Prices and growth and expectations have quite a
relationship... Low prices mean low growth and vice versa... The objective is
to stablise prices and growth at full employment... Prices or inflation
expectations affect spending and growth, too, lower price expectations delay
demand and increase supply vice-versa... If we have high inflation expectations
it means spending and growth would increase and the chance of a recession is
low and vice versa. Though, if there is low inflation it also means that
spending and growth would increase... Otherwise, if we have low inflation
expectations it would delay demand and increase supply and if we have high
prices it means that spending and growth could go down ie there is the possibility
of a slowdown or recession...
Prices or inflation and unemployment decide whether
we are in a recession... A recession is marked by low inflation and high
unemployment and booms coincide with high inflation and low
unemployment... Price expectations could tell that we are approaching a
recession or a slowdown... Higher price expectations mean that demand would
increase and supply could go down while lower price expectations mean that
supply would increase and demand could go down... Disinflation or lower price
expectations could signal a slowdown or recession...
Inflation and expectations in the face of supply-side disruption show that we are nowhere near a slack and growth has achieved
its pre-covid level...
INDIA's productivity has been severely hit by demo,
covid, and, now, war on Ukraine, which is reflected in higher prices and
expectations and high-interest rates... A higher cost of capital means lower
productivity and considerable delay in $ 5 trillion economy...
If the point is to reduce or control demand and
prices, higher prices could themselves be a potent way to do the same and more
effectively, instead, of decelerating the whole economy, at once, higher prices
mean low demand, but higher price expectations could increase demand and
prices... In the UK inflation has increased with rate hikes which means that a higher interest rate could increase inflation because supply could go down...
If the RBI could commit to a strong rupee-dollar
exchange rate the foreign exchange inflows could increase... For this they need
to increase demand for the rupee, they can settle exports and debt in the
rupee... RBI could float rupee-denominated overseas bonds... The
internationalisation of the rupee could be an important reform to increase the demand and value of the rupee... It could also help lower domestic and imported
inflation and depreciation and depreciation expectations... Lower inflation
could also mean productivity and competitiveness could increase...
INDIA is a supply-constrained economy. The RBI's
effort shall be to increase supply. Supply might be positively correlated to prices
and demand ie when prices and demand increase supply increases, too, and, vice
versa. Though, supply is negatively correlated to lower demand and price
expectations... Higher prices mean that supply and demand could increase and higher prices and interest rate expectations could lower demand and
price expectations and increase supply expectations, which could reinforce
lower current prices and vice versa. It doesn't matter much that interest rates are increased
or if the RBI does nothing...
Investment spending depends upon expectations; it
depends on what all other investors are expecting... Investors unconsciously
create booms and busts, through the expectations channel... If they expect that
the market is going to go up they buy which actually increases the market. And,
if they expect that the market is going to go down they sell which actually
results in correction. Nonetheless, too much negative or positive exuberance or
appreciation and correction could mean that the market has gone irrational or
expectations from the market can be classified as irrational... In contrast to
other markets, the cost and return in the stock market for everybody are different;
investors buy and sell at different prices... According to the rational
expectations, the investors shall follow the profit maximization behavior. If
everybody buys and sells at the same price everybody's profit could be
maximized... Markets are forward-looking they could factor in expectations in
the current prices... Too much correction or appreciation means that markets
are gone irrational, against this, if expectations are rational markets would
show stability, significant corrections would be bought and significant
appreciation would be sold, which could make the market stable, moving within
price expectations...
INDIA has lost its purchasing power by 25%... since
2014... Instead of becoming a $5 trillion the economy has lost its real value
by 25% due to inflation and depreciation... But others do not need to pay in
Dollars like INDIA... UK, Japan, Europe... They could pay in their own
currencies...
If this is the scene the RBI should use capital
controls like China... The RBI may use capital controls like China to stop the
sudden exodus of foreign exchange... The RBI could also sell bonds to
quiescence rupee depreciation since a lower money supply would make the rupee
strong, under OMOs...
Masala Bonds could further increase the demand for
the rupee... If the RBI really cares for its foreign currency reserves the road
goes only through a strong rupee... Appreciation and expectations could
increase foreign exchange inflows which are likely to further increase
appreciation... Imported inflation and competitiveness could only be contained
or increased by a strong currency...
Both appreciation and depreciation are good only to
an extent in the short; too much of both is not good... Anything which happens
must be only gradual so that people adjust slowly... Depreciation expectations
might delay demand for exports, though appreciation expectations might increase
demand for exports... INDIA's imports and imported inflation require a strong
currency... Lower inflation means higher productivity and competitiveness...
INDIA shall follow the US model instead of China...
Rupee depreciation is not natural and bad for
imports-exports, too. All currencies have convergence in the exchange rate, and
all the big economies' currencies have appreciated with time, including China,
except Japan, depreciation would also increase imported inflation and would
also make exports uncompetitive due to higher cost and would lower real wages
and domestic demand and growth rate. Managing exchange rate is in the realm of
Monetary Policy and Fiscal Policy, too. In the long run, INDIA's currency is
weakening. For the foreigners' the country is cheap 80 times, but the domestic public
pays 80 times more... Expectations from the rupee is that it would depreciate
which could also delay demand for exports and further increase depreciation due
to less dollar income and higher demand for dollars... RBI is saying that the
rupee is market-determined, though it could also decide the exchange rate like
it decides the nominal interest rate, the RBI has the sole power to decide the
exchange rate.
Fixed exchange rates are not permitted to fluctuate
freely or respond to daily changes in demand and supply. The government fixes
the exchange value of the currency. For example, the European Central Bank
(ECB) may fix its exchange rate at €1 = $1 (assuming that the euro follows the
fixed exchange rate). RBI shall adopt a fixed exchange rate system to control
imported inflation.
Depreciation and expectations delay export demand...
which could increase the trade deficit and imbalance in the Balance of Payments
(BoP)-capital and current accounts... INDIA is unlikely to succeed unless there
is a stable exchange regime... Higher inflation and capital costs make exports
uncompetitive.
A higher interest rate and a strong exchange rate
could increase foreign exchange inflows... Both rate cuts and rate hikes are
good at the right time. Both are aimed at stabilising the prices and growth. At
least this seems consistent. Time consistency of the economic policy is a real
problem. Sometimes rate hikes are good and sometimes rate cuts are good for
prices and growth stability at full employment...
Analyst’s job is to make investors invest more and
more on significant corrections, delaying could further destabilise markets...
Analysts shall first give priority to existing customers; it would also be good
for fresh investors and investment... The problem is to find out ways to change
the outcome...
We have learnt this time that when base year's prices or inflation are too low we could expect higher inflation and growth in the next period or future... and, vice versa... This is called the base and debase effect... Negative earnings may not mean that earnings are negative, but only lower compared to last quarter or year... Companies with consistent forecast and actual earnings and with higher earnings in the next period are likely to get higher investments...
US is a relatively rich economy, people could
weather higher interest rates, by the way, interest rates are very low given
historical rates and emerging market interest rates... 1.75% nominal interest
rate and 8% inflation give a real interest rate -6.25 which is at an all-time
low... If people find it bottom and think as per the value of debt, inflation
decreases the value of debt, and increases investment spending it could further
reinforce higher inflation... Higher inflation and interest rate expectations
could further reduce supply and increase demand...
The Fed is showing concern not to lower real wages
by inflation, but too many rate hikes could vanish employment, too, after all,
both, seem inconsistent... To save standard of living they are cutting on jobs, which is not justifiable...
Rate hikes could lower demand and price expectations
which could also increase supply... This is clearly a supply-side problem...
Rate
hikes and lower demand and price expectations could also increase supply...
Lower price expectations and higher supply are not good for the stock market,
though it may also increase the supply of G&S in the broader economy due to
lower demand and price expectations...
The relationship between higher interest rates and
inflation is quite significant, both have moved up together... This could be
because of higher borrowing costs and lower supply and higher demand, which
could reinforce higher prices...
The real interest rate is negative and bottoming out
which actually lowers the value of debt that can increase investment demand and
spending which could further increase prices... What the central banks are
doing is what they are supposed to do, it helps everyone. This is what they are
supposed to do. It also helps inflation-adjusted equity returns. It is good for
the economy...evidence we have is that the prices or inflation are increasing
with rate hikes...
The oil prices increase we are seeing is the result
of production and supply cuts by OPEC to balance the oil exporting countries'
budgets... Importing countries must raise the issue because it affects inflation
and their budget estimates, too...
A recession in the US would help ease prices that
may help INDIA... A recession could help lower food and fuel inflation and could
increase foreign exchange and investment inflows... Lower inflation could
increase export competitiveness...
This time the Fed may try selling bonds mixed up
with a rate hike of 50 basis points... The Fed may also try quantitative
tightening to calm down inflation... Bond selling could help keep rate hikes
low...
The rate of growth of GDP is negative doesn’t mean that GDP has become negative; it is only the rate of growth of GDP is not as fast as the last quarter or year rate of growth of GDP, though the nominal or money GDP could be quite positive. For instance, if the last quarter GDP is considered 100, a -5% decline would mean that the rate of growth of GDP is only 5% less than the rate of growth of GDP last quarter of the year or only 95% compared to the rate of growth of GDP last quarter or year. This only few people understand and of course the common public, too. But, investors are more significant from the point of view (investment) spending because they have money to speculate on the prices and have the ability to hold on, though consumption spending may also vary. A recession is nothing, but a slowdown in spending of two quarters (may be) which depends upon price expectations and spending, there is also the inverted yield curve idea. The growth rate of GDP and the rate of growth of prices could have quite a relationship; the two-quarters analogy could also be applied to the rate of growth of prices and applies to the same definition of recession, two quarters of disinflation could also mean a recession, too… The lower rate of growth of GDP expectations could also mean a lower rate of growth of price expectations which may delay spending and the recession and lower prices could actually become a reality. At this time when the central bank wants people to delay-defer spending through higher interest rates which could increase the slowdown in the growth rate of GDP and lower demand and price expectations may also increase supply which could actually lower prices that is what is needed to lower interest rate and increase spending again. When the central bank wants less spending people shall spend less and when it wants more spending people shall spend more that is in the interest of the economy and investment. If the economy behaves as expected and the element of surprise is less the loss could be minimized. Inflation expectations lower supply which could reinforce higher current prices... Though, higher prices could lower demand and increase supply and reinforce lower current prices. Higher borrowing costs could lower inflation expectations and could also increase supply. Higher borrowing costs could also delay spending, which is good for the economy. Prices and growth depend upon spending which depends upon price or inflation expectations. Higher expectations increase the spending which could be self-fulfilling and increase current prices and vice versa.
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