Economists are right for China...

Blind faith in the economic policies of the developed-world has landed China in trouble as far as debt and housing-bubble in the economy are in focus. By more and more easing through government bonds purchases China wants to lower interest-rate on public-debt to spend more on infrastructure, but by not lowering interest rate directly it wants to keep housing bubble and private-debt in check. Nonetheless the objective behind easing has been the devaluation of the yuan, everybody knows it. Chinese have relentlessly applied loose monetary-policy and think that it is a panacea for all ailments, but in not a less developed economy with supply-constraints, still, more money supply will always increase overheating and price-bubbles near full-employment. The economy has gone through many currency-re-denominations which is used to avoid too much increase in inflation and loss in the value of money, but, lately, it has also learnt to increase money-supply and depreciate the home-currency, and, give exports, employment and growth a push. The money from easing is flowing out of the economy after quantitative-easing which is responsible for higher interest-rates for the economy. Nevertheless, in the absence of capital-flight to abroad the money would have positively affected the scale of ability of banks to sell credit at lower interest-rate will increase. Higher capital inflows of foreign-investment (dollars and euros) have kept the yuan under pressure to appreciate, but PBOC is buying more and more dollars to keep the yuan depreciated. So at one place domestic capital is flowing out and at the other, in form of foreign-capital is flowing in. Not much difference.  There is a considerable trade-off between the gains from domestic monetary-policy and foreign-exchange-rate-policy, however the whole idea is to keep yuan devaluated which means more export competitiveness and growth in the face of slowing domestic-demand because of overheating and high interest rates. Economists are right when they lecture China on concentrating on domestic-demand.  China is trying to cash foreign demand at the expense of domestic-demand when its own expansionary monetary-policy and depreciation is inviting overheating in the domestic economy. To avoid this it needs tightening, and, not easing to avoid inflation and bubbles. More money-supply and inflation will hurt domestic value of yuan and demand within the economy.

Good-food import is good...

If we reduce the middle-man chain in the supply of food-grains farmers will get higher prices... It will incentivize farming... INDIA still has to transform agriculture in to a technology-intensive sector to increase productivity, output... Liberalising the FDI in the food-supply-chain-management will help increase investment in agriculture... while domestic investors are reluctant and slow... Without significant investment to raise farm output our industry will face higher cost of capital...  Agriculture (food) is very crucial for economic expansion from the view-point of inflation, interest-rate and human-capital...  When we talk about supply-side constraints in INDIA food is a major point, besides infrastructure...  The government should not shy away from importing good food to keep prices in check... The whole argument between the Center and the RBI is about interest-rates and food prices are the reason for high rates... The government has set aside Rs 500 Crores as price stabilization funds which should, as sounds, be used to tame prices, but no doubt we will need foreign reserves for imports... The fund will help improve supply within the economy but, again, it will stress our current account deficit that stands low relative to inflation and high interest-rate as a problem... Foreign trade should be used to increase internal demand and growth... It is an opportunity...  Controlling CAD at the cost of domestic consumption, prices and interest rate seems too hawkish...

Japan still in liquidity-trap...

The value of Japanese Yen domestically is too low... average wages earning perday in Japan is around 7000 Yen... people are carrying lots of money even for day to day expenses... In the US daily wages are around 80 $... 100 times less than Japan... Therefore, if we want to increase demand, inflation and economic-growth in Japan, we will need a very much big stimulus to affect the threshold for the response we like to see... The US pumped trillions of dollars through the QE to generate demand, inflation and growth... And if Japan wants to do to the same it will need a 100 times bigger stimulus without time horizon commitment because the Japanese economy is in the liquidity-trap, people are delaying purchases in expectation of lower prices ahead, monetary-easing will make them delay longer... Any increase in money supply is supposed to increase wages/income and demand... but, nominal wages, when value of money is too low, should increase so much (should be big enough) so that it generates demand and inflation... But, real-wages can rise when we inflation falls and more when prices go below the base year... The Japanese economy has left many inflation base years and there is a lot of scope to compress prices, increase real-wages, demand and growth... Japan should stop avoiding deflation... Lower prices are more expansionary, Pigou-effect... The transmission of higher money-supply to inflation and higher interest rate has broken-down... Liquidity-trap is real...

Governor might suprise us...

Everybody is trying to take clue of what our RBI governor might do in its monetary-policy-review tomorrow. It makes sense that since we do not have latest inflation figure and the data reference is still old Rajan must wait for more data. But, the governor last two times surprised all with off-date rate cuts and there is a little chance this time too he might leave all in awe. Rajan has a tendency for surprising his observers, but no doubt he can maintain a status-quo and wait for latest data. The central-banks job is not so much about manipulating interest-rates directly, it is about managing money-supply and the interest-rate adjusts accordingly. Long-term rates guide short-run changes in interest-rates on retail-loans. The repo-rate too changes money-supply to commercial banks and is not the sole determinant of interest-rates... In short, it is the money-supply which affects interest-rates in an economy and if there an increase in money-supply interest-rates will fall... Keeping this mechanism in focus the central-bank may reduce reserves requirements and liquidity-ratios to increase money-supply and reduce interest-rates on credit... But, the transmission of money-supply to low interest- rate takes six months or more to translate in to higher investment therefore we can expect growth to pick only after the lag... As far as inflation is concerned it is expected to remain low on account of low global commodity prices. This time again Rajan might surprise us with repo-cut...

Exchange-rate and employment...

It would not be an overstatement that in the recent times foreign-exchange-rate policy is centered around exports, employment and growth. The pattern is present everywhere... US, Europe, Japan, China... Even the Make-in-INDIA initiative of the present government is a step in giving Indian export sector a push. INDIA’s export sector, especially manufacturing, is largely underdeveloped and there is a scope for employment generation with relatively low wages. The country so far has concentrated on domestic-demand for growth but now with greater emphasis on manufacturing and exports INDIA is likely to out-pace cooling China which is going through a slow down much like the Japanese and the US style, a deflationary bias in the economy... However, INDIA with a sound policy, even in the exchange-rate...  a little depreciated Rupee to give export and employment a chance... can take advantage of both the positions... An investment inflow and hardening rupee and investment outflow and depreciation... Increasing foreign-exchange reserves during inflows and hardening will help us weather too much depreciation during outflow and costlier imports and also increase our competiveness... Moreover outflow and depreciation will, again, increase export competitiveness. We should use our foreign-exchange rate policy for more productive employment and growth, it would be helpful as far as demand and growth (external and domestic) is concerned... The investment-cycle in INDIA too is soon to kick-in with interest-rate reduction... Good for exports... Depreciation and low interest-cost...

Fed should wait...

A strong-dollar is bad for US’ exports and employment in the country. i think Krugman is pointing in the same direction, more exports, more employment and more growth. Even the QE in US was initially designed to depreciate the dollar by increasing money-supply and give exports a push. Even the whole Europe is on the same track... QE and depreciation... Just the Fed’s signal for a hike can pull out money from emerging market and reinvested in US. More money-supply back to the US is likely to put downward pressure on the rates because money-supply to the economy will increase. The Fed has poured billions of dollars by QE which will return to the economy and that is going to lower interest-rates on government bonds and short-run rates will adjust to the relative money-supply. Whenever money-supply increases it lowers interest rates. In the models they assume no central-bank... when money-supply curves shifts to the right it will reduce interest rates... What will be the effect of money-supply on the dollar is still not clear because the money is already in circulation and will have only a marginal-effect on the dollar... Perhaps the Fed would not like see to US’ exports bogged down by a strong-dollar... The US has lot of potential in the import –substitution area because its trade deficit with China is high. Exchange rate depreciation has always been a centre-piece for countries struggling with recession. Fed should wait because rate hike can make the economy uncompetitive...

Off-date rate cut, again...

Today, again, our RBI Governor reduced repo-rate by a quarter basis points, from 7.75% to 7.5%... But, commentators were trying to find out reasons that resulted in a rate cut without having reference to the latest data... The data for CPI is 5.11% is almost a month old... In January Rajan too delivered a rate cut on an off-date which experts attributed to falling oil-prices and confidence in the inflation glide-path... Nonetheless, the effect of falling oil and transport price/cost is yet to appear in data... May be this time too Rajan has assumed lower prices on the occasion of falling crude-prices and delivered a rate-cut earlier than expected... This time budget too might be responsible for a rate cut... Experts were expecting a rate cut after the budget, but not this soon... on an off-date... which is good from the point of view of ‘timing’... The commitment for fiscal-credibility in the budget has given space to monetary easing, nevertheless for more capital expenditure or infrastructure investment we will also need lower rates... Many times economists reiterate that to remove supply-side bottlenecks we need more investment... The current rate-cut is in line with the current line of thought... Rajan is a supply-side economist too...It is the time to relook at our multi-brand-retail-policy... We need more investment in food-supply-chain-management, in retailing... Good food yet remains out of reach of poor because of prices... Good supply will reduce prices...