Prices, Interest-rate and Bonds...

Liberalizing the bond-market in INDIA would increase competition resulting in lower interest rate... The RBI has also proposed to liberalize foreign borrowing through masala-bonds... We now have competition from abroad to sell debt...Masala-bonds are rupee denominated bonds offered to overseas investors which do not need hedging... however, borrowing in foreign currency must be hedged by currency derivatives... Economists do not favour borrowing in foreign currency because of the lower reserves and also because it cannot be printed by the central bank...If you could borrow from a foreign country at lower interest-rate, domestic-demand for funds would go down and domestic banks would lower interest-rate to increase their demand... Domestic-lenders would face competition from abroad... Moreover, inflow of foreign funds would also likely to lower interest-rate... More investment and more supply could also lower the price-level and interest-rate... It would help transmission of rate cuts by the central-bank..

Lower-price-level and lower bond-yields mean higher bond-prices and returns... A negative-yield would even increase bond-prices more... Bonds are already inflation protected since when yields go down bond-prices increase... The real-value of bonds is protected... More supply of savings would lower bond-yields and increase prices, therefore bonds are safe... Lower prices increase the value of savings if other things remain constant...Low inflation and interest-rate mean savings would be discouraged and spending would be encouraged... Including the dynamics show that in the future inflation and interest-rate would rise because of higher spending... Lower-prices or higher real-interest-rate could make people save less and spend more, while higher-prices or lower real-interest-rate would increase the supply of savings and could decrease spending... According to Wicksell higher real-interest-rate means higher return on capital... We need to explain the relationship between economic-variables in the dynamic sense because expectations are equally important for the outcome... The real-world is dynamic...

Keynes said that money is not scarce when the central-banks can print currency... Supply-side problems and inflation is the main cause for tight money-supply because it reduces the value of capital... If they are not present then the central-banks may continue with lose money to increase employment, demand and economic-growth and in some cases with negative-real-interest-rate... Public-spending, that boost innovation and productivity, on education, skilling or re-skilling and, if necessary, on infrastructure is important for increasing real-wages, with low inflation, and, demand and economic-growth when population-growth-rate and demand is going down in the most of the developed-world - Japan, the US and Europe..

The Political-Economy…

Economics or Political-Economy, one and the same, has a direct link with the standard-of–living of a country which is the product of higher-growth-rate, the barometer to measure the rate of improvement in the productivity and wages, and, demand and growth which may or might have a correlation with the lives of the country-men for which a low and constant un-employment-rate and price-level is must because of the same and same demand and supply, the former same because, of the key-words in Economics  and the latter same is because the quantity-demanded must match quantity-supplied to fulfill the aforesaid objectives but, in the real-world the match is often absent due to inconsistent monetary and fiscal policies dependent on the data delay and availability for transmission of signals, action and change in the economic variables and higher growth could be related to the higher-investment, though not in case of higher inflation because that would require tightening and higher unemployment and lower-prices to restore value of money and equilibrium between demand and supply by managing interest-rate or natural-real-rates, the money-rate or nominal-rate of interest (minus) .the rate of inflation. Lower-natural-real-interest-rate could linked to higher-investment, higher-supply, lower unemployment, and, higher-demand and spending - consumption and investment - even across economies, international-trade has a role since it may help to lower the price-level in the long-run, beyond five-years, and it would also increase demand in the trading-partners economies and they would demand more exports and could help-us earn foreign-exchange, wealth would increase, in the old-times gold, which would also increase employment and lower-poverty because it would also increase taxes and the government-spending on education and research and, skill-development to increase innovation and productivity, and, real wages and demand, and economic-growth or GVA (the Gross-Value-Added after deducting the deflator), in the domestic-economy  and also externally. All the three - monetary-policy, fiscal-policy, and the foreign-trade-policy are responsible to achieve the NAIRU (Non-Accelerating –Rate-of-un-employment). The NAIRU is that rate of un-employment at which the rate of change in the general-price-level does not reduce the value of money, and, demand and economic growth-rate, in case of lower prices money-supply is loosened and when there is inflation the money-supply is tightened which help maintain full-employment and price-stability to achieve the projected economic-growth.

It is also true for INDIA…

Chinese-Economy is a Mirage and it is own biggest enemy… …

China in its last three-decades has warranted a higher-growth-rate through lose money-supply and zero-rate-of-inflation, however economists and analyst doubt Chinese data. Low-inflation and low-wage-demand increase competitiveness and also through depreciation that means higher-inflation and lower real-wages and demand, and higher nominal-exchange-rate to increase demand for exports at the expense of the domestic-demand. It is a surprise that depreciation has not increased inflation in the data or probably because of wrong-data. China continued to grow in double-digits for the past thirty-years which was a very long-stretch. The supper-cycle continued too long with occasional-blips, mostly external. China economic-growth defies the relationship between money-supply and inflation, specially the quantity theory of money. It grew double-digits without generating much inflation. ALL ECONOMICS FAILED… when China is still an emerging market. The poor wage-bargaining of the Chinese is because the Communes never let the poor people know about the real inflation so they may demand their productivity wages… The voices, although no voices, were misinformed. Economists know that lose money supply and too much investment would increase inflation. It is also probable that the absence of democracy may have curbed the economist-voices to criticize lose money supply and inflation. The data is veiled. We do not hear much from Chinese economists. Only the Premier speaks. The Chinese interest rates have a downward long-run-trend in the high growth-period. The Chinese productivity and exports have grown much faster than real wages and, is reflected in the real-GDP and big surplus in the current-account-deficit (CAD). Communes have higher spending-power and a lot of local-government-debt has, now, turned bad. China has still fire-power left to chill the overheating caused by lower interest-rate and the borrowing cost. Missing data for the inflation also means that the Chinese-growth rate has been a mirage because it is also the deflator of the real GDP or Gross-Value-Added (GVA). The Chinese domestic economy never grew that fast except exports… The domestic-economy has suffered in the name of competitiveness…       

China is it's own biggest enemy…

And, it is now trying to be bad with INDIA for a terrorist state…

INDIA should definitely stop imports from China for six-months with extendable deadline which would also be good for INDIA because we can produce at home at lower wages and it would also create employment opportunities in INDIA. Chinese are too much arrogant…

We should treat everybody as equals…

China is now a supporter of a terrorist breading nation like pakistan…

ITS TIME FOR INDIA TO RETALIATE…

China should be thankful to other countries for their less protectionary-policies even when it is mainly protectionary and less liberalized than other democracies... It can not grow on its own by depreciation... It still needs to liberalize imports, capital-account too, so that it helps other countries to reduce their trade-deficit with the country... Peace and Prosperity in the trading-partners' economy is important for its long-run objectives... China itself is its biggest problem for its own stability... External situation is out of China's control...

The supply-side in INDIA...

The current wave in economics is the Real-Business-Cycle-Theory which says that more money-supply is likely to reduce interest rate and improve supply and reduce prices in the long-run... however, inflation is expected in the short run due to full-employment and protectionary policies... It concentrates on increasing demand/supply and growth by concentrating on real variables rather than nominal variables... Lower interest rate would decrease prices in the long-run by lowering the borrowing cost... Higher interest rate would make the Indian companies uncompetitive because of the higher borrowing cost, however the US, for example, is capital rich... INDIA has comparative advantage in labor-intensive techniques because labor is abundant and wages are cheap. Exports would only be competitive if the industry uses more cheap labor than expensive capital-intensive techniques which save labor. Interest rates in INDIA are high compared to the developed-world which means INDIA needs to specialize in labor-intensive products...  Indians would benefit from labour intensive production functions, but if the borrowing cost is also low that would be an added advantage... Higher interest rate is not good for domestic investment... High rural-agri interest-rate cost is another big problem because of lack of proper credit facilities... Farmers borrow at higher rates form the local money-lenders...  

INDIA has a tight unemployment rate on which the supply-side rests too much... INDIA''s, both, high demand and low-supply-side are the reasons for higher prices for food... which increases wage-demand and prices depending on productivity (wages equals marginal product of labor) which in turn depends upon training and skills, they might have a correlation... Moreover wages also do depend upon inflation and inflation expectations... productivity also increases supply which may help keeping prices stable and lower interest-rate and increasing the economic-activity and growth... More public investment in training and skills is needed when the private-sector is constrained by higher credit cost... Low inflation and low wage demand would increase the economy competitiveness among peers... Skills and training might also help keeping prices in check by increasing productivity and supply... In order to boost productivity investment in skills development and innovation, through investment in education and research, are equally important.

FDI which increases employment in INDIA should be promoted, if the domestic investors are reluctant and cost is high... Agriculture is an employment-intensive sector in the country, it gives employment to close to 50% of the population, it is a major source of income in the economy... FDI in food-processing and retail would increase farmers'' income by cutting the middleman-chain by procuring directly for the farmers... Food-inflation is high in the country, more investment would cut supply-side bottlenecks and reduce inflation... 100% FDI in marketing of food products sourced locally is a major supply-side reform to reduce the prices of food items and improve farmers income. Companies can source directly from the farmer... It is the same FDI in multi-brand retail... 100 %... but, only in the food...  Deregulation and liberalization are not the same and sometimes liberalization might require better regulation...

Lower supply would increase prices... And, higher supply would reduce them (prices)... Look at the oil prices behaviour...  The world is going through excess capacity and therefore there is deflation... INDIA is supply constrained and slow trade liberalization has kept prices in a fix... After full-employment imports would help lower prices... It would also help shoot foreign demand... Income in the trading partners’ economy would go up... Imports are important for price-stability, demand, full-employment and growth and jobs... Interest rates are higher due to sticky prices or inflation... It also restricts domestic investment...

The Fed may wait for overheating...

The Fed in the US is set to manage the point of view that the economy is on a strong foot to weather a gradual rate hike in the occasion of a strengthened labor market and Core-inflation near the Fed’s target of 2% inflation. The unemployment in the country is 4.9 is close to the NAIRU when inflation is low and stable and expectations of low inflation have put a downward pressure on the long-run rates and also on the short-run rates when the interest rate expectation are biased lower which might increase spending, but the Fed is in hurry to hike rates in the expectation of overheating which is yet to show-up in the inflation numbers through wage hikes when some sectors like construction is facing shortage of labor due to full-employment. It is true that the economy might be close to maximum employment and low and stable inflation, but the growth-rate is slower than the potential which is around 5% depending on the population growth rate of 10% after accounting for 5% frictional-unemployment. The expectations of higher inflation in the future have made the Fed follow a hawkish stance in the hindsight of an overheating economy that may trigger rate hikes and a slowdown or recession due to higher interest rates. The economists are aware that rate-hike might result in recession or down-cycle. During rate hike cycle the economy tries to pay its debt soon and avoid more debt and a rate cut or lose money-policy would boost demand for debt and increase spending – consumption and investment. Therefore, the Fed can not commit rate-hikes and higher growth rate at the same time, a rate hike would lower demand and growth and inflation in the economy.  This means the Fed’s monetary-policy would itself start the next recession and the gradual rate hikes might only delay it. Up-cycle or boom starts with rate-cuts and down-cycle or recession follows the rate-hikes, monetary-policy or credit-policy is responsible for trade-cycle. The rate-hike to control inflation before it surfaces the data might start the next recession soon. However, the natural real interest for the economy is also close to zero.