Low inflation also supports low unemployment...

Article;
13.3 unemployment-rate in 15-29 age group in 2012-13 Labour-Ministry -Survey.

Comment;

Higher productivity means higher wages which also indirectly means we are under-paid and we are doing jobs longer. Use of skills make any task easier or takes less time therefore we need to match skills with jobs. Without which any task would be a little difficult or harder. We have to work a little more harder and longer. We are paid according to the marginal product which would be less if we are employed elsewhere, wrong skills and job match. In this sense we are over-employed because we are getting less and working same hours as the right jobs and skill match. We are over-employed because we are being paid less. Nevertheless the problem of over-employment co-exist with unemployment in INDIA because we are growing slower and are adding less jobs every quarter because of, again, high inflation and interest rates which has put a hold on investment. Our real wages are low also because of high inflation. We need to improve real wages if we want to correct the “tag” over-employment because it restricts the economy’s demand and consumption which is directly responsible for the level of employment and growth. Our RBI Governor is giving more importance to inflation over unemployment which also depends on the same (inflation). If inflation goes down interest rates will go down and real-wages, investment, employment and growth will pick-up. A low level of inflation is also necessary for a high level of employment or low level of unemployment…

The Liquidity-Trap and the Pigou-Effect...

The paper...

Wrong policy moves (US)...

Article;
Sensex, America and elections its three to tango.

Comment;

This time it (QE taper) looks real because at one occasion according to a FED official probably the whole QE program is misdirected and even harmful... Moreover asset price inflation and another-bubble fear could be the probable cause of sooner than expected QE tapering. But at another occasion Bernake said that interest rates will remain low ever after the end of the QE program until unemployment rate drops to 6.5 %. I think Bernake is going to surprise us this time before he leaves. We need to look carefully in to the words "misdirected and even harmful"… i think the FED is going to accept its policy mistake… because of its wasteful effort to reinforce higher inflation expectations to come out of liquidity-trap... It may be wrong to take the economy in the wrong direction when the economy should go for an internal devaluation which means a lower level of wages and income to achieve full-employment but the economy would generate demand by lowering prices but we have evidences of downward wage rigidity which may prove useful because prices will fall more than wages and that would mean a gain in terms of real-wages… However Keynes said the same thing for prices downward rigidity… But we have evidence of persistent deflation in economies like Japan… The FED too said it was expecting a deflation and is fighting deflation. So, downward price-rigidity is not supported by the evidences. Wrong policy moves…

Let people save...

Article;
INDIA and the slowing economy Chidambaram squares-off RBI again.

Comment;

If people want to save more we should not try to manipulate them... A higher level of savings would exert a downward pressure on interest rate because supply (of capital) will increase... Good for investment... But investment spending is a bit different... A Capitalist always compares his return on savings in banks and the return from investment and invests only when the return is higher than his savings in banks... Therefore a low rate of interest will encourage the Capitalist to take risk... Higher interest rate in this period will increase savings in this period and will lower interest in the next-period… INDIA is going through the first stage, inflation is high therefore we need higher interest rate so that people consume less and save more… In the next stage, when inflation is down due to higher interest rate in the previous period the central bank would lower interest rate and Capitalist will find investment more profitable… Higher savings in this period will always lower interest rate in the next period but the only problem is high inflation… To restrict demand and inflation we need higher interest rates… Higher interest rate on savings will discourage investment spending, as already said above and also because high interest rate itself, but savings would get benefit of higher interest rates… The central bank should make investment a little unprofitable when compared to savings in banks and by doing that it can target inflation a little better… i think a 10% increase in growth, income and inflation would be compatible with 10% interest on savings in banks…

FM is partially true...

Article;
Monetary-Policy has no impact on food-prices-P Chidambaram.

Comment;

Monetary-Policy affects food prices through loose money supply, and increase in employment, wages and income... if it had not then why we are expecting more rate hikes... Does it mean that our RBI Governor is doing a mindless job..? No because he is trying to control demand through interest rates hikes, both the govt. and RBI can affect demand... The govt. through loose fiscal policy in programmes like MNREGA… it is pumping wages and income... Rural areas got a boost in the same terms (wages and income) and demand is built… It is true that food inflation is not always completely a result of demand side forces and sometimes supply side factors are too responsible… But monetary policy can help controlling prices by controlling demand if supply side measures can not be improved in the short-run as in case of vegetables, it takes time… But inflation in cereals like rice and wheat, of which we have enough stock with the government, is not helping us in bringing inflation down… Therefore when we are done with the supply-side issues to control prices in the short-run we need to manipulate demand a little through monetary policy…

Different shades of Europe...

Article;
Europes money trap the end is nowhere in sight.

Comment;

Europe should not lower interest rate so much that it forces the economy into liquidity-tarp... At very low levels of interest rate people will find keeping money with them more convenient instead of keeping it in banks... And it will have to print money in order to carry-out its policies because it loses control through interest rates (already zero)… The US used QE when they lost control over interest rate because of ZLB and affected liquidity and money-supply through printing money… Unconventional tool… Europe is trying to infuse demand and economic activity by improving money-supply… And that would require no inflation targeting for some so that wages and prices move to achieve full employment… But the problem is that we have to deal with different shades of prices and unemployment throughout the Europe… Therefore Paul Krugman suggested high inflation for countries like Germany will make Spain more competitive in exports relative to Germany… Brilliant idea…  Therefore we can generalize the argument saying, that, countries with considerable trade surplus and less unemployment should try to inflate their economies and others with deficit and more unemployment should deflate, to contain trade balance within the Union… im not sure about the Union’s such commitment… Money-supply wise the former should increase nominal wages and income and the latter should increase real wages and income. Both ways demand is created…

Neutralize Sacrifice...

Article;
Both America and Europe Central bankers should be pushing prices upwards perils falling.

Comment;

We prefer inflation over deflation because it reduces the value of debt in terms of sacrifice made to repay a loan... Inflation makes the value of money to fall... and if inflation starts falling it increases the value of money in-hand and we will sacrifice more this time... This is a standard explanation "why we choose inflation over deflation..?" But as far as income is concerned it is fixed in the short-run and if under this condition prices start falling within limits it should be a gain because people will save more and will repay their debt soon... This is totally meaning less to assume that the debt condition will deteriorate... Falling prices will release more money for debt-repayment... We use both, fixed and floating kind of interest rates for loan repayment and the banks can adjust interest as per the client's real sacrifice. In this condition banks should try to neutralize the sacrifice. They should move interest rates to achieve this end... Floating rates are (i think) are more appropriate the neutralize the sacrifice...

Inflation-fighting lacks commitment...

Article;
Bonds, rupee recoup losses after pep talk from Raghuram Rajan.

Comment;

Rs 8000 crore for bond purchases and we are not expecting inflation... What the FED (US) is doing...? It is doing the same thing and is expecting inflation to break liquidity tarp... The US bond purchases and the INDIAN bond purchases are the same type of quantitative easing methods except that the FED is printing money and the RBI is loosening its reserves. Why we are not expecting inflation??? The right thing to do is to sell bonds and not purchase of it... Back in 2011 the RBI loosened CRR two-three times which pushed back high the falling inflation... We are using half-hearted measures to control both demand and supply to rein-in inflation... The commitment to reduce inflation is too flexible...

Target wages and income (US)...

Article;
Tolerating high unemployment inflicts huge damage on US economy.

Comment;

The policy makers have had a choice between lower prices and high employment. In the past (before recession) prices peaked as high as 6%, with oil, and the policy makers  chose high unemployment in favor of lower prices and price-stability, mainly... What high unemployment did, it stroked income and demand negatively. It was the choice of the policy makers... they knew that the past monetary policy inflated the bubble. They said… “let bubble burst and they will clean up the mess later”… Had the central bank increased interest rates to deflate the bubble there would not be that severe demand slump coupled with liquidity-trap... It (higher interest rate) would have helped both... The central bank failed to send the right-signals to the economy… nevertheless they succeeded in lowering the prices… But then again, to break liquidity-trap, the Fed adopted the task of inflating expectations and started its QE programme. It wanted the public to believe that prices will rise and not fall since falling prices foster more falling prices expectation… They tried to reinforce an expectation so that people do not accumulate currency in the expectation of fall in the general price-level. The QE programme was a partial success in inflating the economy but failed to dent unemployment with a considerable gap... Demand is created when income rises, and, both the Fed and the US policy makers should try to affect the same (income) variable but more directly… Fiscal policy could be a direct option, a direct boost to employment, income and demand… but the government is debt constrained but, again the ZLB and liquidity-trap is a good opportunity to borrow and spend... The policy makers should target wages and income since there has been a consistent real-wage-product gap since 1970s… Deflation could have helped in increasing real-wages and demand through the Pigou-Effect but by adopting inflation targeting it (the Fed) has missed that train…

MSF and, demand and speculation...

Last time when Rajan reduced the MSF...

I said…

“The repo-rate hike was expected but the MSF reduction undermines the RBI's credibility against inflation... MSF will affect short-term demand and given the volatility in retail prices which are mainly short-term prices (perishables), we need to control demand... We (in Economics) assume that inflation is a short-term phenomenon; in the long-run we assume zero-inflation. Therefore we need to target inflation in the short term using short term measures like MSF... I think the Governor should have used MSF to restrict short-term liquidity to control demand in the short-run... (Probably) the RBI is using wrong levers to tame demand. If inflation exists in the short-run we also need to use short-term measures like MSF...”

This time i add...

"MSF is used when you have acute cash tightness/emergency/urgent... which has a bearing with demand through liquidity… Last time when the RBI raised MSF it said they want to curb speculation, then why not speculation on commodities...? I think we should keep the MSF tight for speculation of all kinds..."

More rate hikes likely...

Article;
May have done enough on rate hikes watching economy -Raghuram Rajan.

Comment;

Supply-side issues should entice our new Gov as the possible answers to our economic woes since he is a “Supply-Side economist”. Rajan should have helped the economy’s growth-rate by removing supply-side bottlenecks for food and infra in his CEA avatar but he could not help much under the government pressure because the government needed food-grain for its Food-Security-Bill (populism)… In his new avatar he is supposed to increase supply (G&S) by managing interest rate and money-supply, but, inflation has made his task a little cumbersome…  How we can say that we are done with the interest-rates when the CPI is far high than our target…?  We need to increase short-term rates at least 500 bps if the inflation is at 10 % [but actually it is over (CPI)]... But, the Governor is hesitating to increase short-term rates because the Industry wants rate-cut to produce and earn profits, but, we forget that the hike in interest-rates is also increasing the capitalists’ income by increasing interest rate on his savings if he is not investing... Actually, in theory we assume all savings are identically invested, not completely true. Therefore, a hike in interest- rates will benefit Industry is the same manner it will affect others, higher return on savings, their income will increase… (i think) it is the right time to make our interest-rate regime attractive (as Rangarajan says)… I think he should not feel hesitation in increasing interest rates. It will help all, in form of lower prices too…