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.
Monday, January 30, 2012
Saturday, January 28, 2012
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...
Friday, January 27, 2012
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.
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.
Saturday, September 10, 2011
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)
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)
Thursday, June 3, 2010
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.
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.
Monday, May 31, 2010
Politics first...then economics
Ken Worsely brings to attention an interesting (although known)fact - Sound economic policies cannot do much on their own. They need to be backed by political will.
This is from his blog:
...The IMF suggests that Japan increase its consumption tax by 5% as a step towards reducing its public debt.
Of course, consumption tax hikes tend to spell political disaster in Japan, as Prime Minister Noboru Takeshita learned after introducing the consumption tax in 1989 and PM Ryutaro Hashimoto discovered after raising the tax to 5% in 1997. While both the former and current ruling parties have acknowledged that consumption taxes need to be increased, neither party has shown a willingness to say so in their election manifestos.
Until now. Today it was reported that a DPJ joint election panel agreed to include language promising to increase consumption taxes as part of the DPJ’s Upper House campaign. However, it was also agreed that the tax should not be raised until after the next Lower House election, which would be as far away as 2013. And there was no discussion of just how much the tax should be increased.
If that seems vague, the leading opposition party’s stance is not much better. The LDP has called for an increase in consumption taxes in its election manifesto, but does not say when or by how much
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And again - Political will is always required to implement sound economic policies. But in a multi-party democracy, gathering political will is not easy. Different political parties have different agendas. If they are in the opposition, it is in their interest to block any reasonably controversial bill in the parliament. This task of gathering political will gets even more difficult when there are various parties in power- i.e., a coalition government. In such a government there will always be compromises made by parties. Party agenda will always come first. In such economies, decision making becomes difficult. Legislations are passed less frequently. Development happens more slowly.
Unfortunately, we are moving towards such a system. There are lots of countries now which do have coalition govts in the power. Britain, India, Czech Republic...and many others.
I am interested to see if any data exists related to GDP growth of countries during coalition govt Vs. single party government.
This is from his blog:
...The IMF suggests that Japan increase its consumption tax by 5% as a step towards reducing its public debt.
Of course, consumption tax hikes tend to spell political disaster in Japan, as Prime Minister Noboru Takeshita learned after introducing the consumption tax in 1989 and PM Ryutaro Hashimoto discovered after raising the tax to 5% in 1997. While both the former and current ruling parties have acknowledged that consumption taxes need to be increased, neither party has shown a willingness to say so in their election manifestos.
Until now. Today it was reported that a DPJ joint election panel agreed to include language promising to increase consumption taxes as part of the DPJ’s Upper House campaign. However, it was also agreed that the tax should not be raised until after the next Lower House election, which would be as far away as 2013. And there was no discussion of just how much the tax should be increased.
If that seems vague, the leading opposition party’s stance is not much better. The LDP has called for an increase in consumption taxes in its election manifesto, but does not say when or by how much
__
And again - Political will is always required to implement sound economic policies. But in a multi-party democracy, gathering political will is not easy. Different political parties have different agendas. If they are in the opposition, it is in their interest to block any reasonably controversial bill in the parliament. This task of gathering political will gets even more difficult when there are various parties in power- i.e., a coalition government. In such a government there will always be compromises made by parties. Party agenda will always come first. In such economies, decision making becomes difficult. Legislations are passed less frequently. Development happens more slowly.
Unfortunately, we are moving towards such a system. There are lots of countries now which do have coalition govts in the power. Britain, India, Czech Republic...and many others.
I am interested to see if any data exists related to GDP growth of countries during coalition govt Vs. single party government.
Wednesday, May 5, 2010
Yes, Keynesian policies work
Source: Lefty Cartoons
Several economists (or rather monetarists) are taking advantage of the present fiscal situation of the Greece and other countries to rubbish Keynesian demand theory.
Here is another article from another well known economist, Swaminathan Aiyar
Fiscal lessons from the eurozone
Many economists say fiscal deficits don’t matter: India has run fiscal deficits of up to 10% of GDP for three decades, yet has enjoyed record growth. Many are Keynesian enthusiasts, seeing government spending as the solution to any growth slowdown. These economists must think again after the fiscal crisis in the Eurozone.
Source: EconomicTimes
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Let me start my saying that I repeatedly mention in my posts- I am a Keynesian. That is the reason why I want to comment on Swaminathan’s article (and also respond to other economists).
About Greece
Some say this is the ideal example of how Keynesian theories could ruin an economy. I don’t think so. Greece is unique because it didn’t implement the policy properly. Ofcourse you can’t keep spending money blindly. There has to be accountability. Greece deliberately hid its fiscal facts from the market. Angela Merkel recently said-
“We’re right to tell the Greeks: you have to save money, you have to be candid and you have to work on your honesty, otherwise we can’t help you”
Source: Europe.getsomenews.com
So overall, it is not about keynes, but about greece and its dirty,corrupt politics
Keynesian in general
Now to a more broader point about whether Keynesian works. Yes, it does. But you need to have vigilance on where/how much you are spending. It natural. Even at home we keep an eye on our budgets and take loans in limits. Keynes never advocated borrowing from the market endlessly.Even excessive monetary expansion can destroy economies. I don't have to quote any examples here.
Another point is that Keynesian policies actually worked. It saved the world from the greatest depression ever (remember last year when most of the developed countries released bail-out packages).
If countries are continuosly running a deficit of ~10% then they should try to make structural changes in the economy. Something somewhere must not be right. After all, govt spending is expected to boost the overall demand in the economy. Where is all the money flowing?
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