Public-Debt v/s Private-Debt...

Article;

Harvard Debt Luminaries We Dont Like Austerity as Muchas You Think


Comment;

Nobody is saying that austerity is bad and the government should not repay its debt. But austerity is bad in the face of high unemployment and depressed economy. The point is that government has spend much during normal times that it has punctured its reserves which could be used in reviving the economy during recession. The major issue is crowding-out and it is public debt v/s private debt.Debt is debt, afterall. During normal times, before recession, the government must had crowded-out private investment which went un-noticed during the euphoria. But it is more unfortunate to hit the line when snake has passed. Now crowding-out is not an issue anymore because private sector is not investing and is sitting on a lot of idle capacity. It is expecting the government to come up with a credible plan to boost employment and income so that they can rev-up their spending. But stringent government finance are not allowing itself to help with fiscal-policy recommended during a demand slump. Milton Friedman (now passed away) the great monetarist has a great influence among the current US economists which made them use monetary policy, including Open-Market-Operation and quantitative easing, and made them not to give up easily. As far as fiscal policy is concerned it will boost employment and income, the same thing, a raise in minimum wages, although directly, will do but without increasing productivity. Production in the government sect will increase and with it productivity and wages...

Subsidised Wages and Ballooning Fiscal Deficit...

Article;

Growth Improves Wages More Than MNREGA


Comment;

Subsidizing wages will not let the market to equate it with productivity and will suppress real wages, and, will result in ballooning fiscal deficit as happened in the US with no real reason. In the US real wages are far below the productivity levels but the government has reduced this gap by fringe benefits which have become a burden now and the government is trying to pull back its support. We should let the market decide that what the real wages should be according to productivity...

Growth...

Article;

7% Growth not Contingent on New Reforms


Comment;

Growth is contingent on the Food Security Bill because the food and fuel inflation is still around 10% and is hovering around that level since 2004. Very sticky. Fuel prices depend on international factors such as dollar prices and external demand over which we have little control. But food prices are largely determined by internal demand, which is high due to fiscal expenditure, and due to internal supply conditions. I agree weather conditions were not conducive last year but the government has enough food grains in its coffers. And, definitely it can contribute in reducing inflation and inflationary expectations. The government is treading so slow...

Article;

 India should Cut Interest Rates Take on Chinese Goods 

INDIA has a comparative advantage as far as labor and wages are concerned even when compared with China but high interest rates and lack of skills are blocking rise in exports. Why can not we take advantage of this is largely unexplained? Probably the answer lies in lack of entrepreneurship culture. People are very hesitant to take initiative because of the red-tape in the process of manufacturing/production. We need to ease rule and regulations to start any process of production. This also may be due to shortage of skill-sets. People do not know, with skills shortages, that what they can do and what are the opportunities. Both skills and manufacturing are complementary ideas. One can not survive without the other. Skills should be such so that they can be consumed by the market. We need a survey that what skills should we impart so that every Indian is absorbed in the process of growth and development. We should also allow our foreign counterparts to help us in this direction. FDI in education and skills is feasible so that new technologies and skills can come to the Indian market...

INDIA is Supply-Constrained...

Article;

India has Potential to Grow at 8 C Rangarajan


Comment;

The problem is that we are considering WPI as a gauge of inflation but other countries like the US and the European countries use CPI as better indicator of inflation which if we consider is above 10%, in INDIA's case. An inflation rate of 10% is enough for a policy response. But since INDIA is supply constrained we have accepted it as normal. As far as growth rate is concerned which dipped to 5% in the last fiscal the RBI need to reduce repo-rate by atleast 150 basis points to push back the economy to 8%, according to the Taylor-Rule. Of the 150 basis point the RBI has reduced repo-rate by 100 basis points sofar which can catapult the economy to around 7% growth rate. Dr. Rangarajan forecast is right but to achieve 8% growth rate the RBI needs to reduce repo-rate by another 50 basis points and to achieve 9% it has to reduce repo-rate by another 50 basis points. But this can not be done due to, again, supply side constraints. Just to note, the RBI reduced the repo-rate by 300 basis points from around 8% to 5% to avert recession in 2008 which pushed the inflation rate from 10% to 20% and growth rate from 6% to 10%. For INDIA growth is not a problem but the supply side bottlenecks are. I disagree that growth in INDIA will not evoke inflation because sofar it has...

Gold Prices and Full-Employment...

Article;

Gold Rebounds 1 but Outlook Clouded by ETFs Dollar


Comment;

All the prices, including gold and stocks, depend upon the level of employment in the economy. The main reason for fall in gold prices is the recovery of the countries form recession, especially the US. The stocks market in the US is showing signs of recovery and people are diverting their resources from gold to stocks, which (gold) was a good investment during recession. Recently the stock market in the US has achieved the heights seen in 2007 just before the sub-prime-crisis which is responsible for the recent gold price crash. Moreover a strong dollar has kept the demand under check. But in INDIA gold prices are going down because the economy has touched its limits of expansion. The unemployment rate in INDIA fell to 3.8% in 2012 and the economy is still handling the hangover. The CPI is still around 10% which has made gold unattractive because real prices are way below the nominal prices which is expected to fall with inflation because of the RBI's commitment of low and stable inflation. Nominal prices (real prices plus inflation) depend upon inflation and when inflation falls nominal prices fall too. The nominal prices diverge from real prices because of the objective of FULL-EMPLOYMENT. Both nominal and real prices increase upto the level of full-employment but after that only nominal prices increase because production cannot be increased. And when real prices do not increase people prefer selling instead of buying because inflation is too high...

More Tax...

Article;

Panel Asks Govt to Make Strenuous Efforts to Widen Tax Base


Comment;

Widening tax base will bring more people under tax burden and will increase tax collection as have been said in the article. For the Indian-Economy where a third of population lives in poverty we need more taxes not less so that we can spend more on welfare schemes. The need is to widen tax base and/or increase tax percentage on each slab. The purpose is to reduce poverty by eliminating inequality of income and by more symmetrical distribution of income even by a more progressive tax system. Many argue that we can even consider direct redistribution of income by means of taxation. India's tax percentage on each slab are lower than many countries like the US where people are protected against unemployment and are covered under health care, all of them. I hope INDIA too would like to protect its population against uncertainty and cyclical unemployment. Moreover taxes are an important tool to regulate economic cycles. During boom we need to reduce demand by increasing taxes whereas during bust we need to spend more for which we need resources accumulated during the highs. The purpose of taxes is to provide stability (any) to the economy by maintaining reserves...

**Previously i misunderstood widening with narrowing and narrowing with widening...

Labor is Scarce...

Article;

GDP Growth Revival Doesnt Need Another Rate Cut... 

Comment;

The article talks about real interest rates and indirectly about the cost of capital. But totally ignores the labor and its cost (wages), the real impediment to growth. The level of unemployment is a real constraint, about which we are lacking updated data (INDIA). Investment should increase up to the point of full employment and after that wages keep on increasing because the market then competes for labor because, again, after that labor becomes scarce. After full employment only wages and income increase and when people have more money they start speculating which creates bubbles with the economy. The gap between real and nominal interest rate increases (after full-employment) because production can not be increased without labor, it is fully employed. Both labor and capital are means of production but labor is more scarce than capital. Actually capital is not scarce, at all (read Keynes General Theory) we have witnessed quantitative easing (money printing). Any bubble is created when only nominal interest rate increases and not real interest rate which depends upon production of goods and services. The credit growth in INDIA is 16% and the deposit growth rate is around 12% which means demand for funds is higher than the supply and when demand is high, and to increase supply we need to offer high interest rate to depositors; Inflation is eating into the savings, people are saving less, now. We need to offer higher interest on savings so that people consume less and save more to maintain the supply and demand balance…    

Lower Wages will Lead to Low Demand and Over-Supply...

When inflation goes up wages go up and when it goes down wages go down, too. The same with productivity; if productivity goes up wages should go up and vice-versa. Changes in wages affect the level of demand within the economy and the US and Europe is suffering from lack of demand. It is all about expectations. When people expect inflation they demand higher wages and when inflation goes down the market cuts wages. But they (wages) can not go below a certain level called subsistence wages  

Wages can increase in two ways; a) rise in real wages (when inflation goes down) and (b) rise in nominal wages, as normally happens. Real wages rise in real terms when the economy is going through a recession and deflation sets in and fall when economy expands and productivity increases and wages do not increase in comparison because the Capitalists want to contain the cost. There is a constant tussle between the Capitalist and laborers for wages. The Capitalist want lower wages and the laborers want higher wages. If we look at the comparison of wages and productivity in the US we find that productivity increased at a higher pace than wages that has made the demand of the economy lagging behind the actual goods and services which can be produced and consumed. And whenever this thing happens prices will fall and deflation will set in because supply will be high and demand will be low. Means over-supply.

As far as productivity and wages are concerned you will notice that productivity and wages increased significantly in China than rest of the world and the economy is flourishing. Wages and incomes are an important determinant of demand and health of an economy and China is doing much better. Otherwise economy will be stuck at low levels of per-capita income and over-supply. People must have money in order to buy the goods and services produced within the economy…

Bit-Coms...

Comments on E-Currency .

My comment;

Bit-coins are like credits on your purchase of goods and services of the same company. The purpose is to create more demand for the sellers of goods and service of a company, but, is not universally accepted, only for purchase of goods and services of the same company. Almost same thing with credit cards but credit cards can be used internationally.

 If they (shopping credit) were universally accepted it would have done the same thing credit cards do, increase demand, but at the cost of more spending. It is like; you will have to work hard in case you want anything more, e.g, money. It is not free you have to sacrifice some thing. Moreover, the credit you get is against a value like foreign exchange. Suppose you spend Rs 100 and you get Rs 10 as credit, its an exchange and the exchange rate is 1:10 (here). It is a strong exchange rate and you have to spend more and more in order to gain more credits and it depends upon prices. Higher the prices the more the credit you should get. Same thing with money, prices go high and the value of money or bit-coins dwarfs unless you increase it.

 But bit-coins like money can create trouble for the debtor. Suppose the creditors do not spend their credits and accumulate if for long and everybody start to redeem the same day. The company will broke because it can not satisfy such a high demand. Prices of the products will go up and demand will go down and, again, the prices will start plunging. To avoid this situation the company should distribute credits with an expiry-date and will not burden the company too much by increasing the expectations and irrational exuberance. You can simply call it a bubble that will go down some day…

Wages/Income and Productivity...

Wages/Income and Productivity Graph;

Though I wrote about wages, actually insufficient wages, it was incomplete with any empirical evidence. Here I want to rectify my mistake.

As we can see in the above picture that wages are coinciding, actually above, with the productivity before 1966 (around) but as we approach 1970 wages start falling below the productivity and has been constant from there. But after 1970 productivity increased unprecedently (doubled) and wages/incomes not. In the theory we equate wages/incomes with productivity. Same condition with median household income, it is constant.

So, in very short, if productivity has doubled wages should double too. But this has not happened. This is not sustainable in any way. People must be very disappointed. Its like repression of wages, though prices are nearly constant since 1970 with few glitches.

But the economy has not increased in terms of wages/income and value or amount of money. Wages are constant, prices are constant. But the need is, prices constant and wages/incomes rising, either in terms of amount or value. If we are growing the money should also grow in terms of value and/or amount. Any investment we make grows with time. Even currencies appreciate. If prices grow and money (value and amount) does not it is loss. And if both are constant it is a neutral position, the situation we have, we are not growing.

But if we have an internal devaluation  it can solve the purpose without raising wages/income, in terms of value. People would be able to buy more goods and services with the same amount. Its possible…