To avoid present financial crisis developed countries like US, Japan, UK and European Countries are keeping ultra low interest rates [0.1% of Japan, 0.25% of US, 0.5% of UK and 0.25% of ECB (deposit) ] and more over governments & central banks of these countries flooding the their respective economies with lot of Quantitative Easing (QE) by printing more money as that is the last resort in monetary policy to boost the economy.
Countries opt for QE which are facing the problem of low inflation or threat of deflation and they might have already substantially lowered the interest rate nearer to Zero. So to boost the money supply in the economy central banks are compelled to print more money and purchase government bonds from different financial institutes like banks and NBFC (Non Banking Financial Services), in turn flooding these financial institutes with lot of cheap money.
Most of the economist and policy makers provide Keynes theory of "General Theory of Employment, Interest and Money" basis for their move towards monetary easing and QE.
But Sir John Maynard Keynes proposed this theory in 1930s then world was not so globalized as it is today and world was facing double dip recession or popularly known as The Great Depression mainly due to some bad moves like liquidity tightening by FED and protectionism by global leaders.
Where as now world is more globalized than ever and we are era of "BUTTERFLY EFFECT" of Chaos theory. No country is no longer 100 percent closed economy, so no country can say it is totally delinked from rest of the world. Ultra low interest rates in these countries and QE is flooding their banks with cheap money. And this cheap money is leaking to emerging markets. This "HOT MONEY" is creating its ripple effects in commodity market, emerging country's stock markets and their macro economy.
Commodities like Copper, Silver are trading at their peaks in last 2-3 decades and Gold is trading at all time high.
And hot money from these countries is flowing to emerging markets like there is no tomorrow. For example Indian markets witnessed highest ever inflow of FIIs in September month in last 17 years, from the day FIIs allowed. More than 5 billion dollar hot money flooded in Indian markets boosting Indian markets 13% rise in September. Srilankan stock exchange "Colombo Stock Exchange" has given more than 100% return in one year from sub 7000 levels to 16000 odd levels.
Brazilian currency "Real" is appreciated a whopping 30% from March 2009. Indian currency appreciated almost 7% in last 6 months and currency appreciation is common problem to all emerging markets. Already US-China currency war is on and Brazil is shouting at its full strength.
Due to this their respective central banks will (or would have already started) intervene in forex markets by selling their own currencies leaving their local banks with lot of liquidity. This liquidity is in turn creating a pressure on inflation which is already high in certain countries like China and India.
Ultimately its a "ZERO SUM GAME". In past also lower interest rates in initial parts of 2000 (to avoid ill effects of dot com bubble burst) lead to asset bubble in US which caused present crisis.
Showing posts with label Deflation. Show all posts
Showing posts with label Deflation. Show all posts
Tuesday, October 26, 2010
Saturday, October 16, 2010
Is there a threat of liquidity trap and "W" shape recovery part 2
Continuing from last week's my posting of liquidity trap and W shape recovery, I am of the opinion that every region, state or country undergoes a broad macroeconomic cycle of different time frame depending on their structural issues in terms of age, gender, income/saving/spending nature, export/import oriented, regulations in financial systems and etc.
Here I would like to give comparison between US and Japan because they are World's largest economies (except China overtaking Japan recently) and almost they are in same position now.
Japan experienced rapid growth from 1960s to 1990s, helped by post 2nd world war massive US investment, high savings led to high investment in their own country due to currency appreciation, low interest rates & etc. Japan witnessed an average GDP growth of 10% in 1960s, 5% in 1970s & 4% in 1980 indicating a slowdown in real growth after 1980s. It experienced asset price bubble in late 1980s followed by Bank of Japan's sudden increase in interest rate & crash of Nikkie in 1989 when it was around 39000.
Many economists feel, after crisis Japan didn't act quickly, it took 5 years to boost money supply in real economy, which was definitely very late reaction. Out of ten years from 1990 to 2000 Japan witnessed 9 times deflation measured by WPI, Nikkie has given 4 times negative annual return, 4 times less than 10% and just 2 times positive.
Now coming to US, it witnessed the Great Depression in 1930s which produced great economists like Sir John Maynard Keynes and in turn the great Keynesianism theory. From 1945 to 1970s US witnessed higher growth helped household income increased 55% or 1.6% annually but since 1973 household income growth rate fell to 10% or 0.3% annually due to various reasons like fall of Bretton Woods System(Nixon Shock) in 1971, followed by Oil shock or crisis in 1973, Recessions in 1981-1982 and after that several economical cycles of recessions in successive intervals.
In 1980, the US Debt was equal to 33.3% of America's GDP, by 1990 it became 56% of GDP. Debt levels rose quickly in the following decade and based on the 2010 US Budget, total national debt will grow to nearly 100% of GDP, versus a level of approximately 80% in early 2009.
Present financial crisis caused by sub prime mortgage, securitization structures and financial engineering along with FED's low interest rate policy to avoid the 2001 dot com bubble effects. Between 1997 and 2006, the price of the typical American house increased by 124% and at same time household debt v/s annual disposal income was 127% at the end of 2007, versus 77% in 1990.
So both the countries experienced rapid growth for 2-3 decades and after that they are feeling the heat of slowdown in their respective economies due to different reasons, which is nothing but natural economical cycle.
Prof. Raghuram Rajan, economic adviser to Prime Minister Mr. Manmohan Singh, in an interview about Currency conflicts mentioned same structural issues in US which I pointed above. Click here to read the full interview. I read an article in mint on similar note (about Japan & US similarities & differences of crisis, advise of Mr. Bernanke to Japan in late 1990s and he being at top job at present crisis!) its good article, click here to read. The paper presented in late 1990s from present FED chairman Ben Bernanke to Japan about its crisis. It contains lot of important data & structural issues with good explanation, click here to read that.
Here I would like to give comparison between US and Japan because they are World's largest economies (except China overtaking Japan recently) and almost they are in same position now.
Japan experienced rapid growth from 1960s to 1990s, helped by post 2nd world war massive US investment, high savings led to high investment in their own country due to currency appreciation, low interest rates & etc. Japan witnessed an average GDP growth of 10% in 1960s, 5% in 1970s & 4% in 1980 indicating a slowdown in real growth after 1980s. It experienced asset price bubble in late 1980s followed by Bank of Japan's sudden increase in interest rate & crash of Nikkie in 1989 when it was around 39000.
Many economists feel, after crisis Japan didn't act quickly, it took 5 years to boost money supply in real economy, which was definitely very late reaction. Out of ten years from 1990 to 2000 Japan witnessed 9 times deflation measured by WPI, Nikkie has given 4 times negative annual return, 4 times less than 10% and just 2 times positive.
Now coming to US, it witnessed the Great Depression in 1930s which produced great economists like Sir John Maynard Keynes and in turn the great Keynesianism theory. From 1945 to 1970s US witnessed higher growth helped household income increased 55% or 1.6% annually but since 1973 household income growth rate fell to 10% or 0.3% annually due to various reasons like fall of Bretton Woods System(Nixon Shock) in 1971, followed by Oil shock or crisis in 1973, Recessions in 1981-1982 and after that several economical cycles of recessions in successive intervals.
In 1980, the US Debt was equal to 33.3% of America's GDP, by 1990 it became 56% of GDP. Debt levels rose quickly in the following decade and based on the 2010 US Budget, total national debt will grow to nearly 100% of GDP, versus a level of approximately 80% in early 2009.
Present financial crisis caused by sub prime mortgage, securitization structures and financial engineering along with FED's low interest rate policy to avoid the 2001 dot com bubble effects. Between 1997 and 2006, the price of the typical American house increased by 124% and at same time household debt v/s annual disposal income was 127% at the end of 2007, versus 77% in 1990.
So both the countries experienced rapid growth for 2-3 decades and after that they are feeling the heat of slowdown in their respective economies due to different reasons, which is nothing but natural economical cycle.
Prof. Raghuram Rajan, economic adviser to Prime Minister Mr. Manmohan Singh, in an interview about Currency conflicts mentioned same structural issues in US which I pointed above. Click here to read the full interview. I read an article in mint on similar note (about Japan & US similarities & differences of crisis, advise of Mr. Bernanke to Japan in late 1990s and he being at top job at present crisis!) its good article, click here to read. The paper presented in late 1990s from present FED chairman Ben Bernanke to Japan about its crisis. It contains lot of important data & structural issues with good explanation, click here to read that.
Thursday, September 9, 2010
Comments for previous posting & My Response
My Response:
First I would like to thank Uday & Richa for reading the article and taking trouble to comment on that. Now coming to comments part I don't buy some of the comments of Uday & Richa, of course they may be correct in their own way.
Because there are structural issues which only government can handle. For example we are now enjoying the benefit of LPG (Liberalization, Privatization & Globalization) which is again started by then government in 1992 by Mr. Manmohan Singh. So government should take the initiative to do the things better, allow the private players in some of the specific areas step by step to participate & then we can argue that government cant do everything.
Now take the following examples...
Inflation
When world is at the door step possibility of double recession/slowdown/deflation, we Indians are facing the problem of Inflation. Food Inflation is the main culprit in that. And main problem for this is PDS (Public Distribution System) is so pathetic, corrupted & license raj.
For example government is supplying Rice @ Rs. 2 to BPL through PDS. But more than 50% of it is not reaching the targeted people, because middle men are selling same Rice in open market for market rate approximately to Rs. 20. This is just one angle for Inflation & other angle is preservation of food articles, even Supreme Court has given suggestion government that instead of wasting them & distribute to poor people.
In places like Delhi, more than 40% of water & 35% of power leakage & theft is happening, which is Capital of country & where in now we are conducting Commonwealth Games whose preparations are another disaster.
These are just a simple examples how the systems in place are working.
Today, I read an article where in Infosys Mentor Mr. Narayan Murthy is talking about India's problems.
I request to all my readers to please read that article here...
Some important points, he mentioned are as follows...
--> Even 63 years after Independence, 35 crore (350 million) Indians can't read and write.
--> Twenty-five crore (250 million) people do not have access to safe drinking water.
--> While 75 crore (750 million) have no access to sanitation facilities, Murthy said.
--> The country has the largest mass of malnourished children, and 35 per cent of (total production of) grains are allowed to rot.
--> India has an installed electricity generation capacity of 145 gigawatts but only 84 gigawatts are available, which is "sadly a shame
--> Lot of it is due to poor (public) governance. There is no doubt about it. Unfortunately, our public governance is inadequate. Whatever our public governance has touched has not made as good a progress as private governance has. While all of private governance may not be good, private governance institutions have by and large done better because of competition, entry of multinational companies and the need to compete at the global level.
And I read one more article in rediff about global competitiveness of different countries in different segments. And some important points in that are...
--> It ranks 104th in the health and primary education pillar, with high rates of communicable diseases and high infant mortality. Indeed, life expectancy in India is 10 years shorter than in Brazil and China.
--> Infrastructure (86th) is in need of upgrade, especially with respect to quality of roads, ports, and the electricity supply, with India falling 10 places in this area this year.
--> Labour markets are also in need of greater efficiency and flexibility (92nd).
--> And overall India's rank 51st
Bottm line:
Topic is open for discussion...
First I would like to thank Uday & Richa for reading the article and taking trouble to comment on that. Now coming to comments part I don't buy some of the comments of Uday & Richa, of course they may be correct in their own way.
Because there are structural issues which only government can handle. For example we are now enjoying the benefit of LPG (Liberalization, Privatization & Globalization) which is again started by then government in 1992 by Mr. Manmohan Singh. So government should take the initiative to do the things better, allow the private players in some of the specific areas step by step to participate & then we can argue that government cant do everything.
Now take the following examples...
Inflation
When world is at the door step possibility of double recession/slowdown/deflation, we Indians are facing the problem of Inflation. Food Inflation is the main culprit in that. And main problem for this is PDS (Public Distribution System) is so pathetic, corrupted & license raj.
For example government is supplying Rice @ Rs. 2 to BPL through PDS. But more than 50% of it is not reaching the targeted people, because middle men are selling same Rice in open market for market rate approximately to Rs. 20. This is just one angle for Inflation & other angle is preservation of food articles, even Supreme Court has given suggestion government that instead of wasting them & distribute to poor people.
In places like Delhi, more than 40% of water & 35% of power leakage & theft is happening, which is Capital of country & where in now we are conducting Commonwealth Games whose preparations are another disaster.
These are just a simple examples how the systems in place are working.
Today, I read an article where in Infosys Mentor Mr. Narayan Murthy is talking about India's problems.
I request to all my readers to please read that article here...
Some important points, he mentioned are as follows...
--> Even 63 years after Independence, 35 crore (350 million) Indians can't read and write.
--> Twenty-five crore (250 million) people do not have access to safe drinking water.
--> While 75 crore (750 million) have no access to sanitation facilities, Murthy said.
--> The country has the largest mass of malnourished children, and 35 per cent of (total production of) grains are allowed to rot.
--> India has an installed electricity generation capacity of 145 gigawatts but only 84 gigawatts are available, which is "sadly a shame
--> Lot of it is due to poor (public) governance. There is no doubt about it. Unfortunately, our public governance is inadequate. Whatever our public governance has touched has not made as good a progress as private governance has. While all of private governance may not be good, private governance institutions have by and large done better because of competition, entry of multinational companies and the need to compete at the global level.
And I read one more article in rediff about global competitiveness of different countries in different segments. And some important points in that are...
--> It ranks 104th in the health and primary education pillar, with high rates of communicable diseases and high infant mortality. Indeed, life expectancy in India is 10 years shorter than in Brazil and China.
--> Infrastructure (86th) is in need of upgrade, especially with respect to quality of roads, ports, and the electricity supply, with India falling 10 places in this area this year.
--> Labour markets are also in need of greater efficiency and flexibility (92nd).
--> And overall India's rank 51st
Bottm line:
Topic is open for discussion...
Saturday, August 7, 2010
Paul Krugman: Why Is Deflation Bad?
Couple of days back I was reading Paul Krugman's blog. He wrote about Deflation & thought it is very good. So here are the points what he has proposed...
There are actually three different reasons to worry about deflation, two on the demand side and one on the supply side.
So first of all: when people expect falling prices, they become less willing to spend, and in particular less willing to borrow. After all, when prices are falling, just sitting on cash becomes an investment with a positive real yield – Japanese bank deposits are a really good deal compared with those in America — and anyone considering borrowing, even for a productive investment, has to take account of the fact that the loan will have to repaid in dollars that are worth more than the dollars you borrowed. If the economy is doing well, all this can be offset by just keeping interest rates low; but if the economy isn’t doing well, even a zero rate may not be low enough to achieve full employment.
And when that happens, the economy may stay depressed because people expect deflation, and deflation may continue because the economy remains depressed. That’s the deflationary trap we keep worrying about.
A second effect: even aside from expectations of future deflation, falling prices worsen the position of debtors, by increasing the real burden of their debts. Now, you might think this is a zero-sum affair, since creditors experience a corresponding gain. But as Irving Fisher pointed out long ago (pdf), debtors are likely to be forced to cut their spending when their debt burden rises, while creditors aren’t likely to increase their spending by the same amount. So deflation exerts a depressing effect on spending by raising debt burdens – which, as Fisher also points out, can lead to another kind of vicious circle, in which depressed spending because of rising real debt leads to further deflation.
Finally, in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines. See Estonia and Latvia, cases of.
Now, alert readers will have noticed that none of these arguments abruptly kicks in when the inflation rate goes from +0.1% to -0.1%. Even with low but positive inflation the zero lower bound may be binding; inflation that comes in lower than borrowers expected leaves them with a worse debt burden than they were counting on, even if the inflation is positive; and since relative wages are shifting around all the time, some nominal wages will have to fall even if the overall rate of inflation is a bit above zero. So the argument that deflation is a bad thing is also an argument saying that some economic problems get worse as inflation falls, and that too low an inflation rate may actually be economically damaging. That’s why the fact that inflation, while still positive, is below the Fed’s target is bad news; and it’s why respectable people like Olivier Blanchard (pdf) have suggested that a higher target, something like 4 percent inflation, might make sense.
Monday, September 7, 2009
Does Increasing Interest Rates Curb The Present Inflation
Some people might be feeling that, recently I have posted too much of Technical Analysis. But Candle Stick analysis is like that can’t stop in between.
Now coming to today's topic, "Does Increasing Interest Rates Curb The Inflation Rate", there will be many questions on headline of the topic itself! Like…
1. Is there inflation in India?
2. If NO, why retail prices(Sugar, Grains & Cereals) are so high?
3. If YES, then why WPI is not showing it? And what RBI & as well as Government are doing about it?
4. Does RBI is in position to increase the Interest rates in present condition of recession? & etc...
If you go by WPI headline inflation numbers India is in Deflation! Since June 2009 WPI numbers are in negative, due to reasons like "BASE EFFECT". But does really prices of various commodities like food grains, manufacturing items or for that matter oil are low or in other words is there any contraction in demand? Neither is true in India's case! Yes Food grains like cereals price doubled within this negative range of WPI, i.e. 2-3 months. And oil prices are also almost same whereas International Oil Price crashed from $147 to sub $70 levels. And manufacturing sector products are picking up their respective prices example recently Steel Companies increased their prices. So where is the Deflation? Only in numbers! As I wrote many times BASE EFFECT is causing this mismatch & that is expected to fade away from coming months October & November. But is this BASE EFFECT does not cause any more problems in future? No, it will come into picture in next year when WPI compares with this negative range. So obviously it will be very high & that too it will be accompanied with the recovery in the economy with elastic in demand. So is there any solution for this problem, yes there is. First they need to change components & their respective weightages in WPI series & it should be changing every now then depending upon change in economy, per capita income & etc. Second they need to adjust the Inflation numbers seasonally on which much work is going on in NIPEP & DEA. And I think there should be some coordination while comparing to previous years' numbers so that some type of comparative analysis is done by taking previous month as well as previous year.
So does RBI increase the interest rates to control the Inflation or Interest Rate policies are growth oriented? Because many sectors like Textile & other export oriented industries are badly hit due to this recession. Many experts believe that interest rates have hit the bottom. That means no more easy money? According RBI deputy governor Interest rates will be same till March 2010. And there are various school of thoughts are going on whether the recovery will be V shaped or W shaped or U shaped?
And even if RBI increases the interest rates also does it control the prices? I dont think so, because I believe this increase in price is due to mismatch in Demand-Supply & not because excessive money chasing few goods. In addition to that this year drought is spoiling game much more. And rest of the commodities depend upon the international price movements like oil, sugar & etc. So what is the solution for this situation? I think there is no shortcut in this matter. There should overall revolution in PDS [Public Distribution System] using some new technology like UID, should increase the efficiency of the agricultural productions, less dependency on rainwater & etc.
Now coming to today's topic, "Does Increasing Interest Rates Curb The Inflation Rate", there will be many questions on headline of the topic itself! Like…
1. Is there inflation in India?
2. If NO, why retail prices(Sugar, Grains & Cereals) are so high?
3. If YES, then why WPI is not showing it? And what RBI & as well as Government are doing about it?
4. Does RBI is in position to increase the Interest rates in present condition of recession? & etc...
If you go by WPI headline inflation numbers India is in Deflation! Since June 2009 WPI numbers are in negative, due to reasons like "BASE EFFECT". But does really prices of various commodities like food grains, manufacturing items or for that matter oil are low or in other words is there any contraction in demand? Neither is true in India's case! Yes Food grains like cereals price doubled within this negative range of WPI, i.e. 2-3 months. And oil prices are also almost same whereas International Oil Price crashed from $147 to sub $70 levels. And manufacturing sector products are picking up their respective prices example recently Steel Companies increased their prices. So where is the Deflation? Only in numbers! As I wrote many times BASE EFFECT is causing this mismatch & that is expected to fade away from coming months October & November. But is this BASE EFFECT does not cause any more problems in future? No, it will come into picture in next year when WPI compares with this negative range. So obviously it will be very high & that too it will be accompanied with the recovery in the economy with elastic in demand. So is there any solution for this problem, yes there is. First they need to change components & their respective weightages in WPI series & it should be changing every now then depending upon change in economy, per capita income & etc. Second they need to adjust the Inflation numbers seasonally on which much work is going on in NIPEP & DEA. And I think there should be some coordination while comparing to previous years' numbers so that some type of comparative analysis is done by taking previous month as well as previous year.
So does RBI increase the interest rates to control the Inflation or Interest Rate policies are growth oriented? Because many sectors like Textile & other export oriented industries are badly hit due to this recession. Many experts believe that interest rates have hit the bottom. That means no more easy money? According RBI deputy governor Interest rates will be same till March 2010. And there are various school of thoughts are going on whether the recovery will be V shaped or W shaped or U shaped?
And even if RBI increases the interest rates also does it control the prices? I dont think so, because I believe this increase in price is due to mismatch in Demand-Supply & not because excessive money chasing few goods. In addition to that this year drought is spoiling game much more. And rest of the commodities depend upon the international price movements like oil, sugar & etc. So what is the solution for this situation? I think there is no shortcut in this matter. There should overall revolution in PDS [Public Distribution System] using some new technology like UID, should increase the efficiency of the agricultural productions, less dependency on rainwater & etc.
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.
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!
Thursday, February 26, 2009
Inflation 3.36% Vs 3.92
As expected Inflation came down substantially this week also. I mentioned "substantially" because from couple of months reduction in the inflation numbers is of the amount nearly equal to more than 50 basis points every week.
If you see this week also it came down by 56 basis points from 3.92% to 3.36%, due to fall in the prices of fruits, vegetables & some manufactured goods in the wholesale market. [May not applicable to retail market as retailer may be paying still higher prices only to above mentioned items]
And there is a news of possibility of reduction of diesel prices today. If that happens it may affect the WPI series further as Oil sector has nearly 17% to 18% weightage in WPI content.
Many times I mentioned about the how WPI series has disadvantage in measuring the exact inflation due to "BASE EFFECT". Here I got one more fact regarding this issue to show you guys. CNBC TV channel did a survey, according them expected the inflation & WPI is as follows...
Inflation expectations - WPI 2008 versus 2009
Here if you look at the WPI of 2009, from March, you can notice [marked with red color] the Inflation is coming down even though is there no change in WPI measurement. In the above table from March 7 WPI series is kept constant @ 227.6 but due to "BASE EFFECT OF 2008" Inflation is coming down. And as I mentioned in December, this table is also indicating that from the month of April we may face the "DEFLATION" for couple months. If prices really starts coming down in retail markets also then there is surely problem for central banker & governments.
In addition to this, third stimulus package in terms of tax reduction also will come into the picture for next couple of weeks. Since there is reduction of 2% in Excise, Service, Cement & for Naptha will add to further fall of inflation. Because Oil & Manufacturing sector have substantial weightage in WPI series.
So considering all these factors, there is sure chance of RBI action in terms of cutting down the rates. Because dealing with Inflation is quite easy as compared to that of Deflation. Lets wait & watch...
If you see this week also it came down by 56 basis points from 3.92% to 3.36%, due to fall in the prices of fruits, vegetables & some manufactured goods in the wholesale market. [May not applicable to retail market as retailer may be paying still higher prices only to above mentioned items]
And there is a news of possibility of reduction of diesel prices today. If that happens it may affect the WPI series further as Oil sector has nearly 17% to 18% weightage in WPI content.
Many times I mentioned about the how WPI series has disadvantage in measuring the exact inflation due to "BASE EFFECT". Here I got one more fact regarding this issue to show you guys. CNBC TV channel did a survey, according them expected the inflation & WPI is as follows...
Inflation expectations - WPI 2008 versus 2009
Here if you look at the WPI of 2009, from March, you can notice [marked with red color] the Inflation is coming down even though is there no change in WPI measurement. In the above table from March 7 WPI series is kept constant @ 227.6 but due to "BASE EFFECT OF 2008" Inflation is coming down. And as I mentioned in December, this table is also indicating that from the month of April we may face the "DEFLATION" for couple months. If prices really starts coming down in retail markets also then there is surely problem for central banker & governments.
In addition to this, third stimulus package in terms of tax reduction also will come into the picture for next couple of weeks. Since there is reduction of 2% in Excise, Service, Cement & for Naptha will add to further fall of inflation. Because Oil & Manufacturing sector have substantial weightage in WPI series.
So considering all these factors, there is sure chance of RBI action in terms of cutting down the rates. Because dealing with Inflation is quite easy as compared to that of Deflation. Lets wait & watch...
Wednesday, February 25, 2009
Mint:Rediscovering history - Niranjan Rajadhyaksha
As economic activity around the world shrinks at a pace that few expected, the obligatory amnesia of bull markets is now being replaced by a new respect for the past.
Bull markets inevitably lead to the arrogant and ignorant belief that the old rules can be swept away and that economic history is irrelevant. And wiser people who warn that grief has inevitably followed earlier bubbles are scoffed at.
Historian Niall Ferguson recounts a telling episode in his new book, The Ascent of Money. He was invited to speak to a group of bankers at an expensive conference held in the Bahamas in November 2006. “The theme of my speech was that it would not take much to cause a drastic decline in the liquidity that was cascading through the global financial system and that we should be cautious about expecting the good times to last indefinitely. My audience was distinctly unimpressed. I was dismissed as an alarmist,” writes Ferguson.
The tendency to dismiss what happened in the past is less common these days. In fact, as the intensity of the recession in the rich nations increases, the urge to dig deeper into history rises in tandem. And many old and buried ideas are being resurrected.
The initial trek into the past that started after the first credit shock in September 2007 did not go too deep into history. Most economists and analysts were content comparing the downturn—and speculating about the revival—by looking at the mild recessions of the 1990s and the early part of the current decade in the US and Europe. This one was expected to be a repeat of the immediate past.
But they started traveling further back in time when the initial hopes of a quick dip and rebound evaporated. After jumping to the sharp and painful recession of the early 1980s, the debate has now settled into the 1930s: What caused the Great Depression and how can a repeat be avoided in these times?
The D-word has already got an airing in recent weeks. British Prime Minister Gordon Brown said earlier this month that the world needed to agree on monetary and fiscal stimulus to get out of depression. His opponents pounced on him while his media managers dismissed it as a slip of the tongue. But the International Monetary Fund said a few days later that the rich nations are already in depression.
Memories of the gloomy 1930s and greater attention to Japan’s economic stagnation over the past two decades have also helped resurrect economists who provided unconventional explanations for what happened during these two episodes. The old consensus has crumbled.
We have already seen the Keynes revival, as economists have scrambled to learn from the insights of the most influential economist of the interwar years. But others have also got a new prominence. I will just mention two economists here: an American who lived during the Great Depression and a Japanese who has a refreshingly different take on why his country’s economy has stagnated.
Irving Fisher has been the target of several barbs because he made one of the worst market calls ever. He said mere days before the US shares fell off a cliff in the crash of 1929: “Stock prices have reached what looks like a permanently high plateau.”
But Fisher also later came up with an explanation about the depression that followed. This is the debt deflation theory, which essentially says that indebtedness forces families and businesses to sell collateral that pushes down their prices even more and further raises the threat of insolvency. I doubt Fisher is taught to economics students these days. In an article in VoxEU.org, Enrique G. Mendoza of the University of Michigan offers some advice to government around the world: Hire Irving Fisher.
Meanwhile, many are taking a closer look at what Richard Koo of the Nomura Research Institute described earlier this decade as Japan’s balance sheet recession. In an analysis that has striking parallels with Fisher’s prognosis in the 1930s, Koo says over-leveraged Japanese firms trying to reduce debt did not have the stomach for new investment. The fall in the value of pledged shares is creating a milder variant of this problem in India.
The point is not that economists such as Fisher and Koo have the keys to the kingdom. Economists will struggle to explain why economic activity waxes and wanes—and why some recessions can be long, brutish and nasty.
One of the few good things to emerge from the current crisis is that it is has partially rehabilitated heterodox economists such as Fisher, Koo, Hyman Minsky and even John Kenneth Galbraith. And there is a greater respect for economic history.
It is easy to pretend that you are living in unique times when the laws of economics are suspended. But that is only till you get ambushed by reality.
Bull markets inevitably lead to the arrogant and ignorant belief that the old rules can be swept away and that economic history is irrelevant. And wiser people who warn that grief has inevitably followed earlier bubbles are scoffed at.
Historian Niall Ferguson recounts a telling episode in his new book, The Ascent of Money. He was invited to speak to a group of bankers at an expensive conference held in the Bahamas in November 2006. “The theme of my speech was that it would not take much to cause a drastic decline in the liquidity that was cascading through the global financial system and that we should be cautious about expecting the good times to last indefinitely. My audience was distinctly unimpressed. I was dismissed as an alarmist,” writes Ferguson.
The tendency to dismiss what happened in the past is less common these days. In fact, as the intensity of the recession in the rich nations increases, the urge to dig deeper into history rises in tandem. And many old and buried ideas are being resurrected.
The initial trek into the past that started after the first credit shock in September 2007 did not go too deep into history. Most economists and analysts were content comparing the downturn—and speculating about the revival—by looking at the mild recessions of the 1990s and the early part of the current decade in the US and Europe. This one was expected to be a repeat of the immediate past.
But they started traveling further back in time when the initial hopes of a quick dip and rebound evaporated. After jumping to the sharp and painful recession of the early 1980s, the debate has now settled into the 1930s: What caused the Great Depression and how can a repeat be avoided in these times?
The D-word has already got an airing in recent weeks. British Prime Minister Gordon Brown said earlier this month that the world needed to agree on monetary and fiscal stimulus to get out of depression. His opponents pounced on him while his media managers dismissed it as a slip of the tongue. But the International Monetary Fund said a few days later that the rich nations are already in depression.
Memories of the gloomy 1930s and greater attention to Japan’s economic stagnation over the past two decades have also helped resurrect economists who provided unconventional explanations for what happened during these two episodes. The old consensus has crumbled.
We have already seen the Keynes revival, as economists have scrambled to learn from the insights of the most influential economist of the interwar years. But others have also got a new prominence. I will just mention two economists here: an American who lived during the Great Depression and a Japanese who has a refreshingly different take on why his country’s economy has stagnated.
Irving Fisher has been the target of several barbs because he made one of the worst market calls ever. He said mere days before the US shares fell off a cliff in the crash of 1929: “Stock prices have reached what looks like a permanently high plateau.”
But Fisher also later came up with an explanation about the depression that followed. This is the debt deflation theory, which essentially says that indebtedness forces families and businesses to sell collateral that pushes down their prices even more and further raises the threat of insolvency. I doubt Fisher is taught to economics students these days. In an article in VoxEU.org, Enrique G. Mendoza of the University of Michigan offers some advice to government around the world: Hire Irving Fisher.
Meanwhile, many are taking a closer look at what Richard Koo of the Nomura Research Institute described earlier this decade as Japan’s balance sheet recession. In an analysis that has striking parallels with Fisher’s prognosis in the 1930s, Koo says over-leveraged Japanese firms trying to reduce debt did not have the stomach for new investment. The fall in the value of pledged shares is creating a milder variant of this problem in India.
The point is not that economists such as Fisher and Koo have the keys to the kingdom. Economists will struggle to explain why economic activity waxes and wanes—and why some recessions can be long, brutish and nasty.
One of the few good things to emerge from the current crisis is that it is has partially rehabilitated heterodox economists such as Fisher, Koo, Hyman Minsky and even John Kenneth Galbraith. And there is a greater respect for economic history.
It is easy to pretend that you are living in unique times when the laws of economics are suspended. But that is only till you get ambushed by reality.
Sunday, February 22, 2009
Thursday, February 19, 2009
News Paper Articles
Today I read an article from Financial Express about Irving Fisher. It is really good article on Great Depression and Irvin Fisher. Interested guys go through it when you are free since article bit lengthy...
One more article is there in mint about Protectionism.
One more article is there in mint about Protectionism.
Thursday, February 12, 2009
Contraction in the Economy
Due to various reasons economy is facing lot of contraction in the demand line.
If you see the December IIP (Index of Industrial Production) numbers which shows -2% Vs September's 1.7% (revised from 2.8%) we are still in the declining stage rather than at the bottom. Here I would like to mention one thing, I dont believe in YoY measurement as in the case of Inflation. See its very simple we cant compare a top of the bullish market numbers with the bottom of the bearish market. Anyway I dont want divulge from the topic of economic contraction to measurement methods.
If you go into the details of the IIPs there is overall contraction across the market irrespective of manufacturing, consumer durables, consumer goods, mining & capital goods.
And not only IIP numbers but Inflation numbers are also showing that only. If you see the Inflation numbers released today, which shows 4.39% Vs 5.07% indicating the massive drop in the consumer demand. If you compare the inflation of this week & last week, there is the drop of 68 Basis points and this is continuing from last couple of months. Every month there is a drop of 200 to 300 Basis Points in inflation numbers indicating the economic deflation which may lead to recession. Of course BASE EFFECT is doing its part in reduction, but if you look at various angles inflation is coming down due to less-demand, crude oil price & foregoing of consumption.
So government must come up with some populist policies like tax reductions across the sectors for the industries & as well as common man, employment schemes, investment in sectors which can be implemented as early as possible in Interim Budget. And RBI must reduce REPO & REVERSE REPO.
If you see the December IIP (Index of Industrial Production) numbers which shows -2% Vs September's 1.7% (revised from 2.8%) we are still in the declining stage rather than at the bottom. Here I would like to mention one thing, I dont believe in YoY measurement as in the case of Inflation. See its very simple we cant compare a top of the bullish market numbers with the bottom of the bearish market. Anyway I dont want divulge from the topic of economic contraction to measurement methods.
If you go into the details of the IIPs there is overall contraction across the market irrespective of manufacturing, consumer durables, consumer goods, mining & capital goods.
And not only IIP numbers but Inflation numbers are also showing that only. If you see the Inflation numbers released today, which shows 4.39% Vs 5.07% indicating the massive drop in the consumer demand. If you compare the inflation of this week & last week, there is the drop of 68 Basis points and this is continuing from last couple of months. Every month there is a drop of 200 to 300 Basis Points in inflation numbers indicating the economic deflation which may lead to recession. Of course BASE EFFECT is doing its part in reduction, but if you look at various angles inflation is coming down due to less-demand, crude oil price & foregoing of consumption.
So government must come up with some populist policies like tax reductions across the sectors for the industries & as well as common man, employment schemes, investment in sectors which can be implemented as early as possible in Interim Budget. And RBI must reduce REPO & REVERSE REPO.
Tuesday, February 10, 2009
YoY Inflation Vs MoM Inflation & Deflation
Guys, many times I wrote in blog about Inflation, Drawbacks of YoY Inflation, Threat of Deflation, Monetary Policies targeting inflation & etc.
In Yesterday's Financial Express, Ila Patnaik has clearly explained...
-->Advantages of MoM Inflation Vs YoY Inflation
-->What should be the Monetary Policies with respect to that &
-->Banks reluctance in reducing the PLR as compared to reduction in repo!!!
In Yesterday's Financial Express, Ila Patnaik has clearly explained...
-->Advantages of MoM Inflation Vs YoY Inflation
-->What should be the Monetary Policies with respect to that &
-->Banks reluctance in reducing the PLR as compared to reduction in repo!!!
Monday, February 2, 2009
Threat of Deflation
Guys, I am back with my favorite topic deflation/inflation (microeconomics) after two days of net problem in the college. Many times I posted about the possibility of deflation due to reasons like current situations like financial turmoil, monetary policies, followed by bank's reluctance to lend, job losses which makes people save their consumptions for future purpose & etc. Today I read an article from business standard where Mr.Tushar Poddar(Chief India Economist, Goldman Sachs) expressed his thoughts. So I thought you guys also can have a look at it...
The Indian economy is currently being hit by the mother of all external shocks. With the US and the rest of the developed world in its worst recession in 75 years, and the impact being felt on India's growth, employment, exports, asset prices, and rapidly falling inflation, this is not the average downturn in the business cycle.
It is nearly certain, as confirmed by the Government's Chief Statistician, that India will face a period of deflation in the middle of 2009. Most economists tend to think that it will only be a matter of a few months before prices start rising again. Under reasonable assumptions, however, wholesale prices may show year-on-year declines from April through end-2009.
The real danger to the economy is that due to the large negative demand shock, deflationary forces get entrenched, leading to a vicious cycle of falling output and declining prices. To counter this clear and present danger, policy, especially fiscal, will have to use all its firepower to forestall it.
So, is deflation in India really possible, and why should we worry about it?
Everywhere one looks, prices are falling. From airline tickets to cars, from household goods to clothes, and from property prices to stock prices, all are seeing declines. The whole sale price index is already showing the largest absolute declines ever since the series started in 1988, falling by 2.5 per cent month on month in October, 4.7 per cent in November, and 3.9 per cent in December.
Hence, by this measure, we are already facing deflation. Going forward, falling commodity prices, the bursting of the equity and property bubble, and ongoing demand destruction, can continue the downward movement in prices which have nothing to do with a high statistical base from 2008. But why should this be a cause for worry?
Deflation hurts the economy much more than inflation, as borne out by the US experience during the Great Depression from 1929-33 when output shrank 40 per cent and nominal prices by 24 per cent, and by Japan's 'Lost Decade' in the 1990s.
Consumers postpone expenditure, because they think prices will be cheaper going forward. This affects firms, who then scale back production and investment plans, leading to job losses, further affecting purchasing power and demand, which leads to a downward spiral in the economy.
A temporary period of deflation can become sustained as asset prices fall, the credit channel stops working, and people start expecting falling prices. As property and equity prices fall, they reduce collateral which shrinks the balance sheet of firms and makes banks unwilling to lend, further hurting firms.
If consumer expectations of deflation become unhinged, which can happen very quickly, a temporary phenomenon becomes entrenched.
Although in India's case the supply constraints and traditionally high inflationary expectations militate against deflation, the size of the demand shock demand can outweigh them.
At any rate, policy needs to preempt even a small probability of such a grave threat to the India growth story. Policy has to re-inflate and re-ignite demand. It is better to err on the side of inflation rather than deflation.
Monetary policy, although it has been loosened considerably, still has considerable room left to ease. Short-term policy rates at 4-5.5 per cent are still too high, because with deflation on the horizon, real rates will be higher still.
With lending rates still in the 12-12.5 per cent range, real lending rates in India will be among the highest in the region. Given the long lags in transmitting policy rates to bank lending rates and then to overall activity, there is merit in getting policy rates down as quickly as possible.
Monetary policy alone, however, will not be enough. Its effectiveness is constrained due to rising credit risk, which is causing a divergence between policy and bank lending rates. Therefore, cutting policy rates is necessary but not sufficient to stimulate demand. An additional constraint is that at the extreme, nominal policy rates can't go below zero, so during a time of deflation, real rates can remain high.
The onus will then have to fall on fiscal policy. In particular, there needs to be additional stimulus in FY10, over and above the big stimuli provided in FY09. There is an argument that there is no more fiscal space for further counter-cyclical fiscal policy as it would lead to the crowding out of the private sector and could lead to our debt burden becoming unsustainable. Let us examine each in turn.
In the current abnormal environment, the private sector has been crowded out already as banks are not lending to them due to high credit risk. What is of concern is that corporate bond yields are very high relative to government bond yields rather than the level of government yields itself.
Indeed, if monetary policy is further loosened, in an environment of deflationary impulses, government yields can fall further. Additional fiscal stimulus is not part of the problem but part of the solution for corporates.
Although India's debt burden will rise, what matters more for the long-term sustainability of debt is the differential between GDP growth and interest rates. It would be much worse for our debt ratio if growth rates were to be significantly lowered due to the negative shock.
As long as the fiscal expansion is temporary and helps to boost growth, it will not endanger sustainability. India's favorable demographics will also help in bringing down the debt burden. However, the expansion should be carefully calibrated with a medium-term commitment to bring down the deficit when more benign conditions return.
So what form should a fiscal expansion take?
Increased spending by the government suffers from two problems - it takes time to filter through, and there are serious problems in implementation capacity. It is preferable to have a tax cut which is quick, equitable, and can unleash domestic demand from liquidity-constrained consumers. An income tax cut would fulfill all these requirements.
A good start would be to eliminate the education cess on income tax, and provide a one-year holiday on the corporate tax surcharge in the interim budget.
To get back to 8 per cent growth, the long-term policy response has to be more structural reform. But in the short term, where falling domestic demand can complicate the India growth story, the response has to be immediate counter-cyclical easing of both monetary and fiscal policy, while there is still time. There is no use saving ammunition if the battle is lost.
The Indian economy is currently being hit by the mother of all external shocks. With the US and the rest of the developed world in its worst recession in 75 years, and the impact being felt on India's growth, employment, exports, asset prices, and rapidly falling inflation, this is not the average downturn in the business cycle.
It is nearly certain, as confirmed by the Government's Chief Statistician, that India will face a period of deflation in the middle of 2009. Most economists tend to think that it will only be a matter of a few months before prices start rising again. Under reasonable assumptions, however, wholesale prices may show year-on-year declines from April through end-2009.
The real danger to the economy is that due to the large negative demand shock, deflationary forces get entrenched, leading to a vicious cycle of falling output and declining prices. To counter this clear and present danger, policy, especially fiscal, will have to use all its firepower to forestall it.
So, is deflation in India really possible, and why should we worry about it?
Everywhere one looks, prices are falling. From airline tickets to cars, from household goods to clothes, and from property prices to stock prices, all are seeing declines. The whole sale price index is already showing the largest absolute declines ever since the series started in 1988, falling by 2.5 per cent month on month in October, 4.7 per cent in November, and 3.9 per cent in December.
Hence, by this measure, we are already facing deflation. Going forward, falling commodity prices, the bursting of the equity and property bubble, and ongoing demand destruction, can continue the downward movement in prices which have nothing to do with a high statistical base from 2008. But why should this be a cause for worry?
Deflation hurts the economy much more than inflation, as borne out by the US experience during the Great Depression from 1929-33 when output shrank 40 per cent and nominal prices by 24 per cent, and by Japan's 'Lost Decade' in the 1990s.
Consumers postpone expenditure, because they think prices will be cheaper going forward. This affects firms, who then scale back production and investment plans, leading to job losses, further affecting purchasing power and demand, which leads to a downward spiral in the economy.
A temporary period of deflation can become sustained as asset prices fall, the credit channel stops working, and people start expecting falling prices. As property and equity prices fall, they reduce collateral which shrinks the balance sheet of firms and makes banks unwilling to lend, further hurting firms.
If consumer expectations of deflation become unhinged, which can happen very quickly, a temporary phenomenon becomes entrenched.
Although in India's case the supply constraints and traditionally high inflationary expectations militate against deflation, the size of the demand shock demand can outweigh them.
At any rate, policy needs to preempt even a small probability of such a grave threat to the India growth story. Policy has to re-inflate and re-ignite demand. It is better to err on the side of inflation rather than deflation.
Monetary policy, although it has been loosened considerably, still has considerable room left to ease. Short-term policy rates at 4-5.5 per cent are still too high, because with deflation on the horizon, real rates will be higher still.
With lending rates still in the 12-12.5 per cent range, real lending rates in India will be among the highest in the region. Given the long lags in transmitting policy rates to bank lending rates and then to overall activity, there is merit in getting policy rates down as quickly as possible.
Monetary policy alone, however, will not be enough. Its effectiveness is constrained due to rising credit risk, which is causing a divergence between policy and bank lending rates. Therefore, cutting policy rates is necessary but not sufficient to stimulate demand. An additional constraint is that at the extreme, nominal policy rates can't go below zero, so during a time of deflation, real rates can remain high.
The onus will then have to fall on fiscal policy. In particular, there needs to be additional stimulus in FY10, over and above the big stimuli provided in FY09. There is an argument that there is no more fiscal space for further counter-cyclical fiscal policy as it would lead to the crowding out of the private sector and could lead to our debt burden becoming unsustainable. Let us examine each in turn.
In the current abnormal environment, the private sector has been crowded out already as banks are not lending to them due to high credit risk. What is of concern is that corporate bond yields are very high relative to government bond yields rather than the level of government yields itself.
Indeed, if monetary policy is further loosened, in an environment of deflationary impulses, government yields can fall further. Additional fiscal stimulus is not part of the problem but part of the solution for corporates.
Although India's debt burden will rise, what matters more for the long-term sustainability of debt is the differential between GDP growth and interest rates. It would be much worse for our debt ratio if growth rates were to be significantly lowered due to the negative shock.
As long as the fiscal expansion is temporary and helps to boost growth, it will not endanger sustainability. India's favorable demographics will also help in bringing down the debt burden. However, the expansion should be carefully calibrated with a medium-term commitment to bring down the deficit when more benign conditions return.
So what form should a fiscal expansion take?
Increased spending by the government suffers from two problems - it takes time to filter through, and there are serious problems in implementation capacity. It is preferable to have a tax cut which is quick, equitable, and can unleash domestic demand from liquidity-constrained consumers. An income tax cut would fulfill all these requirements.
A good start would be to eliminate the education cess on income tax, and provide a one-year holiday on the corporate tax surcharge in the interim budget.
To get back to 8 per cent growth, the long-term policy response has to be more structural reform. But in the short term, where falling domestic demand can complicate the India growth story, the response has to be immediate counter-cyclical easing of both monetary and fiscal policy, while there is still time. There is no use saving ammunition if the battle is lost.
Friday, January 16, 2009
Threat of Deflation
As I posted on 21st December about threat deflation is going to rise in coming months, now reports started coming.
In today's Mint Paper there is article in which many economists expressed their concern over the pace at which inflation is falling and said it may -ve numbers due to BASE EFFECT.
And they have also mentioned the concern over the method of calculation of inflation. And this what I exactly mentioned in my previous posts... Here is the part of that post what I posted in December...
Now second problem regarding the inflation is the pace at which it is falling! As I mentioned in the above paragraph, due to base effect pace may increase and also widen in coming days. In addition to that there is possibility another round of price reduction in the Petrol, Diesel & Gas also this time (which have nearly 14% weightage in WPI series). If this happens WPI numbers may start giving DEFLATION instead of INFLATION numbers. And DEFLATION is very much possible in this kind of economic scenario where day by day economic contraction is happening.
Now coming to domestic demand, how government is going to improve the demand in the market. Looking at October month’s IIP (Index of Industrial Production) numbers of manufacturing sector and overall we are also facing the threat of recession. And exactly this is what Keynes said, PARADOX OF THRIFT. Means if everyone starts saving money during times of recession, then there is decrement in the consumption which leads to fall in the aggregate demand thus leads to a fall in economic growth. If this continues then there will be downsizings & mass layoffs which are already started, eventually it leads to stagnation in the savings of total population or even declined because of lower incomes and a weaker economy.
In today's Mint Paper there is article in which many economists expressed their concern over the pace at which inflation is falling and said it may -ve numbers due to BASE EFFECT.
And they have also mentioned the concern over the method of calculation of inflation. And this what I exactly mentioned in my previous posts... Here is the part of that post what I posted in December...
Now second problem regarding the inflation is the pace at which it is falling! As I mentioned in the above paragraph, due to base effect pace may increase and also widen in coming days. In addition to that there is possibility another round of price reduction in the Petrol, Diesel & Gas also this time (which have nearly 14% weightage in WPI series). If this happens WPI numbers may start giving DEFLATION instead of INFLATION numbers. And DEFLATION is very much possible in this kind of economic scenario where day by day economic contraction is happening.
Now coming to domestic demand, how government is going to improve the demand in the market. Looking at October month’s IIP (Index of Industrial Production) numbers of manufacturing sector and overall we are also facing the threat of recession. And exactly this is what Keynes said, PARADOX OF THRIFT. Means if everyone starts saving money during times of recession, then there is decrement in the consumption which leads to fall in the aggregate demand thus leads to a fall in economic growth. If this continues then there will be downsizings & mass layoffs which are already started, eventually it leads to stagnation in the savings of total population or even declined because of lower incomes and a weaker economy.
Saturday, November 15, 2008
MoM Inflation
Guys I am posting about inflation again, please bear with me. While discussing in one of our class I told my friends that India is facing the imported inflation. That means majority of our inflation is imported in the form of oil as we import almost 70% of our oil requirements.
The best proof for that argument is this week’s inflation numbers, which reduced to 8.98% from 10.72%. Steepest fall of 1.72%, which is because of Naphtha (33% down) & Jet aviation fuel (18% down). And still petrol, diesel and gas rates are not reduced by the central governments. Center wants the state owned oil companies to recover the losses which amounts to almost Rs. 140000 crore. If those prices are reduced then again inflation will come down & may be within the RBI’s standard before its expectation. And looking at political angle, central government may want to cash in the cut in the prices just before the elections say in February or March. Till that time both the purpose will be solved like recover of loss & political gain. One more problem they are facing is great extent of rupee depreciation from its peak levels 38-39 to above 50 levels so for same amount of crude, India needs to pay nearly 10-12 $ more.
Now coming to today’s topic, I want to congratulate the central government for deciding to come up with month on month inflation numbers rather than existing year on year!
In this existing condition, actual price variation in the market may not be clearly visible as it is always compared with the base week of the previous year. Means even if in the market prices may be decreasing but if in previous year’s inflation increased from its last week then inflation numbers what we get now may not be decreasing in real term and vice versa. This is what I discussed with many of my friend’s earlier and I think once I posted also.
But now government is thinking about month on month inflation numbers. Here we will get almost accurate numbers in accord with the market price movements. Here inflation numbers which will be released will be compared with last month’s inflation numbers which will indicate the most recent trend in the inflation numbers. Of course in the process of changing from YoY to MoM they may face some problems like whether to take average of the whole month or that particular week in the previous month!!!
Now looking at the world economic condition, RBI needs to think one more round of interest rate cut in near future if not immediately. Since there is fear of DEFLATION and it will be there in all recession/depression times. Since almost all major economies like EUROJONE (first time since its formation), UK (Its interest is lower than the Euro first time since Euro formation), US (FED rate is 1%), GERMANY (Interest rate 3.19%) & ITALY (3.75% interest rate) are about to enter or already in recession. So to boost the domestic sentiments RBI needs to think of REPO RATE & CRR.
The best proof for that argument is this week’s inflation numbers, which reduced to 8.98% from 10.72%. Steepest fall of 1.72%, which is because of Naphtha (33% down) & Jet aviation fuel (18% down). And still petrol, diesel and gas rates are not reduced by the central governments. Center wants the state owned oil companies to recover the losses which amounts to almost Rs. 140000 crore. If those prices are reduced then again inflation will come down & may be within the RBI’s standard before its expectation. And looking at political angle, central government may want to cash in the cut in the prices just before the elections say in February or March. Till that time both the purpose will be solved like recover of loss & political gain. One more problem they are facing is great extent of rupee depreciation from its peak levels 38-39 to above 50 levels so for same amount of crude, India needs to pay nearly 10-12 $ more.
Now coming to today’s topic, I want to congratulate the central government for deciding to come up with month on month inflation numbers rather than existing year on year!
In this existing condition, actual price variation in the market may not be clearly visible as it is always compared with the base week of the previous year. Means even if in the market prices may be decreasing but if in previous year’s inflation increased from its last week then inflation numbers what we get now may not be decreasing in real term and vice versa. This is what I discussed with many of my friend’s earlier and I think once I posted also.
But now government is thinking about month on month inflation numbers. Here we will get almost accurate numbers in accord with the market price movements. Here inflation numbers which will be released will be compared with last month’s inflation numbers which will indicate the most recent trend in the inflation numbers. Of course in the process of changing from YoY to MoM they may face some problems like whether to take average of the whole month or that particular week in the previous month!!!
Now looking at the world economic condition, RBI needs to think one more round of interest rate cut in near future if not immediately. Since there is fear of DEFLATION and it will be there in all recession/depression times. Since almost all major economies like EUROJONE (first time since its formation), UK (Its interest is lower than the Euro first time since Euro formation), US (FED rate is 1%), GERMANY (Interest rate 3.19%) & ITALY (3.75% interest rate) are about to enter or already in recession. So to boost the domestic sentiments RBI needs to think of REPO RATE & CRR.
Saturday, November 8, 2008
Flations
Since I posted most of my writings related to inflation and subsequent monetary policies, lets have a look at other things than our usual word inflation! Means apart from Inflation, how money FLATIONS are there, that governments/central banks need to take care of them before deciding policies.
We will start with...
Inflation
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
I dont think I need to give more information on this as we already facing the problem and daily reading in papers.
Deflation
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.
Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the central banks can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.
Now present US conditions are indicating that it may enter into a Deflation due credit crunch crisis, unemployment (due to bankruptcies of companies, mass layoffs to reduce the cost & etc)
Disinflation
A slowing of the rate at which prices increase. Typically, this occurs during a recession as sales drop and retailers are not able to pass on higher prices to customers.
Disinflation is not to be confused with deflation, where prices actually drop.
Presently I believe, from last 4-5 weeks we Indians are in disflationary mode. WPI numbers may be decreasing from near 13% levels to 10.72%, but prices for which a common man pays may not be decreasing so much. But the pace at which they increased till October is slowdown now. I think they peaked now!
Hyperflation
Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless.
Hyperinflation often occurs when there is a large increase in the money supply not supported by gross domestic product (GDP) growth, resulting in an imbalance in the supply and demand for the money. Left unchecked this causes prices to increase, as the currency loses its value.
About HYPERFLATION, I think I posted 2-3 times. So interested people can go through my older posts. But here I would like to mention the example of Zimbabwe which is presently in Hyperflation. And according data released in October 2008 Zimbabwe's inflation or hyperflation was 2.79 Quintillion (10^18) percent.
Reflation
An economic policy whereby a government uses fiscal or monetary stimulus in order to expand a country's output.
Possibilities include reducing tax, changing the money supply, or even adjusting interest rates.
Stagflation
A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.
Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects.
Source...
Investopedia.com
Google.com
We will start with...
Inflation
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
I dont think I need to give more information on this as we already facing the problem and daily reading in papers.
Deflation
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.
Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. To counter deflation, the central banks can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because businesses increase profits and take some of the depressive pressures off wages and debtors of every kind.
Now present US conditions are indicating that it may enter into a Deflation due credit crunch crisis, unemployment (due to bankruptcies of companies, mass layoffs to reduce the cost & etc)
Disinflation
A slowing of the rate at which prices increase. Typically, this occurs during a recession as sales drop and retailers are not able to pass on higher prices to customers.
Disinflation is not to be confused with deflation, where prices actually drop.
Presently I believe, from last 4-5 weeks we Indians are in disflationary mode. WPI numbers may be decreasing from near 13% levels to 10.72%, but prices for which a common man pays may not be decreasing so much. But the pace at which they increased till October is slowdown now. I think they peaked now!
Hyperflation
Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless.
Hyperinflation often occurs when there is a large increase in the money supply not supported by gross domestic product (GDP) growth, resulting in an imbalance in the supply and demand for the money. Left unchecked this causes prices to increase, as the currency loses its value.
About HYPERFLATION, I think I posted 2-3 times. So interested people can go through my older posts. But here I would like to mention the example of Zimbabwe which is presently in Hyperflation. And according data released in October 2008 Zimbabwe's inflation or hyperflation was 2.79 Quintillion (10^18) percent.
Reflation
An economic policy whereby a government uses fiscal or monetary stimulus in order to expand a country's output.
Possibilities include reducing tax, changing the money supply, or even adjusting interest rates.
Stagflation
A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.
Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects.
Source...
Investopedia.com
Google.com
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The irony is - Inspite of India being a Agricultural country, inspite of the fact that India is believed to 'Live in the villages' - these idiot rural indian masses are at the mercy of urban India. Why should they need any government to solve their problems. All the intelligent and capable masses from rural india migrate to metro with greed of big salaries - only waste bodies stay back. Most rural population is good for nothing people thinking that it is responsibility of the Indian govt to take care of them.
September 8, 2010 2:19 PM
Very true, Naveen. These are words of common man....U Me n everyone..
BUT blaming govt. is it always correct? What are we doing to improve things?
Questions? May be we cant do anything, but why not one amongst youth gets into politics to do gud for the NATION....Again a question???