The WORLD is defying David Ricardo...

According to Ricardo explaining income distribution is the objective of Economics and he concluded that as the time will pass agriculturalists will earn more than everybody else because population will grow (as the time will pass) and because land is scarce, therefore prices of food will go up partly due to high demand and partly due to limited supply… But, even after so much time passed this trend is not observable in the real life… and other things have taken precedence (instead of food) in terms of utility, not doubt utility of money is too high… The reverse trend in the agricultural income-pattern is explained by the “Water Diamond Paradox” which says that prices are sometimes not set according to its utility and among the examples are prices of water and diamond… Utility of diamond as compared to the water is very low, but high on prices… So here the relationship that utility decides prices as taught in grad school does not sound true… Utility of diamond relative to water is too low and the price of diamond relative to water is too high… In our example if we replace water with food the conclusion does not change altogether… Then why the farmers the world-over are committing suicides… According to Ricardo they should live in leisure at the expense of others but the scene is just the opposite… Nevertheless, the water-diamond is a right observation… The most important thing is that the inducement to invest in agricultural which has a direct correlation with prices is missing because the government decides the prices and not the market… More prices will motivate farmers to produce more. The inflation in the food category in INDIA explains a massive investment in agriculture and especially in the horticulture or vegetables… High prices are good signal for investment but due to high land prices a common man is only in a position of selling agricultural land and not buying it… The income tax exemption on the agricultural income (I think) is a great incentive to invest in agriculture and the government should also reduce taxes on lands that are bought for agricultural purposes… That would be a great thrust to agriculture… A straight 30% reduction in taxes on agricultural income is a great investment because no investment, except in stock-markets, pays 30%... Investment in agriculture is a great opportunity… The government can not compress prices for too long because the would harbor unrest in the peasantry… If they understand… Higher prices in the future is a great signal for investment… Profitable…        

Consumers should...

Article;
Adam Smith vs Manu : Capitalism is smashing casteism in India.

Comment;

Consumers should understand that buying one rupee sachets does not reduce their consumption... Poor buy things on a daily basis... But i would tell them to save per month and spend per month... Savings in banks would also earn them interest income... And, relatively rich should do it for a year and go to the wholesale market... That would save some money... 

Japan...

Article;
Bank of Japan may ease policy for 'some time' to slay deflation: Haruhiko Kuroda

Comment;

Japan is "still" in "liquidity-trap... interest rates are flat zero... inflation is low because consumer-spending is low ... less demand for products but unemployment-rate is near the natural rate... wages are constant... people are definitely holding alot of cash after so much of easing... People are definitely expecting inflation deflation because they are doing it... they know at some point of time the government will fight deflation stop fighting deflation...   (sorry for typing errors)...

Krugman says ''don't snatch away the bowl..."

Article;
Why some Fed officials want the bank to retreat stimulus campaign more quickly?

Comment;

The Pigou-Effect works in liquidity-trap… Now that We have reduced unemployment-rate close to its natural-rate, but economists say that the US economy is still stuck in liquidity-trap… To overcome liquidity trap Keynesians recommend the use of Fiscal-Policy, but, again, the Public-Debt of the country does not allow it to loose string… So the economy has totally failed to cross the trap… sorry… but, by not using any of the above methods… so it is neither Classical nor Keynesian… However, we can not reject the thesis that politicians are not necessarily economists. Pigou says, in liquidity-trap, when people accumulate reserves in expectation of lower prices ahead and are unable to arrive at the right conclusion, because they always expect that prices will fall more, greed…, it is good from the point of view of growth to let the prices fall and help clear-market and generate more demand… In this state of affairs if interest-rate is at minimum as it is now, it will definitely help the economy to pick steam… economic-activity always awaits low interest rates… Inventories will be sold-off and low interest-rate will help improve supply for future. Economy will gain momentum… Once Bernake himself said, not long back, that “little deflation is not bad”… Pigou says lower prices will increase real-wages, what Yellen wants, higher wages! Higher real wages and income should definitely reduce voluntary-unemployment, “stopped looking for jobs”. Still early to increase rates…

Reform taxes...

Article;
The scourage of black money.

Comment;

Tax is considered by many as a tool of redistribution of income and lowering inequality... but it has lost its meaning probably because of the flaws in the direction... People pay income-tax and then tax on goods & services... By the way of income tax the government one time taxes all the economy, ineligible apart, everybody, consumers and producers, then why the government imposes tax on goods and services? People pay both direct and indirect taxes, why pay taxes two-times? Moreover, indirect taxes are also paid by the poor people who are already dependent on the government… Is that an example of good tax-system where rich do not pay direct taxes and the very poor pay indirect taxes? Is that rational? Altogether, i think, the tax system is too regressive and directionless... Black money is also spent on the same goods and services and indirect-taxes are paid… In this way the money that is spent does not remain black-money, completely, because half the way they are right... The government becomes a partner in the laundering... Although the government owes the money, anyways, but I think the government so far has remained very soft on the issue, almost closed eyes… The possibility of tax-evasion far exceed when income tax is concerned because you can hide your income but you can not hide your expenditure… Therefore, i think, there is a need to make the Indian tax-system more liberal and more efficient and more as a tool to ensure redistribution of income and inequality… 

Living at limits...

Article;
Raghuram Rajan's call for coordinated global monetary-policy -a distant dream.

Comment;

Rajan is worried about the foreign investors exiting INDIA and the rupee depreciating beyond REER. Depreciation will further stoke inflation; however, Indian exports have shown responsiveness. In economics many times we have a trade-off. Lower interest rates are good for stock-market because it indicates that investment will go-up. The capital we are seeing in the market is mostly foreign capital coming out of developed markets central banks chasing higher returns in the emerging markets because they are growing faster, but is expected to retreat its base (the US) as the economy and interest rate improve. They have flown to INDIA following the boom, the up-cycle started in 2004 which has now probably hit its bottom. So they have started withdrawing their investments because following the RBI they expect prices to go down with more tightening. All prices in the economy move in the same direction, even price of capital, interest rate, and price of labor, wages. Stock prices too.  Economic growth, inflation and interest rates are all positively correlated. When investors expect economic-growth, s/he expects inflation and s/he expects higher interest rate because the central bank would increase interest rate to control inflation.. If foreign investors expect a prolonged downturn they will exit now and will return to the market when the easing starts, means when the next cycle begins. Japan and Europe are still easing. Suffering is inevitable because we have reached our limits…

More on lower currency-redenomination…

Just like loose monetary-policy, loose Fiscal-Policy too is responsible for currency de-debasing... If we are going to follow China and some other developed countries then we will have to go through currency re-denomination every-time inflation is too high... Too much inflation debases the currency and people start carrying large volumes of money which is unnecessary, therefore, countries apply currency-re-denomination which reduces the volumes of notes and makes the new currency re-denomination stronger, the new currency will be stronger. Higher re-denomination indicates loss in the value of money… But, the logic is, if everything’s’ value grows as time passes and investments we make also grow, then why the value of money decreases as the time passes… The trend across the developed countries is that their population rate of growth are contracting which means less demand for their products and they are now too much dependent on exports for growth, therefore, we can conclude that as the time will pass supply will eventually outstrip demand and prices will start falling, in one word- deflation, as we have experienced in Japan, the US and many parts of Europe… Therefore, the pattern we are observing is that prices will fall as the economy will grow and supply improves… But, prices can not fall below the lowest denomination of any currency and in this situation if we want more demand we can choose to increase the real value of money, a rise in real wages, incomes and profits… by applying a lower re-denomination of the currency... But, in lower re-denomination the old currency becomes stronger and the value of money increases…

During the past decade Germany has relied on low prices and wages, in sum-up internal devaluation, to keep its exports competitive which can be said to be a good policy in international-trade. Both internal devaluation and depreciation of domestic currency affect prices to increase demand, but with a difference... The former directly lowers prices by a consistent monetary policy while the latter decreases prices relative to income by depreciating home currency to increase demand for exports... However, the latter option was not available to the country since it is a part of currency union and shares its currency with many other countries... External devaluation was not possible... And, the trick, internal devaluation, did the job... Apart from China, Germany is another country which has considerable surplus in international-trade... Its foreign-trade policy can be said to be a success as far as its exports and surplus is concerned... But, lowering prices and wages are constrained by lower nominal price and wage rigidity, a corner-stone of the Keynesian Economics because it helps clear the markets and achieve full-employment, another goal of policies, after price-stability... But, the trend/pattern we have found that there is nominal downward wage rigidity but prices show no such pattern... there has been a consistent pressure on prices, in almost all the developed countries, to go down which has reasons, too... Because, in advanced countries, as compared with developing ones, where population growth rate and pressure is less, supply easily outstrips demand and in case of a deteriorating external environment, inventories easily start piling-up and economic activity slows-down and especially after the Minsky-moment which says there is an increase in risk-taking and debt after a period stability... Too much debt is responsible for low demand... Economists say that inflation erodes the value of debt because value of money goes down... It is good for the debtor, but bad for the creditor... Economists look to favor the debtor and ignore the creditor who has worked to earn that income; therefore, i think the economists should start favoring the creditor... Low real interest rates are good for investment, but bad for savings... Savings are discouraged and investment is encouraged... The question is how is this going to work because without savings how investment is possible...? To keep the savings match investment, or the other way, too... We need to keep savings attractive enough otherwise we will fall in the liquidity-trap because people will prefer accumulating reserves instead of bank deposits... therefore, to avoid liquidity- trap the central-banks must keep the bank deposits attractive... Very low levels of interest rates are not good for savings and investment, too... However without its own currency Germany will find it difficult to move from here... Further, internal devaluation will require Germany's own currency... In internal devaluation prices can not fall below the lowest denomination of Euro and for further fall in prices Germany will have to float a lower denomination of Euro... And, external devaluation is not possible without its own currency and the gains will be shared by the other countries in the Union...

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...

…”unemployment is high and deflation risks persist” it means we need to remove excess supply of labor by reducing wages/income. Deflation means prices are falling, a downward bias... it means the market is trying to correct itself but our inflation targeting is making things worse. We are not trying to let the popular wish materialize. What we should do is to let the economies deflate. Prices and wages/income will fall. But we have evidence of nominal downward-wage-rigidity in many parts of the Europe but as we say that there is a downward pressure on the prices which is an evidence of no downward rigidity in case of prices, opposite of what Keynes said. It means prices will fall more than wages means a rise in real wages/income. Which would increase demand to remove excess labor supply. Precisely called (again) the Pigou-Effect. And, if we want to increase the wealth-effect we can float a lower denomination of Euro which will increase the space between which the prices can fall. I think the Union should let the member countries with high unemployment deflate and low unemployment countries inflate their economies (already suggested by Paul Krugman). Precisely means real appreciation in countries with high unemployment and nominal appreciation in low unemployment countries. The economies should grow and appreciate either in nominal sense or real sense. I think the Union should give the countries liberty to print currencies in lower denomination (of Euro) which is expected to keep money-supply intact even in situation of distress. They are too much dependent…

We can always use paper. Paper's value does not change (little). And, we can periodically infuse more and more purchasing power without engaging metal, if we are in deflation part of the cycle or an induced fall in price-level. Prices will go down, but we can infuse purchasing power and demand within the whole economy at one strike. Fall in nominal wages but rise in real wages. We can easily create wealth even under falling prices. But people need to have cash (a little saving in form of cash) and less inequality will be more helpful for equality concerns. For example we can, in INDIA, increase value of a rupee equal to four rupee if prices come down. All we have to do is to bring out our 25 paise, the lowest denomination if we are comfortable with it, and the RBI agrees everybody that they will reduce prices by 25%. Like a bargain.( the RBI's job is also to boost employment by reducing interest rates and boost per capita income). Its just an example. I have also seen 5 paise in Indian economy in my life too …

Subsidies make you competitive globally...

INDIA is a developing economy and much population is still struggling with poverty... we need subsidies to feed them in the face of insufficient incomes and many unemployed... I think INDIA should not shy from reducing subsidies below 10% in phases as the magnitude of poverty goes down... INDIA is reducing subsidy on diesel and is working on targeted subsidies (to the poor)... Therefore, it should not be perceived as protectionist (mainly)... When it comes to domestic population and jobs even the US sometimes behave like an utter protectionist, immigration-rules and skills specific Visas... In the line welfare of domestic population comes first... Today policies effect globally... The roll-back of the QE programme is creating problems in the emerging markets... so the US will not do it... it can not promise? Subsidies on agricultural products make them competitive abroad, but why oppose a country when it wants to sell low... It is their problem, right... Subsidies bloat fiscal deficit...

Oh... O... It is not very much different from depreciation... Subsidies can make you competitive globally... prices go down...

“Achche din,” Enroute!…

The “Achche din” slogan of the ruling party BJP was more received by the people of INDIA as days of lower prices… every leader in the opposition is making mockery of the slogan… but, very few are praising lower inflation (the CPI) at around 7.3% which is lower than the target (8%) set by the Urjit Committee Report to be achieved by the year 2015. The CPI inflation is not only lower but it is also achieved earlier than the set time-period… It’s an achievement because it has been a trend since around 1970s that inflation remained near 10% in the face of all supply-side bottlenecks which are the result of same types of (lenient) policies… The recent drop in prices can be largely attributed to the strict stand of the new government at the Center that made hoarding a non-bail-able offense and released lakhs of tones of food-grains to the market… Moreover, the right policy in the external (international) sector (exports/imports)... Lower import-tariffs and higher export tariffs which are expected to increase the domestic-supply has done their job a little… It is equally important to press local suppliers not to indulge in hoarding by importing, increasing supply and lowering prices to keep expectations of higher prices by hoarders down… On the expectation of lower prices suppliers will hoard less… The present government at the Center is using all right tools to tackle supply which lagged behind due to rise in wages/incomes and demand due to expansionary policies of the past government… Public expenditure created a lot of demand in the economy… The government should counter inflation from all the sides because it is entirely possible to tackle domestic demand, improve supply-side, and lower prices… And, this is supported by the evidence of the most developed World, Japan, the US, Europe… They are trying to reinforce positive inflation expectations but the supply-side is so good that prices refuse to respond and price-stability has become the “new” normal… It is definitely and entirely possible to keep prices stable… Improvement in the supply-side will undermine effects of rising employment and income in a developing-economy… And, since the interest-rate is high, and the private-sector is waiting for it to come down, it is responsibility of the government to improve investment and supply to the economy… Supply-side can definitely be improved… We need a lesson or two from the developed World…