Uncertainty and Inequality and Growth...

 Economists have developed models including variables that could affect a particular outcome, but have failed to include the uncertainty which could change the results… The Black Swan, the most improbable or uncertain events and the Gray Rhino, the most probable or certain events that could affect the outcome of the dependent variable… The objective or goal of a model is to identify, though the Black Swan events are difficult to gauge, and the Gray Rhino events to include them in the models to predict the effects on the growth… 

The Cov-19 is an example of the Black Swan event which no one could foresee so that a preemptive or proactive action could be engineered which pushed the economies under slow economic activity and high unemployment and low productivity, it was a hit on the both demand and supply and ultimately on growth, globally. In the developed economies which have a good productivity and supply levels but low demand saw a plunge in the inflation or price level, but emerging economies that have low unemployment and productivity and supply, but high demand witnessed surge in inflation… 

Nonetheless, post active action and monetary stimulus and vaccination helped only a slow recovery from the pandemic and slowdown. The developed countries provided a bigger stimulus to increase demand and zero interest rates to incite recovery where demand side was a problem than the weak supply side and high demand in the emerging markets like INDIA where the stimulus have staged with a delay.  The stimulus in the developed countries has increased demand and price expectations in the economy and in the emerging markets it has increased supply and lower price expectations. 

In the US low inflation is a problem for wagers and for the business also their income is not going up and in the emerging economies like INDIA high inflation is a problem, nevertheless the objective is to keep prices stable – interest rate, wages and exchange rate - since lower price expectations during slowdown delay demand and reinforce lower prices and higher price expectations during high growth delay supply and reinforce higher prices. Too much high demand and low supply increases nominal prices or inflation which increase spending, and too much high supply and low demand lower real prices or inflation which could increase spending, too.

Both, lower prices and higher prices are good, but within limits, because lower prices increase demand when supply is high to stabilise prices and achieve full-employment and higher price increase supply when demand is high for the price stability and full employment. In the West we have high supply and low demand and in the emerging world we have high demand and low supply which is needed to balance to stabilise the inflation or price level. Instead of bringing supply down to demand the West may increase demand on par with supply to increase growth and instead of bringing demand down to supply the emerging nations may increase supply upto demand to keep prices stable and gain full employment and growth. Globally, too, the higher supply must keep flowing from the West to the emerging world to keep stability through higher trade and reduce inequality.

The objective is to keep demand and supply and prices stable at full employment – maintaining stable and predictable prices and growth regime for the interest rate, wages and exchange rate, actually real interest rate, real wages and exchange rate…

INDIA needs freedom from the politics...

 It is true that INDIA needs freedom from the politics of appeasement and polarisation and needs a better alternative for growth and development than the current regime based on free markets which started back in 1991... An economy which is productive and free from inflation and unemployment...

Economists repeatedly say that fiscal spending which increases productivity and competitiveness lowers cost and prices and increase demand, exports, too, is quite welcome... Some claim that higher productivity is good but lower prices are bad therefore we need higher prices... Nonetheless, lower prices are good, but not lower price expectations because it delays demand and increase supply and volatility and higher prices are not good but higher price expectations are good because it increases demand but delays supply and increase volatility, but within limits... If prices remain fixed there is less incentive for speculation and profits and investment...

To give clear forward guidance the RBI may remain neutral between 2-6% and restrictive above 6% and accommodative below 2%, it may clear... RBI may avoid adjustment between 2-6% to provide financial stability... A flexible inflation targeting provides stability and may help maintain the inflation and interest rate stable... The band means that the inflation may move between 2-6% and the monetary policy may remain neutral... 

The monetary policy may remain neutral since adjustment in the interest rate may reinforce prices and increase volatility... High inflation could force the RBI to hike which may lower employment and productivity and further reinforce or increase prices and similarly if inflation goes down lower borrowing cost could further reinforce lower prices and increase employment and productivity which would also mean lower prices...

The recent outflows expectations are not due to higher bond yields but lower bond prices due to sell off that followed the $1.9 trillion stimulus and higher bond yield expectations and higher government borrowing... Investors seek lower asset valuations which have higher valuations expectations though safe heaven image is also a factor for driving outflows... Investors’ actions drive prices up and down themselves and also reinforce them through expectations... If prices fall and they expect that they would go up and they invest more and more money and demand and investment and lower supply drive prices higher and if prices increase they expect that prices would fall they hold demand and investment and increase supply that further lowers prices... Nonetheless, under adaptive expectations model lower prices and expectations mean further lower prices and vice versa... If investors expect that prices would fall they would fall and again versa... If prices fall and the same expectations investor increase supply and lower demand which further lower prices and vice versa... Notwithstanding, under both models above expectations reinforce prices and are self-fulfilling...

Lower prices and valuations in INDIA could again increase foreign exchange inflows... Big speculators have a tendency to bid the prices of something up and down for their own purposes... big fish having a large market share to manage prices up and down for gains... At some lower valuations INDIAN market could again become attractive...

More dollar inflows could make the rupee stronger, which could help lower imported inflation and increase competitiveness and productivity... Lower inflation could increase domestic demand by increasing real wages and demand for exports by increasing competitiveness... Higher supply due to low interest rate would reinforce low prices... Other things remaining constant, increase in the value of money would also increase demand due to lower prices or inflation...

The Fed is trying to increase inflation and interest rate expectations to sustain spending which seems not to be working, though if the Fed commits low and stable inflation at 2% and increase money supply and employment and nominal incomes/profits and real income/profits and expectations that might work too... Notwithstanding, high prices could increase interest rate expectations and lower spending and lower prices and expectations...

The Fed has already wrongly anticipated inflation on the basis of full employment a few times and tried to hike rates, but oil price has been a key factor in the models for inflation and inflation expectations for the US which is absent after the shale revolution... Low borrowing cost has further helped improve the supply side and contained other prices... Though real wages have also been cut through inflation which has also helped lower cost, but reduced demand which is also responsible for lower prices... The Fed has missed the inflation target since the last decade, the question is how it would be different this time, inflation so far has not materialised which could help lower bond yields expectations... Investors themselves unconsciously affect asset prices through expectations, if they expect lower prices they sell which actually lower prices and if they expect higher prices they buy which actually increase prices...

When investment demand is down asset valuations are bound to be low... Demonetisation hit the already slow recovery in the growth and pushed the economy back to the square one... And, the economy is still in the recovery mode from the effects of demon...

It could be a bad time to sell the state assets since demand and prices are low hit by demonetisation and cov19... The economy is going through correction which is pushing the govt to sell the assets cheap... and at loss...

Even hundred $1 billion companies are still insufficient to cope with unemployment and inflation in 130 billion people economy and mainly young... The economy is running on steroids like MGNREGS and the food security even during the normal times marred by corruption... We atleast need a thousand $100 billion companies to create jobs for 80 million people joining the workforce every year...

Instead of providing subsidy on fuels, since we are dependent on imports to make the oil companies, we are weak in that sector, more productive the govt is increasing taxes... we are losing competitiveness bcoz of higher transport cost and lower real incomes...