Archive for August 18th, 2008

Dr Doom- A profile of Nouriel Roubini

August 18, 2008

I came across this excellent profile of Nouriel Roubini (free subscription required). I had pointed his talk at IMF in September 2007 here. In Sep 2006 amidst the IMF audience he had predicted the subprime crisis and all laughed him off. In Sep 2007 in similar IMF setting , people listened to him with a lot of fanfare.

The entire article is very interesting and is a must read for all. It tracks his career, his early work, his influences and his work. His view of Keynes:

Roubinialso cites, as a more ideologically congenial example, the sweeping, cosmopolitan approach of the legendary economist John Maynard Keynes, whom Roubini, with only slight exaggeration, calls “the most brilliant economist who never wrote down an equation.”

Quite true. Keynes had so many ideas that he did not need to write an equation. His view on financial system:

For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars.

But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”

(Emphasis is mine).

Monetary policies should also look at quantity based inflation

August 18, 2008

In a graduation course in economics, we cover basics of indices. There are two kinds of indices- price based and quantity based.

In Price based we keep quantities constant and measure the changes in price levels. In Quantity based, we keep prices constant and instead measure the changes in quantities. Price based have become popular and are used to measure price levels (inflation), change in stock prices etc. The quantity based indices have lost their relevance and at most you might be asked to calculate quantity based changes in the final exam. However, it is important to use quantity based indices as well especially in these inflationary times.

We often get to hear about firts, second and third round of inflationare pressures. This means say prices of fuel goes up then first it will show in direct fuel prices (first round), then in other products and services (as companies revise their prices; second round) and then in wages (as employees put pressures to increase wages as expenses increase;third round).

While discussing second round effects, we often say companies might not raise their prices. Higher prices imply lower consumption which imply lower revenues/profits. Hence, companies try and bear (postpone) the initial rise in inflation. So, we say the second and third round effect are highly uncertain and come with a huge lag.

Despite the competition, I keep wondering how do companies manage to keep prices low especially in such inflationary times. They are surely not here to do any charity. However, truth is second round inflation has already happened (and is happening for others in an indirect way.

On frequenting the various retail stores and observing the prices and quantity, I have noted that most companies that have not lowered the prices have instead lowered the quantities. Consumers are paying the same price for a lower quantity and indirectly are paying more than they were paying earlier for the same weight. This is nothing but higher inflation.

People usually notice and track prices but not quantities. The package sizes hardly change and a consumer feels he gets the same quantity. Infact, these days art of packaging has become so good that one might feel he is getting more when the actual quantity is reduced!!

This news from Hindustan Times (April 9, 2008) confirms the developments:

Next time you visit your neighbourhood kirana store, be sure to read the fine print on the packets. Maggi noodles, which always came in the familiar 100 gram pack, have gotten lighter by 5 grams. A 250 g pack of Red Label tea has slimmed down to 245 g. In both cases, prices have remained the same: Rs 10 for the noodles, Rs 52 for the tea.

This trend has caught up with most companies and most items you get are lower value for your money compared to say in 2007.

I was also wondering companies do advertise on their packs – lower prices, more value for same price etc. Why don’t they say (if not advertise) that consumers would get lower quabtity for the same price? Isn’t this misleading?  Surely consumers should know of the developments. The advertising should be symmetric and should tell consumers that they are getting lower value for money than previously.

That is why, I think it will be useful to also have quantity indices and track them in these times. Price inflation and quantity inflation should together tell us how much actual inflation is affecting the consumers.

Assorted Links

August 18, 2008

1. WSJ Blog points to  a paper which says people are optimists. It also points NBER calls recessions in US, who does it in Euroarea?  

2. Krugman says inflation should ease  

3. ASB on inequality

4. IDB points how people use microloans

5. ACB on impact of commodity prices. Also read this post– tigers or tatas?

6. MR points– Roubini is Dr Doom. Krugman also ponders over Roubini. It also asks why India has won so few medals in Olympics

7. FIn Prof points that shortselling restrictions did not work in US

8. FCB points inside mind of an investor. It also points why oil prices have fallen?

9. PSD Blog points credit-card defaults in US are proving to be a boon for India

10. DB Blog on Colombia reforms

11. Econbrowser says there is nothing to worry about recent US inflation

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