Archive for June 27th, 2008

Malcolm Knight raises stagflation concerns

June 27, 2008

Malcolm Knight, General Manager of the BIS, is resigning and I will be surely missing his speeches.

In this recent speech he raises numerous concerns over ailing world economy. The abstract is:

Continued financial deleveraging and asset price declines, persistent tensions in interbank markets and substantial and involuntary increases in banks’ balance sheets suggest increased restraint of new credits for productive activity. Hence, current financial conditions present significant downside risks to economic growth in the United States and other advanced economies.

The easing of monetary policy undertaken in a number of key jurisdictions in recent months to address continuing stress in the financial system and the weakening growth outlook has been accompanied by increases in actual and expected price inflation at the global level.

Recent trading and price developments in the oil market can be viewed as consequence and indicator of the recent pronounced loosening of monetary conditions.

We thus might be entering a period of stagflation with sharply rising expected and actual inflation combined with large downside risks to growth and employment.

 Superb speech full of fantastic graphs (which is a BIS speciality) . In just 7 pages it says all you need to know about the current world economy conditions.


Understanding the rise in Crude Oil Prices

June 27, 2008

I have put my thoughts on the rising oil prices in this paper. It mainly looks like a demand-supply imbalance but other factors like speculation, conflicts etc cannot be ruled out.

The next area of analysis is- if it is a demand-supply imbalance then how much should the prices roughly be? That is still not answered properly. It is only then we can know whether other factors are as much responsible.

Let me know your comments.

Overconfidence is in human genes

June 27, 2008

The title of the post may suggest I have drifted to biology etc. But actually overconfidence is one of the central issues in behavioral economics.

The central idea is whenever you pose questions to people which is based on subjective probability, you will find people are really overconfident. For instance, suppose you ask all mutual fund managers how confident they are they will beat the benchmark index, you will get answers nearing 100%. And you know that can’t be true as only few fund managers will be able to do it. One can understand that their job is based on the assumption that they will be able to beat the index, but still they should be aware of reality as well

Now, one may ask how does this matter? Well, it matters as people take decisions based on overconfidence and mess up outcomes. For instance in the case of fund managers they will end up taking higher risks.

Coming back to the title of the post, you keep coming across these various television serials based on epics like Ramayana, Mahabharata on various TV channels. The versions are redone every now and then. Then there are separate serials on individual characters like Lord Krishna, Ravana etc.

I come across one common thing- all are so overcnfident about their abilities in physical strength and warfare. Most characters have received blessings from different Gods and based on these blessings, believe no one can harm them. Most are also aware that there is one thing that can cause their/them death/harm but discount its happening substantially (black-swan anyone!!).

So, I would guess overconfidence is in our genes and will continue to muddle our decision making.


I misssed pointing to some research on overconfidence. There is plenty:

The sudden flip of Indian economy trackers

June 27, 2008

I have been noticing recently that many economists/analysts have suddenly flipped their arguments. Just till April Monetary Policy 2008 many said RBI should cut interest rates as economy is slowing and inflation is moderating. Another group said the only way RBI can manage inflation is by letting rupee appreciate.

And now, same people are backing RBI’s recent interest rate moves to manage inflation and say growth can take a backseat.  Though, they keep stressing on the role of exchange rate.

They might say times have changed but I don’t think they have changed as much. And anyways economists look at forecasts and they suggested inflation is expected to go up. The prices of commodities and oil have been increasing for a while and they had to show in the inflation numbers. The few numbers that showed moderation in inflation was basically a statistical exercise and the index was never really declining.

As, far as moderating growth is concerned it was only the industrial sector. But it is well known that the IIP index is due for renovation as it does not reflect the reality. And then looking at housing prices and demand for various consumption items increasing (as per media coverage) , it was a case for high growth, high demand  and high inflation.

And then this media hype and coverage over possible slowdown is more worrisome than the actual numbers. I understand the concern over inflation but growth? Even if we grow at 7.5%-8% given world economic conditions, it is very impressive.  


I was thinking about how can we limit all this flipping. A useful way could be to show on the channels what the person said previously. So, the person will be more conscious of his/her views. Right now it is just too random. I am not saying views shouldn’t change, but by showing their previous comments, they would then also explain the reasons.

This is already happening albeit in another way. You have various stock analysts who are supposed to disclose whether they have any of the stocks they are commenting on. This leads to some clarity and we know (hopefully) that they are not advising the stocks they own.

In a simialr manner, we can get more clarity on the recent flippings.



A review of India’s fiscal reforms and challenges ahead

June 27, 2008

Amidst all the economics and inflation chaos, Dr. Reddy gave a superb speech at NIPFP. Dr. Reddy takes you through the various challenges and how certain policies were developed.

It is great to see a Central bank governor to speak so forthright on the fiscal issues.

In the period subsequent to 2003, the central government’s fiscal position has been improving, though there are several underlying fiscal pressures that are not entirely evident in the numbers, as will be explained later. The states’ fiscal positions have also improved significantly during this period and their revenue deficits are close to being virtually eliminated. However, as in the case of the Centre, there are some underlying pressures that are not reflected in the fiscal numbers of the States.

Despite considerable improvement in the fiscal scenario, both at the centre and in the states, India’s combined fiscal deficit (centre and state), as a percentage of GDP, still continues to be one of the highest in the world.

He then covers how various fiscal reforms were introduced. He then reviews challenges ahead:

  • reduce the CRR and the SLR stipulations, as we go along
  • an issue that has come to the fore in the recent period pertains to higher volatility in government’s cash balances maintained with the RBI, which impacts the liquidity conditions in the financial markets
  • magnitude of the combined fiscal deficit of the centre and the states is close to half of the households’ financial savings, which is the largest component of domestic savings. 
  • India is still a bank-dominated system and about 70 per cent of our banks (in terms of business) are owned by the government. So for mon policy to work effectively it has to be in sync with fiscal policy. The single largest source of borrowing for the government being the government-owned banks themselves, this conflict is rather apparent
  • one of the factors imparting rigidity to the interest rate structure in India is the administered interest rates, particularly on small savings instruments
  • effective co-ordination between the fiscal policy and monetary policy is important.  a more aggregate level, in the context of our capacity to respond to global developments, if we have a counter-cyclical policy approach, not only the monetary policy but also the fiscal policy should be counter-cyclical. If the fiscal policy continues to be uni-directional, as we have in our case, with persisting deficits, then the fiscal policy is not in a position to produce a reasonable counter-cyclical impact

He then discusses fiscal policy and its relation with financial markets and external sector.

Nice speech.

Assorted Links

June 27, 2008

1. WSJ Blog points Is Kohn looking to outsource inflation management fight?

2. MR points to a blog written by eco superstars-Gary Becker, Ed Glaeser, Richard Posner, Bill Easterly etc. Another blog in the reading kitty!

3. ISB points infra deficit could derail India growth. This has been known since ages. There are two puzzles – why India keeps growing  despite all the policy issues and two, why nothing dramatic happens in infra.

4. TTR points recent concerns over growth outlook is a media-hype. Even I think so with every news channel going berserk over it.

5. Blattman points to a paper asking does professor quality matter?

6. WSJ Blog points to a study which says big govt does not mean more inflation

7. Mankiw at his humorous best

8. James Hamilton once again on speculation

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