RBI's Concerns...

Article;

RBI Rate Cut- Who Gains From Fall in Interest Rates


Comment;

There is misconception that the value of investment in bonds has increased with low interest rates because inflation has also gone up to 20% also, not long back, just two years. Has it compensated the loss in the value of money or the purchasing power of the bonds it terms of other goods and services? Because if it has not the purpose remains unsolved because the purchasing power or value of bonds has reduced between the time when bonds were purchased and time when it is en-cashed, although the amount of money has increased. To restore the value of money the return on bonds must be greater than the rate of inflation…   Article;  Monetary Policy Cannot be Eased Further Says D Subbarao

CAD is going to detoriate further because repo rate by all major economies has been reduced and that is for the purpose to infuse demand in the these economies and will increase prices if it actually increases demand and especially prices of fuel. We often hear that oil importers are demanding more dollars. Because that this time we have to shell out more dollars and we do not have enough of that. Therefore we need to find new sources to earn more dollars or we need a stronger currency so that we can buy more dollars. The RBI to earn dollar can invest in dollar denominated assets or US government bonds or the government can give impetus to our export sector by lowering tariff barriers. This is the best way to earn foreign exchange and will also increase employment within the economy. But that chain is missing either due to low demand in trading partners economy or high interest rates within our own economy. Another thing we can do is to demand with our trading partners that we will only accept Indian rupee in exchange of our goods and that would help the economy with a strong rupee because demand for rupee will go up…

Ways Out...

Article;

RBI Likely to Cut Rates for First Time in Nine Months


Comment;

We need a proper threshold of this economic stimulus otherwise purpose will not be solved. At least 50 basis point cuts. May be we can do it in parts 25 basis point this month and 25 later. But better would be to push little harder since growth rate has come down more than expected below 6. To push it 7 we need to press a little harder. If the RBI changes its base period, a little higher normal period, it can opt for a more aggressive rate cut. But that is only if 2012 prices are considered normal and base...

Article;

Federal Reserves Biggest Debate When to Slow Asset Buying


Comment;

The target is good, unemployment rate. Inflation won’t rise too much above the natural unemployment. It will resist increasing since there is too much unutilized capacity in the market. Inflation will first go up then will come down. If we are targeting inflation we need to push it back every time it comes down. How long will people keep money as asset. There are many concerns related with it like security of that money and all. And slowly they will resume spending, investment and consumption, and that will bring out economy from liquidity trap. Spending is more important even by the central bank eventually all spending will improve. Its a chain reaction. Let the economy feel it is wealthy...

 

Credibility of Words...

Credibility of the central banks is more important than backing your economy by gold. The purpose of the gold is to hedge against inflation and price rise. But that is from an investor’s point of view, the central bank needs only to make credible promises regarding inflation. Their words are more important. In today’s world where recessions are frequent and have been accepted as part of trade cycles and common we constantly need to infuse money and demand. And, in this period of crisis even if the central bank has too much gold pumping more money will erode the value of gold too as in case of money. It makes no difference whether we have gold or not. Pumping more money in the economy will only mean less value for our gold and money. It is inevitable. These days gold has a value only in the eyes of common investors. But that is a myth too. Gold can never restore the value of money once lost. It only compensates in form of the amount of money but that is subject to decrease in value of money also because inflation rises every year. The inflation we see at 2% or 3% is a gauge of increase not a constant value. It also means that gold is losing value with the same rate unless you increase your investment. It is same as depreciating currency, amount increases but value decreases if other prices rise too much. In times of high inflation central banks increase interest rates and economic activity declines and gold prices fall too and therefore it is good to put your money in inflation indexed assets that are paying higher interest rates. Any investment is just a myth as long as inflation and inflationary expectations are not properly anchored. In this world only words have value and gold has a value as long as there is a buyer…

Utility...

Article;

In Many Ways Economics has Crowded Out Politics Globally Michael Sandel


Comment;

In micro economic prices are determined by comparing them with costs and utility and market also works on the same line. This is true for normal goods but in case of public goods utility and cost is so high that a single person can not pay the price. This is called externality and here the market fails and Public Policy comes in. But the recent trend is public-private-partnership (PPP) models. Only a government agency can levy taxes for public goods and we pay prices for normal goods. As far as allocation of goods is concerned the principle remains the same utility/need. Greater the utility/need the more just distribution it necessitates. But that does not necessarily mean higher prices like in case of food grains…

Push Back the Inflation Rate...

Article;

Euro Zone to Contract in 2013 dashing ecb optimism-poll

Comment;

Inflation is going down it tells us that the union is going in recession again. But since complete price stability is more common inflation may tend towards the normal. Which is normal. But since we want a high growth rate we should again push the inflation at 2% the official target by cutting interest rates atleast we should try for it. If the growth rate has improved with such a policy we need to continue it...

The Stability...

Article;

Budget 2013 Focus to be on Economic Revival Fiscal Health and Boosting India as Attractive Investment Destination

Comment;

Stability in the sense of an economy has several meanings. There is political stability, there is economic stability and then comes the price stability which is a part of economic stability, which stability is he talking about? The growth of the economy has been held hostage by price stability which is responsible for high interest rates and low economic activity, and ultimately low profits. The RBI is continuously, except in one instance the April repo-cut, hopeful and is waiting that inflation will come down and there will be legitimate reasons to cut the repo-rates, not just profits. The macro-economic variables, nominal and real, of which employment is a real variable, a real measure of economic growth is missing out of this important stability discussion. Neither the central bank nor the government is talking about this important variable. It could be a sign that we need to reduce the repo-rates now and it could be an achievement of the government it can showcase. But since we Indians do not believe in numbers, like many, and many do not understand their meaning at all we do not think we need those numbers. But actually we do need the economy’s unemployment rate so that the RBI can decide in favor of high real employment growth, low interest rates and higher GDP growth. But then economy’s growth rate will increase and then it will not mean stability either Political or Economic. It will mean elections…

Sticky Wages and Prices...

Article;

The RBI Needs to Stimulate Growth While Containing Inflation


Comment;

Wages and prices are flexible upwards and rigid down wards. The level prices once reach provides a floor for further rise. You cannot reverse the situation just like before completely. But you can always mend it a bit by policy intervention. Prices have come down considerably but are above the natural rates. Philips Curve says that long time back when employment rose 5% in the UK it inflated the economy by 5%. If we generalize this empirical finding we can assume that in any economy 5% increase in employment will produce 5% inflation. Which is the RBI’s comfort zone 5-6% and the natural limit, and, frictional unemployment is 5%, also. Currently, inflation is at 10% and this is food and fuel inflation close to CPI and at best we can expect that the momentum remain constant, growth at 6%, and the RBI’s intervention will bring down it to 7% as happens with WPI index. And, if we rely on Keynes and his sticky prices we can not expect the inflation to come down at 5% unless an economic eruption occurs that disturbs the supply-demand scene or the real sector. But, it is true that prices and wages are sticky. Income tax is an important tool to tackle demand and we know the law of demand, high demand high prices and low demand low prices. So it tells us that we need to use income tax to bring down aggregate demand and prices. Or later we will use it and prices will not come down. The expansionary policy of the government points to a regime of high prices too. The government should revise the mandate of price stability…

y…

Japan Needs a Massive Stimulus...

Article;

Bank of Japan Pledges Unlimited Easing Commits to Price Goal


Comment;

 Wages in Japan is 739 yen too high than 7.24 dollar in the US in absolute terms with out dollar and yen. Both country are at the same stage of development and even the poverty figures with the US at 16% and Japan at 14% tells that the same number of people in theses economies are above and below the poverty line. Then why we see the differential we see in their wages rate. It is because of our currency system, other things being constant. Have people accepted high voulmes of money as normal in Japan? Or deflation is due to a very high base period? Japanese per capita income has increased relative to other countries in OECD  with a higher rate. When Chinese per capita increases 3, 000 to 5, 000 US $ the Japanese percapita income rose from 37, 000 to 45, 000 US $. And, per capita income in the US expanded from $ 46, 000 to $ 48, 000 in the same period. I just want to say that Japan needs a so massive stimulus that is hard to expect. The13 trillion yen in stimulus will not match the quality of recovery we want. If the US spends 1 trillion on recovery Japan will need 100 trillions. At least the absolute wage differential but same stage of development tells us so … IS THIS IS WHAT OUR CURRENCY SYSTEM OFFERS ?

Inequality is holding back US recovery (BY) Joseph E. Stiglitz

"Inequality is holding back US recovery"



**imp

Our Mistakes...

Article;

Price-rise Weakness in Government Record Concrete Steps will be taken in Next Financial Year


Comment;

You know Mr. Prime Minister your government has pushed growth so hard that unemployment rate fell below its natural rate after which inflation started ticking up and is almost persistent. And the many rounds of price hike of petroleum products has worsen the inflation scenario. We as a economist should not entertain policies that push unemployment rate below its natural rate (5%, frictional unemployment)...

Article;

RBI Governor Subbarao may not Oblige with a Rate Cut of 50 Basis Points- Economists

Comment;

RBI is doing what needs to be done but the government with an economist as head does not know about the limits of growth. Growth can not be pushed above a certain rate if unemployment rate falls below its natural rate at 5%. Also called the NAIRU i.e., non accelerating inflation rate of unemployment. above which inflation is nearly dead and below which inflation starts rising. Its time for the government to increase income-tax to control aggregate demand. But i think the government will try to present a populist budget because elections are next year...

Reserves...

Article;
Can Europes Markets Climb through the slump



Comment;
Europe is fixed in a problem of too much of the government debt and deleveraging of it. That is too much of government debt as high as 200% of GDP. The deleveraging process necessitates tightening of the fiscal belt which is counter productive during recession. We simply call it austerity. Higher taxes and spending cuts. When government spends money it creates employment actually a multiple of it through multiplier. European countries are mostly welfare states and they spend a lot on welfare. And, when the government spending is stopped that multiplier stops working. They have spent so high that the sum can not be derived from taxes without curbing demand. This, in a recession can not be done. The countries had a relief if either they had a reserve or the privilege to monetize their debt. Economies are stuck without money, they can not devalue. No real monetary track of economy. A single centarl bank regulates the market  and of course it does not offer different interest rates to economies in different part of the cycle. Some are better than others, they need different interest rates. The ability to monetize your debt or a default, may be half, will be the only ways to go around if we need the governments to spend more and create more employment…

Japan's Poor...

Article;

Weak Economy Large Budget Deficits will Force Japan to Default on Domestic Debt

 Comment;   Relative poverty in Japan is only next to the US among OECD countries and I think the government needs to address this issue. Inequality in Japan has increased in recent years due to slow economic growth the need is to reduce inequality in its economy. Japan is facing the same situation (not all) the United States is facing, depressed demand. The economy is in a deflating mode and to reflate it we need to infuse demand in the economy. But where is the demand? We all know that the demand constitutes the purchasing power in the hands of a buyer and not just the desire to buy a product. To buy a product we need to have money. And who does not have money but the desire to buy a product? The poor... We need to support the poor to reduce inequality in the economy and this will kick start the economy. We know about multipliers – any spending creates a multiple of that spending in the final. And the multiplier is highest when we put money in a poor man’s pocket because he almost spends all of it. Therefore, to sum up, Japan to reflate its economy should spend more on poor people and build demand right from the bottom…

Stimulus or Stymied?: The Macroeconomics of Recessions by Brad DeLong

Very Nice... Stimulus or Stymied the Macroeconomics of recessions

The Poorest...

 Article;
Rage against the coin



Comment;
If we use this money to avert depression and use fiscal policy in liquidity trap, then we surely need to worry about inflation down the line. The question is “Whether this money will be accepted by common people and in times of high inflation (whether) it can be used to suck liquidity from the market like done under Open-Market-Operations (OMO)? If it is so it will be good but the only difference differences will be that there will be no debt on the either side. But only wealthy people can do so, not the common man. The arrangement should be such that in times of crises people or every house-hold can buy or exchange that coin and be able to hedge themselves against unemployment and inflation as does the government. Or, people will see it as an antique and investment in antique. But the ailment of the economy is depressed demand and the money’s best use will be to infuse demand in the economy through fiscal policy. If government needs to infuse demand very soon it can support the poorest households for another year or two but good thing would be to also make arrangements for jobs. Otherwise we would be in a long debate like this one (the coin)….

Demand worth Trillion $...

 Aritcle;

A platinum Solution to US Fiscal Woes 1 trillion coin


Comment;

One thing is missing that these coins will be accepted by the Fed under the US Law and it will print money equal to 1 trillion to pump into the economy. But still the problem is not completely gone. The question is “Whether this money will be accepted by common people and in times of high inflation (whether) it can be used to suck liquidity from the market like done under Open-Market-Operations (OMO)?" If it is so it will be good but the only difference differences will be that there will be no debt on the either side. But only wealthy people can do so, not the common man. People will see it as an antique and investment in antique, and, will remember for ages to come… (Has it happened before?) But the ailment of the economy is depressed demand and the money’s best use will be to infuse demand in the economy, and, we need to think an out-of-box solution like this one….

Ideology and Economics by Paul Krugman

Pleasure...Ideology and Economics


IMPORTANT***

Crowding-Out...

Article;
Staggered Rise in Diesel Price will Squeeze Inflation


Comment; I agree with targeted subsidy but what will happen to transport costs. If fiscal deficit fuels inflation then, “how exports become uncompetitive?” Inflation means more money in circulation it gives exports a competitive advantage in terms of the value of money and also the value in terms of foreign currency. We can see this example in India itself; inflation is high and currency depreciating. Depreciations give country competitive advantage. If we can not exploit the situation due to higher interest rate, is a not a thing to be amazed… Actually it is a self correcting process but it is not working due to central banks intervention. Economy’s demand needed to be restricted because people are getting more and are spending more. Investment needs to be recycled to the good and services market through savings. But since now we are spending more we have less to save. Interest rates by banks are enough to attract depositor but unable to spark investors due to higher interest rates. Moreover the demand is coming from the bottom of the pyramid due to employment creation in the economy. The chain breaks where high interest rates keep a tab on investment. The main problem is employment creation and little inflation motivates the market. Public employment creation is crowding-out private employment creation. We have to decide which one, private or public; employment creates reasonable inflation levels…

Fuel Subsidies are Anti-Inflationary...

Article;

Reduce Subsidies Raise Capital Expenditure for Economic Revival


Comment;

Fiscal deficits are inflationary because government spending is increased but subsidies on essential products like fuel are there to contain price rise and inflationary effects since transport cost is a major determinant of prices of goods in an economy. A paper by Paul Krugman Increasing Returns and Economic Geography for which he has been awarded Nobel-Prize too says that transport costs play a major role in the overall price structure of an economy. Therefore from the point of view of inflation subsides are good because they keep expenditure on transport divided between government, and, the economy (consumers and producers). If the government had not shared the prices of fuels then the whole price for fuel must be paid by the economy, consumers and producers, both. To sum-up, subsidies are anti- inflationary, but, they increase government expenditure and sometimes revenues are short but the impact of rise in fuel prices is felt by all. The government either has to prop-up production of fuel, which in the short-run not possible or it can help reducing the pressure on their prices paid by the economy. In the long run we will pay the fuel bill if we are not dead…