INDIA, US, China... (Rev.)

The protectionism does work and the free-trade does not, when we have capacity to produce at lower prices and scope to reduce unemployment, importing at higher prices lower real wages/income/profits...

Automation might help save labour and lower prices (due to lower real wages) in countries with full employment to increase productivity... ie capital and tech rich countries... Countries with higher unemployment need to use cheap labour intensive tech...

The economists dislike protectionism and automation... If, it had been true, that they are bad, China had not grown unprecedentedly... Imports are important for lower prices to increase economy’s productivity... unfurnished and intermediate goods to get a place in the supply goods global chains and lower global prices may be good for price and employment stability...

The 6% unemployment rate (INDIA) is only 1% more than the full employment range which points that the economy is growing just below the potential real growth 8%... which could be gauged also from the fact that after factoring the natural rate of unemployment the population growth rate is 8% which is also the potential growth…

The economy (INDIA) is growing 7% which is just 1% short than the potential growth rate... 1% increase in unemployment shows that the growth rate is lower by 1%... 1% of unemployment means 10 million jobless...

The US shows that full employment could go down as low as 3.5 % which means that there could be 25 million unemployed in the economy which also means that INDIA could grow at just over 10%...

INDIA has adopted a flexible inflation targeting which means that the RBI can tolerate higher inflation upto 6% and could afford to be patient not to raise real rates...

Had the RBI not increased nominal interest rates when inflation was low, the higher real interest rates had not increased the borrowing cost, which exposed the shadow banking crises and the economy turned slow due to liquidity crisis...

Price stability always comes at the cost of higher unemployment... We have stable prices during NDA... with setbacks for demand... from monetary policy, too...

The rate cuts would not solve the problem of low inflation in the US, rather they could further lower inflation by lowering borrowing cost and increasing (investment and employment and) supply and demand by increasing productivity of capital or lowering the opportunity cost of capital, which could again increase rate cut expectations and the economy might find itself in a deflationary spiral... The same is true for inflation and rate hikes; they further increase rate hike and inflation expectations...

The Fed may try to stabilize real interest rate at neutral or zero at which there is price stability and full employment...

If the multiplier theory is true tax cuts in the US could multiply its effect every year if money supply is not tightened and/or reduce spending by the government... Now, the Fed has to maintain stability of the natural real interest rate, real wages and exchange rate, and savings and consumption, and, investment and employment, and, demand and supply, and, prices and incomes and the economic growth and expectations...   China is facing excess capacity and over supply and also lower demand due to trade tension with the US which have reduced prices and expectations which must be changed to higher prices and expectations to increase demand and also to constrict supply to increase growth... China must increase real interest rate and expectations to increase price and price expectations through higher borrowing cost and lower supply without overheating... Higher price expectations could increase demand and lower supply to increase prices and expectations....

RBI and Oil...

The RBI should devise a mechanism to push banks pass on full rate cuts while maintaining the existing margins... which is doable... to stoke investment and growth... Higher liquidity too could increase scale of business and profits... Atleast banks are better-off even with full transmission of rate cuts...

The growth and inflation relationship is weak and is dependent on the excess capacity and output gap... Higher unemployment means prices might go down as a result of production and growth...

A neutral stance may help avoid rate cut expectations and delay in consumer and investment spending as people are less sure about rate cut expectations... When people expect lower prices they delay spending... Nevertheless, lower household inflation expectations could further reduce spending... To avoid this, a neutral stance is good... It means both rate cut and rate hike depending on the inflation and expectations…

Price and demand-supply or quantity of commodities are like bond price and interest rate or bond yield, income is decided by both bond price and yield, likewise income from oil or a commodity is decided by both price and quantity, either quantity goes up and prices go down or quantity goes down and prices go up, nevertheless returns or income remains same and lower prices mean higher quantity demanded and supplied and higher prices lower quantity demanded and supplied, revenue or income remains same...

It is a mirage that higher price would increase income... Moreover, lower prices further lower price expectations because either supply and demand or quantity increase or people delay spending if they expect lower prices, similarly higher prices further increase price expectations 'coz people demand and supply or quantity decrease or people increase spending if they expect higher prices...

Lower price expectations delay demand and increase supply which further lowers price expectations... Higher price expectations increase demand and delay supply which again increases price expectations...

Higher oil prices and inflation expectations and back to back rate hikes stroked the slow recovery from demonetisation and GST which were implemented in the backdrop of recovery from the past rate hike cycle, NPAs and slowdown... INDIA still needs to achieve the best... in terms of demand and growth when expectations from INDIA are high, especially by the investors, domestic and foreign, from a long run perspective... The investment cycle is still to kick in fully with lower inflation and rate cuts...

When oil prices were low, imports fell when investors ought to import or invest more... to create reserves to sell at higher prices later and contain prices and demand...

Volatility in oil prices add to the uncertainty... Transport prices are an important part of global trade... When global growth is expected to go down oil prices are expected to be lower... Nevertheless, low and stable inflation and interest rate and expectations when growth expectations are low could support oil prices, but inflation and interest rate expectations and higher oil prices would be contractionary... Like interest rate is to reduce domestic inflation, exchange rate could be used to reduce imported inflation... Cheaper exchange rate or at discount could help reduce cost of foreign exchange and prices or inflation, especially through oil imports... Lower interest rate may increase depreciation or nominal exchange rate increasing real exchange rate and demand for exports by lowering the price level... Lower inflation or higher productivity increase demand and supply or quantity, exports, too... In exchange rate parlance increasing means lowering or depreciation in the exchange rate, true for real exchange rate, too... and decreasing means increasing or appreciation in the exchange rate... real rates, too...

BJP has promised more public investment to increase productivity which would increase competitiveness and demand and growth or lower cost/price to increase demand when Cong has promised more demand directly, which may increase fiscal deficit and inflation without increasing effective distribution (market) of labor (employment) and production... Lower AND stable prices have been the attributes of the BJP...

NYAY and Unemployment and The Monetary Policy...

The need to make people independent by providing skills and jobs is overrided by policies to make people dependent and increase scope as vote banks...

NYAY has targeted only the employed and promised to support their income... Atleast no one has put that unemployed would get Rs 12, 000/month...

Probably NYAY has nothing to do with unemployment; it is an income support for the working group earning less than Rs 12, 000... Are unemployed going to get complete 12, 000...?

How NYAY is going to help unemployed... (?), when the problem has been unemployment.

NYAY has overestimated the cost of living... Rs 9, 000 could be appropriate for a family or a household given the existing subsidies... But, it has not targeted the unemployed... There is still scope for unemployment benefits and dbt for education and skills...

There is still need for unemployment benefits transfer b’coz NYAY has only targeted the poor employed by its income support scheme...

Unemployment benefits are an important part of the Social Security...

The government should promote self education and self certification after graduation...

Modi's 10% reservation to economic weaker, people earning less than 8 lakh, is a bigger game changer, it covers a larger population, including the middle class too, besides poor...

Recently Raghuram Rajan raised doubts about the employment and growth data. But, Rajan himself never valued unemployment data while deciding the monetary policy during his stint when price stability and unemployment, both, are important from policy point of view... He never pointed that unemployment data are too much cumbersome...

Government's commitment to low fiscal deficit and better supply side management, especially the food, and lower debt and inflation have been slowly recognised by the RBI... But, had not translated to lower inflation expectations, by RBI, and lower interest rate...

After demo the RBI had to cut rates to increase falling growth expectations... which hit the already bottoming out economy and slowed the economy further... which was further hit by oil prices and depreciation and two successive rate hikes...

The RBI had not been helpful for more production and employment... lower borrowing cost could also increase competitiveness and demand/supply and growth....

Higher interest rate would be bad for, both INDIA and the US... A strong dollar could further increase depreciation and increase oil prices and CAD and outflows... and higher interest rates in INDIA... A US recession would help INDIA in terms of lower commodity and oil prices and inflows...

Lower inflation and inflation expectations might not increase the nominal exchange rate transmission... means lower inflation and expectations premium...

Today the RBI in its monetary policy review delivered a 25 basis points rate cut even when household inflation expectations has remained benign while maintaining a neutral stance which points that further rate cuts might be possible going ahead…

The RBI must have avoided interest rate cut expectations since it could delay demand worsening growth... It had better provided a 50 basis cut while maintaining a neutral stance dependent on the incoming data given higher real interest rate compared to peer countries...

Formalisation, Central Banks and Expansion, and Arabs...

There is no connect between formalisation and wages... Even with the Unions in developed countries wages are lagging productivity…Formalisation basically means more data and information on the economy to frame consistent policies… Low skills and productivity are reasons behind jobs and joblessness and lower wages… Formalisation also lowers tax evasion by maintaining accounts…

The central banks or the RBI are to curb irrational exuberance and excesses and try to control too much volatility in prices in the stocks and the broader economy, but not all the prices... Price change and expectations play an important role in investment or speculation...

Lower prices or inflation increase demand and price expectations and higher prices lower demand and price expectations...People buy low and sell high in the expectation of higher prices and higher price increase supply and lower demand and price expectations...

The same is with inflation people try to gain from rational expectations... But, too much volatility in G&S prices might increase change in the interest rate and expectations and demand and spending and growth worsening financial and economic stability... Irrational exuberance creates booms and busts, the central bank must curb too much boom and busts…

Depreciation is a failed strategy because it lowers domestic demand... competitiveness could also be increased by lower borrowing cost and increased capital productivity which could also increase domestic demand... Lower oil and inflation is one of the reasons of strong rupee which means higher real exchange rate, more demand for domestic products...

2.5% nominal interest rate and 2% inflation mean a 0.5% real interest rate which is likely to increase savings and lower spending even when inflation is tamed resulting in lower price and interest rate expectations... During the last recession the Fed has already tried negative real interest rate when nominal rates were close to zero and inflation below target...

The healthy balance sheet maintenance could work as precautionary money during the next recession... Too much tightening could lower price and interest rate expectations leading to a slowdown...

The expected inverted yield curve as a precedent for recession in the US is exaggerated since this time the Fed is more cautious about its past mistakes of too much tightening and defaults and higher unemployment and lower prices and interest rate, later...

This time it has recognised that there is a neutral real interest rate at which there is price stability and full employment and it admits, now, that we have reached the neutral real rates or zero real interest rate at which prices and inflation are stable near full employment...

Nonetheless, labourforce participation rate has been low compared to a decade ago, before the Recession 2008, which might be increased by increasing real wages and if the Fed waits for wage build up when inflation and expectations are low....

Nevertheless, there has been a gap in productivity and real wages since 1970s... By delaying the rate hikes with respect to inflation the Fed has lengthened the expansion... Things move slowly in the economic world, the next slowdown is expected when higher real wages increase demand and price and real interest rate expectations...

…it might still take 3 - 5 years depending on the speed of increase in real wages... lower inflation also means higher real investment and profits...

Higher productivity and lower wages and natural real interest rate since 1970s could be responsible for lower inflation and expectations... Data shows that inflation has increased with rate hikes since 2015... Low inflation and expectations have lowered premium on long term interest rates... Nonetheless, if inflation and expectations increase it could again increase long term rates...

                                                                   Interest rate          

                                                                   Inflation

Withdrawing accommodation and raising interest rate are like taking away money from people and supplying loans and consumption/investment spending, actually backed by banks reserves, even when it has not created inflation and inflated assets, but rolling back money supply and increasing interest rate might lower demand/supply and price and growth expectations...

The Fed should never increase interest rates so much that it increases chances of default and slowdown in the economy even when inflation is muted which might lower price expectations and delay in economic activity...

The stand-off between the US and China is also a major cause of further slowdown in already slow European economies... Germany, the best performing economy in the Euro-area has considerable trade with China which might sour investments...

We have reached a state where no economy can claim insulated from foreign trade and investment and grow in isolation... Even the US growth has slowed down since the inception of trade and tariff war...

Arabs said they want oil at $70… even with supply cuts, but what would happen when the sanctions on Iran and Venezuela would be removed altogether? Prices might fall like the house of cards... Both are among the biggest oil producers... Shale would also suffer along with Arabs...It is just a matter of politics... 

China-Pak, Imports, Data, Liquidity, Neutral Rates and DF...

China is on its way to become a terror(ist) country... It posits in US'' shoes...But, Superpower does not mean supporting terrorists... 

The US this time has backed INDIA, but China only slowly...

China is still secretly working on the Manifesto... and now terror supporting Superpower through its clout...

We do not need to curb Chinese exports to INDIA at once... we should impose tariff and delay the date for effectiveness till it changes stance on azhar... 

Moreover, china has less space to retaliate than INDIA ''coz of low exports to china... 

It could fall heavily on china added the US tariffs on china which is supporting INDIA... 

Additionally, higher tariff on china could help domestic industry and employment... local jobs are also important...

Had China declared azhar a terrorist back in 2009, Pulwama had not happened... china is as equally responsible for terror attacks in INDIA as is pak... jem is already banned in UNSC and everybody knows that masood is the chief... 

INDIA should boycott china and its products... Trade deficit with china is around $ 51 billions, it would cost china as dear as its investment in pak 50 billions... 

INDIA should impose 100% tariff on china and delay till hold on azahar in UNSC...

Why we are importing when wages are cheap in INDIA... Higher price imports are bad for real wages and demand in INDIA... china is famous for protecting its domestic market...

We are importing costly chinese products when we can produce at lower cost and prices...

China is overlooking long term gain for short run gain... China has already made a mistake to invest in a terror affected region... knowingly has risked its money... 

Peace is a sin e qua non for growth in investment...

Recently, there has been a discussion on the quality and credibility of data in INDIA… what else you can expect from an economy that is largely informal and unorganized?

The RBI has thought of increase liquidity through foreign exchange swap…

But, buying dollars would make it strong means costly or inflationary imports like higher oil prices and depreciation of rupee and outflows and higher interest rate and expectations... 

Lowering CRR could be a better liquidity improving lever... or just OMOs... 

Neutral real interest rate means 0 (zero) real interest rate, neutral means 0... 

It would neither increase savings and investment, means constant increase in savings and investment and growth...

If it increases productivity through investment in health, education, skills and innovation, deficit financing (DF) could help... 

When monetary policy works investment flows to sectors having higher price expectations, but fiscal policy could crowd out private investment and increase demand without creating supply and increasing inflation and inflation expectations...

Demand/Supply and Prices (Stocks, too)...

Higher prices and expectations further increase prices and price expectations which lowers demand or increase supply and lower price expectations and lower prices and expectations further lower prices and expectations and increase demand or lower supply and increase price expectations… therefore, trade cycles are imminent, in the stock markets and in the economy, too…

For example, if a stock market investor expects higher prices based on past data s/he increases investment (or demand) and would delay supply which further increases prices and expectations, similarly if s/he expects lower prices s/he would delay demand and could increase supply, which would further lower prices and expectations... 

Foreign investment inflows also work in the same way if they expect inflation and higher interest rate and expectations based on data they are likely to sell which further increases inflation and depreciation and interest rate expectations, outflow of foreign exchange would again increase depreciation and inflation and interest rate and expectations…   

On the otherhand, if foreign investors expect lower inflation and interest rate and expectations they increase investment which further increase foreign currency inflows and appreciation and lower interest rate and expectations.   

Nonetheless, higher prices to an extent are good for investment in stocks and also in the case of broader economy; it increases the pricing power of businesses… Higher prices are good for supply and demand if real wages or price of labour or incomes increase, but too much higher prices might increase supply or lower demand and price expectations, 

Moreover, lower prices are also good to a degree for investment in stocks and the broader economy; it also reduces the cost for businesses. Lower prices are also good for demand if real wages or price labour increase, at lower prices people would demand more or supply less, but too much lower prices might increase demand or lower supply and increase price expectations.

The trade war is actually a tariff war... which has actually benefited the US... Higher tariff makes domestic industry competitive in the country... Even with the tariff war the US has been able to carve a strong growth...

Trump should look within for answers... a strong dollar is one of the reasons of uncompetitive US exports... Rupee is depreciating every year and dollar becomes strong making US exports shrink... Higher tariff on imports increase the cost and prices of US exports which increases inflation and interest rate expectations... The US economy is too costly... and lower growth expectations...

Too much lower prices (stocks, too) or inflation point lower demand due to higher real interest rate and confusion created by monetary policy signals due to lower oil prices, demonetisation and lower growth and expectations... Lower oil prices, though not full to consumers and demonetisation and now lower food prices all lowered inflation and inflation expectations, but not resulted in rate lower interest rate and expectations, however with a 25 basis points reduction only recently... INDIA...

People do not know that they can bid and offer equity prices and if everybody bid to buy low and sell or offer high they can control equity prices in a bigway... People should always wait for high price... and lower price to buy...

Credibility of rating agencies is also important... During the US Recession 2008 rating agencies underestimated the risk of too much debt and defaults... Even INDIA''s growth rate highest in the world has not been reflected in the rating agencies ratings... Moody has improved INDIA''s rating after a long period but Fitch has not changed its rating just a notch above the lowest investment grade...

1000 or 2000 Rs is just a piecemeal to discourage unemployment, but could be sufficient to spend on education and skills training... In the US unemployment is measured by demand for unemployment benefits which could help target basic income only to the unemployed...  Education and training are the best response to the problem of low productivity and wages and demand...

Prices and Interest Rate and Expectations...

The Fed’s job is to curb too much volatility in the either direction and keep the borrowing cost stable to stabilize demand and supply and prices and growth and expectations... But, not in the stock market, however, stable costs would help stocks... 

Higher price expectations further increases price expectations and lower price expectations lower price expectations, because when people expect higher prices they demand more in present which increase prices... 

Similarly, when people expect lower prices they again delay demand and lower prices, however lower prices increase demand... In this situation Monetary policy could further increase volatility through the borrowing cost...

Nevertheless, higher prices lower demand... Borrowing cost (here) refers to the neutral real interest rate at which the economy is at full employment...

Moreover, higher price expectations delay supply which also increases demand and price and expectations and lower price expectations would further increase supply and lower demand and price and expectations... 

Nonetheless, higher prices lower demand and increase supply which lowers price expectations, but higher price expectations increase demand and lower supply again increasing price expectations... 

Sameway, lower prices increase demand and lower supply (relatively) and increase price and expectations, but lower price expectations delay demand and increase supply which again lowers price expectations... 

The goal of economic policies is the curb too much higher or lower prices or inflation... 

Given the population growth rate of INDIA it needs to create 6-8 million jobs to absorb workforce and not 20 million or 2 Crore jobs after deducting natural rate of unemployment or full employment...

Monetary Policy increases the supply of money therefore it reduces interest rate whereas Fiscal Policy increases the demand for money for spending therefore it increases interest rate and expectations... 

The bond market reactions are different on expansionary monetary policy and fiscal policy... Higher money supply by monetary policy reduces bond yields, but higher fiscal deficit increases bond yields...

Fiscal Policy increases demand for money in the economy through taxes and debt which directly increases the demand for money and interest rate... fiscal deficit or debt increases demand through wage spending which also increases inflation and interest rate and expectations...

True RBI missed the oppourtunity to lower interest rates to boost growth after demonetisation which reduced inflation and inflation expectations too much even with an accommodative stance...

The RBI has set the benchmark rate to the repo rate, to increase rate cut transmission, which would be in effect from April 1, 2019 which is likely to reduce borrowing or lending interest rate across the board likely to increase demand for loans, consumption and investment spending, and growth and expectations.

Moreover, RBI is expected to further cut interest rate or the Repo Rate and/or adjust capital requirements since liquidity deficit might not let rate cut transmission materialize… 

The RBI might educate people about the real rates which matters and not the nominal interest rate INDIA has one of the higher real interest rate and capital requirement countries.

50% of our arable land is dependent on weather for irrigation amid water disputes among states... It is major risk for farmers' income... 

If farm prices can not be increased due to resultant inflation, costs must be brought down... 

Moreover, if prices of manufactured goes down that could also increase real wages in the farming..

The US still gives subsidies to farming... Moreover, Israel has expertise in more crop per drop which might be engaged to improve farm performance...