INDIA Is Not Demand-Deficient, Spending Would Recover Fast...

As the demonetization story is slowly unfolding in terms of the effects on the demand, supply, and prices and growth, expectations… about the future that how long we have been in the trail of facts would signal the agents to do the best in their budgets, investors included, during this short-period of crisis of cash, matter. If people would feel that demonetization has benefitted them apart from the hardships they have faced they would support it since it is a big social-reform that is worth a short-run-pain since black-money is a form of social injustice and add up to illegitimate demand in the economy. The common-man is the agent to bring this big social-transformation, from corruption to a clean system, since his welfare is dependent on good public-services and state support in the form of direct benefit transfer and social-security net. Higher taxes are spent on the important things in life which are difficult to provide by a small vendor and the money from demonetization would be spent on the welfare of the poor, the Pradhan-Mantri-Garib-Kalyan-Yojna (PMGKY) has been started to show the government’s commitment to improve the condition of the poor of INDIA. Good infrastructure and employment-skills are sine-qua-non to a good standard of living and would help reduce poverty. Employment is best insurance against poverty and exploitation and the curb on black-money would improve the distribution of income and reduce inequality. Black-money in cash is saved after evading taxes that has a direct bearing on the spending on public-purposes to increase the quality of life and social-progress. Tax-evasion is a crime against the society, it holds-back development and growth, and higher spending by government may increase demand and supply. Apart from this a sweeping change could be expected when the banks are flushed with deposits and would be able to finance the loan demand at lower-rates when we say that INDIA is not demand deficient and the RBI has kept levers tight due to inflation and inflation expectations which would lower growth-expectation. However it is expected to cut rates when it has maintained an accommodative stance in case of lower inflation. Demonetization has improved on expectations about loose fiscal-policy and monetary policy in the next few quarters. The economy would definitely gain beyond demonetization because of better expectations for the key economic-variables like low-inflation, lower interest-rate and higher-spending, consumption and investment, and lower unemployment, too… The economy meanwhile is getting its math right… Higher savings due to limit on cash withdrawal would also be spent… Demonetization has increased expectations about the growth-rate in the following quarters. The economic-growth rate could touch 9% in the next few quarters on the back of rebound in demand till the cash-cripple is over because spending would recover at a faster rate …        

Demonetization Would Increase Value of Money, Demand and Growth...

The commentators on the demonetization are often heard advocating the positive long-run effects of it and that it might also cause disruption in the everyday exchanges with cash for some-time since a large part it has been replaced by new currency and digital transactions, which seems to be right. The long-run effects would play-out through the effect of money-supply on inflation and interest-rate and the value of money, however disinflation and lower interest-rate observed after the demonetization due to lower cash, although unemployment has increased temporarily with the shortage of cash to finance economic-activity, are likely to increase demand and growth-rate in the future. Inflation in INDIA has come down in the data following demonetization, moreover the expectations about jobs and incomes is not so grim because investors have only delayed investment and the improvement in the supply of cash day by day would soon help to revive investment and employment. When income is more or less fixed and inflation and inflation expectations are biased lower, would increase spending as soon as the economy adjusts to the money-supply and demand. We generally assume higher inflation while increasing money-supply, but when it is reduced we may also expect inflation to go down too because some of the demand and spending would go down. The black-economy which could be as big as a third of the white economy might be an important source of demand in the economy, especially for a home. Prior, real-estate was a cash and black-money oriented market which is now going to see a price-correction because of demonetization which is likely to increase demand of the common people, it would make homes affordable for the poor section of the country, however lower demand and prices would also lower the EMI and increase demand. When demand for construction would go up employment would go up too. The real-estate sector is an employment intensive sector which mostly uses unskilled labor; more employment would increase demand and the economic-growth. Demonetization would help the government in its mission of house for all by 2022. Lower prices signal more spending if employment and income do not go down, it is more expansionary because real-wages, real interest rate or real return on capital and real exchange rate increase domestic and external demand, lower prices could make the economy competitive. In INDIA’s case spending is only being delayed which is likely to come-back except the black-money demand and that people would find the market cheap after the pain-period is over. Demonetization could lower money-supply and increase the value of money, because it would make money scarce relative to goods and services by the way of lowering inflation and inflation expectation by reducing black-money dependent illegal demand. 

Liquidity and Cash...

In November the Consumer-Price-Index (CPI), the preferred gauge of inflation to set policy-rates, has dropped from 4.2% in October to 3.6% which is far from that the RBI expected in its review in the recent meeting and lower than the banks inflation-target for 2017 at 5% that might now force it to increase liquidity to increase transmission of the rate-cuts by the commercial-banks to increase falling investment and economic-growth due to demonetization and the cash-crisis. Now, when we have inflation lower than the inflation target for January 2017 we may expect the RBI to cut policy-rates in the next policy review to revive the economy that is trying to gather recovery from the previous down-cycle when there is still more scope to push for exports and pursue double-digit growth. There is, now, a gap of 2.6% in the key-rate and the CPI which gives more space for rate-cuts when the central-bank has already committed an accommodative stance. The bank had been in a rate-cut round even before the advent of demonetization which has further strengthened the case of rate-cuts in the event of falling growth-rate due to finance and cash gap. A rate cut at this juncture would help increase spending when it has been delayed by the public.

All the major economic-variables and expectations have been on a downtrend because of interruption in the supply of cash from the bank-accounts, inflation, unemployment and economic-growth, which might signal expansion in the RBI and the government’s balance-sheets, it is expected from them to try to improve consumption and investment by adopting the right-policies, this time to improve transactions, even by credit and debt outside the banks and bank-accounts. The government might try to induce small and big, wholesalers and retailers to use buy now and pay later service to build the trust economy to avert the cash-problem by using the Adhar-card and maintain account of credit/debit by receipts. Demonetisation and cash-crunch has struck business and trade, but we might create trust-economy based on identification and the ability the pay later. Everybody knows that there is cash emergency. However, the cashless-transactions through cards and mobile are also helping to reduce cash-hardship.  

The government has re-oriented the black-money-movement to the cash-less-movement... The government is pressing for wages and income-transfer direct to the bank accounts... It would help parity in the minimum wages and would reduce exploitation... Higher tax collection would increase allocation towards poor and lower interest-rate due to higher bank-deposits would increase investment and employment... Lower black-money-demand would make things affordable for common man... Nobody can deny that black-money would increase inequality... Black-money-is bad for an equal society...

However, it takes only few hours to learn cashless... People would have to learn because of income and consumption or living... Mobile and Jan-Dhan accounts would act as a base... Their penetration is higher...

The Fed Review This Month...

The discussion over the US’ Fed policy in December among economists and analysts is gearing-up as we approach the date and the consensus view is that it would increase tightening depending on the inflation target and the unemployment-rate. The actual inflation has remained on the upside but lower than the target, when the unemployment-rate has fallen close to 4.6 % and the economy has grown more than expected in the previous term which further bolsters the chance of a rate-hike this month. However, the recent jobless claims do also strengthen the rate-hike case. Therefore, the Fed is almost on its mark to increase the Fed’s Fund-rate to stop overheating and to increase traction in the future slowdown by increasing its ability to cut-rates in the future by increasing them at the moment, but as we know the natural-rates are on a downward trend, therefore we could not expect the Fed to increase sharply because that would affect the economic activity in a negative stride and would bring the slowdown in the economy. The natural rate theory says that interest-rate should not produce inflation or deflation so as to make the economy stable because inflation fosters inflationary expectation that is neither good for consumption because aggregate demand would go down, nor for investment because the value of capital-stock would go down. However, deflation would increase deflationary expectations, but since lower prices would also discourage supply people would rush to buy the inventories. The expectation that people would delay spending is not acceptable. In addition lower-prices would again lower interest-rate and interest-rate expectations which would increase supply in the future which further means price correction or lower prices. Lower borrowing cost is a larger part of the overall cost which is likely to increase supply and lower prices. The Fed is targeting inflation and has increased inflation expectations which have made the economy costly when there is already a long-term marginal-productivity and real-wages gap. Nonetheless, Janet Yellen has conveyed to the government to increase productivity by investing in education, skills and innovation. But, what would be the use of increasing productivity when there is already a big gap in real-wages and productivity since 1970s. Paul Krugman supports the stagnant-wages theory. Nonetheless, the Fed too might help increase real-wages by increasing deflation and deflation expectations by keeping the money-supply little tight… Or by increasing nominal wages by continuing with lose money-supply and increase inflation and inflation expectation which actually reduce demand. Milton Friedman in his optimal-monetary-policy envisaged deflation as the right strategy and maintained that nominal interest-rate should be sufficiently down. Therefore, the Fed might increase rates again after a complete year to keep the prices lower and lower inflation expectations in the future, but there might be a trade-off between inflation and unemployment, a little higher unemployment at which prices and wages support a higher or increasing real wages which also means lower prices is the right thing to desire for. Wages or real wages should increase to keep demand intact in the face of lower population and labour-force-participation rate. Revival in the lagging demand due to low real wages compared to the productivity might also help to increase domestic-demand and spending and economic-growth…. Nevertheless, in the next five years we could expect natural interest-rate not above 2% which is currently negative… By increasing nominal rates the Fed would also increase real-interest rate because inflation and inflation expectations would also go down… But, sharp tightening is not expected because that would also lower growth and growth expectations… 

The Missing Data...

The government’s Chief-Economic-Advisor Arvind Subramaniam praised the RBI for the status-quo it maintained in the repo-rate which was unusual because normally the government has demanded rate-cuts to boost growth. But, the RBI disappointed everybody else who hoped for a 25-50 basis-points reduction in the key rates in the expectation of the demonetization-unfolding that is yet to become clear, say inflation and the economic-growth. The RBI expected only a 15-20 basis points reduction in inflation when it downgraded the economic-growth forecast to 7.1 from &.7.6 % because it is probably expecting data for November. The apex bank even though admitted a lower economic-growth and inflation in the aftermath of the note-ban, but unable to justify its course of action in the absence of the latest data. Probably the monetary-policy date might had been set post inflation numbers for Nov. However, if inflation falls below 3.5 % in the month the RBI would regret a missed opportunity to push the falling growth-rate. Nonetheless, the RBI has made it clear that it continues to expect inflation to have an upwards bias, but lower demand and growth expectations mean inflation could go down, but the question is how much to accommodate the real interest rate of 1.25 % which also depends on inflation which it thinks has still biased higher. The bank sees inflation target for 2017 to have upward-risks. De-monetisation experiences before had mixed effects on the economies in which they had been implemented. The RBI is clouded by uncertainty which might be a novel situation to deal with. It is true that the current phase of the transition from demonetization to re-monetisation in not much a liquidity- problem, it is mainly a problem of cash; people have money in their accounts, but not in the physical-form of currency notes which is the dominant form of trade for which consumption is being delayed. This is why the PM is pressing for cashless transactions to evade the problem of absence of notes which would also make transactions through bank-accounts a standard practice which would help to curb black-money transactions and fake-currency to finance terror. Nevertheless the RBI has proposed to end the incremental Cash-Reserve-Ratio of 100% to normal which might help to adjust the interest-rate spread between deposits and loans rates lower or help interest-rate transmission by the central-bank. The banks are full of liquidity and the bond yields are on a downward trend, deposit-rates have come down, but the RBI is probably wary of the nature of the excess liquidity, temporary or not. The RBI in today’s review did not expect too much lower inflation and the economic-growth after demonetization, however if inflation and growth falls too much in the recent data and the expected data we might not rule-out an out-of-date rate-cut by the Monetary-Policy-Committee which would be convenient when growth risks are on the downside…    

Early for CRR and MSS...

We have the next monetary-policy review on Dec 7, 2016 and the economists and analysts are hoping that the RBI could cut repo-rate by another 25 basis-points and some are hopeful to the extent that it would deliver a 50 basis-points reduction in the view of reduction in demand/supply and prices or economic-activity or economic-growth-rate in the face of demonetization and cash-crunch. However, it is quite clear that demonetization would lower demand and growth and prices in the short-run because money-supply and demand would be hit due to liquidity-crisis posed by the drive which is likely to recover with catch-up in the money-supply and demand for consumption and investment with time. Nonetheless, a good kharif-crop and lower vegetable-prices or inflation and inflation expectation, and low demand due to demonetization, are the factors that may push further lower interest-rate expectations which would increase investment-demand and growth-expectations. The interest-rate-cut expectation due to more deposits in banks is another factor that may increase interest-rate cut expectations. Lower borrowing cost when demand/supply has been cut by lower money-supply is likely to keep prices lower and increase demand and growth in the future. The increase in incremental Cash-Reserve-Ratio (CRR) requirement by 100% and the Market-Stabilitsation-Scheme (MSS) to mop-up extra liquidity in the hindsight of negative-effects, probably because it would retard the interest-rate reduction process by the RBI because the commercial-banks are already flooded with deposits and are cutting the savings-rate that might create uncontrolled swings in the mood of the economy. Too, much lower interest rate might increase inflation and inflation-expectations and hurt real-interest-rates and savings which might require tightening in the money-supply and lower growth-rate-expectations soon. It is quite rational to curb overheating expectations because the objective of the economic-policies is to achieve full-employment and price-stability with full-growth. But, inflation and inflation and inflation-expectations in the Indian-economy are biased lower also because of low food-inflation and inflation expectations and probably it is too early to think of tightening – higher incremental CRR and MSS. The policy-makers should let the public taste the sweetness of lower-interest-rate and more consumption and investment when prices and price-expectations are possibly on a downward-trend and the general income is fixed except the lower black-money demand. It is right and true that the size of the formal economy would increase after demonetization and lower-prices, the economy’s real-Gross-Domestic-Product (GDP) would increase… Lower prices and interest-rate would increase demand and supply and growth in the economy…   

The Black-Money Hang-over...

A large part of Rs 500 and Rs 1000 black-money has been converted in to gold even after demonetisation in the shadow market... There was no ban on gold accumulation and sale of it... Black-money can easily be converted into gold and make high value denomination notes black money into white... There was no restriction on selling gold and depositing the money as sales turnover... Gold traders could easily sell gold by accepting banned notes and then submit the money at banks as profits... There was no restriction on depositing money with PAN as business-profits... Unusual gold-sales must be brought to scrutiny...

Delaying the time limit to cut-out high-value denomination black-currency would increase the hangover... Black-money hoarders are smart people... More time to them would increase conversion to other asset classes to create black-wealth... Cash is still not abolished absolutely and banks are still accepting the banned-notes which could be a business turnover after selling something... Cash in Rs 500 or Rs 1000 notes still do not require a bank-account-number or PAN to verify the source of income to buy investment assets such as gold or foreign-exchange or land... A lot of black-money has already been converted in black-wealth... Unusual income during the demonetization-period should be brought under the lens... No significant price-crash has been observed even after replacing 86% of the currency from circulation which might be attributed to the grace-period to exchange old currency or deposits in bank-accounts... Gifts and inheritance in a back-date are still out of the purview of scrutiny... Only income has been targeted... There is alot of room for improvization to reduce ill-gotten wealth in the last five or ten-years... Notwithstanding, cash-less transactions would decide the fate of black-money-less-transactions, black-money and black-wealth...

A help of few thousands to the poor after increase in government coffers after demonetization would not last too long... PM should invest in innovation and skill-development to increase productivity and wages and incomes ... something durable... it is likely to increase demand in the economy further on a solid base...

Demonetisation is likely to lower inflation which could make things affordable for the poor... even food... poor people could buy nutritious-food... It is a strike on inequality... PM has repeatedly said that this would benefit the poor...

INDIA Must Try The New-Model...

The goal of economic-policies is to achieve low-inflation and low unemployment with highest possible potential for the economic-growth... The first two are the primary objects while the economic-growth is the underlying objective... Probably, market stabilization might entail these with clear and present situation... However, we do not need MSS (Market Stabilization (Securities) Scheme), today it has beed proposed to bring those with the help of the RBI, right- away, because inflation and inflation expectations are committed lower in INDIA with bias for more expansion in the money-supply and the expected growth-rate which has a direct effect on investment, unemployment and (wages and) incomes and the demand and the economic-growth-real-GDP... Higher expected economic-growth-rate or the real-GDP (expectations) incentivizes investment... In the Harrod-Domar sense it is the warranted growth... we have two other growth-rates... The actual-growth-rate - the current-growth-rate-and the natural-growth-rate or the potential-growth-rate - the rate of growth of the labour-force...

The convergence of all the growth–rates is in the same direction in the long-run. When the actual-growth-rate diverges from the warranted growth-rate or the expected growth-rate or the natural-growth-rate or the pace of increase in the labour-force or the economy produces less jobs or there is unemployment or when demand and inflation are low, we require loose money-supply, otherwise we need tightening in case of high-demand and inflation… A higher actual growth rate might also increase real GDP growth-rate expectations in the next-period…

Shaping expectation is one important task of the economic-policies… But, shaping expectation sometimes may take time… It works with a lag or when people actually feel the outcome or based on current situation, when they know which policy suits then better and create a positive response… For a very long-period in the history inflation and inflation expectation were more common than deflation… However, countries, like Japan, are reeling under deflation for the past two-decades and have tried a lot to increase inflation and inflation expectation to cut real-wages and for competitive exports…

Withstanding, lower real-wages-than productivity has crippled domestic-demand and also the external-demand (for imports) which has set the process of evaporating wages gains and demand… However, international-trade is more expansionary, but at the cost of the domestic demand… But, why a country would increase exports at the loss of the domestic demand…? Domestically, lower prices and higher consumption would increase Welfare…

Therefore, it is fairly possible to have disinflation or deflation and expectations based on the historical evidences as in Europe and Japan where nominal interest-rates are negative to ward-off deflation.

Economists’ fear that deflation would make people delay purchases in the expectation of lower prices are ahead, but everybody knows that supply is limited… People would rush to buy the inventories… Moreover, lower prices would help lower-interest-rate and may also likely to increase internal-devaluation and increase the exports…

INDIA needs not to emulate the old model for inflation, depreciation and exports… However, occasional depreciation of the Indian currency could increase exports, too…

INDIA might also help to increase exports by increasing demand for imports and higher real-wages in the trading-partners economy… Higher real-wages abroad could also increase demand for Indian exports, whereas higher real wages would also boost domestic-demand…  

Lower-prices would increase real-wages – at home and abroad too…

INDIA has committed to a disinflationary-path, also through demonetization which is likely to increase higher real-wages and expectations, but would take time to adjust to the right money-supply when 80% of the notes are being recycled…

The RBI has set to maintain the liquidity with Rs 2000 notes… Probably, it would limit the circulation to match the money-quantity as before the ban… The sooner the policy makers help mitigate the cash crisis, either by cashless-transactions or other means, the sooner we would achieve the stability in the market…  

Demonetization could help lower inflation and inflation expectations which would increase spending provided the cash-gap recovers soon…

Lower-prices and higher real-wages and incomes expectation would increase demand and spending and the economic growth-rate, globally, including the domestic…

Expansionary Policies After Demonetization...

Amid the arguments the debate on the demonetization has come close to the point that it has hit the money-supply in the pockets of the public since a large part of it is banned with the move to demonetize (old) Rs 500 and Rs 1000 notes… Almost 80% of the money-supply… Having noticed the changes in the key economic-variables like demand, supply, prices and un-employment in the market over two-weeks, we may find that there are many slips between the cup and the lips… The move has struck the demand in the economy by the way of demonetization of the high value notes to curb black and the counterfeit monies and in the same way it has also restricted the supply-side by reducing money to finance business, even exports have been down. Almost everybody feels that the bold measure to curb black-money and fake-currency, though even with good intentions has slowed down trade and employment in the economy… That, the decision is likely to be a pain in the short-run, but the economy would gain by reducing unjust demand and prices in the economy in the long-run, it would increase real wages and wealth… However, matching money-supply to the pre-crisis period is of utter importance… Previously, the RBI had an accommodative-stance to liquidity… The RBI is responsible for doing the job, nonetheless by increasing investment and employment, and productivity or production the government is equally responsible for keeping demand and growth high to tide over the wave of note-ban. The step could hurt the economic-growth-rate of the economy with slowdown in the demand and supply and inflation and possibly unemployment, but lower price and interest-rate expectations might help increase investment, growth and employment in the future if income does not decrease... Lower-prices and interest-rate could increase spending in the economy in the long-run… Keeping real-wages expectations high the policy-makers might target higher real-GDP. Lower prices would increase real-wages, real-interest-rate, and real-exchange rate and expectations which are likely to increase demand and supply, in the external-sector, too… Both, the RBI and the government are responsible for maintaining employment and wages and incomes and demand within the economy… They might work to keep demand and supply high by manipulating the money-supply and fiscal-expenditure to increase productivity, through innovation, and the economic growth-rate… Notwithstanding, the will to curb cash-transactions would decide the generation of black-money in the future… 

Globalisation reduces inequality...

Globalisation increases choice which could be a step towards a more free-society. The options to the society increases. It increases the choice of work and living, you can choose to live in country of your choice and choose the work according to your specialisation. Globalization leads to specialisation. Even the Foreign-Trade-Theory is based on the specialization point; they say we need to specialize in the line in which we have comparative advantage. It says to exports that product which it could produce at cheaper cost and prices; it says to specialize along those lines. Lower-prices are the foremost argument in favour of Free-Trade and globalisation which would increase real-wages and the standard of living. However, economists are conscious, that higher imports may reduce domestic employment and production and profits. Notwithstanding, globalisation as has been said before is good for real-wages and equality. Capital is moving from the rich-world to the poor-countries which have set the process of sharing prosperity, through immigration, too. Countries tend to allow immigration of low-skilled workers in order to provide the domestic-people with skills and higher-standard of living; nonetheless skills can be acquired to improve wages. Globalisation increases choice and prosperity, but there should be full-employment in the domestic-economy. Protection is often sought for protecting the full-employment objective of the economic-policies with lower general-price-level...

International-trade increases employment and real-wages and demand in the global-economy which further means higher production and growth-rate and more taxes to help eradicate poverty. The presence of more companies in the economy would increase revenue and public-spending on necessities. Presence of domestic-firms in foreign countries would further increase profits and taxes. It generates employment and income and demand in the global-economy.

Foreign-investment which increases employment to achieve full-employment must be given access to domestic-markets. Trade that destroy domestic jobs are not feasible. More companies in the country would lower prices and increase wages, too.

Immigration might also help increase labour-force-participation-rate and increase the economic-growth rate. It would reduce overheating in the domestic-economy after full-employment.

It is good for lower-wages and price-stability and could increase growth-rate and demand within the economy.

Multiculturalism increases tolerance in the society which makes it more liberal. However, frictions are also probable.

The Opposites...

This discussion between the Fed and the government over the use of fiscal-spending to increase demand and growth within the economy has turned out to be the point of contention. The Fed Chair’s view is that the spending is not opportune as the economy is near full-employment and more spending would increase over-heating and probably would force it to increase nominal interest-rate before than expected which might be true because at this time it would mean debasing of the currency which is a pet issue amongst the policy-makers, higher inflation is seen as negative for the value of money and demand.  But, the economists favour lower real-interest-rate or natural-rate which means lower value of debt, however they forget that lower prices would increase that value of money and more savings due to lower-prices could help maintain lower nominal-rates and real-interest-rate if the economy is below full-employment and price-level is low. Fiscal-spending at this level would increase expected inflation because we have signs of wages firming up because of full-employment. Nonetheless, higher inflation and inflation expectation could increase export-competitiveness in the short-run, but at the cost of lower domestic real-wages and higher nominal exchange rate and lower-imports which may increase exports, but is not suggestible since domestic demand could go down. Lower consumption means lower domestic-welfare and depreciation would increase capital outflows that means domestically less investment could lower  inflation and interest-rate expectations which is the opposite of what the policy-makers want. They want higher inflation and interest-rate to come-out of the liquidity-trap, the opposite. However, if the Fed targets lower-prices and interest-rates it might increase expected inflation and interest rate and expectations by increasing demand. They are targeting higher inflation, but inflation would increase when demand increase and that is dependent on real-wages and income which higher inflation might push down. Keynesians too believe that effective-demand during slowdowns would increase if employment and wages increase. The Fed has committed a higher inflation target and has also target higher real-GDP, but other things constant, if inflation increases, it would reduce real-GDP because of a higher deflator. Higher inflation would increase the value of  deflator when GDP is constant. So both, the signals to target higher inflation and higher GDP are half conflicting. Notwithstanding, if we try to keep inflation constant or lower with a higher real-GDP target that might increase the GDP when the money-supply, demand, output and income increase… If we commit higher inflation it would also lower real-GDP expectations if other things remain constant…      

Demonetisation and the Monetary-Policy...

A complete cashless economy where transactions from bank account is mandatory could dis-incentivize cash transactions by attracting investigation and law-suit on big transactions with unaccounted money on which taxes have not been paid...To dramatically reduce the circulation of black-money the government might had made the use of debit or credit cards with a pan number in 30 days with the help of some software in smart phones to verify finger-prints and the bank account number... we already have Adhar-card and Jan-dhan bank accounts... the bump would have been narrowed... for this too we would need bank-deposits for future transactions... money had come to the banks in the form of deposits... Modi has still left room for future black-money by not abolishing cash transactions altogether... Still notes could be hoarded...

A thought over this move on its effect on the economy is crucial to convey the idea behind the government decision to unearth black-money to the public... The whole concept is to ban use of unaccounted money and fake or counterfeit money in the everyday transactions which may affect the demand within the economy in the short-run. To remove fake currency from the circulation the government measure is also to curb terrorist activities in the short-run is the most important argument in favour of ban of high denomination notes for which little-pain in the public life comes worthwhile, besides black-money... Security of human-life is more important...

However, lower consumer-spending with only white-money due to disruption in the supply of notes is hurt, the consumption is being delayed till the crunch is over and we are back to the normal-life in terms of money supply and demand... Nonetheless, the rate of price-rise or expectation about it would decide the sames in future, too, including the prices...   The ban on high denomination notes may negatively affect demand and the invalid-demand, both, is the short-run, but in the long-run it is likely to curb invalid demand or black-money-demand to a greater-degree...

The total demand less the demand dependent on the black-money might help reduce prices to a significant-level which would increase real-incomes in the medium-term... All those things that could be purchased with the black-money would see price-reductions and increase in demand as the life gathers momentum with the right money-supply... The reserve bank has committed a liquidity-neutral-stance to lower inflation and inflation expectation and employment and production and the economic-growth-rate...

The monetary-policy should try to match demand and supply of notes and quantity of money with the pre-ban levels... More deposits in banks could lower the rate of interest and increase investment... Lower prices may help increase savings and investment in the long-run... The RBI must try to keep demand intact by lowering the key-interest-rates. We may expect a rate-cut in the upcoming monetary-policy reviews...

Lower prices and lower interest-rate in the near-term would prove to be expansionary and beneficial for demand and growth.

The retail inflation in October has come lower to 4.2 % which also fosters rate cut expectations when we have set an inflation-target of 4% with a band of +/- 2% in the medium-term...

The real-interest-rate-cut expectation is also lower when inflation has scored lower and the RBI has set a neutral rate target of 1.25%...

Disinflation or Slow Deflation Trajectory...

In Economics we generally assume that the value of money falls in the long-run because inflation increases as the money-supply is increased, the Monetarism. One of its principal proponents Milton Friedman based his models on the Irving Fisher’s Quantity-Theory-of- Money which states that as the money-supply is increased, either by the monetary and/or the fiscal policy it increases inflation which also forms the core of the inflation-expectations theory because it assumes that when money-supply is increased it also increases inflation -expectations. This is what the Fed in the US is trying to do to come out of the liquidity-trap, since only higher inflation and inflation-expectations make case for rate-hikes and hike-expectations the short and the long-run. Inflation and interest-rate expectation may influence spending decisions.

The Fed could try to moderate long-run interest-rate and interest-rate expectations that the economy can weather rate-hikes in the long-run on its current growth... without decelerating.... A little higher unemployment rate may save the economy from overheating, when the neutral real interest-rate has some positive bias so that the downward pressure on the price-level to make savings worthwhile... Capitalists earn profits, save and invest, they have a low propensity to consume... they demand less compared to income... The value of multiplier would be low... The economy is demand deficient... Since 1970s, real wages have stagnated low even after in increase in the economy’s productivity... Higher real wages would increase domestic demand and income and growth...

In the liquidity-trap, Keynes advocated government intervention during recessions... He probably prescribed counter-cyclical economic-policy to stabilize trade-cycles for full-employment and stable-price, too...

The Fed thinks that neutral real rates could go up... Currently, it is negative with 2% inflation when the nominal rates are close to zero... It is expecting that neutral rate might go up probably because higher nominal rate may lower economic-activity and inflation... Lower prices and higher real rates could increase savings in banks... Money value would increase and more savings would lower loans-rate which means more investment in the future... Lower price or prices expectations are more expansionary, both consumption and savings and investment increase... The Fed might commit a lower price and price-expectations trajectory in the long-run to increase demand when demand from population growth-rate is going down which determines the employment, production and economic-growth...

Lower cost of supply - lower real interest rate and lower real wages – because of lower-prices and lower population growth-rate has made supply outpace demand and also lower the price-level, and lower oil prices have all contributed to low inflation and low inflation expectation... Fundamentally we are in a lower price regime…

Invalid Demand and Prices Could Go Down...

Modi government has banned the exchange of Rs 500 and 1000 notes to curb the black money or the shadow economy and counterfeit currency menace the Indian-economy is facing, which is expected to have a long-run effect on the demand and supply as well as the prices and unemployment within the economy. The step is likely to reduce the amount of money that has entered the economy through wrong channels like tax-avoidance and fake currency by the neighbors to sponsor terrorism. This is the undesirable-money that is coming into the economy for destabilizing it and not good for the country in terms of demand/supply and prices or inflation. The black-money is often turned into other investments and is often hoarded under the mattresses. This is already known that the magnitude of black-money within the the economy is far greater than the black-money that has been kept in the foreign-economies to evade tax. The decision by the government would rule out the possibility to trade in other investment asset-classes like gold, land and property and their demand would go down… In another way it would reduce the demand for everything that could be purchased with the black money which means overall demand in the economy could go down with the decision to remove the old 500 and 1000 rupee notes from circulation. The measure could increase the real value of money in the economy because now money is less which means demand and prices would go down. The relative quantity of money would go down compared to the goods which would push down demand and prices. However, the government has reduced the number of notes in big cash transaction. Nonetheless, the more use of debit or credit cards in the transactions would too help to account for the source of money and verify whether the money is not unaccounted and prior taxes have been paid… The decision to cut back on the black-money should benefit everybody in the same way in terms of the value of money which could go up with lower demand and prices, except black-money would go out of the market… It would increase real wages and income and wealth… Lower prices increase demand and spending – consumption and investment – and the economic-growth-rate…    

Lost Jobs and Unemployment Benefits...

The Bankruptcy-code passed few months back was among the most important legislations of the parliament, besides the GST and the price-control during high inflation, the government has proposed to set prices of some categories during high-prices due to demand and supply mismatch and lower interest rate and unemployment (more jobs). The uncertainty before the Bankruptcy-code on the hiring and firing of employees was a major road-block in the way of starting investment and employ people when the Indian-economy is growing at a high-speed even when the developed world is going through weak demand, which has undermined the Indian-exports and achieve us double-digit growth-rate. Once a company is declared bankrupt it becomes easy to lay-off labor and dilute the assets to pay bank-credit or credit… During slowdowns unemployment or lay-off increases which lowers demand and growth and investment and lowers the price-level whereas due to boom employment or hiring and demand, growth, investment and prices increase. The bankruptcy-code deters firms to fire labour because of loss or low demand. The market that has a weak labour bargaining-power, employ more people temporarily than a labour-market which gives importance to permanent-jobs. The temporary labour by contract could be fired when there is a downturn. The bankruptcy-code was positive for firms to decide for solvency; naturally a bankrupt firm could not support workers because of balance-sheet recession. Nonetheless, an economy with more permanent-jobs is likely to recover fast during a slowdown because demand would go down less while an economy with more temporary-jobs would take more time to recover. Lower nominal wages given to the labour could be substituted for lay-offs… lower nominal wages instead of complete lay-off could help the economy to recover fast, however during heavy headwinds it is not possible to continue employment… Lay-offs might be the last option used to tackle unemployment and demand and growth. Notwithstanding, the social-security-net by the government is also a land-mark labour-reform, but INDIA still face void in terms of a comprehensive unemployment-benefits plan because it is true that during recession firms employ temporarily and create low paying jobs or less jobs…  Unemployment-benefits during downturns could replace the demand lost because of joblessness…       

Problems with the GST...

The GST is an issue i used to avoid writing on because i think all types of taxes have the same demand and supply effect on the economic-growth, have discussed taxes before that lower taxes would boost private spending when the public pays a higher part of their income as taxes. Both, income and indirect-taxes are levied in a big-part of the world when there should a choice to pay in indirect taxes or direct-tax over a year. This should be a choice of the public to pay either income-tax or indirect taxes. Both would have a dampening effect of demand and growth… Since taxing twice, direct-income-tax and indirect-taxes do not look rational, a developing economy is likely to have higher taxes because higher fiscal deficit and the fear of debasing money… Nonetheless, higher debt-GDP-ratio in much of the developed-world, the rolled over fiscal-deficit over the years has resulted in a heavy debt which does not allow the government to commit a stimulus the size the problem warrants… Thus, lower taxes are expansionary and higher taxes reduce demand and inflation… Higher government spending is often the cause of higher inflation… However, the economy-policy must be there to increase demand/supply and economic-growth to the potential… Nevertheless, the GST is the indirect tax part of the economy, but it would also affect demand, growth and investment in the next-period… However, I was always conscious of the problems the GST would have to be through… and a same rate of tax for every good and services would not be feasible because different goods and services have different utility and dependent on the needs of the society which is important for growth and development… which turned out to be the same as thought… we have four slabs for goods and services… Higher GST would be demand-negative which would regress both, consumption and investment… Notwithstanding a proper VAT could be the best for the economy… A single VAT –Value-Added-Tax because we also measure the GVA, i.e. Gross Value-added… According to the Laffer-curve taxes are revenue increasing only upto a point, but after then it decreases revenue… A tax on value, for both direct and indirect taxes could be the way to simplify the tax-structure for a better understanding of our tax-system. Taxes are also an effective tool to incentivize investment in case of higher social-utility or somewhat important for controlling inflation…  

The US might target higher real-wages # 2....

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 The US might target higher real-wages....

The central-bank could commit higher real-wages through tighter labour market and low inflation and inflation expectations through low interest-rate when unemployment is below the natural-rate and there is an upward pressure on the real wages by lowering the borrowing cost, increasing supply and lowering the general-price-level because lower prices would increase the value of money and demand and lower unemployment and higher growth. Higher real-wages could increase investment in people skills and reduce voluntary unemployment and increase the supply of labour and productivity too, it would increase demand and growth... Nonetheless, lower interest rate due to higher supply and lower price-level could increase real-wages-expectations and increase spending and lower prices may help increase savings and investment and the economic-growth rate... Higher real interest-rate, since of lower-prices, would also increase return on capital...A little higher real-interest-rate would save both little, labour and capital and would help lower  demand and prices with a downward bias to make the money strong and valuable to increase demand in the long-run when population growth rate is going down... Higher real-wages in this scenario would help maintain demand/supply and the price-level and the real- GDP... Too much expansionary and too much contractionary policy would increase volatility and in the attempt to control the swings during booms and busts, either we slow too much or grow too much... If the FED tries to stabilize the value of money at the current-level of the prices or increase disinflation or little deflated expectations is would increase the wealth expectations and demand and the economic-growth-rate... Borrowed from the Milton Friedman’s OPTIMAL MONETARY POLICY...  The government too may contribute by increasing the real wages expectations by demanding more labour and help achieve wage-gains... Nevertheless, if the budget increases on infrastructure and skills-development or reduce taxes on the lower and middle-class it could also increase real-wages and expectations and spending – consumption and investment...  When the value of money increases in the economy it affects everybody in the same way by the way of inflation/disinflation/deflation...                                                                                                                                                                                                                                              

The US might target higher real-wages....

The Fed could try to moderate long-run interest-rate and interest-rate expectations that the economy can weather rate-hikes in the long-run one its current growth... without decelerating.... A little higher unemployment rate may save the economy from overheating... When the neutral real interest-rate has some positive bias so that the downward pressure on the price-level to make savings worthwhile... Capitalists earn profits, save and invest; they have a low propensity to consume... they demand less compared to income... The value of multiplier would be low... The economy is demand deficient... Since 1970s real wages have stagnated low even after increase in the economy’s productivity... Higher real wages would increase domestic demand and income and growth..

The US might target higher real-wages....

Targeting economic-variables has had been popular...

Targeting economic-variables has had been popular though targeting the economic-growth-rate is more common than others like wage-rate, interest-rate and the exchange-rate… These variables do have a significant effect on growth by the way of manipulating supply/demand or in common the economic-activity after accounting for inflation and inflation expectation in the nominal terms… Nominal rates include the real-rates plus inflation… Similarly, we have a corresponding real-rate after subtracting inflation for every nominal-variable… Inflation decides the future expectation about the real-wages, the real-interest-rate and the real-exchange-rate…Like nominal-wages and real-wages, nominal- interest-rate and real-interest-rate and the nominal-exchange-rate and the real-exchange-rate… By targeting these variables we try form an impression or expectations about the health of the economy by managing supply/demand and inflation and the economic-growth-rate… The counter-cycle economic-policy makes the transition between boom and busts, in a controlled way so that that the trade-off between unemployment and inflation during trade-cycles for the underlying objective of growth becomes smooth… Expansionary-policy during slowdowns and tight budgets during inflation to control demand and expectation by the way of targeting variables has been the role of economic-policies for the past three decades… Targeting variables has been a popular practice also through forming expectations… Inflation or the general-price-level and expectations about the same determine the expectations about the real-variables – real-wage-rate, real-interest-rate and real-exchange-rate - and demand/supply/growth… The economic-growth and expectations about it would increase spending and demand in INDIA, if expectations about the economic-growth are bright, people would demand more and it could help achieve the full-employment and full-growth and investment to help the economy innovate could increase productivity and wages and incomes… In the West, the developed-world is cutting real-wages with inflation to make exports competitive, is also not uncommon, too… Every developed-country has a higher weight-age of exports in its trade-account… Depreciation or the efforts to increase exports during slowdown has pulled economies out of depression because when a country compares it’s domestic-demand vis-à-vis the export-sector it is more vast and also because of foreign exchange earnings… In the past three-years the low import of gold due to higher-tariffs has saved INDIA much of its exchange-reserves and foreign-money, too, through higher debt and equity inflows in the form of FPI’s, FII’s, and FDI’s… have all shot-up… Nonetheless, the export sector in INDIA is under-penetrated… The government might try to increase depreciation to give exports a kick in-terms of higher nominal-exchange rate, it is short-term fix, but, in the longer-run lowering the general-price-level or prices would save the domestic demand with the foreign-demand… lower-prices too can make exports competitive and also increase domestic demand because of increase in the real-wages… Expectations about higher real-wages increase spending… Likewise, interest-rate and interest-rate expectations affect investment and spending decisions… An interest-rate cut cycle may increase investment… the RBI has maintained that it would target a neutral or natural-rate of 1.25% which means lower real-rates than in the past which would increase real interest-rate-cut expectations... A lower real-rate would increase risk-taking because investors would move to higher-yielding asset classes… Bonds are safe but equities have higher yield, but more liquid… Lower-interest-rate-expectations could give a push to spending, higher demand through higher real wages and real-wage expectations could also increase spending… INDIA is going through expansion… but, NPA’s and impediments to rate cut-transmission by the commercial-banks is a drag on the economic-growth-rate, but, delay in action could further pull the growth-rate expectations down… Expect our governor to bring innovative ideas to the board to curb bad-loans… It is more a matter for the government because the majority of bad assets are in the Public-Sector banks…. Lowering cash-reserve-requirements during a bad-turns may help banks pass-on the rate-cut by the RBI… In the last rate-cut-cycle the nominal interest-rate was just above the 4%... Committing a higher real-wage, a higher real-interest-rate and a higher  real-exchange-rate and expectations would increase consumption and investment and foreign demand, too, in the economy through more spending and higher supply/demand/growth… and, more jobs, too…            

The Warranted Growth-Rate...

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  Industries should be local to villages where wages are cheap... and there is manpower... Industry may use more labour when real rates are also expected to go down in the medium term... Investment should be hedged through derivatives... The capital-labour or labour-capital ratio or the ratio of the cost of the both is also expected to go down... A lower ratio should increase both consumption and investment... It is a stylized fact that real-wages and real interest-rate would go down in the long-run because population could go down and supply may go up... A lower inflation expectation would increase spending... Lower real interest rate might be positive for the economic-growth rate... Growth expectations may improve...



In The Developed-World...

Lower cost of supply - lower real interest rate and lower real wages - and lower population growth-rate have made supply outpace demand and lower the price-level, and lower oil prices have all contributed to low inflation and low inflation expectation... Fundamentally we are in a lower price regime...

Protection for the sake of domestic un/employment might be feasible... If it increases domestic economic-activity and the economic growth-rate... in terms of jobs... more domestic jobs must come-up...

The government might bring out tenders where it thinks there is potential... It should guide investment... The government has the data...

Foreign FPIs can make the market dance on their tunes... The magnitude of their demand is very large... They could destabilize the market very easily... Hot money should be controlled for the sake of domestic-investors... FPIs must invest for atleast three months before they are allowed exit... Too much volatility on the downside should be restricted... SEBI should think over making the market more attractive for investors...

My Experience in the Stock-Market...

It’s been 9 days since i re-joined the stock-market as an online-trader and this time my experience has been very-good and is worth sharing... It was beyond the expectations... With the same demand and supply... of the stocks... it’s the volume... When you will search net http://www.investopedia.com/university/stocks/stocks4.asp you would agree.... The most important link is Gainers from the ECONOMIC-TIMES website (at this very news paper).... Last time i lost much in brokerage of penny-shares, therefore, you do not need to invest heavily in this type of shares if your are  are not a long-time investors... This time i got the impression that you can earn Rs 500 per/day if you invest Rs 50 Thousand, if you follow my procedure... 1% per-day...  In Gainers, the above link. you have to find in the volumes of demand and supply from Bids and Offers, i.e. Demand and Supply, respectively... they follow the same demand and supply-functions like the Economics text-books... when demand increases prices increase and otherwise they go low, during low supply prices will increase and higher supply would reduce prices, lower prices are the right-times for investment when the Sensex is RED and GREEN is the time to sell... It would also stabilize the market because during bear-cycle when the stock price is cheap buying would increase the market and in the bull-cycle sell it when it pays 1% or more... In the next-year possibly you would be able to double your investment... If i’am not exaggerating... One percent every day could pay you back at 20% a month... On a Rs 50 Thousand investment you could earn 1% every day and double the income and investment next-year... No investment doubles your investment in One-year... The probability is that if you buy   6 shares  3 would give you 1% equity-returns form investments every day... You have to find-out the gap between the demand and supply, bids and offers... A larger gap and higher bids would help higher-prices, the volume of demand and supply is very important... you need little idea about demand and supply... little Economics.... Patience would save you brokerage...