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.