Come back post

wow!! I realize that i am writing after 10years. Not sure why i forgot or just got distracted. Today i saw a movie 'Sardar Uddham'. Was a good movie, but it made me also think. We got our independence just 75yrs back and everybody has moved on. Everybody talks about future and growth...but not the past. but is it bad? I don't know. What inspires ppl in every generation is different and is based on the issues their previous generation has seen. We continue to look for solutions to problems we had seen while growing up. So that means that our thinking is formed when we grow up and does not materially change as we grow. Hmmm...a good thought to end this post. Will try to write more.

Policy Dilemma

Read an interesting article- Pays to be unpredictable in Foreign-exchange intervention: RBI

Here is an excerpt from the article:
"A central bank should have two policies, one strategic policy that is clearly laid out and stable, and another tactical policy that is more unpredictable, Subbarao said at an international conference organised by the RBI."

Seems like what Subbarao is suggesting is two have two policies. I agree with having a tactical policy which is a bit unpredictable. Having a long-term and a short-term policy brings with it a different kind of a dilemma. The dilemma of having a short-term policy that is in contradiction to the long-term policy. That is quite possible right? Ofcourse. For example, what if the US Fed announces now a 25 basis point increase in rates, having announced a long-term policy of maintaining low rates.

If you establish a long term policy, then you need to be true to that else the credibility of the Bank takes a hit. And ofcourse if you have a tactical policy which is inline with the long-term policy, then that makes the long-term policy kind of redundant.
My take is that the Bank should have a long-term inflation-linked goal (not policy)and announce short-term policies. I recently wrote a post on how Central Banks should have only short-term policies.

EU Summit Plan: It's all greek to me!

People have big hopes from the EU Summit in Brussels. All attention is on how Greek crisis will be solved. People are bullish that some relief will come after the talks in Brussels. Also, this week countries like Belgium, Italy, and Spain are set to sell more debt securities. Will be interesting to see how markets react. This all sounds alright.
What is interesting to me is the mind-set of people involved.
Clearly, negotiations with creditors and availability of rescue funds buys more time and reduces the probability of the event (at least in the short term). However, it increases the potential negative consequences that might arise in light of a collapse.
What do you think? Mathematically, here is what it looks like:

(Probability of failure) X (Consequences of failure) = Failure Impact


EU leaders want to reduce the probability of failure at the cost of greater negative consequences. Doesn't look like a smart move to me.

World Economic Forum- Confidence in India fading?

Source: AIESEC

EconomicTimes has an interesting story on the business confidence among Indian CEOs changing. It reports two key observations:

1. According to PricewaterhouseCoopers' latest global CEO survey, India as dropped to fourth place, behind China, the United States and Brazil as the country that 1,258chief executives across the world feel is most important for their overall growth prospects.

2. Confidence among Indian CEOs about their own prospects in the next year is still at 55%, down from a staggering 88% last year according to PwC's global survey.

The first point comes to me as a surprise. Yes, China and United States will continue to be important for business. But between Brazil and India, I believe India has had a better growth story. The 2012 forecast for Brazil is to grow by about 2.5% compared to about 7% for India. Also, the Brazilean Real and the Indian rupee both witnessed in excess of 15% depreciation in the last 6 months. One of the things that could explain this new order of preference is the series of corruption scandals and demostrations in India during 2010-11. This clearly has sent a wrong signal to the investor community. This is not to say that there is no corruption in Brazil. Yes, there is corruption, but it may not be at the same level and so openly talked about.

The second point is also difficult to understand. Nothing much (expect for 1% of GDP rate) has been lost since last year around the same time. The inflation is at similar levels and the rupee ofcourse has depreciated significantly. This should come as good news, especially to exporters. Yes, the global outlook has turned more gloomy and this would have definitely made an impact on India's prospects as well. Actually, I would imagine that a significant percentage of people who didn't vote for India would be in Industries which are impacted more by global economy than the domestic economy.
Just a few thoughts...

Central Banks: Setting Expectations

I sometimes wonder whether Central Banks need to be really transparent in sharing their forecasts and policies in advance. One extreme example is ofcourse of US Fed's announcement of keeping the interest rates low till 2014 (BBC).
Why have long-term forecasts and policy announcements? I see two problems with that. First,anything that is announced by Fed influences people's perception about reality and expectation about future. By making a long-term announcement, the Banks can paint a picture that although might not be true, but since it influences the people so much, it becomes an end itself for people. They take the future as given and make changes to fit into that environment. This gives life to the picture. Who knows how 2014 will look like? Second, by making such long-term promises, the Banks fall into the trap of keeping them. If promises are broken, their credibility takes a hit.

So why announce interest rates for 2014? Its funny but true how Central Banks and similar credible institutions can influence the world economics so much. I would personally like to see short-term forecasts of no more than 1 year and policies of no more than six months in future.

Will the Greek default push us off the cliff?

The global economy is in a such a jam right now. There is no consensus on how to move forward. The political leadership in the US is divided and it is the same in Europe. The Central Banks are not sure how to move forward. I think the on-going G7 summit is not going to come out with anything significant. The resignation of Juergen Stark, ECB Executive Board's member, highlights the conflict within the Bank (Channel 4 news). Officially he has resigned due to personal reasons, but there there are reports that suggest he was against the Bank's buying of European govt bonds. In such a complex and sensitive situation, all the economy needs is a push either way.
Obama tried with his job creation package to pull back the economy, but Krugman thinks Obama has a near zero percent chance of getting the bill passed (The Economic Times). A push in the opposite direction right now seems likely. And this could come from a Greek default. Don't know how the Greeks are going to continue to push away the inevitable default. The chances of a default today stand at 90% (Bloomberg)

Govt spending and interest rates

Monetarists always have one main point against Govt spending- They believe that deficit spending necessarily leads to interest rate hike, which crowds out pvt investment. Ans this eventually contracts the economy.

This is a very important point against keynesian economics because people quote several real world examples to support this view. But is this really true?

I don't think so. In theory this might sound convincing to a few. But the real question is what happens to the money that is borrowed. Quite obviously if the borrowed money does not enter the economy quickly and/or if the money is not channelized into productive activities, the real purpose of borrowing gets defeated. After all, per keynes, the deficit spending was to boost demand through efficient and productive spending. This increased spending was expected to restart the economy and have a positive effect on the growth, thus combating high interest rates.

But this does not always happen. Look at Greece. They were corrupt and naive. No actually I think they were simply corrupt.