A Stronger Rupee Will Attract More Investment...

Article;
RBI Gold Curbs Seek to Keep Rupee in 52-56 Band

Comment;
If the RBI buys dollar it will depreciate the domestic currency and will not help the currency to trade within limit, 52-56. The Indian currency which is still near 56.50 will depreciate further and will worsen the CAD. We know that when we buy a currency its demand goes up and it becomes stronger and when we sell its supply increases and it depreciates. The current scene points that the Indian rupee is depreciating therefore it is worsening the CAD. We are paying more rupees for every dollar, we are sacrificing more rupees every dollar, our condition is getting worse, we are getting poor. If the RBI really wants to keep rupee trading 56 or less then it will have to sell dollars and not buying it.

Only a stronger rupee will attract foreign investments. If we are getting more inflows by spending on a stronger rupee we should spend. The current situation is that foreign exchange is flowing out of the economy due to a weak rupee...

Gold Demand And Prices Will Go-Down...

Article;
Poke-Me Government is responsible for India's Craze for Gold

My Comment;

Gold does not depreciate like iron, it rusts, which makes gold a top choice for backing steel coins and paper currency, it is an ultimate investment which even during recession pays well. Every government has some gold for bad times; even IMF accepts gold as security for a loan. People feel secure near gold and nominal prices can not go below zero because its demand as an investment may decrease but gold and gold-rings are very popular during marriages. Therefore there is no doubt that gold is not completely useless. But as an investment they are not safe when the banking has made paper-gold and other better paying instruments. Therefore, its physical quantity in not a restriction, now, because nobody wants their gold now so that we can manage the demand. What will happen when every body wants to redeem the same day because they are expecting a 20% decrease in prices and they need the money now because government has banned trade in gold except jewellery for an unlimited period of time. I think which is the case now and demand for gold and its prices will become less volatile and become constant, which could be the best assumption. The price of gold can not go above but can go down because its demand as an investment has become zero. We have reduced its usage, its use. Its demand will go down; its price will go down too (expectation)….

Gold (Consolidated)...

All the prices, including gold and stocks, depend upon the level of employment in the economy. The main reason for fall in gold prices is the recovery of the countries form recession, especially the US. The stocks market in the US is showing signs of recovery and people are diverting their resources from gold to stocks, which (gold) was a good investment during recession. Recently the stock market in the US has achieved the heights seen in 2007 just before the sub-prime-crisis which is responsible for the recent gold price crash. Moreover a strong dollar has kept the demand under check. But in INDIA gold prices are going down because the economy has touched its limits of expansion. The unemployment rate in INDIA fell to 3.8% in 2012 and the economy is still handling the hangover. The CPI is still around 10% which has made gold unattractive because real prices are way below the nominal prices which is expected to fall with inflation because of the RBI's commitment of low and stable inflation. Nominal prices (real prices plus inflation) depend upon inflation and when inflation falls nominal prices fall too. The nominal prices diverge from real prices because of the objective of FULL-EMPLOYMENT. Both nominal and real prices increase upto the level of full-employment but after that only nominal prices increase because production can not be increased. And when real prices do not increase people prefer selling instead of buying because inflation is too high.

To elaborate I would like to take, those who disagree, to a situation. “Other things remaining constant, level of employment and income constant. A bubble, say in gold, bursts with a government decision that it will never put its money in gold in any form, directly or indirectly. Or simply the government will never buy or sell gold in any form. And I think this situation will have a devastating effect on gold prices. Nominal prices are very much higher than real prices. And in the long run nominal prices tend or converge to the real prices which is always lower than nominal prices, it’s an expectation not a prophecy, may be just mine. And everybody will try to sell gold at the same time. Prices will start moving down unless everybody who wants that gold gets it, and market will undergo a correction, a downward spiral. And at lot of wealth will go down the drain. But people who have a job and lot of cash will gain from this situation because prices will come down because, again, due to low economic activity. Luckily not that low as in a housing collapse because that is a labor intensive industry and generate a lot of employment. People will go through a loss because of gold and will save more this time. Consumption will lag behind. Prices will come down definitely. And, if in this situation prices come down that will mean that we can, now, buy more than before. And, if we have a lot of cash then we can buy a lot more.”

The level of unemployment can tell us how much gold-prices can rise in future if we are thinking as an investor. Unemployment at 5% and employment near 95% because it is the capacity we have, to expand. Our unemployment rate in 2012 was 3.8% I mean full-employment because after that production can not be increased because labor is fully employed. International trade, apart. Gold prices rise and fall in conjunction with other prices and wages. It moves with demand. If they rise gold prices rise and they fall too. Atleast the recent unfoldings suggest that gold prices fell almost 20% and then WPI fell 4.5 %.

C Rangarajan said the gold demand may go down which is contrary to my view. With decline in inflation real returns on gold will increase because inflation is going down. We can purchase more by selling gold than before. Lower prices will attract more buyers on the expectation that prices will go-up one-day. Lower prices are an attraction to the buyer. This is what an expectation does. It should be a gain. He says that we need to reduce gold demand. But low inflation will make gold more attractive and affordable than before because real returns (inflation adjusted) will be high. It is strange that gold demand increases when inflation is low and decreases when inflation is high. High inflation will make it unattractive because prices will rise more than the price of gold.

Credibility of the central banks is more important than backing your economy by gold. The purpose of the gold is to hedge against inflation and price rise. But that is from an investor’s point of view, the central bank needs only to make credible promises regarding inflation. Their words are more important. In today’s world where recessions are frequent and have been accepted as part of trade cycles and common we constantly need to infuse money and demand. And, in this period of crisis even if the central bank has too much gold pumping more money will erode the value of gold too as in case of money. It makes no difference whether we have gold or not. Pumping more money in the economy will only mean less value for our gold and money. It is inevitable. These days gold has a value only in the eyes of common investors. But that is a myth too. Gold can never restore the value of money once lost. It only compensates in form of the amount of money but that is subject to decrease in value of money also because inflation rises every year. The inflation we see at 2% or 3% is a gauge of increase not a constant value. It also means that gold is losing value with the same rate unless you increase your investment. It is same as depreciating currency, amount increases but value decreases if other prices rise too much. In times of high inflation central banks increase interest rates and economic activity declines and gold prices fall too and therefore it is good to put your money in inflation indexed assets that are paying higher interest rates. Any investment is just a myth as long as inflation and inflationary expectations are not properly anchored. In this world only words have value and gold has a value as long as there is a buyer.

Our Policies and CAD...

The RBI infuses liquidity but they say CAD is a concern.

The economy is in expansion mode... Interest rates are coming down and the central bank infusing liquidity through open-market-operation (OMO) and cash reserve ratio (CRR). We are going see an uptick in demand and prices, especially stocks, in the next six-months. I think we have accepted inflation as sticky especially CPI. It is still near around 10% (CPI). Moreover CAD is deteriorating but it opens room for exports. I do not think we need to worry too much about imports because rising prices will itself put break on demand if demand and prices rise too much. Why the government and the central bank is worried about worsening trade and current account deficit, they are not paying for it. They are only concerned about the foreign exchange which they actually do not have. They should concentrate on exports and foreign exchange. I think high interest rates are hampering growth of exports. The central bank should give a boost to the export sector in form of lower interest rates and the government should reduce export-tariffs. The government has a huge stock of food-grains therefore it should sell it and earn foreign exchange. This is a short-run approach to our problems in the long-run everything becomes constant…

My Aggregate-Supply-Aggregate-Demand (AS-AD) Model...

**This one i wrote back in 2004 but never had an opportunity to revise. Now, everybody is talking about AS-AD models....

The classical denies the possibility of a deficiency of aggregate-demand and of equilibrium below full-employment which is true. But after that if demand increases it can not be fulfilled without raising the cost of production and consequently prices.

But if at the same time government maintains a reserve capacity for labour and capital within the economy through means of taxation, together, they can help the economy raising output without a rise in cost of production and inflation. Taking the globe, as one whole, there would be much reserve capacity to offset an increase in demand in some region of the globe. In short, the role of modern government and institutions is the one which provides stability of prices, as have been emphasized. Generally, the government and other institutions are not included in discussions in prior models. But under disequilibrium government and other institutions should intervene and its role must be the one which stabilizes the market and price-level.

Price-stability after full-employment can only be achieved if government and its institutions maintain a reserve capacity for labor and capital.

In the Classical theory, aggregate-demand is determined by the supply of money and changes in money supply can be assumed constant if the economy is in equilibrium. In the Classical-Theory the level of output is determined solely by the aggregate supply of labor.

In the figure below, the intersection of the aggregate demand, which slopes downward towards right, where the supply curve becomes perfectly elastic, determines full-employment, which is actually not, since a reserve capacity is maintained by the government and its institutions and at this the total quantity of goods and services produced is completely sold-off. The equilibrium established will be as follows;

Op* is the price level, Oq* quantity produced and q* and qg is the reserve capacity maintained by the government.

To make it a dynamic model we can assume that in the next period when population increases and money supply is expanded it would shift the demand curve to the right and the new equilibrium will be as follows;

Op* is the price level (same), Oq** quantity produced (more than before) and q** and qg (less than before) is the reserve capacity maintained by the government.

We see that if the government maintains a reserve capacity and uses it in times of crisis it can boost output and employment without increasing prices…

Our Rate of Growth of Power-Consumption Coincides with Our Growth-Rate...

Article;

Growth Calls for Proactive Policy GDP Numbers Challenge the Government

Comment;

In the last three decades our rate of growth of power consumption has coincided with our growth rate. Both are around 6%. The growth-rate of power consumption is an important indicator of our growth rate- the rate with which the economy is growing. To cut short, the rate of growth of power consumption rightly reflects the rate with which the economy is growing because it is the speed with which we are producing goods and services using power. Therefore if we really want to know our actual growth rate we should refer to our rate of growth of power consumption. It is an important index if we want to know about the growth rate of our economy…

INDIA Should Specialize in Labor-Intensive Products...

Article;

Big Trade-Deficit with China Excellent

Comment;

India is labor rich and wages are low compared to China therefore India should specialize in labor intensive products. But, since people do not have skills and the economy technology, our productivity levels and per capita income is low. The writer says we need to export surplus… Therefore from this point of view we have a surplus of food grain stock and we can export the surplus. Indian economy is good as far as production of food grains is concerned. Since India is land and labor rich it should specialize in agricultural products and export the surplus. Skills development is another area where the Indian economy can cash increasing productivity of the masses but needs investment…