We should go for a stronger currency...

Article;

http://economictimes.indiatimes.com/news/economy/policy/did-rbi-goof-up-on-the-dollar/articleshow/10722223.cms

Comment;


It is true that the RBI's selling of dollar would have kept inflation low. The situation in which we are calls for a decision that whether we want to gain from rising rupee or from a falling rupee. If rupee goes up it will make imports less expensive or if it goes down it will make exports cheaper. India is a big importer therefore a stronger rupee will help in form of cheaper imports. But a weaker rupee would increase the demand of Indian exports and we have seen the exports rising. In the current times India is facing high inflation, above 10%. Therefore it is in the interest of India to opt for a stronger currency because if Indian currency falls it will increase demand for exports and employment and wages will increase in the export sector which is opposite of what the RBI is trying to do currently. But, if we were in normal times a falling rupee would be in our interest as it would increase income and employment with in our economy. More importantly fuel prices are also rising which are then translated in to higher prices of goods.

Keynesian Fiscal Stimulus

You can read the paper at the following link:

http://www.lerner.udel.edu/sites/default/files/imce/economics/WorkingPapers/2011/UDWP2011-11.pdf

CURRENCY-SPECULATION...

Currency-speculation mainly aims at making profit by selling or buying currency on the expected rise or fall in its value. Data points that during 1975, 20 percent of the total foreign exchange transactions comprised of speculation and today’s figure says that the percentage of real economy in foreign-exchange transactions is lower than that of speculation. Contrary to the Economics text-books, individuals and corporations do not compete with each-other for resources and market; rather they struggle for money through market and resources. The floating currency or exchange-rates has made currencies an asset giving rise to a new head for investment by speculating on the future movements of the popular currencies. It has now become a part of the investment portfolios among the other popular assets for investing money. It involves a low transaction cost and one can access the market twenty-four hours.

The unprecedented increase in currency-speculation is, generally, attributed to three interacting factors. The dumping of the gold-standard in the year 1971, by the US paved way for the after-development in currency-speculation, and made the trade in the foreign exchange market responsible for movements in the value of the most acceptable currencies. Economies with their higher stages of development and the efficiency in governance, effective monetary and fiscal policies, were given more value for their currencies than countries bad and in efficient government practices. The deregulation effected in the 1980s and the Baker plan by the World Bank and International Monetary Fund (IMF) gave more scope to the international flow of capital for the organizations that previously resorted to speculation. And, lastly, the innovation in the technology of money-transfer, computerization and electronification, almost revolutionized the money-market all-over the world.

The effects of currency-speculation are scary and a threat to the national governments. Currency-speculation works through expectations regarding the change in the currency or money supply and is now, not only constrained to the expectations rather speculators, actually, affect the money supply by holding or releasing it in large quantities. By doing this they affect the economic-policies just for getting their ends and, in fact, they make the national economic policies ineffective in achieving their desired objectives. It has reduced the power of governance to almost zero. The frequent changes, appreciation and depreciation, in the value of the currencies that are in demand are often credited to large scale speculation. Among the examples, fall of the British Sterling, by George Soros, in 1991, and Mexico’s currency in 1994 are much defamed. George Soros, mentioned above, is the greatest speculator of all times.

Recession may help INDIA...

Article;

http://economictimes.indiatimes.com/news/economy/indicators/recession-2011-2011-could-be-worse-for-india-as-us-recession-looms-large/articleshow/9522482.cms

Comment;

Right now the biggest challenge facing Indian economy is inflation. And, as far as inflation is concerned the drop in investment in WORLD market and economic activity would help INDIA in managing its price situation. Since, Europe and the US are stuck in their own problems and interest rate on government bonds in Europe and the US are falling the chances are that the investors will face INDIA and other emerging markets where interest rate are much higher as compared to the developed world. As far as, growth-rates are concerned INDIA's growth rate at 8% looks more attractive than most developed countries. I do not think there is a need to worry about INDIA's growth rate since our main problem is inflation and it is inflation which has hold INDIA's growth momentum. Moreover, INDIA looks more concerned with domestic demand however fall in exports is a concern form the point of view of balance of payments but imports can accommodate the demand pressure due to rising fiscal expenditure. Since global economy and demand is weak INDIA should see the present crisis as an opportunity to relieve domestic demand for food. If INDIA can not grow 10% then the problem must be attributed to inflation and not external events. However, the present crisis is going to help INDIA in form of lower prices whatever little. But this time i agree that the possibility to escalate demand by lowering repo-rates will not be available due to rising demand without government's will to ease rising prices.

PORTFOLIO-MANAGEMENT

Through his paper, Liquidity Preference as “Behavior Towards risk”, James Tobin popularized the Portfolio Balance Approach, a concept of portfolio management which later became an important post-Keynesian development. He liberated the idea of the speculative demand for money from its dependence on expectations regarding the future changes in the interest rate and has worked away from the assumption that the only alternative of holding cash balances is to hold a single-maturity bonds as well as other assets, apart from money, can be liquid. The discipline concentrates on decisions regarding the mixture of investment and policy to attain the objectives of investment by minimizing risk for individuals and organizations is termed as portfolio-management. It involves SWOT – strength, weaknesses, opportunity, and threat – analysis while considering investment in assets- debt, equity, domestic, international, and so on.


Portfolio-management offers you track of all the investment, assets and cash-flow done by your manager and his team, regularly updated. It gives you a complete account of all the mutual-funds, securities, unit link plans or gold purchases, and keeps information regarding the appreciation/depreciation in their values. It keeps a record of your capital gains in the current and past financial-year and tax-status. It maintains a complete history of the transactions that are done in your ULIPs, mutual-funds, and stocks for different fiscal-years. They help you update your mutual-fund Systematic Investment Plan (SIP) installments, current and future, in two simple-steps. They also follow funds and stocks before deciding for them to invest, and can also set a trigger-price – price at which an order gets triggered from the stop-loss book, where orders are placed to minimize the loss. The team compares the portfolio against various indices, and, finds out the historic and current dividends for your stocks. Asset risk calculates capacity for risk taking and its tolerance-level.


Portfolio-management can be divided into, active-management and passive management. Active-management entails analysis, technical, fundamental and many others, to trade regularly. The manager and his team decide about the securities to include it in the portfolio or mutual-fund. Very often, active portfolio-management work under a set of rules, for instance, sometimes the money-manager might buy growths stocks for a certain amount and blue-chip for another. Nonetheless, the basic foundation of active-portfolio-management still remains the same that the return for the investor can be maximized by trading securities on a regular basis. To cite an example, a manager or his team may buy share X after selling Y, then, on the next day the team may buy Z by selling X, and so on. On the other hand, under passive portfolio-management the manager and his team take decision to include a particular security in a portfolio or fund and leave it unchanged over considerable length of time, e.g., they buy shares of company XYZ and hold them for a period of five or ten years.

ENTREPRENEURS…

Entrepreneurs are a class of people who take risk of investment under the uncertain market conditions and earn profits. So to be to the point, an entrepreneur is person who takes risk on investment. But, that is a standard textbook (Economics) definition. In a more encompassing sense, anybody who works’s under uncertain economic conditions, whether he is an investor or not, can be said to be a part of the definition. The work of an entrepreneur is to organize something that has fair chances of being a success or a failure. He introduces novel concepts, which he thinks, are important. There are a few types of entrepreneurs of which business and social entrepreneurs are important. You can also describe entrepreneurs with the word, catalysts, very often they are pioneers in their field. The success and failure of any idea also comes in the purview of risk.

A feasibility report, to evaluate the chances of success and failure of a particular business, tailored according to the specific needs, is a very important before starting a business. It is an insight into the variables that are crucial for its take-off. The demand and supply conditions of specific regions, cost, available players in the market, consumers’ choice and preferences, etc., are all considered in a feasibility report. To furnish the purpose you can take help from professionals, you will find many consultants, who can craft you a good feasibility- report. They use tools, like available studies, internet-surveys, telephonic-surveys, or you can do a pilot experiment, in which you can launch your business on a very micro-level to get the initial results to decide for a full fledged start.

Simply, presence in the market would not solve the purpose. In order to get a strong hold in the market you need to create a little difference, all you need is an identity there. Availability of your product at each selling point is the first step you can make to be sure that it is with consumer’s reach. When we talk about competition the first thing that comes to mind is the price, beside quality. A lower- launch price is a good strategy, and is often used and when the customer becomes loyal, you can consider an increase. These are common for a new product in any market. Thereafter innovations- changes in look, quality, shape, weight, etc., are important to be in demand. In the long-run, the one thing that is most crucial to remain competitive is cost cutting, but, that’s a curvy issue for prices are always on the rise be it raw-materials, intermediate-goods, or final-goods. But, to be an efficient player in the market, a lower cost of production and a lower price always brings fortune.

Inequality in the US...

I found this good piece on inequality in the US;

ftp://ftp.igier.unibocconi.it/wp/2011/402.pdf

Default would be Contractionary...

Article;

http://krugman.blogs.nytimes.com/2011/07/25/default-in-a-liquidity-trap-very-wonkish/

Comment;

I agree that the effects of default and inflationary expectations due to quantitative easing would be different. A default would decrease money supply in reversing and new loans could not be generated and the whole system would be in a contractionary mode whereas generating inflationary expectation through quantitative easing would be expansionary. A default would undermine all the calculations made in order to keep the economy healthy and would necessitate big changes in the system. I can remember Krugman’s suggestion given earlier about an effective default regarding the people’s loans made during the housing bubble and now this time we are considering a default on the part of the US government to payback its debt. It is like we are back in the same situation again and the whole discussion has turned to the same point of a contracting economy because of default of the debt generated during the past. The threat of default will obviously be contractionary and would increase interest rate because the supply of loan-able funds will be inhibited since government is unable to repay its loans and new loans can not be generated without printing more money.

Imports can accommodate domestic demand...

Article;

http://economictimes.indiatimes.com/news/economy/policy/food-security-law-could-push-up-world-prices-widen-subsidy-bill/articleshow/9353459.cms

Comment;

The concern here is about importing food to deliver food security bill, but, that is about future. In future as far as food imports are concerned, we are in a transition period regarding the exchange rate of rupee which is expected to become stronger, exports is increasing which are good signs from the point of view of balance of payments. It is reducing. Food is among the most important thing that moves man and an economy, too. Without food security the rate of credit growth is also not possible because the central bank would increase interest rate to keep a tab on inflation. When growth is in question we compare ourselves with China which is also a big importer of food. It is common sense that an economy can not grow without food because people would not grow. The problem for INDIA is not world prices but the hunger of the domestic economy. We have to feed empty stomachs. Prices are not a problem as long as we have money to pay for it and in the international trade we value exchange-rate rather than international prices. Resorting to cash transfer schemes, successful in Brazil, without availability of food to sell will increase prices more than the economy can bear. “Too much money chasing too few goods.” Imports are a good source to accommodate for domestic demand.

Hoover...

Article;

http://krugman.blogs.nytimes.com/2011/07/18/herbert-hoover-was-hooveresque/

Comment;

Resorting to printing press, as Hoover said, will devalue the dollar and will decrease the purchasing power of $. But, that would happen also when we will improve money supply in any form. Its basic economics when money supply is increased it devalues the purchasing power of $. Actually, it devalues $ in terms of other currencies in international arena. Today, the situation is different. Inflation has been properly anchored and prices were in a deflating mode, not long ago, and, we can bear inflation some more if it comes with recovery. Devaluing dollar at this point of time will help increasing exports for the country. If wages and salaries increase this time it will affect the prices only marginally and increase in wages would and should also mean increase in real wages. The government has not used fiscal policy in any real sense. Keynes said that if there is no work for the government to do which can boost effective demand then the government can simply dig pits and re-level them. But i do not think the government has no real work to do in the US. Fiscal policy at this point of time is expected to do two things. It will increase employment and will infuse demand, internally. Fiscal stimulus used so far has been of a different nature and were aimed at improving balance sheets of the banks. We need fiscal policy is some real sense…

Use Fiscal Policy...

When it comes to growth the trade-off between inflation and employment is in question. The thing that is dominating the current situation is inflation in face of high unemployment. Quantitative easing although concentrating on increasing money supply is not sufficient in improving demand which is not in line with the classical rule, "supply creates it own demand." Demand is created when there is an improvement in wages or effective demand. In the US demand, even after two rounds quantitative easing, is sluggish. The US economy should concentrate on policy that increases wages. The central bank is only responsible for managing the money supply which has bought bonds to facilitate money supply and economic activity, but it did not work as was expected to and is fading away. The next tool the economy has, to use its fiscal policy which directly affects demand and wages. The question arises is that why we can not pay for fiscal policy through quantitative easing? Why the government can not directly use the money for fiscal policy? The answer is that we expect central banks and government to work independently to avoid another recession to occur. The great recession was the result of too much reliance on monetary policy to generate growth but it tumbled later. Through fiscal policy the government should concentrate on increasing wages. Fiscal policy is expected to increase demand for labor and increase employment which the economy wants at this point of time.

Flexible Exchange-Rate (to share)...

This paper with data is helpful in explaining good effects of flexible exchange-rate on inflation, and, domestic-demand and supply. Especially, appreciation...

http://www.nber.org/~confer/2011/ISOM11/Eichengreen_Rose.pdf

Barter the food stock...

Article;

http://economictimes.indiatimes.com/features/financial-times/the-mighty-pinch-indians-spent-rs-58-trillion-more-owing-to-inflation/articleshow/9083318.cms

Comment;

The article points to the price movement since 2008. Form a farmers point of view we need to see that higher prices are translated in farmers profit. If it has positively impacted farmers' and farm labors' income whose composition is around 60% in Indian population then we can say that the growth in the last three year has contributed in reducing poverty and inequality within Indian-Economy. If it has not, we can say that growth has just benefited middle and upper classes in form of higher income and low consumer durables' prices in the last three years. Liberalization of the food sector is good for farmers and farm income but bad for unemployed people living in poverty without farms because there is no mechanism which can ensure parity wages in the un-organised sector. As far as food inflation is concerned India has sufficient stock of wheat and rice which the government can trade for food items which are deficient in supply. The government can barter the stock of wheat and rice stocks for food items whose share in food basket and price of food basket is high. However, FDI in retail is supposed to do the job in terms of supply of food items but it remains a paradox how the poor is going to pay for food if his income does not increase or if it increases but insufficiently. FDI in retail will increase the competition for creating stocks of food and will push prices up but if our income remains a constraint how the poor is going to be compensated, if not through wages.

Financial Literacy...

Article;

http://economictimes.indiatimes.com/opinion/comments-analysis/banking-shadow-and-shadow-banking/articleshow/8919680.cms

Comment;

The article has been written beautifully but the writer misses the main points like financial education, and, the difference between regular banking and shadow banking. The term shadow banking comes from the great recession in the US in 2008 and points to practices that are run behind the regular banking practices. In shadow banking shadow bankers arrange funds on the market rate of interest and lend the money for other purposes like home loans to people who are unable to understand the dynamics of money market. The article lacks the point of generating own resources for microfinance that can avoid the ripples created by loan crises just like what happened in the US in 2008 in case of sub prime loans. People were educated and knew how our financial system works but they could not gauge the magnitude of the crisis. It was huge enough to sweep the incomes generated during prosperity. Financial education or financial awareness or financial consciousness all are equivalent terms in terms of meaning, they convey that people opting for loans understand the risk associated in face of no repayments, their properties, their mortgage will be confiscated… But many times the end receivers of the loans fail to estimate the individual risks associated with such deals due to lack of financial literacy. In India where half of the population is illiterate assuming financial literacy will increase the cases of individual defaults and in the end the burden will come on the shoulders of the government.

Euro-Crisis...

Lehman collapse in 2008 was followed by a fall in the price level. When the credit bubble bursts in the US in 2008 it leaves the economy with falling prices and low economic activity.

But, globally these days the scene is different. We are in the regime of high prices and the central banks world over are raising interest rates to keep a tab on inflation. Therefore, we have the world divided in three parts. Economies that are experiencing high inflation like India, China, and some parts of Europe. Then there are economies which are recovering from the financial crisis like the US. And, then there are economies which are struggling to avert the problem of recession like Greece, Spain, Portugal etc, etc.

Nevertheless, Greece’s problem is not as bad as the US because inflation in Greece is around 3% well above the rate of inflation recorded in the US that sparked concerns about deflation. But the inflation rate for Greece is going down and if its problems are not solved the economy will be gripped in a deflationary situation. During the US’ recession in 2009 inflation was negative whereas Greece’s inflation stood at 1% which suggests that the recession in the US affected Greece, too. We are not sure why we are getting this pattern but we can not deny the impact of foreign trade. To be precise, Greece is in a better position than the US as far as inflation is concerned and if it tries it can pull the economy back on its usual track.

However, Greece’s main problem is debt but debts can be sold-off to other players or we can reduce them by budget austerity. Since Greece is not in that bad situation as the US we can keep the economy afloat. But, the main problem remains same, euro. If government debt is bailed out in Euro it will push inflation up because of increase in the money supply and European Central Bank (ECB) is already increasing interest rate to curb inflationary pressure.

Inflation is always a concern because it affects the real value of money if income is not increasing and since Greece is in recession it is not generating new incomes. However, Greece should push its inflation target to natural rate of inflation and unemployment at 5%.

Moreover, increase in money supply with euro will also benefit countries like Germany and France alongwith Greece through depreciation. But, this time I do not think Greece will be ready to share the fruits of international trade.

Repo Rate and Reverse Repo Rate…

Repo rate is the interest rate at which the central bank lends money to other banks stands at 7.50% whereas reverse repo rate is the rate at which the central bank borrows form other banks has been increased to 6.50%.

A question that arises in an inquisitive mind is that, why there is a difference between the two rates and what does the difference signify?

The difference between the two is 1%. Repo rate which is higher than the reverse repo rate tells us that, now, the central bank wants to lend money to banks on a higher interest rate because it wants the rate of inflation to be equal to its stipulated target at 6%. And, the reverse repo rate shows that the central bank wants to borrow at a lower rate than repo rate. Everytime when inflation is a concern the central bank has mainly manipulated repo rate and reverse repo rate because the banks wants to signal other banks about the condition of the economy regarding the inflation and unemployment scenarios. If inflation is high it increases both the rates and when unemployment is high it somewhat decreases them given the level of inflation. Reserve bank of India is a bank of last resort which always maintains a ratio of funds depending on the need of the economy under various heads. When repo rate is increased it means that the bank wants to decrease the flow of money/finance to the economy and when it increases reverse repo rate it means it wants to increase the availability of finance for the central bank’s use for lending. The central bank is the lender of the government; therefore, an increase in reverse repo rate means the central bank wants to lend to the government at a lower rate than the repo rate. A higher repo rate means that the central does not want other banks to finance the private needs of the economy or financing but at a higher rate. When repo rate is increased it decreases the availability of finance for private use whereas an increase in repo rate shows that the central bank also wants decrease finance for public use. Therefore, we can conclude that the overall condition of the economy does not support the idea of expenditure, public or private, at all.

However, the natural rate of inflation and unemployment for developed economies is 5% and since India is a developing economy therefore the central bank has set higher inflation rate at 6% for the economy. Inflation is nothing but the rate of increase in money supply to finance the needs of the economy, public and private.

When the central bank increases repo rate it means it wants to lend to other banks at higher interest and when it increases reverse repo rate it means it does not wants to borrow and when it increases or decreases them simultaneously it means it wants to keep the situation somewhat intact. The message is clear that the central bank wants to keep the level of inflation constant if it can not decrease it to its target at 6%.

Moreover, the difference between the two i.e. 1% also tells us that the banks should follow the central bank to keep the difference between the deposit rate and lending rate equal to 1%. However, it remains a dilemma whether whom the central bank discourage and whom to encourage to take loans government or private investors?

However, the rate of increase in home loans is around 17% which is equal to our natural growth rate or rate of growth population at 17%. The only growth rate compatible to our growth models that say actual growth rate must equal the natural growth rate. Natural growth rate is the rate of growth of population, and, since, everybody wants to own a house it seems logical and understandable, too…

Ways, India Can Grow…

Some grow and some choose the way to grow. The dilemma India is facing is hurting both the consumers and the producers. Actually, the dilemma is that the government wants the economy to grow at 10% while the central bank has constrained the limits of expansion at 6%.

The main problem facing any economy is finance and India’s growth story is no different when compared with others in the league like China. Since the economy’s finances are regulated by the central bank keeping rate of inflation in mind which is already high somewhere near 8% and the bank is continuously giving us its message that inflation is a concern for poor who’s composition in our demography is high nearly 50% of the total population who earn no salaries but wages.

The difference between wages and salaries is that salaries are determined by companies on the basis of employees’ performance and are revised every year keeping rate of inflation in mind. Generally it happens... Whereas wages are market determined and depends on the bargaining power of unions of any organization. But in India the unorganized sector is vast and unaccounted for which getting the right information about their functioning and parity of wages compared with organized sector is often doubtful. Moreover, workers who work in organized and accounted sectors also get bonuses depending on the company’s performance in every fiscal year. The problem is we do not have any mechanism to ensure parity of wages and salaries in the organized v/s unorganized sectors.

Finance controls nothing but the consumption of the economy. And, half of our population can not purchase consumer durables with their wages if they have not saved enough for the rest of the year.In that case they either resort to banks or local money lenders. We all know the condition of private money lending where exploitation is very high and the interest rate poor people pay is often higher than the market rate of interest. In India, banks are not willing to reach poor people and they either do not have any plans for poor population’s consumption directly in form of higher interest rate on their savings. Indirectly they lend for business purposes where interest are high but our uneducated poor are less shrewd than market and their position are often so tight that they even have to curtail their daily consumption. Another noteworthy difference between wages and salaries is that salaries are more
fixed than wages in a given month whereas wages are earned daily and depend on the availability of work. Therefore, banks are more willing to lend to the salaried class than to wage earners either for purchase of goods or for business. Therefore the point is that those who earn wages should be protected against inflation and price rise. Workers interests are more protected in the organized sector than in unorganized sectors.

A natural question that arises in such a condition is then why inflation is higher than the stipulated 6%, by the central bank?

And, the answer lies in the fact that government has tools to extract money for its expenditure. Government levies taxes and then it spends on development projects like MNREGA to build infrastructure for the economy. Inflation results from an increase in money-supply either by central bank or by the government. To be more clear, inflation results when too much money chase too few goods, or, when demand exceeds supply. The money spent on development projects finds its way in our markets and the real supply of goods, mainly food articles, decreases in comparison to demand which is bound to be high since India is an economy of a billion people and where almost 50% are poor, and,when they get money they run straight to their local grocery shops which are already deficient in food supply and therefore prices rise more than they are expected to rise and inflation now stands at 9%.

However, the government has increased minimum wages under MNREGA but will the government do it next year, too. If it does inflation will go up some more next year, too. If it does not that would be unfair.

The economy desperately needs a mechanism which ensure that if inflation increases wages increase too or consumption will lag behind...

Moreover, we need to ensure availability of goods, food and non food items, both. We desperately need labor reforms and FDI in retail to keep the economy sound and steady on its growth path, and, to converge it towards the equilibrium…

Dialectical-Materialism…

In dialectical materialism we find a synthesis of two words dialect and matter. Dialect means any situation or effort that conveys two messages for two different people or two messages for a single person in an introspective mood. Whereas matter or materialism is the science of matter and/or its distribution, atleast for Marx and Lenin (we can see the dialect arising in case of matter “and/or”). The purpose of the above lines is to relate it with the situation the Indian economy is facing, poverty and unemployment at very high levels almost.

The current situation suggests that the Indian government is trying to reduce poverty by pumping more money in the system through fiscal measure, taxes and expenditure, whereas, the central bank is continuously raising interest rates to convey its separate message. The purpose, of the government is to reduce poverty and of the central bank is to contain inflation and increase employment, given the constraints of real supply of goods and services… Their action says this thing too.

The efforts at the government level produce dialect. We all understand the goal of efforts by the government, poverty reduction, and they are justified from the point of view consumption, investment, and, savings. Actually what the government is trying to do is to increase public investment/expenditure through welfare schemes to affect the level of income, and, higher level of employment and consumption. But at the same time inflation is bound to rises and is rising which is decreasing the value of money. The relationship between quantity of money and its value is negative. Then a natural question that arises is then why we should increase money base within the economy if it is eroding past wealth what people have accumulated. When inflation rises, it relatively decreases the value of amount of money in hands which we call real value of money.

The central bank of India has, however, committed to low inflation and high employment levels. Even this task is not without dialect, since, lower money supply will lead to lesser amount of investment and jobs which is also responsible for high inflation we experienced in the recent past due to increase in money base. The problem remains unsolved poverty... If the central bank increases interest rate it will increases unemployment and if it allows employment to occur inflation will spurt.

Therefore we are in a twin situation. “If inflation increases it will reduce the value of money in our hands and if employment increases it will shoot inflation, again. We are literally experiencing a dialect regarding the efforts on the part of the government and on the part of the central bank, too."

We are stopped at the very first stage...

Some say that inflation is a tool for redistribution of income between profit and wages while others say it erodes the past wealth. While, economics, economist, and market talk about marginal products and factor rewards.

The main problem is who is deciding the factor rewards be it labor or capital, and the prompt answer that comes to sharp minds advocating capitalism is MARKET!!

But when it comes to market very few and mainly classical economist know that market work through its hands and moreover with invisible hands. Then a natural question that comes to mind is then why there is so much inequality in the distribution of the rewards of factors of production. A common man will, as they naturally do, ask that look! we have two physical hands are we are not able to take care of ourselves then how market with its invisible hands is considered so efficient that we should leave our worries to its shoulders, and invisible too, to perform the task every body has entrusted it. Actually, this is not a common man’s question, he is a never allowed to ask questions, but question being consistently asked by great minds like Marx and Lenin. And, even they could not find a solution and resorted to revolutions that history and its students would not forget.

Coming to our main point, distribution of income, and especially when we are in an introspective mood like this one the whole life comes to a stand from where we can only see our past and the poverty, instead of prosperity, we have accumulated around ourselves in countries like INDIA. By the way it is a mixed economy. We know that when we read the preamble of our constitution. We will see words like …Socialist, Republic… (and all that). As a whole, we are a Democracy (multi-party), an institution that is of the people, by the people and for the people. By the way a democracy has real hands, our elected representatives. In strict sense economic sense, “democracy has an advantage over market and capitalism, as far as hands are concerned”. At-least, somebody is responsible. Poverty is nothing but the result of failure of any mechanism that is entrusted with the task of redistribution of national income and INDIA has no such mechanism except a Central-Bank which is only responsible for managing business booms and swings and is only indirectly responsible for employment and the prosperity it brings to a common man’s life by regulating finance of the economy.

Actually, in real terms, as far as distribution of national income is concerned employment generates real wealth, if inflation is properly anchored, than mere regulating the finance which is subject to inflation. Everytime when central banks increases finance to the economy it generates inflation depending on the real supply of goods and services. By real supply we mean physical/core supply of real goods and services.

The main problem is we do not have any mechanism to ensure skills and employment to the poor population. We are not only concerned about any particular geographical region and inequality since we are living in an interdependent world where prices and incomes of one region affect the demand and supply of necessary goods and services in some other location. And, the problem aggravates with an illiterate population.
As far as, illiteracy is concerned it is at the backbone of all our problems because the poor man does not know what benefits the government is accruing to pull them out of poverty, be it skills, finance, employment, food, civil rights…… The list goes endless but it stops at the very first stage education.

I hope we are prepared to ensure education, skills, and finance to our poor population with inflation being properly anchored to lowest to keep them and our economy away from inequality…

Japan vs US

Article;

http://krugman.blogs.nytimes.com/2011/06/01/1937-in-2011/

Comment;


Reading the paper one finds that committing to R2 raises the growth rate of the Japanese economy, while, R1 gives complete price stability. Committing to an inflation rate tells us that that economy wants to grow at a higher growth rate. In growth-economics we try to equalize natural growth rate with other rates of growth. To be clear, natural growth rate is the rate of growth at which the population and workforce increases. The paper completely neglects this aspect. Nevertheless, the rate of growth of Japanese population is 0.1%. Therefore we can expect that when the economy will grow it will grow as per its’ natural growth rate without any fiscal expenditure. And, if we add public expenditure to this state of affairs we calculate the actual growth rate of the economy, natural growth rate plus rate of growth of public expenditure. This is why the Japanese growth rate tumbled when it stopped its expansion program in 2000s. The same thing happened with the US in 1936. No body can underestimate the effects of monetary expansion, at-least mathematically.Nonetheless, the Japanese economy could grow at rate of 0.1 percent anytime, other fiscal expenditure constant. For now, it can be said that the reconstruction will improve the economic condition of Japan, both, mathematically and also in the real.

The actual solution for the US lies in the comparison of the population growth rate with Japan. Japan’s population growth rate is 0.1% where as of the US is 9.7 % and allowing for frictional employment to obtain actual growth rate, with which the economy can grow, for Japan is -4.9%(negative) and for the US it is 4.7% (positive). Frictional unemployment which Keynes said stands at 5% is a variant of natural-rate-of-inflation-and-unemployment. But if we add the effect of public expenditure in this scene it depends on the commitment of both the countries about the rate of inflation. If Japan wants an inflation rate of 0% it will have to add money supply, anyways, equal to 4.9% of its national income. On the other hand, the US can grow naturally, will grow, without any public expenditure by reducing money for the private sector, but not without quantitative easing (new money). Just to point out, in quantitative easing you do not tax others to pay your expenses, anyways, so the reserve for private investment does not reduce. Anyways, again, in the US demand is low and fiscal deficit is burgeoning so we do not want to affect them, atleast in the short-run. However, the need of the US economy is to grow atleast 9.7 percent to sustain income saving and consumption levels, with inflation at zero, in the long-run.

We are already in a Crisis...

Article;

http://economictimes.indiatimes.com/news/international-business/another-financial-crisis-brewing-mark-mobius/articleshow/8654314.cms

Comment;

Mobius said another financial crisis is inevitable which holds some truth but not in places it is thought to occur. Means the US and Europe. They are facing crisis but of a different kind. The US is trying to keep its economy afloat form the past recession which depends on inflation and inflationary expectation. However, it is in a comfortable zone, below 5%. But, the economic expansion depends on the rate of population growth, as far as growth economics is concerned. The economy is likely to grow with a difference of population growth rate minus frictional unemployment which is respectively 9.7% and 5% and the remainder is 4.7%. When the US economy will grow it will grow 4.75 to 5% remaining other fiscal expenditure constant which adds to money supply. As far as, Europe is in question it several economies are already in recession which is creating problems and uncertainty for the Euro area. The main problem is Euro, which they are using to manage both areas, areas with recession and then areas which are not experiencing the problem. Then, the focus come to emerging economies like India, China, and, Japan. The common problem of these areas is inflation. The Indian Central Bank has increased interest interest rate several time during the last year and looks committed to reduce inflation. China is also doing the same but is in a kind of boom mainly because of soaring exports and housing prices. We can not reject the idea of recession in the making. Japan's woe is reconstruction.

Limits of Economic Expansion...

Article;

http://krugman.blogs.nytimes.com/2011/05/27/inflation-notes/

Comment;

The UK has been the home of English Classical economists and Keynesians who pioneered in understanding the growth and distribution on income. Before coming to the main point it is important to understand the natural forces that determine the rate of growth of an economy like rate of population growth that constrains the growth in the short run. By the way it is 0.7 %. Keynes himself admitted that capital is not as scarce as labor, therefore, an economy’s growth rate is largely decided by the rate of growth of population and workforce, which is exogenously determined. The rate of growth of population is also below the rate of frictional unemployment at 5%. The rate of population is even below the frictional employment rate. The economy has crossed its limit of economic expansion. As the discussion in the blog suggests there is no dearth of credit and liquidity; therefore we can conclude that the economy is not generating enough products and income, too. We can say that the economy is experiencing the classical stationary state and lack of innovation. Since the economy has not embraced euro and its exchange is market determined the economy has an advantage over the other European countries in managing its growth with the help of international trade. International trade is the sector from where the demand and income is likely to come from. As far as revenue and fiscal deficit are concerned they will not improve unless additional demand and income is created.

Are high food prices good or bad for poverty? (to share...)

I found this blogpost helpful in ascertaining whether high agricultural prices are good for poverty...

http://rodrik.typepad.com/dani_rodriks_weblog/2010/11/are-high-food-prices-good-or-bad-for-poverty.html

Internal and External Inequality...

From an economic point of view an economy faces both internal and external challenges regarding the growth of income and its distribution. Challenges that result in inequality of some kind or other have been the subject matter of economics since the classical economists.

Adam Smith, known as the father of Economics, was not an economist but a philosopher who enquired about the nature and causes of wealth of nations different from Keynes who enquired about the nature and causes of wealth of individuals. Smith’s main contribution was the “labor theory of value” which has been the central theme of the classical and neoclassical economics. Ricardo was important in explaining the distribution of income on an international level.

The labor theory of value as being read and taught in the context of modern economics explains the distribution of income between factors of production, mainly, labor and capital. Ricardo in international trade tried to enquire about the distribution of income between countries engaged in international trade and the inequality that result from the same. Therefore, both Smith and Ricardo tried to explain the distribution of income resulting form trade, national and international. Their purpose was to determine the subject matter of economics, “the distribution of income” which affects the level of inequality with an economy.

The classical economists while explaining distribution of income assumed “constant returns to scale” for both labor and capital that considers them equally important during the production process. On a national-level constant returns to scale implies that the distribution of national income between factors of production would be according to their marginal products and would be equal.

However, Keynes largely concentrated his attention on the scarcity of factors of production and admitted that labor is scarcer than capital, and, moreover, it has no reason to be scarce. Keynes was more interested in micro economic analysis of income distribution between factors of production contrary to the classical economist like Ricardo who mainly concentrated on the international distribution of income between countries.

Fuel Inflation...

Article;

http://economictimes.indiatimes.com/news/economy/indicators/breaking-4-week-trend-food-inflation-up-at-855/articleshow/8595444.cms

Comment;

Inflation in fuel can be seen affecting prices of other essential commodities. Low stock and exploration of new sources of fuels, be it oil or gas, is putting pressure on prices to swell to food items. Exploration of oil and gas within INDIA in the short-run is difficult to achieve and effect of these on prices can only be seen in the long-run, 5-10 years ahead. During the short-run INDIA can take help of oil-producing countries to import their products. But, for this they need foreign currency reserves which they have accumulated during good seasons. Food inflation is declining but they can not remain unaffected by surge in fuel prices. Fuel prices can be seen to be constant for more than a year, they are neither increasing or decreasing. One interpretation of this trend could be bad management of the affairs, but, if the government has foreign currency reserve the when they are going to use it. We do not need food to be bought with that money we need price-stability and fuel prices are affecting that crucial variable. Opening imports and letting the Indian currency appreciate is another way around, which means cheaper imports and would also help in reducing our international-trade-deficit. I have heard about taking 25 paise out of circulation but that would mean a depreciating Indian currency. At this time when inflation is a major concern for liquidity to the industrial sector opening imports and letting the currency appreciate can give you results in the short-run.

Pension and Population Burden...

Article;

http://economictimes.indiatimes.com/opinion/policy/how-to-fix-the-pension-system/articleshow/8579503.cms

Comment;

The burden of pension and raising retirement age in America and Europe is understandable. Their population is aging with very low mortality rates which necessitates that their population work longer hours than their Indian and other emerging nation's counterparts to sustain their consumption. Another notable feature of the aging economies is their low birth rates. By the way, birth rate minus mortality rate gives you actual growth rate of population. Therefore, the overall growth rate of population in European and American nation is decreasing. The economic effects of these exogenous changes is also worth noting. Low birth rate also means that lower number of people will be added to their workforce and therefore will generate less income and pension funds and therefore they need old people to work more in order to generate more income and pension funds. While longevity will increase the burden on pension funds. But the overall burden on pension funds will be decided by how many people join their workforce and how many retire in the same period. The replacement of old by the young population should be enough to generate more income and pension in order to sustain consumption and growth rate of these economies. Moreover, they need to incentivize high birth rate in-order to reduce the burden of an aging population in the years to come. As far as, the growth rate of population in emerging countries is concerned they are also facing burden but of an unemployed workforce.

Independent Debt Office, a bad idea...

Article;

http://economictimes.indiatimes.com/opinion/columnists/jaideep-mishra/go-slow-on-debt-office-plan/articleshow/8524089.cms

Comment;

An independent debt office for handling government debt will be a big mistake since the chances are that it will be influenced be political ambitions. Central banks have their own functions and the most important among them is to choose between inflation and employment. And, as far as debt is concerned it has a direct bearing on the level of inflation and employment since the funds are spent on developments projects which affect the level of demand in an economy which determines level of employment and prices/inflation. Employment and prices also affect the distribution of income, and, therefore also affect the level of inequality within an economy. Any government that comes to power comes on some promises or on prior performance and tries to maximize the chances of being elected next time. Central banks purpose is to address inequality by managing money supply and economics cycles that consumption and investment produces. The rate of increase in debt and money supply should not be more than 5% of GDP which should equal the natural rate of inflation and unemployment, i.e. 5%. Anyways, inflation/price-rise is nothing but rate of increase in money-supply. In his paper "The Stagnation Regime of the New Keynesian Model and Current US Policy'' George W Evans has talked of Rainy-Day-Funds (RDF) to be used during recession which he feared that politicians would spend the fund before appropriate time.

Inequality...

Article;

http://economictimes.indiatimes.com/opinion/editorial/india-poor-for-sure/articleshow/8524186.cms

Comment;

The most reliable index of equality in macro-economics is calculation of per-capita income, national income divided by population. The per-capita income of INDIA is around Rs 56, 000 and people subsist on less than Rs 110 a day. And, if we multiply 110 with 30 days (number of days a month) we get a figure of Rs 3, 300. An when we compare this figure with our per capita income we see a huge difference Rs 52, 700. This reflects the level of inequality within our economy. The extent of poverty largely decided by appointed committees say that atleast 50-60% of our population is poor. Committees differ in their poverty and inequality estimates. The above comment was to convey that how mathematical estimates can be wrong in depicting a true picture of the economy and as far as per-capita income is concerned it sometimes surprise others with a non-economics background students and general public.

Greece...

Article;

http://economictimes.indiatimes.com/news/international-business/greek-pm-ecb-officials-reject-debt-restructuring/articleshow/8497612.cms

Comment;

Greece is hit by recession, therefore, debt restructuring if private investors are not interested due to recession expectations will trouble their assets in the short-run. Budget cuts will further aggravate the situation because during recession fiscal spending is important and privatization, during the short-run, will depend on what private investors are expecting from the government. There is a difference between public and private risk. Both public and private spending should go up and their interplay is expected to do the job. As far as European Union and euro is concerned Greece should concentrate on its own currency against euro because it’s between Greece and Europe, and, Greece and World as far as foreign trade is concerned. Bailout or quantitative easing is a good idea but its effectiveness depends on Greece’s currency, their magnitude, and Greece’s capacity for internal inflation, and inflation within Europe. Revenue shortage is normal since we are in recession with low economic activity but that would automatically go once the economy catches it economic growth, at-least 5%.

International monetary system...

Article;

http://economictimes.indiatimes.com/opinion/guest-writer/redefining-g20-the-way-forward/articleshow/8456893.cms

Comment;

International monetary system should concentrate on removing deficit and surpluses for the sake of constant returns from the external sector. Imports equal exports. Demanding currency of the country we are interested in international trade with will be helpful in eliminating imbalances in trade. For example, if we take the US and China and their currency the fundamentals say that they are enjoying same level of economic and political clout in international arena so they must resolve their differences on an equal level. Looking down on one another would increase the conflict and the economic war would end in the battlefield. Separation of both the field is important in averting a clash. And, equal power of currency should reflect the equal physical power. If both allow their currencies to appreciate slowly the differences would be resolved. We should not carry our economic differences in battle fields.

Commit and Achieve Inflation Target...

Article;

http://economictimes.indiatimes.com/news/international-business/fed-nears-agreement-on-how-to-exit-stimulus-but-timing-unclear/articleshow/8454808.cms

Comment;

Exiting stimulus before a 5% inflation achievement would be a bad idea for the sake of economy's confidence. Raising interest rates, when the inflation target is achieved, would do the job automatically with the market mechanism. Means people would be induced to invest in the assets the central bank is investing in right now. But unless the government commits and achieve inflation target, and people are confident that the economy is on its usual track they are not going to invest the reserve they have accumulated during the recession and liquidity tarp. If consumption has returned to pre-recession levels its time to use the money for investment purposes. The two main functions of money in the macro economy.

Inflation, Again...

Article;

http://timesofindia.indiatimes.com/home/opinion/edit-page/Fighting-Fit/articleshow/8419956.cms

Comment;

Inflation we are talking about is the average of rural and urban areas. In other words, areas that are developed and undeveloped within INDIA and then there are regions that fall in-between. The logic is same as the undeveloped, developing, and, developed parts of the WORLD and choosing same inflation target for all the regions in INDIA is not logical. Since they need money-supply according their local needs inflation targets also change. Therefore national targets are different from local inflation targets and growth rate for different regions is also different. However, as far as petrol prices are concerned they are largely determined on the central level and little by state forces. Decisions taken at the central level are bound to spiral even in areas that are experiencing low levels of food inflation.

Our Exporters...

Article;

http://economictimes.indiatimes.com/opinion/comments-analysis/anniversaries-do-count/articleshow/8285622.cms

Comment;

Euro is depreciating which is what exporters want. The bone of contention with the US is resolved. Even from the point of view of China, again an exporter, which demanded stronger US currency is on its way to success. Every body is returning to the point before the recession started except Greece and other in the bailout group. The time is not right for the bailout group to exit euro. Their export, if they try, may go up too with the others in the euro zone. Demand is getting pace all over the WORLD. At least inflation says so. Bailout to Greece and others is a good and/or bad idea from the point of view of inflation. Good because Greece and others are in a type of recession. They need bailouts. And, bad because it is going to increase inflation for the WORLD economy if the euro zone does not have a surplus capacity to absorb the rising demand.

The Dollar Reign...

Article;

http://www.nytimes.com/2011/05/15/magazine/paul-krugman-how-the-financial-crisis-was-wasted.html?_r=1

Comment;

"We live in an inter-dependent world" (although have already said in the write). It is not only about consumption and jobs. Actually the point is that we are using our foreign currency reserves, made up of US dollars. And, at this juncture when every body has embraced the dollar as their reserve currency the US and Europe can not shut a blind eye to the outer world. We have US dollars and that is depreciating and broadening our deficit in balance of payments. A way out of the situation is to end foreign trade in the US dollar and start demanding the currency of the nation we are demanding products of.

Un-natural Stock Market...

Article;

http://economictimes.indiatimes.com/opinion/editorial/sebi-chairman-in-favour-of-competition-among-bourses/articleshow/8212637.cms

Comment;

The purpose is to make available things at lower prices to consumers. Too much competition will unnecessarily increase the price of end products and will add to instability. Price-competition is different from usual competition in stock market which is highly unstable, but not naturally, except human-behavior. Rather the emphasis should be on to increase competition to make GOODS & SERVICES available at lower cost. The cost of competition in stock market is instability.

Fuel Prices...

Article;

http://economictimes.indiatimes.com/news/politics/nation/diesel-petrol-may-cost-rs-5-more-from-next-week/articleshow/8164471.cms

Comment;

It is not going to affect the economy too negatively. Since everybody's income has risen. Complete deregulation will put the economy in trade-cycle. Ups and downs. Slow, small and sustained increase is better than increases at once. Rs 5 is a little more than what is expected at this point of time. An auto-ricksha driver will find it a little difficult to manage his cost and offerings. Inflation will go up some more since it is going to spiral all over the economy in form of transport prices. Not very good decision at this time.

Sudsidies...

Article;

http://economictimes.indiatimes.com/features/financial-times/will-liquidity-from-fiis-be-able-to-support-sensex-for-long/articleshow/8131388.cms

Comment;

Some countries oppose subsidies on agricultural products in the developing world. However, it is another way to sustain consumption. Since during the great re-cession, although not so great, has ended, signs are there, consumption suffered. Market is efficient when every body has an equal voice and most often government has an upper hand and it has fiscal devices to sustain the same, means it can make way for resources which markets do very aggressively and hurt consumption. Subsidies are another kind of capacity the governments generate and markets consume. They are often justified on necessary products. India needs to address the issue and subsidies are a way around.

Double-Digit Growth...

Article;

http://economictimes.indiatimes.com/news/economy/indicators/indias-double-digit-growth-ambitions-fade/articleshow/8070292.cms

Comment;

Double-digit growth without food security would also increase inflation to double digits. Another way of ensuring food security to the poor is increase in his income, at-least he has a choice then. He can go and buy whatever he likes from the shop if what he consumes is not available. If the Government does not have money the central bank can print some money to make way for poor by deciding minimum (JUST) wages. Of-course this will increase inflation some more and the process can be repeated again. And, when inflation is unbearable, although it may not happen because poor have option to buy other things, the Government can introduce a re-denomination of the Indian currency. It has happened in China, in France etc..etc..

Independent Micro-finance...

Article;

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/iba-backs-icicis-micro-loans-recast-proposal/articleshow/8043281.cms

Comment;

As far as micro-finance is concerned it should be independent of regular baking. Since the situation is getting same as shadow banks (banks that borrow from regular banks and lend on higher interest rates) this is getting complex. We need some stabilizers to prevent a situation like this. Micro-finance should be run on its own deposits and should adjust lending rates to their own deposit rates. That would be fair and should never extend loan for agriculture because there risk is maximum, depending on monsoon and you are risking poor depositors’ money. Extending repayment period is a good option and would de-motivate excessive risk taking in future. Micro-finance group can also opt for extending loans against silver since it is also getting high and should not be creating debt bubbles for the rest of the economy. The aim of micro-finance should be to remove poverty and not to add to it.

Money…

Money has many functions but the pattern we are seeing through decades, underlying money, help us to concentrate on just one, for now, function money as a medium of exchange. To be more clear let us define what medium of exchange means; in our day to day life we exchange money for goods and services and in the international arena we also exchange money for goods and services but there we also exchange money for money, means we exchange dollar for rupee and sometimes rupee for dollar, given certain conditions.

For example, if we anticipate that dollar is going to depreciate we make up our mind to buy rupees because in the future we are going to profit ourselves from such a move. To be clearer, suppose that the present exchange ratio of dollar and rupee is 1:40 and we anticipate that dollar will depreciate. Actually, in economics appreciation is depreciation and depreciation is appreciation. For a common man, if we say him that dollar is going to depreciate he will understand that that ratio will come down but actually it increases. Therefore, he will think that the ratio will become either .75:40, but, no… actually depreciation will mean that the ratio will become 1.25:40. This is what depreciation means when we deal in foreign exchange… the latter one 1.25:40. And, the former is an example of appreciation.

Nevertheless, a man can only benefit himself from such a move if s/he spends the profit he gained in INDIA. Since, appreciation and depreciation are also a function of money supply. If money supply decreases in the US, which is controlled by its central bank, it means inflation has gone down and if money supply increases in the US it means inflation has gone up. Therefore, during increase in money supply it is always profitable to spend money at the home-country. The above explanation is just a simple version of the quantity theory of money. But that also depends on many factors.

However, money supply and actually the money in circulation also increase when people start spending their savings. But, since the government and central bank does not have any direct control over this supply of money it sometimes does not help from a policy point-of-view and may help through lower prices since the consumer has a incentives to spend now and if the economy is in uncertainty they may hold their savings some-more which sometimes result in liquidity-trap kind of situation.

But, money has more than one function and the next important function is its store-value. Central bank often keeps an amount of dollar as reserve and release rupees of equivalent value depending on the rate of exchange. This can also be helpful on a micro or local or state level. Means, the state can decide a value of a rupee too. Read this thing happening in the Western WORLD, many regions have their local currencies. Let us explain with an example.

Suppose our local currency is biscuit (of-course made of wheat) and a local bank controls its supply. The other way to control it is market. When market controls it, it produces trade cycles, and, inflation and deflation, as it normally happens, and the price of wheat will go up and down as in case of gold biscuits and currency prices. But, if local bank and government controls it simultaneously it will keep the real value of wheat-biscuit somewhat intact…

Gambling with the planet by Joseph Stiglitz (to share...)

The consequences of the Japanese earthquake - especially the ongoing crisis at the Fukushima nuclear power plant - resonate grimly for observers of the American financial crash that precipitated the Great Recession. Both events provide stark lessons about risks, and about how badly markets and societies can manage them.

Of course, in one sense, there is no comparison between the tragedy of the earthquake - which has left more than 25,000 people dead or missing - and the financial crisis, to which no such acute physical suffering can be attributed. But when it comes to the nuclear meltdown at Fukushima, there is a common theme in the two events.

Experts in both the nuclear and finance industries assured us that new technology had all but eliminated the risk of catastrophe. Events proved them wrong: not only did the risks exist, but their consequences were so enormous that they easily erased all the supposed benefits of the systems that industry leaders promoted.

Before the Great Recession , America's economic gurus - from the head of the Federal Reserve to the titans of finance - boasted that we had learned to master risk. "Innovative" financial instruments such as derivatives and credit-default swaps enabled the distribution of risk throughout the economy. We now know that they deluded not only the rest of society, but even themselves.

These wizards of finance, it turned out, didn't understand the intricacies of risk, let alone the dangers posed by "fat-tail distributions"- a statistical term for rare events with huge consequences, sometimes called "black swans." Events that were supposed to happen once in a century - or even once in the lifetime of the universe - seemed to happen every ten years. Worse, not only was the frequency of these events vastly underestimated; so was the astronomical damage they would cause - something like the meltdowns that keep dogging the nuclear industry.

Research in economics and psychology helps us understand why we do such a bad job in managing these risks. We have little empirical basis for judging rare events, so it is difficult to arrive at good estimates. In such circumstances, more than wishful thinking can come into play: we might have few incentives to think hard at all. On the contrary, when others bear the costs of mistakes, the incentives favor self-delusion. A system that socialises losses and privatises gains is doomed to mismanage risk.

Indeed, the entire financial sector was rife with agency problems and externalities. Ratings agencies had incentives to give good ratings to the high-risk securities produced by the investment banks that were paying them. Mortgage originators bore no consequences for their irresponsibility, and even those who engaged in predatory lending or created and marketed securities that were designed to lose did so in ways that insulated them from civil and criminal prosecution.

Too-big-to fail banks, and the markets in which they participate, now know that they can expect to be bailed out if they get into trouble. As a result of this "moral hazard," these banks can borrow on favorable terms, giving them a competitive advantage based not on superior performance but on political strength. While some of the excesses in risk-taking have been curbed, predatory lending and unregulated trading in obscure over-the-counter derivatives continue. Incentive structures that encourage excess risk-taking remain virtually unchanged.

So, too, while Germany has shut down its older nuclear reactors, in the US and elsewhere, even plants that have the same flawed design as Fukushima continue to operate. The nuclear industry's very existence is dependent on hidden public subsidies - costs borne by society in the event of nuclear disaster, as well as the costs of the still-unmanaged disposal of nuclear waste. So much for unfettered capitalism!

For the planet, there is one more risk, which, like the other two, is almost a certainty: global warming and climate change. If there were other planets to which we could move at low cost in the event of the almost certain outcome predicted by scientists, one could argue that this is a risk worth taking. But there aren't, so it isn't.

The costs of reducing emissions pale in comparison to the possible risks the world faces. And that is true even if we rule out the nuclear option (the costs of which were always underestimated). To be sure, coal and oil companies would suffer, and big polluting countries - like the US - would obviously pay a higher price than those with a less profligate lifestyle.

In the end, those gambling in Las Vegas lose more than they gain. As a society, we are gambling - with our big banks, with our nuclear power facilities, with our planet. As in Las Vegas, the lucky few - the bankers that put our economy at risk and the owners of energy companies that put our planet at risk - may walk off with a mint. But on average and almost certainly, we as a society, like all gamblers, will lose. That, unfortunately, is a lesson of Japan's disaster that we continue to ignore at our peril.

If by Rudyard Kipling (to share...)

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or, being lied about, don't deal in lies,
Or, being hated, don't give way to hating,
And yet don't look too good, nor talk too wise;

If you can dream - and not make dreams your master;
If you can think - and not make thoughts your aim;
If you can meet with triumph and disaster
And treat those two imposters just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to broken,
And stoop and build 'em up with wornout tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on";

If you can talk with crowds and keep your virtue,
Or walk with kings - nor lose the common touch;
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds' worth of distance run -
Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man my son!

Education, Skills, and, Employment Opportunity Symmetry…

Despite of all education and skills asymmetry, like information asymmetry, the real problem also lies in asymmetry of employment opportunities and lack of initiative on the part of the job-seeker, too. Deregulation of banks and especially bank deposits (savings) would increase the availability of loan-able funds. The idea has appeal from the point of view of micro finance, too. Deregulation would increase rate of saving since it would induce the consumer to save, and, to save, even on the cost of consumption. And, most importantly education, skills, and, employment opportunity symmetry makes one independent, and, help you to avoid extremism. Moreover, it also fosters positive self-acceptance.

As far as micro-finance is concerned it constrains the amount the investors are seeking for investment. The borrower can borrow, but, with a limit, say 20,000. Micro-finance with it shortcomings is now available to be exploited by group rather than individual. For example, if individual can borrow 20,000, group of investors, say, five individuals, jointly, can borrow (5*20,000) 1, 00,000 or more. This increases the chances of doing business on a scale larger than the usual and the risk remains the same. Even if the borrower borrows less than the upper limit say 10, 000 they can share the risk on investment. Nevertheless, if 10 borrow 10, 000 each, the risk becomes shared and reduced, but, the amount remains the same (10*10,000) 1, 00, 000.

Besides drafting a manufacturing policy we need to create awareness for how to do business. This would release the risk associated with, both, the lender and the borrower. Providing assistance to do business is the other way around, meaning they can also employ graduates from B-schools and do business under their assistance. This would create employment manifold and will pave way to entrepreneurship in India.

Education and skills asymmetry is also responsible for extremism like terrorism because it is easier to learn how to do with a gun rather than with money and investment opportunities. Once entered in such a territory it is very difficult to walk away with your-self and it becomes a burden. Culture is important in shaping one’s mind and i’am proud to be an Indian and a follower of the Indian culture. India has embraced everybody with an open heart and mind with the challenge to transform their heart and soul to conquer the part of ego that is a not acceptable. We all have heard stories of dacoit who completely transformed themselves and became saints and have also created legends.

Be proud to be a good man of your country…

Why being partial...

Inflation rates/targets has something to do with the stage of development and growth of an economy. Normally, underdeveloped, developing, and developed economies have different conditions and targets for the rate of inflation ranging from 11-12, 8-9, and 5-6 percent, respectively, for each type of country. Since, underdeveloped economies have high unexploited opportunities for investment and resources utilization, high level of unemployment and low level of savings; it is good for the economy to set high inflation targets for the sake of motivation. Similarly, in a developing economy like India where investment opportunities and the level of resource utilization is higher than an underdeveloped economy but lower than a developed economy inflation target are set also set lower than developing but higher than a developed economy. And, in developed economy inflation targets are lower than underdeveloped and developing economies because of high level of investment and low levels of unemployment.

When A. W. Phillips discussed the trade-off between inflation and unemployment, back in 1957 in the UK, the country was considered a developed economy, high rate of capital accumulation/formation, besides high rate of investment and employment.

Mrs. Joan Robinson who is famous for her model ‘the accumulation of capital’ has visualized a ‘golden age’ for her economy. Her economy believes in ‘the capitalist rule of game’ in a completely independent economy, closed economy with zero imports and exports, capitalist produce and households consume. Firms are free to adopt a price policy and distribute profits among shareholders. But, later in her model she assumes price-level unchanged or constant and here the real problem arises. If we assume price level unchanged and constant we should also assume that the level of output and population will also be constant, if it is not deflation will set in. Nevertheless, her model is read and taught with great vigor in classrooms. Here comes the main point; instead of capitalist, government can set prices to suit the economy’s needs, but this does not mean that we are moving away from the market rather it is to supplement the market. Capitalist should be free to set prices for their product (non-farm) and the government should be free to set prices for farm products. Why being partial? Both, government and capitalists are responsible for taking economy ahead.

Moreover, Don Patinkin presented his model in the context of the Great-Depression and liquidity trap, and, found that capitalism is no solution to mass unemployment. His model moves between neutrality and non-neutrality of money which lacks rational expectations and a proper definition of it. He found that an increase in money supply has a real-effect on individual and a nominal-effect on the general price-level, and, concluded that real balances foster dynamic-stability.

Long live reforms!

Industry’s Concern…

FY 2010 ends on March, 31, 2011 and our industry captains look concerned about the next FY, 2011. Nevertheless, the issue that caught attention is Foreign-Direct-Investment (FDI) because of changing policies and lingering reforms, whatsoever.

When it comes to reforms the first thing that comes to mind, from the point of view of demand and economy, is labor reforms, since demand for our industry products are destined to come form bottom of the pyramid, means lower class.

However, as far as FDI is concerned the climate of the economy is conducive to it. For the Indian currency is not so strong and in the course of time it has only one way to go and that is to go up (appreciate). And, from a foreign investors point of view they have every reason to gain, since when you pull back your investment you take your home currency back to your market and as has mentioned above Indian currency has every reason to appreciate if we rely on market fundamentals and long-run growth, 5-10 years ahead. Therefore, investment opportunities for Indian currency and economy, too, look great.

As far as, reforms are concerned reform of labor-market and retail are important. When we talk about reforms the first thing that concerns a concerned mind is whether the specific market is organized or not? Organized, because whether it follows a pattern and decision taken regarding its betterment affects all alike, bottom to top and top to bottom. To sum up, Indian labor market is not organized in this particular sense. Top is going more on top and bottom is stuck to the bottom. The only class that has seen some transformation is the Indian middle-class.

Even in retail-market any pattern is not visible cities, actually big cities have plenty of supply in form of local-stores and malls, even if people prefer to go to malls for shopping. Local-stores take care of local consumers or they go to malls one a week or once a month. Actually, shops and malls are not a problem but the stock of goods they maintain and maintain with uncertainty creates uncertainty somewherelse in small places. Nevertheless, stocks are also maintained for black marketing and difference in prices, whatever little, plays an important role in diverting consumers from shops to malls and every kind of shop under a single roof is a good opportunity to exploit from the point of view of transport facilities.

Strong currency also means higher purchasing power and opening of the import sector is another way to increase Indian welfare in form of low prices and availability of goods and services…

Long live reforms!!!

The Indian Economy…

In growth theories we equate mathematical-growth-figure with others, out of 100%. If the RBI sets its inflation target at 5-6% it is likely that economy will also grow at 5-6%, which are not bad figures at all. The same inflation-rate suggests that the rate of growth of goods and services (G&S) and rate of growth of money supply will remain at the same level (quantity theory of money), fiscal spending being zero. But, if in the next period fiscal spending increases to 3% it going to add another 3% to inflation and growth figures to 9%. After all it is increasing money-supply, fiscal deficit being zero. But, if fiscal deficit also increases to 3% it will catapult inflation and growth to 12% which is very high and needs RBI and Government intervention not to push inflation targets further beyond 9%.

Let us see its effect on distribution of national income between capital and wage investment in case of organized labor and capital organizations.

Assuming that the central-bank has shifted its inflation target to 9% with government spending at 3% and fiscal deficit/debt at zero, since, the government has created a spare capacity during booms (assume).

It is a requisite to give conclusions on the present scenario of the Indian-economy.

These days RBI has underscored it inflation target at 5-6% and Government spends with the rate of 6% without any spare capacity. Therefore in the first instance we get inflation figures at 12%. Lack of strong labor organization can not force the investors to increase wages by 12%. But, if the organization (strong) is present and organized it is going to add further to inflation, and if the retail chain is also not organized it will add to inflation somemore. By the way capital market is more organized than labor market under RBI’s supervision and it responds almost every month since US’ recession.

The point is if RBI sets an inflation target every body should follow it even those in the government. Or, the chain of spending, deficit, and debt without a reserve capacity would push inflation between our shoulders and nose.

The preset government spending around 6% of GDP and RBI’s inflation target is likely to produce an overall inflation of 12%.

Therefore wage-increase should not be less or more than 5-6%. It is another way to increase money supply although through wages.

Nevertheless, every body is applauding national rural employment guarantee schemes…

Case for stronger currency…

The speed with which inflation goes up and down it will almost take more than a year to get it at the targeted level of 5-6%. The expectation arising out of this situation says that the RBI will take further steps to take inflation at the level, desired. It is, now, at 10%.

The government can help RBI if it facilitates supply of real goods and services (G&S).

One possible action could be the opening of the imports with a stronger Indian currency.

RBI's moves (decreased money-supply) could be supplemented by reducing import duties and a stronger rupee. After-all, it is the real availability of G&S that adds to real WELFARE and some times a stronger currency also works.

Government should increase tariff on inflow of funds and should decrease duties on imports of goods.

INDIA imports more than it exports and in international- trade deficit in Balance of Payment (BOP) is always disequilibrium. Therefore, the case is for a stronger currency…

US’ Capitalism …

Prices play an important role in planning our present and future.
The US believes in capitalism, i mean it is a market economy and prices are determined according to market (demand and supply) therefore part of flexible prices in the utility basket is bound to be higher than the sticky ones. In INDIA the government controls prices of oil and gas so it is considered to be stickier than normal goods and services, but in case of labor, market determines the price, it is almost unorganized. Just opposite of the US, where stock market in case of oil and strong labor organizations take care of the factor rewards.

A paper by James D. Hamilton, Department of Economics University of California, San Diego at http://dss.ucsd.edu/~jhamilto/oil_history.pdf says, “...All but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960. Likewise, all but one of the 12 oil price episodes listed in Table 1 were accompanied by U.S. recessions, the single exception being the 2003 oil price increase associated with the Venezuelan unrest and second Persian Gulf War…”

The point is, if oil prices are an indicator of recessions in the US why not the government takes care of oil-prices instead of market dealing with it. Since, we have an insufficient capacity around the world to absorb the rising demand for fossil fuels. We need a big-push so that the fear of peaking oil prices and the expectation it is generating through inflation could be reduced. Since transport-costs are important in international trade, according to “Purchasing-Power Parity,” it is going to spiral all over. Emerging economies are already experiencing high levels of inflation.

But, expectations may not work if the person does not act and to act you must have information and money. Like, cause and effect, and, stimulus and response it is not as spontaneous as it is assumed in ECO-NO-MICS. Information works differently for different people, therefore you can not blindly reject the above hypothesis that it can generate all the three expectations at the same time. The only thing certain is that it will move and people who have access to information and resources will act. I mean not fixed at its current level forever.

Here, we mainly concentrate on Keynes’ precautionary demand for money which can go either way, for consumption or for investment, accelerator or multiplier. It is the money of our use. Since the US economy is recovering from a liquidity-trap and people have maintained an excess capacity during that period.

For simplicity we assume that income is constant and people are going to manage their excess reserves. They are feeling insecure about their future and are trying to anticipate the next policy moves, and, have to make choices. There are two types of people, relevant, from the point of view of policy. People who just profit themselves by anticipating the move and then there are others who will profit themselves by that particular move.

A price rise generally indicates that people will buy more of a good if they have information and resources, and it is only possible if it is available, or there is a chance to increase supply in the next-period. So it means somebody is selling it. But the opposite may also be true, it may not be available. And, there is a need to give the market a push, means policy intervention either by government or central bank(s) and the market is inefficient in giving results, employment at the targeted level.
But the irony is that all the three can not happen at the same time and in our stream someone’s loss is others profit, i mean a zero-sum game.
If fiscal deficit is so large that the government can not commit to generate additional income without increasing tax burden by using fiscal policy and the central-bank clueless to what to do when interest rates are already near zero.


Suppose the central bank commits to buy bonds of a certain value in successive periods. But, the pressure on prices sharpens due to increase in oil and transport cost, and oil companies are hiring new labor which increases wage rate although increase in the price of core commodities remains constrained, but not zero, due to increase in money supply by purchase of bonds. And the bank’s commitment to let the inflation and employment float to the targeted level is yet far and can not be realized without further increase in the general price-level.

After-all it is creating uncertainty for the growth of world economy and the US' recovery also depends on the demand generating outside it, although not solely. But, we can say a major part on the basis of previous recoveries.

INFLATION

...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...

Full explanation is at the following link...

Central-Bank, and, Inflation and Employment

RBI must follow its inflation target…

INDIA Inc’s plea to not increase interest rates is not a solution to the rising cost of living. Nevertheless, even if RBI considers not to do the same INDIA Inc is going to face demand to raise wages from the bottom at the end of the financial year in March.

The issues involved, actually there is only one, rise in the cost of living. Since INDIA is relying on domestic demand, imports over exports, is a sign, it is not that hard to decide between who’s actually in need, though the need may not be dire and exploitation of the more in need may be other way around. But since our economy’s vision is to mitigate poverty and improve living conditions of the more dependent ones RBI may consider their demand or i think confrontation is the another way.
And, to avoid this one RBI and Government, in tandem, should start working on the issue, high-inflation

The speed with which inflation goes up and down it will almost take more than a year to get it at the targeted level of 5-6%. The expectation arising out of this situation says that the RBI will take further steps to take inflation at the level, desired.

The government can help RBI if it facilitates supply of real goods and services (G&S).

One possible action could be the opening of the import with a stronger Indian currency.

RBI's moves (decreased money-supply) could be supplemented by reducing import duties and a stronger rupee. After-all, it is the real availability of G&S that adds to real WELFARE and some times a stronger currency also works.

INDIA imports more than it exports and in international- trade deficit in Balance of Payment (BOP) is always disequilibrium.

Any central bank does not work for a class it works for the economy and especially for the poor in the economy, the dependent ones. Wages and prices are flexible upwards and are relatively rigid downwards.

This kind of behavior is best explained in ECONOMICS by Duesenberry-Doctorine or the Ratchet-effect.
According to the Deusenberry-Hypothesis, “…in the matter of consumption, an individual is not merely influenced by current consumption, but also by the standard of living he has enjoyed in the past…”