In the process, Dollar is going in and Rupee is coming out the stock of reserves maintained by financial institutions. Finally, it is increasing the money supply available to the Indian- Economy for investment and is going to hurt the arrangements by the Central-Bank to contain inflation which is already above the normal target level by 7 percent, which should be around 5-6 percent.

Nobody accepts Dollars at our Indian shops but institutions like banks do, and in some cases individuals, too. Currency speculation in the recent times has highlighted shortcomings of the foreign exchange market and foreign currencies, now, are a part of our investment portfolios. Here, Dollar does not pose to be a lucrative option, in the short-run, because of a declining trend due to quantitative easing and depreciation in Dollars’ value. Quantitative-Easing will be done in several rounds to materialize the object the US policy makers have in mind – inflation and un/employment at targeted levels. But, for those who had expected such a move would have bet on the emerging market currencies and must have benefited themselves.

The main argument is that the domestic and foreign exchange policies are not in line with the macro-economic object of low and stable inflation. When we look at other emerging economies like Brazil, and our immediate neighbor China they look much concerned with the rising inflation even-though the inflation rate in China is at a comfortable level of 3 percent. When inflation is higher than the targeted-level the Central Banks is required to raise interest rates although it affects the real-economy, which reduces investment and the total availability of goods and services, and thereby welfare.

Structural reforms, like the one talked about retail, rather than continuously increasing interest rate is the real solution for the inflation India is facing to increase the welfare of the economy. The strategy to not to buy Dollars so as to reduce the upward pressure on the Rupee to rise, a strategy to increase exports and decrease imports, is welcome because that would increase investment in the export sector of the economy and will add to the same problem of employment, income, demand, and, at last, inflation. But, at least, we can levy some kind of tax to reduce the quantity of money flowing inside the economy. After all, it is, ultimately adding to the total quantity of money available for investment and the Central Bank, in the form of higher interest rate, is constantly giving us the message that we need to curb inflation. Moreover, it will also restrict the upward pressure on the Rupee to make exports costlier and imports cheaper because of increasing purchasing power of money on the international front.

Let us be Hopeful !!!!!!!