CPI Vs WPI...

Article;
Will Inflation Linked Bonds Be Able To Reduce Demand For Gold

Comment;

It as far as competition with gold is concerned the linkers would be giving less than CPI. The gold is giving CPI plus real interest rate and linkers are bonded with WPI. Do we see any difference… I mean, CPI is 9.90 and WPI is 4.5. If gold prices rise in comparison to CPI and giving better than it, why the public would invest in an asset giving less than gold? In the US and UK returns are indexed according to CPI therefore they are popular. But again inflation in comparison to in these countries is much higher but the absolute interest rates are almost same 2-3 percent. Unless the bonds are linked with CPI it will be of less use from the point of view of a long term investment. In the long run we do not assume inflation therefore we need to be protected against inflation and erosion of wealth…

Should Continue with QE...

Article;
Premature for FED to Wind- Down Stimulus Nobel Prize Winner Joseph Stiglitz

Comment:

Earlier the Fed said it will continue Quantitative-Easing (QE) unless unemployment rate drops to 6.5%. The stock market has bounced back and we can hope that the money will find its way through it. The market (i think) has breached liquidity trap because people have resumed spending. At least green shoots are there. Inflation rose and it is falling with the Fed’s announcement to taper QE off. Inflation targeting and a higher inflation will make the sitting on cash unattractive and will make people spend more. And, if they are expecting deflation they will hoard more cash because that will increase the value of money when inflation goes down. As long as stock market is receiving the money we can expect that it will boost economic activity and reduce unemployment. The program has shown its results as far as inflation is concerned. It is moving with the commitment to continue, up to up and down to down. Moreover it is not debasing the currency. The dollar has again emerged as a strong currency even after all the easing. Both monetary and fiscal policies affect the value of currency. Both can achieve depreciation which the US wanted to achieve in order to boost exports but loose monetary policy by the other central banks has not let the objective materialized. And, fiscal policy has/had little room to expand; the Government deficit and debt are high...

Invest in Human-Capital and Oil...

Article;
Govt Working on Norms on Investment of Surplus Funds By CPSES

Comment;

If the government has surplus and wants to invest it somewhere meaning fully it should invest in human capital, on education and skill development. The merit of this kind of investment will be to create more employment opportunities through multiplier. Employment multiplier is older than investment multiplier and is also the root of the same. Keynes used employment multiplier to explain investment multiplier. It simply says that if we create employment by public spending it actually creates employment in other places, a multiple of the original employment creation.

Moreover, if the government has money we should invest in oil and exploration of oil fields. This is also very important, apart from skill development, because if we look at history we will find that most of the recessions (in the US) we have been through are associated with oil price booms. Means it can create constraints for growth. Oil prices are easily transmitted to other prices through transport prices, and, if the government wants to keep a tab on prices and inflation it should keep oil under its hand.

 2.8 Lakh-Crore is much money we can easily spend on the two heads and keep the rest as surplus…

Loose Monetary Policy...

 Article;
Five Reasons Why Rupee is Depreciating Despite Strong FII Flows

Comment;

It is strange that with so much of Quantitative easing the US dollar is getting strong. I think everybody is pursuing a lose monetary policy and the effect we want is further diluted. I think "Everybody is trying to devalue at the same time." That's right ....

Gold Prices Rise With Employment...

 Article;
Gold Faces More Pressure as Inflation Stays Tame

Comment;

The level of unemployment can tell us how much gold-prices can rise in future if we are thinking as an investor. Unemployment at 5% and employment near 95% because it is the capacity we have, to expand. Our unemployment rate in 2012 was 3.8% I mean full-employment because after that production can not be increased because labor is fully employed. International trade, apart. Gold prices rise and fall in conjunction with other prices and wages. It moves with demand. If they rise gold prices rise and they fall too. Atleast the recent unfoldings suggest that gold prices fell (almost 20%) and then WPI fell 4.5 %...

Gold Prices and Demand...

C Rangarajan said the gold demand may go down which is contrary to my view.

With decline in inflation real returns on gold will increase because inflation is going down. We can purchase more by selling gold than before. Lower prices will attract more buyers on the expectation that prices will go-up one-day. Lower prices are an attraction to the buyer. This is what an expectation does. It should be a gain.

He says that we need to reduce gold demand.

But low inflation will make gold more attractive and affordable than before because real returns (inflation adjusted) will be high. It is strange that gold demand increases when inflation is low and decreases when inflation is high. High inflation will make it unattractive because prices will rise more than the price of gold...

RBI Buys Dollars...

Article;

RBI Back to Buying Dollars to Shore-Up Forex Reserves


Comment;

RBI's buying of dollars will make the dollar stronger and will affect CAD by depreciating Indian-Currency. Demand for dollar will go-up and with it its prices and other prices, too. It will worsen the CAD position by making imports dearer but may boost exports by depreciation. Internally it will push up employment and prices. It is inflationary. Prices of oil and gold, whose demand is almost inelastic, will go up globally, also, as the situation improves, the global demand…The present scenario suggests that it will foster exports as demand in the developed economies is catching up but will deteriorate CAD by making imports costlier. The global demand is increasing which means that inflation in the emerging and developed countries will go up. Some countries have set inflation target for themselves; they want inflation to be higher. Therefore globally the expectation is that prices will go up and that will increase our CAD. RBI’s action can do both, it can increase exports by making them cheaper and at the same time it can decrease imports by making them costlier. But our import demand is largely inelastic…

Decreasing Returns...

Article;

India Seeks Cut in Trade Distorting Agriculture Subsidies by US-European Union


Comment;

In the international market it is the cheap price that goes around the world because there is a constant pressure on the exchange rate to depreciate so that the buyer has more money and more purchasing power. This is what nations try to achieve in a crisis. Precisely, demand backed by an improvement in the value of money of the other party. Other country’s currency appreciates and amount increases. It is an expectation that demand will increase. If India can sell agriculture products and subsidy can fetch you foreign exchange we should do it but without increasing domestic inflation. We are spending less and we are earning in dollars and pounds, stronger currencies, and if we sell it in the market at the right time, it will be a gain. But it has an added advantage. Our foreign reserves improve. At least the is what our CAD demands... After all food grains are products too. I think India can take on China on this front. Sell food grains and reduce the deficit. Investment in agriculture, straight, has been told to be a great investment in the Long-run because land is scarce, more than labor and capital. Prices will rise in the long run. We need more investment in agriculture to not let the prices go above the roof and earn foreign exchange…

Nominal Wage -Cut to Increase Employment...

Article;

Unemployment in Europe is Expected to Worsen


Comment;

If unemployment is high in Europe we need to cut down wages in order to boost demand for labor. Wages should fall in order to clear the labor market. Atleast this is what the market clearing prices suggest. But real wages are already low compared with productivity levels like the US. Prices are coming down and inflation targeting seems to be not working because price-stability is the stated objective. Prices depend upon the demand level which is seemed to be low, and, demand is also dependent on prices, low prices high demand and high prices low demand. Europe is in a strange situation, at one place it needs to cut down nominal wages so the people are hired and at the other we need higher real wages so the demand is created. How we can achieve this is important… We can achieve a rise in real wages and at the same time a cut down in nominal wages through internal devaluation and deflation. What we need to do is to let the prices slide downwards which will also reduce nominal wages but nominal wages can not go below real wages due to downward wage rigidity and let the real wages rise when prices are falling. Real wages will rise if prices go down and nominal wages will go down if prices go down. Nominal wage equals real-wage plus inflation. When inflation will go down nominal wages will go down and real wages will rise…

LAW OF PRICES...

In Economics we say that prices should be such to clear the market.  Inflation targeting may be of less use because we should let the prices become market clearing. When we choose inflation targeting we do not let prices go below the prices in the base year which means we have set a limit for compression of prices and if it goes below that it is a deflation. But, deflation is a good-thing because it decreases prices which are good for competitive devaluation. What we try to achieve by depreciation? More demand, less prices relative to the money-supply and more exports. We gamble on other people's income. There should be a "LAW OF PRICES”, too, means "less price more demand and more prices less demand" And, a product's demand is largely determined by its prices. How many people can afford it and lower prices will attract more buyers. You can earn your long term profit in the short run if we reach a wider population by keeping prices low. It is called scale-economies. When prices go down it is a moment of relief and we should welcome it by floating a lower redenomination. But by redenomination i mean the difference between paisa and rupee. When we move from rupee to paisa it is a lower redenomination and if we move from paisa to rupee it is a higher redenomination. The central bank commits that the value of money must be increasing and not decreasing. But what generally happens a Rupee looses some of its value every year...

RMB as Reserve-Currency...

Article;

Why Doing Business in China Takes a Lot of Cash


Comment;

The highest denomination is rmb 100 which is near to the $100 highest denomination in the US but people hold five-times more cash in China than in the US. It means money supply is higher in China than the US. High money-supply means a weaker currency. It (China) has kept money-supply high in order to gain from  cheap currency and cheap exports. This is what the US objects "an artficially low exchange rate and low value of money to gain advantage from cheap exports." China is expected to overtake the US in 2018, so by that standard we can expect the rmb-dollar exchange to equalize near that period. Meanwhile we are going to witness an appreciation in rmb during this period and a debate to include rmb as a reserve currency like dollar. Chinese interest rate are lower than the Indian rates it means it is opting for a loose monetary policy to gain advantage in exports even when its main trading partners are facing recession and weak demand. If China wants rmb to get the status of reserve currency it needs to let its currency float near to the value of dollar.