Archive for September 16th, 2015

While price fixing is generally considered illegal, when the central banks do it, it is called capitalism…

September 16, 2015

Jeff Deist of Mises Institute has a piece which criticises Federal Reserve setting interest rates. But the criticism applies to all central banks generally.

He says generally economics says price fixing by any central agency is a bad thing and deemed as illegal. But when central banks fix interest rates it is called capitalism:

Economists, bankers, fund managers, and investors around the world are absolutely fixated on the Federal Reserve’s anticipated announcement this week, with many fearing that a rate hike could trigger more shocks like the recent Black Monday selloff.

In a world of social media and 24-hour news cycles, it’s fair to say Wednesday’s FOMC meeting in the Eccles Building has been the most widely reported and discussed central bank action in history. But missing from the coverage is one fundamental point: “monetary policy” and bureaucratic control over interest rates is not capitalism, it is outright centralized planning.

What else can we call the orchestration of a pivotal price signal in the worldwide economy by 12 individuals sitting in one room? If one accepts the Fed’s role in setting interest rates, it’s hard to understand where and when to draw the line. 

Why not prices of goods, services, and wages? If experts can determine the price of money, why can’t they determine the price of a bushel of wheat or an automobile? When the former Soviet Union’s State Committee on Prices attempted exactly that, western capitalists scoffed. Yet we accept centralized monetary planning as part and parcel of free markets!

As this blog keeps saying nothing is more ironical than seeing central bankers talk about free markets/capitalism..


China’s forex follies

September 16, 2015


Prof. Barry Eichengreen explains China’s forex follies:

On August 11, China devalued its currency by 2% and modestly reformed its exchange-rate system. This was no earth-shattering event, but financial markets responded as if a meteorite had struck them. The negative reaction is no mystery: China’s devaluation was a textbook example of how not to conduct exchange-rate policy.

One of the government’s motivations was presumably to give a boost to China’s slowing economy. Although the service sector, which accounts for the majority of employment, is holding up relatively well, the country’s output of tradable goods, many of which are produced for export, is weakening sharply. Chinese exporters are caught between the pincers of weak foreign demand and rapidly rising domestic wages.

Devaluation is the tried and true remedy for such ills. But a 2% change in currency values is too little to make much of a difference, given that wages in Chinese manufacturing are rising at an annual rate of 10%. It could be that Chinese policymakers regard the 2% devaluation as a down payment – the first in a succession of downward adjustments. But, in that case, they violated the first rule of exchange-rate management: Don’t cut off a cat’s tail in slices.

The rationale for this rule is straightforward: If foreign investors expect that more currency depreciation will follow, they will rush out of Chinese markets to avoid further losses. Capital outflows will accelerate, financial conditions will tighten, and investment will suffer. In fact, this is precisely what China is experiencing.

A single large devaluation that gets the entire adjustment out of the way minimizes this risk. Indeed, if investors expect the sharp improvement in competitiveness to lead to stronger economic performance, the currency will recover some of its lost value. Capital will flow in rather than out. Spending will rise rather than fall, which is precisely what China needs in the current circumstances.

Instead, by resorting to their traditional incremental approach, Chinese policymakers undermined confidence that they know what they are doing. Because they adjusted the exchange rate without describing their motives, they merely encouraged the belief that China’s economic performance is even worse than official data suggest.

Well, it is always difficult to guess the right amount if devaluation. Market expectations are as weird as it can get. They mostly get things wrong and then react in a knee jerk fashion making a mockery of the policy. Then at a time not too long ago, China was criticised for not letting its currency appreciate. Renminbi was seen as a highly undervalued currency which boosted Chinese exports artificially.

What times we are living in. Whatever you think cannot happen, is happening.

How fashion for bottled water is pushing the world to a new kind of risk..

September 16, 2015

Brahma Chellaney of Center for Policy Research has an important piece on the obvious emerging environmental risk – plastic water bottles.


Over the last 15 years, the bottled-water industry has experienced explosive growth, which shows no sign of slowing. In fact, bottled water – including everything from “purified spring water” to flavored water and water enriched with vitamins, minerals, or electrolytes – is the largest growth area in the beverage industry, even in cities where tap water is safe and highly regulated. This has been a disaster for the environment and the world’s poor.
The environmental problems begin early on, with the way the water is sourced. The bulk of bottled water sold worldwide is drawn from the subterranean water reserves of aquifers and springs, many of which feed rivers and lakes. Tapping such reserves can aggravate drought conditions.

But bottling the runoff from glaciers in the Alps, the Andes, the Arctic, the Cascades, the Himalayas, Patagonia, the Rockies, and elsewhere is not much better, as it diverts that water from ecosystem services like recharging wetlands and sustaining biodiversity. This has not stopped big bottlers and other investors from aggressively seeking to buy glacier-water rights. China’s booming mineral-water industry, for example, taps into Himalayan glaciers, damaging Tibet’s ecosystems in the process.

Much of today’s bottled water, however, is not glacier or natural spring water but processed water, which is municipal water or, more often, directly extracted groundwater that has been subjected to reverse osmosis or other purification treatments. Not surprisingly, bottlers have been embroiled in disputes with local authorities and citizens’ groups in many places over their role in water depletion, and even pollution. In drought-seared California, some bottlers have faced protests and probes; one company was even banned from tapping spring water.

Worse, processing, bottling, and shipping the water is highly resource-intensive. It takes 1.6 liters of water, on average, to package one liter of bottled water, making the industry a major water consumer and wastewater generator. And processing and transport add a significant carbon footprint.

The problems do not stop when the water reaches the consumer. The industry depends mainly on single-serve bottles made from polyethylene terephthalate (PET), the raw materials for which are derived from crude oil and natural gas. In the 1990s, it was PET that turned water into a portable, lightweight convenience product.

But PET does not decompose; and, while it can be recycled, it usually is not. As a result, bottled water is now the single biggest source of plastic waste, with tens of billions of bottles ending up as garbage every year. In the United States, where the volume of bottled water sold last year increased by 7% from 2013, 80% of all plastic water bottles become litter, choking landfills.

One just does not understand why bottled water has become such a fashionable thing. What emerged as a necessity (in say railway stations etc) has become a luxury. Most restaurants push the bottled water by saying “do you want tap water or bottled water?” Hearing tap water most choose to opt for bottled water which is sold at much higher rates than MRP. And then some fancier ones may give you choices in bottled water like Evian and so on.

Then you have shopping malls kind of places where simple water stations are not kept/maintained but bottled water machines are present. The whole idea is to push the bottle and let environmental damages be damned.

The government in India which has banned plastic bags should do something on plastic bottles as well. Now, one knows that there are too many bans in this country and we don’t want one more. But then there seems to be no other way. The market way could be to increase price of bottled water sharply. But there are certain places like railways etc where bottled water cannot be avoided. Having multiple prices for a product like water s not going to be easy to manage.

Places like Malls/ Cinemas etc where bottled water can be avoided should be encouraged to do so. They should be asked to keep and maintain water dispensers. Like people have started carrying their own bags as shops started charging for bags, we need people to start carrying their water bottles wherever they can. The overall circulation of plastic bottles has to come down.

These are the sorts of issues which no one really cares about as they do not impact you immediately. They impact with a long grind but finally when the moment comes there are no solutions really..

JP Morgan Fund does use side pockets idea..

September 16, 2015

This blog had pointed to a solution proposed by Prof JR Varma on its mutual fund mess. He had suggested that the fund should keep the bad asset away from its portfolio (in a side pocket). The fund could say business as usual based on the remaining value of the portfolio (which was about 95%).

The fund has decided to go ahead with this side pocket idea (not sure whether they read the idea). BS explains:


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