As a daily routine when I checked Ajay Shah's blog yesterday, I came to know about the seminar conducted by NIPFP (National Institute of Public Finance and Policy) & DEA (Department of Economic Affairs), Ministry of Finance.
In that seminars various papers & presentations about the present micro & macro economical conditions, are presented & discussed. All those materials are uploaded to their "website". There is very large material not only about the recent seminar but some of the old seminars which are happening from 2007. So interested people can download the required materials.
NIPFP-DEA has got a blog also where in they update all the happenings. People those who are interested can subscribe free of cost so that all the updates will be at your doorstep whenever they update.
Tuesday, March 31, 2009
Sunday, March 29, 2009
Mr. Swaminathan's Article in STOI:History reveres the sharif badmash who gets results
The year 2009 marks the 200th birth anniversary of Abraham Lincoln, and also the end of Manmohan Singh’s term as prime minister. Both ended
office with awesome reputations as honest men in highly corrupt eras. Lincoln was nicknamed Honest Abe. Singh has been called sharif Manmohan.
Yet, critics have accused both Lincoln and Singh of being hypocrites who advertised their personal honesty but agreed to dirty deals to promote their political aims. Singh’s elevation to the top post in 2004 was hailed as a historic breakthrough for integrity. Yet, within days he formed a council of ministers that included seven politicians facing criminal charges. The most notorious was Mohammed Taslimuddin, a Bihari ganglord accused of crimes ranging from murder to rape, a close pal of RJD chief Lalu Yadav.
Earlier, when joining Deve Gowda’s government in 1996, Lalu managed to get Taslimuddin made a minister. But following a public outcry, Deve Gowda dropped Taslimuddin. Deve Gowda was capable of feeling embarrassed at such a scandalous appointment. Not so Dr Singh.
He ended his term with an episode just as sleazy. He faced defeat on a confidence vote on the Indo-US nuclear deal. The Left front had ditched him on this issue, and frenzied last-minute efforts had to be made to secure enough defections from Opposition parties to survive. In Parliament, Opposition legislators exhibited huge quantities of currency allegedly paid to buy their votes.
Ultimately Dr Singh won the confidence vote. But so afraid was he of losing another such vote that subsequent sessions of Parliament were declared to be mere extensions of the monsoon session. Not more than one confidence motion can be moved in a single session, so this manoeuvre saved Dr Singh from having to face another vote of confidence, and possible defeat.
Cynics say that all’s fair in love, war and politics, and other parties are no better. They say that Dr Singh was never PM except in name: he simply carried out Sonia Gandhi’s instructions. Does this argument absolve Dr Singh? Hardly. He could have resigned rather than give in to tainted ministers and vote buying. But he chose to go along with these.
A stronger defence is that history judges people by their achievements, not the means they used. Abraham Lincoln in his time was also accused of slimy hypocrisy, and with as much justification.
He is revered today as the man who abolished US slavery. Yet, in 1860 he won the Republican nomination to run for president largely because he was seen as moderate on slavery abolition. His chief rival, William Seward, was an outspoken abolitionist. But Lincoln claimed every state had the right to decide whether or not to have slavery, and that imposing abolition would be unconstitutional. He thought slavery was morally wrong, but constitutionally acceptable. His partymen felt this soft approach would help win the Border States — Missouri, Kentucky, Maryland and Delaware — that allowed slavery but opposed the secession of the South. This was a key reason for his nomination and electoral success.
On assuming office, Lincoln said his quarrel with the South was not on slavery but on secession. The South insisted on seceding, and the Civil War commenced. Then in 1862, Lincoln suddenly abandoned his oft-stated constitutional position and abolished slavery, on the dubious ground that he could ignore constitutional propriety under the War Powers Act.
His Emancipation Declaration abolished slavery only in the rebel Southern states, not the Border States, whom he dared not antagonise. He said, famously, ‘‘I would like to have God on my side, but I absolutely must have Kentucky.’’
But once the Civil War was won, Lincoln abolished slavery in the Border States too. According to one analyst, ‘‘Lincoln used the Border States to screw the South; and having done that, he screwed the Border States too.’’
In Lincoln’s era, the dictum of politics was ‘‘to the victor, the spoils.’’ There was no permanent civil service, so presidents could literally buy political support and much else with promises of office. To win the Republican nomination in 1860, Lincoln struck dubious deals with a number of notoriously corrupt Democrats.
Few people remember or pay much attention to those sleazy manoeuvres today. History remembers Lincoln as the man who won the Civil War and abolished slavery. For the same reason, i think history will remember Manmohan Singh as the man who made India a miracle economy with 9% growth, and clinched the Indo-US nuclear deal.
Gandhiji said the means did not justify the ends. But Yuddhishtra in the Mahabharata thought differently (remember Ashwatthama). Manmohan Singh cannot claim to be Gandhian, but can claim to be Yuddhishtra.
office with awesome reputations as honest men in highly corrupt eras. Lincoln was nicknamed Honest Abe. Singh has been called sharif Manmohan.
Yet, critics have accused both Lincoln and Singh of being hypocrites who advertised their personal honesty but agreed to dirty deals to promote their political aims. Singh’s elevation to the top post in 2004 was hailed as a historic breakthrough for integrity. Yet, within days he formed a council of ministers that included seven politicians facing criminal charges. The most notorious was Mohammed Taslimuddin, a Bihari ganglord accused of crimes ranging from murder to rape, a close pal of RJD chief Lalu Yadav.
Earlier, when joining Deve Gowda’s government in 1996, Lalu managed to get Taslimuddin made a minister. But following a public outcry, Deve Gowda dropped Taslimuddin. Deve Gowda was capable of feeling embarrassed at such a scandalous appointment. Not so Dr Singh.
He ended his term with an episode just as sleazy. He faced defeat on a confidence vote on the Indo-US nuclear deal. The Left front had ditched him on this issue, and frenzied last-minute efforts had to be made to secure enough defections from Opposition parties to survive. In Parliament, Opposition legislators exhibited huge quantities of currency allegedly paid to buy their votes.
Ultimately Dr Singh won the confidence vote. But so afraid was he of losing another such vote that subsequent sessions of Parliament were declared to be mere extensions of the monsoon session. Not more than one confidence motion can be moved in a single session, so this manoeuvre saved Dr Singh from having to face another vote of confidence, and possible defeat.
Cynics say that all’s fair in love, war and politics, and other parties are no better. They say that Dr Singh was never PM except in name: he simply carried out Sonia Gandhi’s instructions. Does this argument absolve Dr Singh? Hardly. He could have resigned rather than give in to tainted ministers and vote buying. But he chose to go along with these.
A stronger defence is that history judges people by their achievements, not the means they used. Abraham Lincoln in his time was also accused of slimy hypocrisy, and with as much justification.
He is revered today as the man who abolished US slavery. Yet, in 1860 he won the Republican nomination to run for president largely because he was seen as moderate on slavery abolition. His chief rival, William Seward, was an outspoken abolitionist. But Lincoln claimed every state had the right to decide whether or not to have slavery, and that imposing abolition would be unconstitutional. He thought slavery was morally wrong, but constitutionally acceptable. His partymen felt this soft approach would help win the Border States — Missouri, Kentucky, Maryland and Delaware — that allowed slavery but opposed the secession of the South. This was a key reason for his nomination and electoral success.
On assuming office, Lincoln said his quarrel with the South was not on slavery but on secession. The South insisted on seceding, and the Civil War commenced. Then in 1862, Lincoln suddenly abandoned his oft-stated constitutional position and abolished slavery, on the dubious ground that he could ignore constitutional propriety under the War Powers Act.
His Emancipation Declaration abolished slavery only in the rebel Southern states, not the Border States, whom he dared not antagonise. He said, famously, ‘‘I would like to have God on my side, but I absolutely must have Kentucky.’’
But once the Civil War was won, Lincoln abolished slavery in the Border States too. According to one analyst, ‘‘Lincoln used the Border States to screw the South; and having done that, he screwed the Border States too.’’
In Lincoln’s era, the dictum of politics was ‘‘to the victor, the spoils.’’ There was no permanent civil service, so presidents could literally buy political support and much else with promises of office. To win the Republican nomination in 1860, Lincoln struck dubious deals with a number of notoriously corrupt Democrats.
Few people remember or pay much attention to those sleazy manoeuvres today. History remembers Lincoln as the man who won the Civil War and abolished slavery. For the same reason, i think history will remember Manmohan Singh as the man who made India a miracle economy with 9% growth, and clinched the Indo-US nuclear deal.
Gandhiji said the means did not justify the ends. But Yuddhishtra in the Mahabharata thought differently (remember Ashwatthama). Manmohan Singh cannot claim to be Gandhian, but can claim to be Yuddhishtra.
Saturday, March 28, 2009
Updates from the world of business...
20% RETURNS IN 20 DAYS
Surprised! Ya most of the market players surprised by the rally in the global markets including ours. There are various reasons like FED's 1 trillion $ plan, some economic indicators showing positive sign, back in home inflation in line with market expectations, oversold markets leading to cheap bargaining, net buying from FIIs & as usual DIIs like mutual funds & LIC & etc. Whatever may be the reason, as in TECHNICAL ANALYSIS we popularly say "WHAT IS MORE IMPORTANT THAN WHY" market has given the around 20% returns as compared to march first week 8000 odd levels to 10000+ levels.
Now there lot of discussion going on in Dalal street whether this is bear market rally or start of the bull trend. Anyway I am not going to discuss that as I myself naive in this as compared to all those experts. But what I am proposing to traders & investors here is be cautious! As most of the traders/investors lost lot of their money in this crash over the 15 months, everybody will be looking to make some profit at least as and when situation permits. And in addition to that if it is bear market rally then it is going to crash if not now, after another 10% rally as historically bear market rallies have crashed after reaching the range of 30%-40%. So as I frequently say in this kind of bear market there is always "1 STEP PULL BACK WHENEVER 2 STEPS PUSHED AHEAD"
And one more popular discussion is whether markets bottomed out or not? If you see the below graph, you can see that markets have bottomed in the range of 8000-8300 levels. But question is whether is this a intermediate bottom or markets are going test the new level? But I dont think markets test the new lows! Again I may be wrong, since in this kind market nothing can be ruled out as present upside is happening, in the same way downside is also quite possible. If you observe the CIRCLE in the graph, 50 DMA is still below the 100DMA, so you cant conclude this rally is sustainable in the medium term. And there are strong supply regions in 10500 & 11000 odd levels. So traders should be careful while taking long/short positions. Capitalize on the situation & book the profits whenever your intermediate targets are achieved!
NIFTY SHIFTS TO FREE FLOAT
From June 26th Nifty is shifting to free float market methodology to calculate the index. This is the good method of calculating the index as number free float shares differ from total shares of a company. As you might be knowing free float share means number of shares traded in the secondary market in day today trading may be less/more as compared total share which include free float, promoters holdings, government holding & etc.
Presently Nifty is calculated based on full market capitalization which may not depicting the exact trend in the market movements. But this new from the board will be more pragmatic since it is going to be more weighed on daily traded shares.
If you see the below table in which NTPC & ONGC will be major losers as their free floats are around 20% 60% of their total market capitalization respectively. Being Public Sectors Majors government holds the majority of the stake in these companies. While on the gaining side almost all companies are private companies like L&T, ICICI Bank, HDFC & ITC. Since as compared to their full market capitalization to free float market capitalization more number of shares leading to increase their weightage in the index as shown in the below table.
This change will impact more as Nifty is the most traded index it alter all portfolio combination..
Inflation @ 0.27% Vs 0.44%
Indian headline inflation measured by WPI [Wholesale Price Index] fell near zero level of 0.27% for the week ended March 14 as compared to its previous week's 0.44%.
For the week ended on March 14th the WPI index increased by 0.1 basis to reach 227.7 basis points, but because of high base of 226.4 of previous year inflation is heading southward. Last year for the same week means, March 7 2008 to March 14 2008 WPI increased by 0.7 basis points due to which present year increase of 0.1 basis point is not contributing in increasing the WPI headline inflation.
Where as if you see the CPI [Consumer Price Index] numbers couple of them are still in double digits. For example Pulses and cereals, the two most commonly consumed items, are at 9.97% and 10.12%, respectively. The inflation rate for sugar is at 20.97 per cent. But for these numbers there is agricultural reasons like periodic cycles in agricultural outputs. For example in case Sugarcane, there will be bumper crop for 2 consecutive years & next year it will very low crop like that every crop has its cycle of yields. And in addition to that thanks to "OUR WELL DEVELOPED PDS [PUBLIC DISTRIBUTION SYSTEMS]" which contribute to higher inflation particularly in scarce time due to hoarding by agents.
So what is the solution to minimize this "BASE EFFECT", because all our "MONETARY POLICIES" will be dependent on Inflation numbers measured by WPI. Since base effect is going trouble us next year also since this year we will face negative inflation for the for the couple of months April & May and most probably for June also due to high base of 10%-13% of inflation last year in these months. And in addition to that if this DISINFLATION LEADS TO DEFLATION PRAGMATICALLY due to job losses/salary cuts & other forms of economic problems negative inflation may extend also. And this is going increase inflation substantially in next year as it is in negative this year.
So government should think of adopting to CPI that too with the SEASONAL ADJUSTMENTS so that all the changes are adjusted in inflation numbers. So all the policies taken on these numbers will lead accurate results.
Surprised! Ya most of the market players surprised by the rally in the global markets including ours. There are various reasons like FED's 1 trillion $ plan, some economic indicators showing positive sign, back in home inflation in line with market expectations, oversold markets leading to cheap bargaining, net buying from FIIs & as usual DIIs like mutual funds & LIC & etc. Whatever may be the reason, as in TECHNICAL ANALYSIS we popularly say "WHAT IS MORE IMPORTANT THAN WHY" market has given the around 20% returns as compared to march first week 8000 odd levels to 10000+ levels.
Now there lot of discussion going on in Dalal street whether this is bear market rally or start of the bull trend. Anyway I am not going to discuss that as I myself naive in this as compared to all those experts. But what I am proposing to traders & investors here is be cautious! As most of the traders/investors lost lot of their money in this crash over the 15 months, everybody will be looking to make some profit at least as and when situation permits. And in addition to that if it is bear market rally then it is going to crash if not now, after another 10% rally as historically bear market rallies have crashed after reaching the range of 30%-40%. So as I frequently say in this kind of bear market there is always "1 STEP PULL BACK WHENEVER 2 STEPS PUSHED AHEAD"
And one more popular discussion is whether markets bottomed out or not? If you see the below graph, you can see that markets have bottomed in the range of 8000-8300 levels. But question is whether is this a intermediate bottom or markets are going test the new level? But I dont think markets test the new lows! Again I may be wrong, since in this kind market nothing can be ruled out as present upside is happening, in the same way downside is also quite possible. If you observe the CIRCLE in the graph, 50 DMA is still below the 100DMA, so you cant conclude this rally is sustainable in the medium term. And there are strong supply regions in 10500 & 11000 odd levels. So traders should be careful while taking long/short positions. Capitalize on the situation & book the profits whenever your intermediate targets are achieved!
NIFTY SHIFTS TO FREE FLOAT
From June 26th Nifty is shifting to free float market methodology to calculate the index. This is the good method of calculating the index as number free float shares differ from total shares of a company. As you might be knowing free float share means number of shares traded in the secondary market in day today trading may be less/more as compared total share which include free float, promoters holdings, government holding & etc.
Presently Nifty is calculated based on full market capitalization which may not depicting the exact trend in the market movements. But this new from the board will be more pragmatic since it is going to be more weighed on daily traded shares.
If you see the below table in which NTPC & ONGC will be major losers as their free floats are around 20% 60% of their total market capitalization respectively. Being Public Sectors Majors government holds the majority of the stake in these companies. While on the gaining side almost all companies are private companies like L&T, ICICI Bank, HDFC & ITC. Since as compared to their full market capitalization to free float market capitalization more number of shares leading to increase their weightage in the index as shown in the below table.
This change will impact more as Nifty is the most traded index it alter all portfolio combination..
Inflation @ 0.27% Vs 0.44%
Indian headline inflation measured by WPI [Wholesale Price Index] fell near zero level of 0.27% for the week ended March 14 as compared to its previous week's 0.44%.
For the week ended on March 14th the WPI index increased by 0.1 basis to reach 227.7 basis points, but because of high base of 226.4 of previous year inflation is heading southward. Last year for the same week means, March 7 2008 to March 14 2008 WPI increased by 0.7 basis points due to which present year increase of 0.1 basis point is not contributing in increasing the WPI headline inflation.
Where as if you see the CPI [Consumer Price Index] numbers couple of them are still in double digits. For example Pulses and cereals, the two most commonly consumed items, are at 9.97% and 10.12%, respectively. The inflation rate for sugar is at 20.97 per cent. But for these numbers there is agricultural reasons like periodic cycles in agricultural outputs. For example in case Sugarcane, there will be bumper crop for 2 consecutive years & next year it will very low crop like that every crop has its cycle of yields. And in addition to that thanks to "OUR WELL DEVELOPED PDS [PUBLIC DISTRIBUTION SYSTEMS]" which contribute to higher inflation particularly in scarce time due to hoarding by agents.
So what is the solution to minimize this "BASE EFFECT", because all our "MONETARY POLICIES" will be dependent on Inflation numbers measured by WPI. Since base effect is going trouble us next year also since this year we will face negative inflation for the for the couple of months April & May and most probably for June also due to high base of 10%-13% of inflation last year in these months. And in addition to that if this DISINFLATION LEADS TO DEFLATION PRAGMATICALLY due to job losses/salary cuts & other forms of economic problems negative inflation may extend also. And this is going increase inflation substantially in next year as it is in negative this year.
So government should think of adopting to CPI that too with the SEASONAL ADJUSTMENTS so that all the changes are adjusted in inflation numbers. So all the policies taken on these numbers will lead accurate results.
Tuesday, March 24, 2009
US Markets Soar on Treasury’s Debt Plan
Dow Jones almost surged 500 points on Treasury's plans to rescue plans of banks & housing sector.
Yahoo Reports
The government's announcement was what the market had waited weeks to hear. Treasury Secretary Timothy Geithner had announced an outline of the program last month but provided few details then about how it would work, leading to a poor reception in the markets.
Meanwhile, the housing report released Monday was overwhelmingly positive for the markets even though it showed a decline in home prices in February. Investors are embracing any sign that a glut in homes for sale may be easing.
The market had received another dose of housing good news last week on the troubled industry as housing starts for February came in much better than expected.
Bloomberg says:
Templeton Asset Management Ltd.’s Mark Mobius said the next “bull-market” rally in developing nations and there are bargains in every emerging market following a record slump in stocks & stocks surged from Shanghai to Sao Paulo on the U.S. Treasury’s plan to revive the banking system.
The MSCI Emerging Markets Index climbed the most this year, erasing losses for 2009, on U.S. plans to buy as much as $1 trillion of toxic assets. China’s Shanghai Composite Index rose for a sixth day, the longest winning stretch in more than 17 months, as the government encouraged mergers in the auto and steel industries. Russia’s Micex jumped to the highest since October after Citigroup Inc. said the stocks are “dirt cheap,” while banks led Brazil’s Bovespa index to a 5.1 percent gain.
“You have to be careful not to miss the opportunity,” Mobius, who helps oversee about $20 billion of emerging-market assets as executive chairman at San Mateo, California-based Templeton, said in an interview with Bloomberg Television today. “With all the negative news, there is a tendency to hold back.”
The 72-year old investor, voted among the “Top Ten Money Managers of the 20th Century” by the Carson Group, said there are bargains in every emerging market after the MSCI benchmark fell 57 percent from its October 2007 peak. Equity valuations tumbled as a collapse in U.S. consumer spending shrank demand for manufactured goods and commodities, while frozen bond markets curbed developing-nation companies’ access to credit.
Yahoo Reports
The government's announcement was what the market had waited weeks to hear. Treasury Secretary Timothy Geithner had announced an outline of the program last month but provided few details then about how it would work, leading to a poor reception in the markets.
Meanwhile, the housing report released Monday was overwhelmingly positive for the markets even though it showed a decline in home prices in February. Investors are embracing any sign that a glut in homes for sale may be easing.
The market had received another dose of housing good news last week on the troubled industry as housing starts for February came in much better than expected.
Bloomberg says:
Templeton Asset Management Ltd.’s Mark Mobius said the next “bull-market” rally in developing nations and there are bargains in every emerging market following a record slump in stocks & stocks surged from Shanghai to Sao Paulo on the U.S. Treasury’s plan to revive the banking system.
The MSCI Emerging Markets Index climbed the most this year, erasing losses for 2009, on U.S. plans to buy as much as $1 trillion of toxic assets. China’s Shanghai Composite Index rose for a sixth day, the longest winning stretch in more than 17 months, as the government encouraged mergers in the auto and steel industries. Russia’s Micex jumped to the highest since October after Citigroup Inc. said the stocks are “dirt cheap,” while banks led Brazil’s Bovespa index to a 5.1 percent gain.
“You have to be careful not to miss the opportunity,” Mobius, who helps oversee about $20 billion of emerging-market assets as executive chairman at San Mateo, California-based Templeton, said in an interview with Bloomberg Television today. “With all the negative news, there is a tendency to hold back.”
The 72-year old investor, voted among the “Top Ten Money Managers of the 20th Century” by the Carson Group, said there are bargains in every emerging market after the MSCI benchmark fell 57 percent from its October 2007 peak. Equity valuations tumbled as a collapse in U.S. consumer spending shrank demand for manufactured goods and commodities, while frozen bond markets curbed developing-nation companies’ access to credit.
Monday, March 23, 2009
A2Z Economic Terminologies[Q&R]
Quantity theory of money
The foundation stone of MONETARISM. The theory says that the quantity of MONEY available in an economy determines the value of money. Increases in the MONEY SUPPLY are the main cause of INFLATION. This is why Milton FRIEDMAN claimed that “inflation is always and everywhere a monetary phenomenon”.
The theory is built on the Fisher equation, MV = PT, named after Irving Fisher (1867–1947). M is the stock of money, V is the VELOCITY OF CIRCULATION, P is the average PRICE level and T is the number of transactions in the economy. The equation says, simply and obviously, that the quantity of money spent equals the quantity of money used. The quantity theory, in its purest form, assumes that V and T are both constant, at least in the short-run. Thus any change in M leads directly to a change in P. In other words, increase the money supply and you simply cause inflation.
In the 1930s, KEYNES challenged this theory, which was orthodoxy until then. Increases in the money supply seemed to lead to a fall in the velocity of circulation and to increases in real INCOME, contradicting the classical dichotomy. Later, monetarists such as Friedman conceded that V could change in response to variations in M, but did so only in stable, predictable ways that did not challenge the thrust of the theory. Even so, monetarist policies did not perform well when they were applied in many countries during the 1980s, as even Friedman has since conceded.
Random walk
Impossible to predict the next step. EFFICIENT MARKET THEORY says that the PRICES of many financial ASSETS, such as SHARES, follow a random walk. In other words, there is no way of knowing whether the next change in the price will be up or down, or by how much it will rise or fall. The reason is that in an efficient market, all the INFORMATION that would allow an investor to predict the next price move is already reflected in the current price. This belief has led some economists to argue that investors cannot consistently outperform the market. But some economists argue that asset prices are predictable (they follow a non-random walk) and that markets are not efficient.
Real balance effect
Falling INFLATION and INTEREST rates lead to higher spending (see WEALTH EFFECT).
Real exchange rate
An EXCHANGE RATE that has been adjusted to take account of any difference in the rate of INFLATION in the two countries whose currency is being exchanged.
Real interest rate
The INTEREST RATE less the rate of INFLATION.
Reflation
Policies to pump up DEMAND and thus boost the level of economic activity. Monetarists fear that such policies may simply result in higher INFLATION.
Relative income hypothesis
People often care more about their relative well being than their absolute well being. Someone who prefers a $100 a week pay rise when a colleague gets $50 to both of them getting a $200 increase, for example. Poor people may consume more of their INCOME than rich people do because they want to reduce the gap in their CONSUMPTION levels. The relative income hypothesis, set out by James Duesenberry, says that a household’s consumption depends partly on its income relative to other families. Contrast with PERMANENT INCOME
Ricardian equivalence
The controversial idea, suggested by David RICARDO, that GOVERNMENT deficits do not affect the overall level of DEMAND in an economy. This is because taxpayers know that any DEFICIT has to be repaid later, and so increase their SAVINGS in anticipation of a tax bill. Thus government attempts to stimulate an economy by increasing PUBLIC SPENDING and/or cutting taxes will be rendered impotent by the private-sector reaction.
The foundation stone of MONETARISM. The theory says that the quantity of MONEY available in an economy determines the value of money. Increases in the MONEY SUPPLY are the main cause of INFLATION. This is why Milton FRIEDMAN claimed that “inflation is always and everywhere a monetary phenomenon”.
The theory is built on the Fisher equation, MV = PT, named after Irving Fisher (1867–1947). M is the stock of money, V is the VELOCITY OF CIRCULATION, P is the average PRICE level and T is the number of transactions in the economy. The equation says, simply and obviously, that the quantity of money spent equals the quantity of money used. The quantity theory, in its purest form, assumes that V and T are both constant, at least in the short-run. Thus any change in M leads directly to a change in P. In other words, increase the money supply and you simply cause inflation.
In the 1930s, KEYNES challenged this theory, which was orthodoxy until then. Increases in the money supply seemed to lead to a fall in the velocity of circulation and to increases in real INCOME, contradicting the classical dichotomy. Later, monetarists such as Friedman conceded that V could change in response to variations in M, but did so only in stable, predictable ways that did not challenge the thrust of the theory. Even so, monetarist policies did not perform well when they were applied in many countries during the 1980s, as even Friedman has since conceded.
Random walk
Impossible to predict the next step. EFFICIENT MARKET THEORY says that the PRICES of many financial ASSETS, such as SHARES, follow a random walk. In other words, there is no way of knowing whether the next change in the price will be up or down, or by how much it will rise or fall. The reason is that in an efficient market, all the INFORMATION that would allow an investor to predict the next price move is already reflected in the current price. This belief has led some economists to argue that investors cannot consistently outperform the market. But some economists argue that asset prices are predictable (they follow a non-random walk) and that markets are not efficient.
Real balance effect
Falling INFLATION and INTEREST rates lead to higher spending (see WEALTH EFFECT).
Real exchange rate
An EXCHANGE RATE that has been adjusted to take account of any difference in the rate of INFLATION in the two countries whose currency is being exchanged.
Real interest rate
The INTEREST RATE less the rate of INFLATION.
Reflation
Policies to pump up DEMAND and thus boost the level of economic activity. Monetarists fear that such policies may simply result in higher INFLATION.
Relative income hypothesis
People often care more about their relative well being than their absolute well being. Someone who prefers a $100 a week pay rise when a colleague gets $50 to both of them getting a $200 increase, for example. Poor people may consume more of their INCOME than rich people do because they want to reduce the gap in their CONSUMPTION levels. The relative income hypothesis, set out by James Duesenberry, says that a household’s consumption depends partly on its income relative to other families. Contrast with PERMANENT INCOME
Ricardian equivalence
The controversial idea, suggested by David RICARDO, that GOVERNMENT deficits do not affect the overall level of DEMAND in an economy. This is because taxpayers know that any DEFICIT has to be repaid later, and so increase their SAVINGS in anticipation of a tax bill. Thus government attempts to stimulate an economy by increasing PUBLIC SPENDING and/or cutting taxes will be rendered impotent by the private-sector reaction.
FE Editorial: India’s strength in this slowdown
PROJECTIONS by the IMF that India’s GDP growth will slow down from 6.3% in 2008-09 to 5.3% in 2009-10, after the conclusion of the Article IV consultations last week with India, shows that the pessimism levels have perhaps finally bottomed. This optimism hinges on the assumption that the stimulus packages and a good domestic harvest should support domestic demand. India, where the final consumption expenditure of households constitutes around 60% of the GDP, is certainly better placed to stimulate domestic demand than most other major markets. Share of consumption expenditure in GDP is much lower in China (33%), Russia (50%), and most of the low and middle income countries (averaging 56%), or even the EU (57%). India’s growth in recent years has been spurred by consumption spending, where growth has peaked at a real rate of 8.1% in 2007-08. Though the slowdown is expected to dampen the pace of consumption growth, it will still be significantly higher than in most low and middle income countries and even the euro area, where the growth of consumption spending has averaged 4.7% and 1.4% respectively, in the current decade.
Consumption demand in India will also be bolstered by substantial additions to the workforce, even though most of the labour flows are mainly to the informal sector. It should be noted that India has generated 11.3 million new jobs annually in the first half of the decade as compared to 7 million in China, 3.7 million in the OECD area and 2.7 million in Brazil. And there is also no ground for excessive pessimism on the external front. India’s inability to fully exploit its export potential will inadvertently help, given that its low (23%) ratio of exports of goods and services-to-GDP puts its on a better footing to stave off the slump in external markets, compared with countries with larger export dependence like the EU (40%), China (40%) and Russia (34%). India’s export prospects have also been bolstered by the trends in real effective exchange rates (Reer). Most recent numbers for the period September 2008 to February 2009 show that the Indian rupee has depreciated marginally during the period, and this should help as the Reer of other major currencies like the renminbi, dollar and yen has appreciated between 5% and 25%.
Consumption demand in India will also be bolstered by substantial additions to the workforce, even though most of the labour flows are mainly to the informal sector. It should be noted that India has generated 11.3 million new jobs annually in the first half of the decade as compared to 7 million in China, 3.7 million in the OECD area and 2.7 million in Brazil. And there is also no ground for excessive pessimism on the external front. India’s inability to fully exploit its export potential will inadvertently help, given that its low (23%) ratio of exports of goods and services-to-GDP puts its on a better footing to stave off the slump in external markets, compared with countries with larger export dependence like the EU (40%), China (40%) and Russia (34%). India’s export prospects have also been bolstered by the trends in real effective exchange rates (Reer). Most recent numbers for the period September 2008 to February 2009 show that the Indian rupee has depreciated marginally during the period, and this should help as the Reer of other major currencies like the renminbi, dollar and yen has appreciated between 5% and 25%.
Sunday, March 22, 2009
Directionless Markets!
Last week was good for Indian markets as compared to rest of the world markets. Indian markets moved some 2.5% upward in last week & reached the stage where in break out or break in both are possible.
If you see the below graph, wherein markets are trading round about the 9000 levels and formed the "SYMMETRIC TRIANGLE." Symmetric triangle is a situation from where both the chances are possible like upward as well downward movement. And in Symmetric Triangle formation you can see that both the ends upper & lower ends will be converging towards a point. This is the main reason which can cause a possibility of movement for the both the sides. And same thing you can in the graph, where in lower end of 8000 odd levels & higher end of 10500 levels are converging & ended @ 9000 levels.
But one relieving factor is, SMA [Simple Moving Average] of 20 days is below the current trend indicating the trend still is upward which you can see in the below graph. And if you see the both the graphs at downward movement at every fall sensex is facing some kind of support like @ 8800, 8650 & etc. And its same for the upward movement also from 9000 & above levels there is immediate resistance at 9200 levels, 9500 & 9750 levels.
If you see the below graph, wherein markets are trading round about the 9000 levels and formed the "SYMMETRIC TRIANGLE." Symmetric triangle is a situation from where both the chances are possible like upward as well downward movement. And in Symmetric Triangle formation you can see that both the ends upper & lower ends will be converging towards a point. This is the main reason which can cause a possibility of movement for the both the sides. And same thing you can in the graph, where in lower end of 8000 odd levels & higher end of 10500 levels are converging & ended @ 9000 levels.
But one relieving factor is, SMA [Simple Moving Average] of 20 days is below the current trend indicating the trend still is upward which you can see in the below graph. And if you see the both the graphs at downward movement at every fall sensex is facing some kind of support like @ 8800, 8650 & etc. And its same for the upward movement also from 9000 & above levels there is immediate resistance at 9200 levels, 9500 & 9750 levels.
Saturday, March 21, 2009
A2Z Economic Terminologies
Continuing with the A2Z Economic Terminologies, today I am posting about O's & P's wordings...
Okun's law
A description of what happens to UNEMPLOYMENT when the rate of GROWTH of GDP changes, based on empirical research by Arthur Okun (1928–80). It predicts that if GDP grows at around 3% a year, the jobless rate will be unchanged. If it grows faster, the unemployment rate will fall by half of what the growth rate exceeds 3% by; that is, if GDP grows by 5%, unemployment will fall by 1 percentage point. Likewise, a lesser, say 2%, increase in GDP would be associated with a half a percentage point increase in the jobless rate. This relationship is not carved in stone, as it merely reflects the American economy during the period studied by Okun. Even so, in most econo mies Okun’s Law is a reasonable rule of thumb for estimating the likely impact on jobs of changes in OUTPUT.
Open-market operations
CENTRAL BANKS buying and selling SECURITIES in the open market, as a way of controlling INTEREST rates or the GROWTH of the MONEY SUPPLY. By selling more securities, they can mop up surplus MONEY; buying securities adds to the money supply. The securities traded by central banks are mostly GOVERNMENT BONDS and TREASURY BILLS, although they sometimes buy or sell commercial securities.
Opportunity cost
The true cost of something is what you give up to get it. This includes not only the money spent in buying the something, but also the economic benefits that you did without because you bought that particular something and thus can no longer buy something else. For example, the opportunity cost of choosing to train as a lawyer is not merely the tuition fees, PRICE of books, and so on, but also the fact that you are no longer able to spend your time holding down a salaried job or developing your skills as a footballer. These lost opportunities may represent a significant loss of utility. Going for a walk may appear to cost nothing, until you consider the opportunity forgone to use that time earning money. Everything you do has an opportunity cost. ECONOMICS is primarily about the efficient use of scarce resources, and the notion of opportunity cost plays a crucial part in ensuring that resources are indeed being used efficiently.
Pareto efficiency
A situation in which nobody can be made better off without making somebody else worse off. Named after Vilfredo Pareto (1843–1923), an Italian economist. If an economy’s resources are being used inefficiently, it ought to be possible to make somebody better off without anybody else becoming worse off. In reality, change often produces losers as well as winners. Pareto efficiency does not help judge whether this sort of change is economically good or bad.
Permanent income hypothesis
Over their lives, people try to spread their spending more evenly than their INCOME. The permanent income hypothesis, developed by MILTON FRIEDMAN, says that a person’s spending decisions are guided by what they think over their lifetime will be their AVERAGE income. A sharp increase in short-term income will not result in an equally sharp increase in short-term CONSUMPTION. What if somebody unexpectedly comes into money, say by winning the lottery? The permanent income hypothesis suggests that people will save most of any such WINDFALL GAINS. Reality may be somewhat different.
Phillips curve
In 1958, an economist from New Zealand, A.W.H. Phillips (1914–75), proposed that there was a trade-off between INFLATION and UNEMPLOYMENT: the lower the unemployment rate, the higher was the rate of inflation. Governments simply had to choose the right balance between the two evils. He drew this conclusion by studying nominal wage rates and jobless rates in the UK between 1861 and 1957, which seemed to show the relationship of unemployment and inflation as a smooth curve.
Pigou effect
Named after Arthur Pigou (1877–1959), a sort of WEALTH EFFECT resulting from DEFLATION. A fall in the PRICE level increases the REAL VALUE of people’s SAVINGS, making them feel wealthier and thus causing them to spend more. This increase in DEMAND can lead to higher employment.
Purchasing power parity
A method for calculating the correct value of a currency, which may differ from its current market value. It is helpful when comparing living standards in different countries, as it indicates the appropriate EXCHANGE RATE to use when expressing incomes and PRICES in different countries in a common currency.
By correct value, economists mean the exchange rate that would bring DEMAND and SUPPLY of a currency into EQUILIBRIUM over the long-term. The current market rate is only a short-run equilibrium. Purchasing power parity (PPP) says that goods and SERVICES should cost the same in all countries when measured in a common currency.
Okun's law
A description of what happens to UNEMPLOYMENT when the rate of GROWTH of GDP changes, based on empirical research by Arthur Okun (1928–80). It predicts that if GDP grows at around 3% a year, the jobless rate will be unchanged. If it grows faster, the unemployment rate will fall by half of what the growth rate exceeds 3% by; that is, if GDP grows by 5%, unemployment will fall by 1 percentage point. Likewise, a lesser, say 2%, increase in GDP would be associated with a half a percentage point increase in the jobless rate. This relationship is not carved in stone, as it merely reflects the American economy during the period studied by Okun. Even so, in most econo mies Okun’s Law is a reasonable rule of thumb for estimating the likely impact on jobs of changes in OUTPUT.
Open-market operations
CENTRAL BANKS buying and selling SECURITIES in the open market, as a way of controlling INTEREST rates or the GROWTH of the MONEY SUPPLY. By selling more securities, they can mop up surplus MONEY; buying securities adds to the money supply. The securities traded by central banks are mostly GOVERNMENT BONDS and TREASURY BILLS, although they sometimes buy or sell commercial securities.
Opportunity cost
The true cost of something is what you give up to get it. This includes not only the money spent in buying the something, but also the economic benefits that you did without because you bought that particular something and thus can no longer buy something else. For example, the opportunity cost of choosing to train as a lawyer is not merely the tuition fees, PRICE of books, and so on, but also the fact that you are no longer able to spend your time holding down a salaried job or developing your skills as a footballer. These lost opportunities may represent a significant loss of utility. Going for a walk may appear to cost nothing, until you consider the opportunity forgone to use that time earning money. Everything you do has an opportunity cost. ECONOMICS is primarily about the efficient use of scarce resources, and the notion of opportunity cost plays a crucial part in ensuring that resources are indeed being used efficiently.
Pareto efficiency
A situation in which nobody can be made better off without making somebody else worse off. Named after Vilfredo Pareto (1843–1923), an Italian economist. If an economy’s resources are being used inefficiently, it ought to be possible to make somebody better off without anybody else becoming worse off. In reality, change often produces losers as well as winners. Pareto efficiency does not help judge whether this sort of change is economically good or bad.
Permanent income hypothesis
Over their lives, people try to spread their spending more evenly than their INCOME. The permanent income hypothesis, developed by MILTON FRIEDMAN, says that a person’s spending decisions are guided by what they think over their lifetime will be their AVERAGE income. A sharp increase in short-term income will not result in an equally sharp increase in short-term CONSUMPTION. What if somebody unexpectedly comes into money, say by winning the lottery? The permanent income hypothesis suggests that people will save most of any such WINDFALL GAINS. Reality may be somewhat different.
Phillips curve
In 1958, an economist from New Zealand, A.W.H. Phillips (1914–75), proposed that there was a trade-off between INFLATION and UNEMPLOYMENT: the lower the unemployment rate, the higher was the rate of inflation. Governments simply had to choose the right balance between the two evils. He drew this conclusion by studying nominal wage rates and jobless rates in the UK between 1861 and 1957, which seemed to show the relationship of unemployment and inflation as a smooth curve.
Pigou effect
Named after Arthur Pigou (1877–1959), a sort of WEALTH EFFECT resulting from DEFLATION. A fall in the PRICE level increases the REAL VALUE of people’s SAVINGS, making them feel wealthier and thus causing them to spend more. This increase in DEMAND can lead to higher employment.
Purchasing power parity
A method for calculating the correct value of a currency, which may differ from its current market value. It is helpful when comparing living standards in different countries, as it indicates the appropriate EXCHANGE RATE to use when expressing incomes and PRICES in different countries in a common currency.
By correct value, economists mean the exchange rate that would bring DEMAND and SUPPLY of a currency into EQUILIBRIUM over the long-term. The current market rate is only a short-run equilibrium. Purchasing power parity (PPP) says that goods and SERVICES should cost the same in all countries when measured in a common currency.
Thursday, March 19, 2009
I am back!!!
Yes guys I am back! Almost I took a break of 2 weeks from posting due to various reasons. Lot of things happened in this due-course in National level, International level, Political front, Economic issues like Inflation, IIP numbers, Stock market... Of course I cant cover all the things happened in this 2 weeks but I tried brief what all happened & my views about those...
Starting with my favourite topic "Inflation", it came down to historical low level of 0.44% from 2.43%. Here you can see the drop level is almost 200 basis points which is not a good sign for economy point of view. But is this sign of contraction in demand or just I was arguing with many days like "High Base Effect".
Till today[& now also] I argued that its a High Base Effect which is causing the Inflation to fall so drastically. But If you the see the today's fall of almost 200 basis points & 0.4% drop in WPI may indicating future fall in the demand to various economic conditions. So now the country is going to sustain the growth levels? How the governments create the jobs when Fiscal Deficit is already crossing 8% of the GDP!
And if it is only Base Effect problem what is remedy for this problem? Remember this is not going to end here in this year! Since next couple of months we are going to face deflation [speaking statistically] next year same period is going to high inflated zone. In addition to that next year overall world economy is will be in revival mode so crude oil, commodity prices & by default manufacturing products starts zooming out. So what we will do at that time? How our monetary policy will be?
Now coming back to stock market, last week only 3 days were trading days & I think it gave much needed gap to the falling market. BSE Sensex almost touched 8000 levels & from their we are seeing a bear market rally now. I can say market is trying to find out the bottom around 8000 levels, even though it sounds very early & optimistic looking at present conditions. But if you see the bear market patterns, all bear markets almost lasted for 18 to 24 months. And here from last 15 months we are in bear market, I can say we are at least near the bottom of the market if at not at the bottom! And one more supporting point is till now FIIs have been major sellers & DIIs have been buyers, once the redemption pressure from FII side zero, I think FIIs will return to Chinese & Indian markets.[Already Chinese markets have given 20%+ returns in this year].
Now coming to National Politics front now a days there is too much talk going on about so called "The Third Front". According to me media is giving unnecessary giving too much importance to this circus for bunch of unhappy divorced parties. Actually in Kannada there is one phrase "AATKKUNTU LEKKAKKILLA", that means there are in the play but dont count them! They can never form a stable government & they will not do this time also. If you see the leaders of third front you see all the people are rejected by either by Congress or BJP! See Devegouda who calls himself as secular, allowed his Younger Son Mr. Kumarswami to take over the party & join the hands with so called communal BJP in Karnataka for 20 months. At that these same CPI & CPM leaders threaten Gowda, warned about his end of carrier in national front. And now all are together. And coming to Chandra Babu Naidu, Jayalalitha & Mayawati I think they are playing opportunistic politics rather than doing any ideology! And if you see today's speech of Mr. Karat he is ready to talk to Congress after the election, what is the need to join hands with the 3rd front? And particularly I fail to understand why people like Karat, being a highly educated from JNU behaves like that? And in which era they are living, compare China & India, we are lagging 20 years behind to china in in all developments!
Starting with my favourite topic "Inflation", it came down to historical low level of 0.44% from 2.43%. Here you can see the drop level is almost 200 basis points which is not a good sign for economy point of view. But is this sign of contraction in demand or just I was arguing with many days like "High Base Effect".
Till today[& now also] I argued that its a High Base Effect which is causing the Inflation to fall so drastically. But If you the see the today's fall of almost 200 basis points & 0.4% drop in WPI may indicating future fall in the demand to various economic conditions. So now the country is going to sustain the growth levels? How the governments create the jobs when Fiscal Deficit is already crossing 8% of the GDP!
And if it is only Base Effect problem what is remedy for this problem? Remember this is not going to end here in this year! Since next couple of months we are going to face deflation [speaking statistically] next year same period is going to high inflated zone. In addition to that next year overall world economy is will be in revival mode so crude oil, commodity prices & by default manufacturing products starts zooming out. So what we will do at that time? How our monetary policy will be?
Now coming back to stock market, last week only 3 days were trading days & I think it gave much needed gap to the falling market. BSE Sensex almost touched 8000 levels & from their we are seeing a bear market rally now. I can say market is trying to find out the bottom around 8000 levels, even though it sounds very early & optimistic looking at present conditions. But if you see the bear market patterns, all bear markets almost lasted for 18 to 24 months. And here from last 15 months we are in bear market, I can say we are at least near the bottom of the market if at not at the bottom! And one more supporting point is till now FIIs have been major sellers & DIIs have been buyers, once the redemption pressure from FII side zero, I think FIIs will return to Chinese & Indian markets.[Already Chinese markets have given 20%+ returns in this year].
Now coming to National Politics front now a days there is too much talk going on about so called "The Third Front". According to me media is giving unnecessary giving too much importance to this circus for bunch of unhappy divorced parties. Actually in Kannada there is one phrase "AATKKUNTU LEKKAKKILLA", that means there are in the play but dont count them! They can never form a stable government & they will not do this time also. If you see the leaders of third front you see all the people are rejected by either by Congress or BJP! See Devegouda who calls himself as secular, allowed his Younger Son Mr. Kumarswami to take over the party & join the hands with so called communal BJP in Karnataka for 20 months. At that these same CPI & CPM leaders threaten Gowda, warned about his end of carrier in national front. And now all are together. And coming to Chandra Babu Naidu, Jayalalitha & Mayawati I think they are playing opportunistic politics rather than doing any ideology! And if you see today's speech of Mr. Karat he is ready to talk to Congress after the election, what is the need to join hands with the 3rd front? And particularly I fail to understand why people like Karat, being a highly educated from JNU behaves like that? And in which era they are living, compare China & India, we are lagging 20 years behind to china in in all developments!
Saturday, March 7, 2009
Getting It Wrong - Ajay Shah
In today's Financial Express Ajay Shah, one of my favourite blogger has written the editorial. I am posting that same article for you guys...
In August 2008, looking forward into the future, inflation was expected to be strong and growth was expected to be moderate. With inflation running at roughly 8%, RBI chose a short-term rate of roughly 8% which gave a real rate (at the short end) of roughly 0%. This was criticized as being an expansionary monetary policy at a time of substantial inflationary pressure.
There has been a sea change ever since: inflationary expectations have subsided and growth expectations has dropped. If reasonable values for lowered inflationary expectations and reduced growth expectations were put into any reasonable monetary policy rule, this would have yielded a rapid drop in the short term rate to zero. This did not happen. As a consequence, monetary policy has tightened greatly — the real rate has gone up sharply - at a time of an unprecedented downturn. This is hard to justify.
From August 2008 to January 2009, the WPI shows annualised inflation of -15%. From October 2008 till January 2009, the CPI shows inflation of 0. In this period, RBI chose a short-term rate of roughly 4%. This gives a policy rate—in real terms—of roughly 19% going by WPI and roughly 4% going by CPI. In other words, when the downturn came, RBI sharply tightened monetary policy - raising the real rate from 0 to a value between 4% and 19% depending on what inflation measure is to be trusted. This contradicts what we expect monetary policy to do when facing a downturn.
Thus, while RBI’s cutting rates by 50 bps is on the right track, there are deeper problems with economic analysis at RBI. It is true that ex-post, it is always easy to criticise what was done. But it is also true that monetary policy is all about forecasting inflation and forecasting growth, and using these values to set the short-term rate. And macroeconomic forecasters will always be judged by their average forecast performance. For RBI to become a well respected central bank, it needs to embark on the process of building reputational capital by coming out right on these calls.
Even today, with a short-term rate of roughly 3.5%, the real rate is high. Reasonable values for forecasted inflation now range from -5% to 0%. This suggests that the policy rate is still between 8.5% and 3.5% in real terms. These values are still far bigger than the value of zero which RBI had in place in August 2008. This does not make sense.
And yet, the economic significance of these problems is limited. The reason lies in the feeble monetary policy transmission in India. The empirical evidence shows that changes in monetary policy do very little to shake the economy. Monetary policy in India seems to be a tale told by RBI, full of sound and fury, signifying nothing.
The Indian intelligensia gets a lot of exposure to the treatment in the international media of central banks such as the US Fed or the Bank of England. There is an aspiration that monetary policy must play a similar role in stabilising the country across the cycle of boom and bust that characterises market economies. This aspiration reflects the enormous changes which have taken place in India in the last 15 years, and is entirely appropriate. But India is in a primitive institutional environment where monetary policy is feeble and does the wrong things. Making progress requires two things. In good times, the real rate should go up and in bad times it must go down. RBI has played this precisely wrong in recent years; in good times, the real rate was 0 or negative, and in bad times the real rate has risen. A proper monetary policy process at RBI is required to get this right.
And monetary policy must signify something. It must reach out and influence asset prices all across the economy, through a well functioning monetary policy transmission. While RBI has cut the short rate, this has not influenced much in the economy. At a time when firms have been hit by adverse shocks and require external financing, non-food credit of the banking system has been stalled at Rs.25 trillion or so from September 2008 onwards. Interest rates for corporate bonds have risen sharply in real terms. Since bank lending against equities is walled off, the monetary policy transmission to the stock market is weak.
Bottom line:
To achieve a strong and effective RBI that matters, far-reaching changes in Indian finance are required. It requires a well functioning Bond-Currency-Derivatives Nexus and banking reforms. The path to this has been mapped out in the reports by Patil, Mistry, Rajan and Aziz. Every month that goes by without making progress on these reports is one more month of tottering along with malfunctioning fiscal, financial and monetary institutions.
In August 2008, looking forward into the future, inflation was expected to be strong and growth was expected to be moderate. With inflation running at roughly 8%, RBI chose a short-term rate of roughly 8% which gave a real rate (at the short end) of roughly 0%. This was criticized as being an expansionary monetary policy at a time of substantial inflationary pressure.
There has been a sea change ever since: inflationary expectations have subsided and growth expectations has dropped. If reasonable values for lowered inflationary expectations and reduced growth expectations were put into any reasonable monetary policy rule, this would have yielded a rapid drop in the short term rate to zero. This did not happen. As a consequence, monetary policy has tightened greatly — the real rate has gone up sharply - at a time of an unprecedented downturn. This is hard to justify.
From August 2008 to January 2009, the WPI shows annualised inflation of -15%. From October 2008 till January 2009, the CPI shows inflation of 0. In this period, RBI chose a short-term rate of roughly 4%. This gives a policy rate—in real terms—of roughly 19% going by WPI and roughly 4% going by CPI. In other words, when the downturn came, RBI sharply tightened monetary policy - raising the real rate from 0 to a value between 4% and 19% depending on what inflation measure is to be trusted. This contradicts what we expect monetary policy to do when facing a downturn.
Thus, while RBI’s cutting rates by 50 bps is on the right track, there are deeper problems with economic analysis at RBI. It is true that ex-post, it is always easy to criticise what was done. But it is also true that monetary policy is all about forecasting inflation and forecasting growth, and using these values to set the short-term rate. And macroeconomic forecasters will always be judged by their average forecast performance. For RBI to become a well respected central bank, it needs to embark on the process of building reputational capital by coming out right on these calls.
Even today, with a short-term rate of roughly 3.5%, the real rate is high. Reasonable values for forecasted inflation now range from -5% to 0%. This suggests that the policy rate is still between 8.5% and 3.5% in real terms. These values are still far bigger than the value of zero which RBI had in place in August 2008. This does not make sense.
And yet, the economic significance of these problems is limited. The reason lies in the feeble monetary policy transmission in India. The empirical evidence shows that changes in monetary policy do very little to shake the economy. Monetary policy in India seems to be a tale told by RBI, full of sound and fury, signifying nothing.
The Indian intelligensia gets a lot of exposure to the treatment in the international media of central banks such as the US Fed or the Bank of England. There is an aspiration that monetary policy must play a similar role in stabilising the country across the cycle of boom and bust that characterises market economies. This aspiration reflects the enormous changes which have taken place in India in the last 15 years, and is entirely appropriate. But India is in a primitive institutional environment where monetary policy is feeble and does the wrong things. Making progress requires two things. In good times, the real rate should go up and in bad times it must go down. RBI has played this precisely wrong in recent years; in good times, the real rate was 0 or negative, and in bad times the real rate has risen. A proper monetary policy process at RBI is required to get this right.
And monetary policy must signify something. It must reach out and influence asset prices all across the economy, through a well functioning monetary policy transmission. While RBI has cut the short rate, this has not influenced much in the economy. At a time when firms have been hit by adverse shocks and require external financing, non-food credit of the banking system has been stalled at Rs.25 trillion or so from September 2008 onwards. Interest rates for corporate bonds have risen sharply in real terms. Since bank lending against equities is walled off, the monetary policy transmission to the stock market is weak.
Bottom line:
To achieve a strong and effective RBI that matters, far-reaching changes in Indian finance are required. It requires a well functioning Bond-Currency-Derivatives Nexus and banking reforms. The path to this has been mapped out in the reports by Patil, Mistry, Rajan and Aziz. Every month that goes by without making progress on these reports is one more month of tottering along with malfunctioning fiscal, financial and monetary institutions.
A 2 Z Economic Terminology [M & N]
Marshall plan
Probably the most successful programme of INTERNATIONAL AID and nation building in history. It was named after General George Marshall, an American secretary of state, who at the end of the second world war proposed giving aid to Western Europe to rebuild its war-torn economies. North America gave around 1% of its GDP in total between 1948 and 1952; most of it came from the United States and the rest from Canada. The Americans left it to the Europeans to work out the details on allocating aid, which may be why, according to most economic analyses, it achieved more success than latter day aid programmes in which most of the decisions on how the MONEY is spent are made by the donors. The main institution through which aid was administered was the Organisation for European Economic Co-operation (OEEC), which in 1961 became the OECD. Nowadays, whenever there is a proposal for the international community to rebuild an economy damaged by war, such as Iraq's in 2003, you are sure to hear the phrase “new Marshall Plan”.
Marshall, alfred
A British economist (1842–1924), who developed some of the most important concepts in MICROECONOMICS. In his best-known work, Principles of Economics, he retained the emphasis on the importance of costs, which was standard in CLASSICAL ECONOMICS. But he added to it, helping to create NEO-CLASSICAL ECONOMICS, by explaining that the OUTPUT and PRICE of a product are determined by both SUPPLY and DEMAND, and that MARGINAL costs and benefits are crucial. He was the first economist to explain that demand falls as price increases, and that therefore the DEMAND CURVE slopes downwards from left to right. He was also first with the concept of PRICE ELASTICITY of demand and CONSUMER SURPLUS.
Menu costs
How much it costs to change PRICES. Just as a restaurant has to print a new menu when it changes the price of its food, so many other FIRMS face a substantial outlay each time they cut or raise what they charge. Such menu costs mean that firms may be reluctant to change their prices every time there is a shift in the balance of SUPPLY and DEMAND, so there will be STICKY PRICES and the market for their OUTPUT will be in DISEQUILIBRIUM. The Internet may sharply reduce menu costs as it allows prices to be changed at the click of a mouse, which may improve EFFICIENCY by keeping markets more often in EQUILIBRIUM.
Misery index
The sum of a country’s INFLATION and UNEMPLOYMENT rates. The higher the score, the greater is the economic misery.
Monetarism
Control the MONEY SUPPLY, and the rest of the economy will take care of itself. A school of economic thought that developed in opposition to post-1945 KEYNESIAN policies of DEMAND management, echoing earlier debates between MERCANTILISM and CLASSICAL ECONOMICS. Monetarism is based on the belief that INFLATION has its roots in the GOVERNMENT printing too much MONEY. It is closely associated with Milton MILTON FRIEDMAN, who argued, based on the QUANTITY THEORY OF MONEY, that government should keep the MONEY SUPPLY fairly steady, expanding it slightly each year mainly to allow for the natural GROWTH of the economy. If it did this, MARKET FORCES would efficiently solve the problems of INFLATION, UNEMPLOYMENT and RECESSION. Monetarism had its heyday in the early 1980s, when economists, governments and investors pounced eagerly on every new money-supply statistic, particularly in the United States and the UK.
Money illusion
When people are misled by INFLATION into thinking that they are getting richer, when in fact the value of MONEY is declining. Whether, and how much, people are fooled by inflation is much debated by economists. Money illusion, a phrase coined by KEYNES, is used by some economists to argue that a small amount of inflation may not be a bad thing and could even be beneficial, helping to “grease the wheels” of the economy. Because of money illusion, workers like to see their nominal WAGES rise, giving them the illusion that their circumstances are improving, even though in real (inflation-adjusted) terms they may be no better off. During periods of high inflation double-digit pay rises (as well as, say, big increases in the value of their homes) can make people feel richer even if they are not really better off. When inflation is low, GROWTH in real incomes may hardly register.
Monopsony
A market dominated by a single buyer. A monopsonist has the MARKET POWER to set the PRICE of whatever it is buying (from raw materials to LABOUR). Under PERFECT COMPETITION, by contrast, no individual buyer is big enough to affect the market price of anything.
Multiplier
Shorthand for the way in which a change in spending produces an even larger change in INCOME. For instance, suppose a GOVERNMENT loosens FISCAL POLICY, increasing net PUBLIC SPENDING by pumping an extra $10 billion into education. This has an immediate effect by increasing the income of teachers and of people who sell educational supplies or build or maintain schools. These people will in turn spend some of their extra money, putting more cash into the pockets of others, who spend some of it, and so on.
In theory, this process could continue indefinitely, in which case the multiplier would have an infinite value. In practice, most people save some of their extra income rather than spend it. How much they spend will depend on their MARGINAL PROPENSITY to consume. The value of the multiplier can be calculated by this formula:
multiplier = 1 / (1 – marginal propensity to consume)
If the marginal propensity to consume is 0.5 (50 cents of an extra dollar), the multiplier is 2. In practice, it is often hard to measure the multiplier effect, or to predict how it will respond to, say, changes in MONETARY POLICY or fiscal policy.
Nafta
Short for North American Free-Trade Agreement. In 1993, the United States, Mexico and Canada agreed to lower the barriers to trade among the three economies. The formation of this regional TRADE AREA was opposed by many politicians in all three countries. In the United States and Canada, in particular, there were fears that NAFTA would result in domestic job losses to cheaper locations in Mexico. In the early years of the agreement, however, most studies found that the economic gains far outweighed any costs.
Nash equilibrium
An important concept in GAME THEORY, a Nash equilibrium occurs when each player is pursuing their best possible strategy in the full knowledge of the strategies of all other players. Once a Nash equilibrium is reached, nobody has any incentive to change their strategy. It is named after John Nash, a mathematician and Nobel prize-winning economist.
Negative income tax
A way of building redistribution into the TAXATION system by taking MONEY from people with high incomes and paying it to people with low incomes. Because it takes place automatically through the tax system, it may attach less stigma to the receipt of financial help than some other forms of WELFARE assistance. However, it may also discourage recipients from working to increase their INCOME (see POVERTY TRAP), which is why some countries have introduced a form of negative income tax that is available only to the working poor. In the United States, this is known as the earned income tax credit.
Net present value
A measure used to help decide whether or not to proceed with an INVESTMENT. Net means that both the costs and benefits of the investment are in cluded. To calculate net present value (NPV), first add together all the expected benefits from the investment, now and in the future. Then add together all the expected costs. Then work out what these future benefits and costs are worth now by adjusting future cashflow using an appropriate DISCOUNT RATE. Then subtract the costs from the benefits. If the NPV is negative, then the investment cannot be justified by the EXPECTED RETURNS. If the NPV is positive, it can, although it pays to make comparisons with the NPVs of alternative investment opportunities before going ahead
Non-price competition
Trying to win business from rivals other than by charging a lower PRICE. Methods include ADVERTISING, slightly differentiating your product, improving its quality, or offering free gifts or discounts on subsequent purchases. Non-price competition is particularly common when there is an OLIGOPOLY, perhaps because it can give an impression of fierce rivalry while the FIRMS are actually colluding to keep prices high.
Probably the most successful programme of INTERNATIONAL AID and nation building in history. It was named after General George Marshall, an American secretary of state, who at the end of the second world war proposed giving aid to Western Europe to rebuild its war-torn economies. North America gave around 1% of its GDP in total between 1948 and 1952; most of it came from the United States and the rest from Canada. The Americans left it to the Europeans to work out the details on allocating aid, which may be why, according to most economic analyses, it achieved more success than latter day aid programmes in which most of the decisions on how the MONEY is spent are made by the donors. The main institution through which aid was administered was the Organisation for European Economic Co-operation (OEEC), which in 1961 became the OECD. Nowadays, whenever there is a proposal for the international community to rebuild an economy damaged by war, such as Iraq's in 2003, you are sure to hear the phrase “new Marshall Plan”.
Marshall, alfred
A British economist (1842–1924), who developed some of the most important concepts in MICROECONOMICS. In his best-known work, Principles of Economics, he retained the emphasis on the importance of costs, which was standard in CLASSICAL ECONOMICS. But he added to it, helping to create NEO-CLASSICAL ECONOMICS, by explaining that the OUTPUT and PRICE of a product are determined by both SUPPLY and DEMAND, and that MARGINAL costs and benefits are crucial. He was the first economist to explain that demand falls as price increases, and that therefore the DEMAND CURVE slopes downwards from left to right. He was also first with the concept of PRICE ELASTICITY of demand and CONSUMER SURPLUS.
Menu costs
How much it costs to change PRICES. Just as a restaurant has to print a new menu when it changes the price of its food, so many other FIRMS face a substantial outlay each time they cut or raise what they charge. Such menu costs mean that firms may be reluctant to change their prices every time there is a shift in the balance of SUPPLY and DEMAND, so there will be STICKY PRICES and the market for their OUTPUT will be in DISEQUILIBRIUM. The Internet may sharply reduce menu costs as it allows prices to be changed at the click of a mouse, which may improve EFFICIENCY by keeping markets more often in EQUILIBRIUM.
Misery index
The sum of a country’s INFLATION and UNEMPLOYMENT rates. The higher the score, the greater is the economic misery.
Monetarism
Control the MONEY SUPPLY, and the rest of the economy will take care of itself. A school of economic thought that developed in opposition to post-1945 KEYNESIAN policies of DEMAND management, echoing earlier debates between MERCANTILISM and CLASSICAL ECONOMICS. Monetarism is based on the belief that INFLATION has its roots in the GOVERNMENT printing too much MONEY. It is closely associated with Milton MILTON FRIEDMAN, who argued, based on the QUANTITY THEORY OF MONEY, that government should keep the MONEY SUPPLY fairly steady, expanding it slightly each year mainly to allow for the natural GROWTH of the economy. If it did this, MARKET FORCES would efficiently solve the problems of INFLATION, UNEMPLOYMENT and RECESSION. Monetarism had its heyday in the early 1980s, when economists, governments and investors pounced eagerly on every new money-supply statistic, particularly in the United States and the UK.
Money illusion
When people are misled by INFLATION into thinking that they are getting richer, when in fact the value of MONEY is declining. Whether, and how much, people are fooled by inflation is much debated by economists. Money illusion, a phrase coined by KEYNES, is used by some economists to argue that a small amount of inflation may not be a bad thing and could even be beneficial, helping to “grease the wheels” of the economy. Because of money illusion, workers like to see their nominal WAGES rise, giving them the illusion that their circumstances are improving, even though in real (inflation-adjusted) terms they may be no better off. During periods of high inflation double-digit pay rises (as well as, say, big increases in the value of their homes) can make people feel richer even if they are not really better off. When inflation is low, GROWTH in real incomes may hardly register.
Monopsony
A market dominated by a single buyer. A monopsonist has the MARKET POWER to set the PRICE of whatever it is buying (from raw materials to LABOUR). Under PERFECT COMPETITION, by contrast, no individual buyer is big enough to affect the market price of anything.
Multiplier
Shorthand for the way in which a change in spending produces an even larger change in INCOME. For instance, suppose a GOVERNMENT loosens FISCAL POLICY, increasing net PUBLIC SPENDING by pumping an extra $10 billion into education. This has an immediate effect by increasing the income of teachers and of people who sell educational supplies or build or maintain schools. These people will in turn spend some of their extra money, putting more cash into the pockets of others, who spend some of it, and so on.
In theory, this process could continue indefinitely, in which case the multiplier would have an infinite value. In practice, most people save some of their extra income rather than spend it. How much they spend will depend on their MARGINAL PROPENSITY to consume. The value of the multiplier can be calculated by this formula:
multiplier = 1 / (1 – marginal propensity to consume)
If the marginal propensity to consume is 0.5 (50 cents of an extra dollar), the multiplier is 2. In practice, it is often hard to measure the multiplier effect, or to predict how it will respond to, say, changes in MONETARY POLICY or fiscal policy.
Nafta
Short for North American Free-Trade Agreement. In 1993, the United States, Mexico and Canada agreed to lower the barriers to trade among the three economies. The formation of this regional TRADE AREA was opposed by many politicians in all three countries. In the United States and Canada, in particular, there were fears that NAFTA would result in domestic job losses to cheaper locations in Mexico. In the early years of the agreement, however, most studies found that the economic gains far outweighed any costs.
Nash equilibrium
An important concept in GAME THEORY, a Nash equilibrium occurs when each player is pursuing their best possible strategy in the full knowledge of the strategies of all other players. Once a Nash equilibrium is reached, nobody has any incentive to change their strategy. It is named after John Nash, a mathematician and Nobel prize-winning economist.
Negative income tax
A way of building redistribution into the TAXATION system by taking MONEY from people with high incomes and paying it to people with low incomes. Because it takes place automatically through the tax system, it may attach less stigma to the receipt of financial help than some other forms of WELFARE assistance. However, it may also discourage recipients from working to increase their INCOME (see POVERTY TRAP), which is why some countries have introduced a form of negative income tax that is available only to the working poor. In the United States, this is known as the earned income tax credit.
Net present value
A measure used to help decide whether or not to proceed with an INVESTMENT. Net means that both the costs and benefits of the investment are in cluded. To calculate net present value (NPV), first add together all the expected benefits from the investment, now and in the future. Then add together all the expected costs. Then work out what these future benefits and costs are worth now by adjusting future cashflow using an appropriate DISCOUNT RATE. Then subtract the costs from the benefits. If the NPV is negative, then the investment cannot be justified by the EXPECTED RETURNS. If the NPV is positive, it can, although it pays to make comparisons with the NPVs of alternative investment opportunities before going ahead
Non-price competition
Trying to win business from rivals other than by charging a lower PRICE. Methods include ADVERTISING, slightly differentiating your product, improving its quality, or offering free gifts or discounts on subsequent purchases. Non-price competition is particularly common when there is an OLIGOPOLY, perhaps because it can give an impression of fierce rivalry while the FIRMS are actually colluding to keep prices high.
Thursday, March 5, 2009
Monetary Stimulus/Fiscal Stimulus-->Helicopter Money
All countries & companies are trying save themselves from the recession or depression by various tactics. In these tactics Fiscal & Monetary policies are major ones and remaining are the part these policies or slightly related to these policies.
Today when I was posting this article Dow Jones was down by 200 points mainly because of the negative news from General Motors & US Economy, which may be heading for another depression. After receiving 13 Billion US dollars package also, General Motors is on the verge of the bankruptcy. City bank, after getting stimulus packages also, its stock was trading below 1 US dollar because of lack of investor's faith in it.
To counter the cycle of the recession [which may lead to depression] UK has reduced the its interest rates to historical low of 0.5%. Today's UK move is towards the liquidity trap about which I have explained in the below paragraphs. Along with UK, European Region which is in recession technically, today its central bank, European Central Bank (ECB) has reduced the interest rates to 1.5% from 2%, lowest since it formation in 1999.
Some time back I wrote about the "helicopter money". Today I am posting about the "helicopter money" because, present situation is leading to that condition.
Before presenting the present condition, I would like remind my readers about the what is helicopter money? And when it arises?
Helicopter money is the ultimate solution to the liquidity trap. Now you may ask what is liquidity trap?
A liquidity trap is a situation in which a country's interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy. In these situations, borrowers prefer to savings rather than spending. This makes a recession even more severe, and can contribute to deflation. And interest rate cant be negative. This situation leads to helicopter money.
Helicopter money is situation in which Governments/Monetary Authorities gives the money directly to the consumer/resident of the country bypassing the financial intermediaries like banks. Keynes is considered is as the inventor of the Liquidity trap & Milton Friedman has coined the Helicopter Money.
Now coming back present conditions, Japan has cleared the cash in hand bill to the every resident of the country. This is nothing but helicopter money concept where in every Japanese resident is expected to get the 12000 yen costing total about 20 billion US dollars. Children under 18 and people aged over 65 would get 20,000 yen as part of the scheme. Japan took this controversial step because, it left with no other option. Every thing has been tried & tested including the fiscal stimulus & lowering interest to 0.1% level.
Today when I was posting this article Dow Jones was down by 200 points mainly because of the negative news from General Motors & US Economy, which may be heading for another depression. After receiving 13 Billion US dollars package also, General Motors is on the verge of the bankruptcy. City bank, after getting stimulus packages also, its stock was trading below 1 US dollar because of lack of investor's faith in it.
To counter the cycle of the recession [which may lead to depression] UK has reduced the its interest rates to historical low of 0.5%. Today's UK move is towards the liquidity trap about which I have explained in the below paragraphs. Along with UK, European Region which is in recession technically, today its central bank, European Central Bank (ECB) has reduced the interest rates to 1.5% from 2%, lowest since it formation in 1999.
Some time back I wrote about the "helicopter money". Today I am posting about the "helicopter money" because, present situation is leading to that condition.
Before presenting the present condition, I would like remind my readers about the what is helicopter money? And when it arises?
Helicopter money is the ultimate solution to the liquidity trap. Now you may ask what is liquidity trap?
A liquidity trap is a situation in which a country's interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy. In these situations, borrowers prefer to savings rather than spending. This makes a recession even more severe, and can contribute to deflation. And interest rate cant be negative. This situation leads to helicopter money.
Helicopter money is situation in which Governments/Monetary Authorities gives the money directly to the consumer/resident of the country bypassing the financial intermediaries like banks. Keynes is considered is as the inventor of the Liquidity trap & Milton Friedman has coined the Helicopter Money.
Now coming back present conditions, Japan has cleared the cash in hand bill to the every resident of the country. This is nothing but helicopter money concept where in every Japanese resident is expected to get the 12000 yen costing total about 20 billion US dollars. Children under 18 and people aged over 65 would get 20,000 yen as part of the scheme. Japan took this controversial step because, it left with no other option. Every thing has been tried & tested including the fiscal stimulus & lowering interest to 0.1% level.
Inflation 3.03% Vs 3.36%
Even though WPI series came down only o.1% from its previous week to this week's 227.6, Inflation came down by 30 basis points due to BASE EFFECT.
Inflation for the week ended February 14 is 3.03% as compared to 3.36%.
Inflation for the week ended February 14 is 3.03% as compared to 3.36%.
Good Articles
Yesterday I read an article in rediff which talks about India's growth in these 5-6 years & present problems in agriculture sectors. Its a good article from Kunal Kumar Kundu, COH, Global Market Research, Infosys BPO Ltd. Click here to read that article.
As I have written in my yesterday's post about the rate cuts by RBI, business standard got an article which almost talks about the issues which I raised in post. To read that business standard article click here.
Bloomberg's article on RBI's rate cut...
As I have written in my yesterday's post about the rate cuts by RBI, business standard got an article which almost talks about the issues which I raised in post. To read that business standard article click here.
Bloomberg's article on RBI's rate cut...
Rate Cuts By RBI
As I was posting from many days, yesterday [04/03/09] finally RBI reduced the Repo & Reverse Repo by 50 Basis Points. Repo rate reduced to 5% from 5.5% & Reverse Repo to 3.5% from 4% with immediate effect.
And in previous posts I clearly mentioned that there is no need to reduce the CRR further as liquidity is not the problem for us now. It has been reduced to quite substantially from its peak levels of 9% in October to present 5%. Compared to October & November when Lehman Brothers collapsed, suddenly international lending/transaction stopped for some movement. This lead our call money rate go beyond the corridor of repo & reverse repo and reached round about 20%. And as of yesterday's closing call money rate is in the range of 2.25% to 4.30% which is well within the range of repo & reverse repo limits.
This move was expected by many experts & economists, because there are various indicators which were indicating towards RBI. For example Inflation coming below 4%, to be precise 3.36%, GDP growth of 3rd quarter contracting to 5.3% from expected 6.1%, fiscal stimulus should be followed/supported by monetary stimulus, no room,time & authority [with the central government] for further fiscal stimulus packages, fiscal deficit going beyond the expectation & etc.
As I said before also cut in reverse repo will force the banks to lend rather than going for safer route of depositing with the RBI for assured returns. Now because of low returns with the reverse repo rates, banks will be forced to think of other alternative, that is lending to clients & customer for higher lending rates varying from 10% to 18% [depending upon the purpose], as lending rates are yet to come down. Once the lending starts towards the various sectors & various sizes of the sectors [small, medium & large scale], the economy will start productive work. This lead to more jobs across the all working capable men/women. If you see the call money rates there is room to cut reverse repo further but that can be done in subsequent stages by looking at the conditions.
And talking about the Repo rate it has come down from 9% in October to 5% now. Because of this cost of capital will be a lesser burden to banks as compare to October condition. But only this move cant help the normal person. As in the time crisis everybody including banks wants to play safely as there is risk of default & rise in their NPA [Non Performing Assets]. So this move should be accompanied by cut in reverse repo as RBI has done/been doing.
But in addition to this there should be some clear cut criteria for lending norms. There should be clear regulation & ratings for corporates & individuals depending upon various parameter like risk aversion quality, past history, line of business, scope for the business, effect present conditions to business & etc.
Now government & governor of RBI should persuade the various bankers to lend & transform the benefit of RBI cuts to end user. Because banks, financial intermediaries can act as very important role in both development as crisis situation. In 1930s great depression time, situation aggravated because banks stopped lending & ultimately causing problems themselves also since almost 11000 out of 25000 banks collapsed in US at that time. So somebody has to take the initiation in reducing the rates. SBI, India's largest bank already reduced the deposit rates for various maturity periods. So I hope it will be followed by reduction in lending rates & other banks will also follow the path...
And in previous posts I clearly mentioned that there is no need to reduce the CRR further as liquidity is not the problem for us now. It has been reduced to quite substantially from its peak levels of 9% in October to present 5%. Compared to October & November when Lehman Brothers collapsed, suddenly international lending/transaction stopped for some movement. This lead our call money rate go beyond the corridor of repo & reverse repo and reached round about 20%. And as of yesterday's closing call money rate is in the range of 2.25% to 4.30% which is well within the range of repo & reverse repo limits.
This move was expected by many experts & economists, because there are various indicators which were indicating towards RBI. For example Inflation coming below 4%, to be precise 3.36%, GDP growth of 3rd quarter contracting to 5.3% from expected 6.1%, fiscal stimulus should be followed/supported by monetary stimulus, no room,time & authority [with the central government] for further fiscal stimulus packages, fiscal deficit going beyond the expectation & etc.
As I said before also cut in reverse repo will force the banks to lend rather than going for safer route of depositing with the RBI for assured returns. Now because of low returns with the reverse repo rates, banks will be forced to think of other alternative, that is lending to clients & customer for higher lending rates varying from 10% to 18% [depending upon the purpose], as lending rates are yet to come down. Once the lending starts towards the various sectors & various sizes of the sectors [small, medium & large scale], the economy will start productive work. This lead to more jobs across the all working capable men/women. If you see the call money rates there is room to cut reverse repo further but that can be done in subsequent stages by looking at the conditions.
And talking about the Repo rate it has come down from 9% in October to 5% now. Because of this cost of capital will be a lesser burden to banks as compare to October condition. But only this move cant help the normal person. As in the time crisis everybody including banks wants to play safely as there is risk of default & rise in their NPA [Non Performing Assets]. So this move should be accompanied by cut in reverse repo as RBI has done/been doing.
But in addition to this there should be some clear cut criteria for lending norms. There should be clear regulation & ratings for corporates & individuals depending upon various parameter like risk aversion quality, past history, line of business, scope for the business, effect present conditions to business & etc.
Now government & governor of RBI should persuade the various bankers to lend & transform the benefit of RBI cuts to end user. Because banks, financial intermediaries can act as very important role in both development as crisis situation. In 1930s great depression time, situation aggravated because banks stopped lending & ultimately causing problems themselves also since almost 11000 out of 25000 banks collapsed in US at that time. So somebody has to take the initiation in reducing the rates. SBI, India's largest bank already reduced the deposit rates for various maturity periods. So I hope it will be followed by reduction in lending rates & other banks will also follow the path...
Tuesday, March 3, 2009
Business News Updates
Rupee hits new low as foreign funds pull out
The rupee hit a new low of 51.94 in intra-day trade against the US dollar, mainly owing to a growing risk aversion by foreign funds and rising dollar demand from importers, but recovered to close at 51.46, 30 paise lower than Friday’s close.
Dow drops below 7,000 for first time since 1997
Investors' despair about financial companies and the recession has brought the Dow Jones industrial average to another unwanted milestone: its first drop below 7,000 in more than 11 years. The market's slide Monday, which took the Dow down 300 points, was nowhere near the largest it has seen since last fall, but the tumble below 7,000 was nonetheless painful.
Deteriorating economy cuts off oil market rally
Oil prices plummeted more than 10 percent Monday with little to suggest energy demand will recover in the deteriorating global economy.
Benchmark crude for April delivery fell $4.61 to settle at $40.15 a barrel on the New York Mercantile Exchange. In London, the price for Brent crude fell nearly 9 percent, or $4.14, to settle at $42.21 on the ICE Futures exchange.
The rupee hit a new low of 51.94 in intra-day trade against the US dollar, mainly owing to a growing risk aversion by foreign funds and rising dollar demand from importers, but recovered to close at 51.46, 30 paise lower than Friday’s close.
Dow drops below 7,000 for first time since 1997
Investors' despair about financial companies and the recession has brought the Dow Jones industrial average to another unwanted milestone: its first drop below 7,000 in more than 11 years. The market's slide Monday, which took the Dow down 300 points, was nowhere near the largest it has seen since last fall, but the tumble below 7,000 was nonetheless painful.
Deteriorating economy cuts off oil market rally
Oil prices plummeted more than 10 percent Monday with little to suggest energy demand will recover in the deteriorating global economy.
Benchmark crude for April delivery fell $4.61 to settle at $40.15 a barrel on the New York Mercantile Exchange. In London, the price for Brent crude fell nearly 9 percent, or $4.14, to settle at $42.21 on the ICE Futures exchange.
A 2 Z Economic Terminologies
Continuing with the economic terminologies, today I am posting K & L terminologies...
Keynes, john maynard
A much quoted, great British economist, not famous for holding the same opinion for long. Born in 1883, he studied at Cambridge but came to reject much of the CLASSICAL ECONOMICS and NEO-CLASSICAL ECONOMICS associated with that university. Keynes helped set up the BRETTON WOODS framework, but he is best known for his General Theory of Employment, Interest and Money, published in 1936 in the depths of the Great Depression. This invented modern MACROECONOMICS. It argued that economies could sometimes be stable (in EQUILIBRIUM) even when they did not have FULL EMPLOYMENT, but that a GOVERNMENT could remedy this under-employment problem by increasing PUBLIC SPENDING and/or reducing TAXATION, thereby increasing the level of aggregate DEMAND in the economy. Many politicians picked up on these ideas. As President Richard Nixon observed in 1971, “We are all Keynesians now.” However, it is much debated whether Keynes would have supported the way many of them put his thoughts into practice.
Keynes identified the economic importance of ANIMAL SPIRITS. Making and losing fortunes in the FINANCIAL MARKETS led him to refer to the “casino CAPITALISM” of the stockmarket. He also noted that “there is nothing so dangerous as the pursuit of a rational INVESTMENT policy in an irrational world”. He had an amusingly accurate view of the impact and transmission of economic ideas: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” As for the frequency with which his opinions would evolve: “When the facts change, I change my mind – what do you do, sir?” “In the long run we are all dead,” he said. For him, the long run was 1946.
Laffer curve
Legend has it that in November 1974 Arthur Laffer, a young economist, drew a curve on a napkin in a Washington bar, linking AVERAGE tax rates to total tax revenue. Initially, higher tax rates would increase revenue, but at some point further increases in tax rates would cause revenue to fall, for instance by discouraging people from working. The curve became an icon of supply-side ECONOMICS. Some economists said that it proved that most governments could raise more revenue by cutting tax rates, an argument that was often cited in the 1980s by the tax-cutting governments of Ronald Reagan and Margaret Thatcher. Other economists reckoned that most countries were still at a point on the curve at which raising tax rates would increase revenue. The lack of empirical evidence meant that nobody could really be sure where the United States and other countries were on the Laffer curve. However, after the Reagan administration cut tax rates revenue fell at first. American tax rates were already low compared with some countries, especially in continental Europe, and it remains possible that these countries are at a point on the Laffer curve where cutting tax rates would pay.
Leveraged buy-out
Buying a company using borrowed MONEY to pay most of the purchase PRICE. The DEBT is secured against the ASSETS of the company being acquired. The INTEREST will be paid out of the company’s future cashflow. Leveraged buy-outs (LBOs) became popular in the United States during the 1980s, as public DEBT markets grew rapidly and opened up to borrowers that would not previously have been able to raise loans worth millions of dollars to pursue what was often an unwilling target. Although some LBOs ended up with the borrower going bust, in most cases the need to meet demanding interest bills drove the new managers to run the firm more efficiently than their predecessors. For this reason, some economists see LBOs as a way of tackling AGENCY COSTS associated with corporate governance.
Libor
Short for London interbank offered rate, the rate of INTEREST that top-quality BANKS charge each other for loans. As a result, it is often used by banks as a base for calculating the INTEREST RATE they charge on other loans. LIBOR is a floating rate, changing all the time.
Liquidity trap
When MONETARY POLICY becomes impotent. Cutting the rate of INTEREST is supposed to be the escape route from economic RECESSION: boosting the MONEY SUPPLY, increasing DEMAND and thus reducing UNEMPLOYMENT. But KEYNES argued that sometimes cutting the rate of interest, even to zero, would not help. People, BANKS and FIRMS could become so RISK AVERSE that they preferred the LIQUIDITY of cash to offering CREDIT or using the credit that is on offer. In such circumstances, the economy would be trapped in recession, despite the best efforts of monetary policymakers.
KEYNESIANs reckon that in the 1930s the economies of both the United States and the UK were caught in a liquidity trap. In the late 1990s, the Japanese economy suffered a similar fate. But MONETARISM has no place for liquidity traps. Monetarists pin the blame for the Great DEPRESSION and Japan’s more recent troubles on other factors and reckon that ways could have been found to make monetary policy work.
Lump of labour fallacy
One of the best-known fallacies in ECONOMICS is the notion that there is a fixed amount of work to be done – a lump of LABOUR – which can be shared out in different ways to create fewer or more jobs. For instance, suppose that everybody worked 10% fewer hours. FIRMS would need to hire more workers. Hey presto, UNEMPLOYMENT would shrink.
Keynes, john maynard
A much quoted, great British economist, not famous for holding the same opinion for long. Born in 1883, he studied at Cambridge but came to reject much of the CLASSICAL ECONOMICS and NEO-CLASSICAL ECONOMICS associated with that university. Keynes helped set up the BRETTON WOODS framework, but he is best known for his General Theory of Employment, Interest and Money, published in 1936 in the depths of the Great Depression. This invented modern MACROECONOMICS. It argued that economies could sometimes be stable (in EQUILIBRIUM) even when they did not have FULL EMPLOYMENT, but that a GOVERNMENT could remedy this under-employment problem by increasing PUBLIC SPENDING and/or reducing TAXATION, thereby increasing the level of aggregate DEMAND in the economy. Many politicians picked up on these ideas. As President Richard Nixon observed in 1971, “We are all Keynesians now.” However, it is much debated whether Keynes would have supported the way many of them put his thoughts into practice.
Keynes identified the economic importance of ANIMAL SPIRITS. Making and losing fortunes in the FINANCIAL MARKETS led him to refer to the “casino CAPITALISM” of the stockmarket. He also noted that “there is nothing so dangerous as the pursuit of a rational INVESTMENT policy in an irrational world”. He had an amusingly accurate view of the impact and transmission of economic ideas: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” As for the frequency with which his opinions would evolve: “When the facts change, I change my mind – what do you do, sir?” “In the long run we are all dead,” he said. For him, the long run was 1946.
Laffer curve
Legend has it that in November 1974 Arthur Laffer, a young economist, drew a curve on a napkin in a Washington bar, linking AVERAGE tax rates to total tax revenue. Initially, higher tax rates would increase revenue, but at some point further increases in tax rates would cause revenue to fall, for instance by discouraging people from working. The curve became an icon of supply-side ECONOMICS. Some economists said that it proved that most governments could raise more revenue by cutting tax rates, an argument that was often cited in the 1980s by the tax-cutting governments of Ronald Reagan and Margaret Thatcher. Other economists reckoned that most countries were still at a point on the curve at which raising tax rates would increase revenue. The lack of empirical evidence meant that nobody could really be sure where the United States and other countries were on the Laffer curve. However, after the Reagan administration cut tax rates revenue fell at first. American tax rates were already low compared with some countries, especially in continental Europe, and it remains possible that these countries are at a point on the Laffer curve where cutting tax rates would pay.
Leveraged buy-out
Buying a company using borrowed MONEY to pay most of the purchase PRICE. The DEBT is secured against the ASSETS of the company being acquired. The INTEREST will be paid out of the company’s future cashflow. Leveraged buy-outs (LBOs) became popular in the United States during the 1980s, as public DEBT markets grew rapidly and opened up to borrowers that would not previously have been able to raise loans worth millions of dollars to pursue what was often an unwilling target. Although some LBOs ended up with the borrower going bust, in most cases the need to meet demanding interest bills drove the new managers to run the firm more efficiently than their predecessors. For this reason, some economists see LBOs as a way of tackling AGENCY COSTS associated with corporate governance.
Libor
Short for London interbank offered rate, the rate of INTEREST that top-quality BANKS charge each other for loans. As a result, it is often used by banks as a base for calculating the INTEREST RATE they charge on other loans. LIBOR is a floating rate, changing all the time.
Liquidity trap
When MONETARY POLICY becomes impotent. Cutting the rate of INTEREST is supposed to be the escape route from economic RECESSION: boosting the MONEY SUPPLY, increasing DEMAND and thus reducing UNEMPLOYMENT. But KEYNES argued that sometimes cutting the rate of interest, even to zero, would not help. People, BANKS and FIRMS could become so RISK AVERSE that they preferred the LIQUIDITY of cash to offering CREDIT or using the credit that is on offer. In such circumstances, the economy would be trapped in recession, despite the best efforts of monetary policymakers.
KEYNESIANs reckon that in the 1930s the economies of both the United States and the UK were caught in a liquidity trap. In the late 1990s, the Japanese economy suffered a similar fate. But MONETARISM has no place for liquidity traps. Monetarists pin the blame for the Great DEPRESSION and Japan’s more recent troubles on other factors and reckon that ways could have been found to make monetary policy work.
Lump of labour fallacy
One of the best-known fallacies in ECONOMICS is the notion that there is a fixed amount of work to be done – a lump of LABOUR – which can be shared out in different ways to create fewer or more jobs. For instance, suppose that everybody worked 10% fewer hours. FIRMS would need to hire more workers. Hey presto, UNEMPLOYMENT would shrink.
Monday, March 2, 2009
Warren Buffett's Letter To His Share Holders
Due to some reason I am unable to provide the exact letter of Warren Buffett to his share holder this year. But I got three analysis on his letter to his shareholders...
One from Bloomberg
Another from Yahoofinance
Here in Business Standard, they hinted an Indian could be Warren Buffett's Successor according to his letter.
One from Bloomberg
Another from Yahoofinance
Here in Business Standard, they hinted an Indian could be Warren Buffett's Successor according to his letter.
Sunday, March 1, 2009
Newspaper Articles
Guys please read the article regarding "learn to live with slowdown" in swaminomics in TOI...
Read the article in Financial Express,"Buffett, the lender of last resort"
Read the article in Financial Express,"Buffett, the lender of last resort"
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