Archive for October, 2015

Sanders, Trump, and John Maynard Keynes..

October 20, 2015

Hunter Lewis of Mises Institute points to how rise of Sanders and Trump shows people confusing capitalism with crony capitalism (how do you remove the crony from capitalism is a million dollar question).

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How India’s dual economy of cash and credit impacts inflation..

October 20, 2015

An interesting article by Pronab Sen of National Statistical Commission.

He says one has to understand India’s inflation game via dualism between cash and credit:

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Bangalore Power cuts and ET Reformer of the year award to Power Minister…

October 20, 2015

This one is a rambling post.

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Why did early governments/city-states allow coinage?

October 16, 2015

Perhaps one of the oldest and fascinating topics on monetary economics. How and why did coinage emerge in places historically?

Prof. Jacques Melitz has a superb piece on the topic. He first discusses places which started coinage and then on the issues with the coinage. There were two of them:

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How financial advice distorts financial choices/decisions?

October 16, 2015

Luigi Guiso and Gabriele Foà have a nice piece on the topic.

They try and figure whether fianncial advice by experts is biased or unbiased.  The idea is pretty simple. If people are making decisions based on prices then advice is biased. However, if decisions are based on characteristics of firms, then it is unbiased:

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India shouldn’t overdepend on finance and central bankers

October 16, 2015

Jaimini Bhagwati has a piece saying India should not ape the west by overdepending on finance and central bankers.

He highlights how Janet Yellen was put as the most powerful person ahead of Obama in the world. This is even more ironical as Yellen has tried some bit to lower all the hype. She does not draw same attention as her predecessors:

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Du Runsheng, world’s most influential yet ignored economist?

October 15, 2015

Not even heard of the name. Apparently he was the main economic thought behind China’s 1978 rural transformation.

Here is a story..

Last week, Du Runsheng passed away at the ripe old age of 102. The death of the “father of rural reform” was widely covered in China and Hong Kong, as Du’s proteges include such Chinese economic luminaries as Zhou Qiren and Justin Yifu Lin, not to mention Wang Qishan, who is now one of the seven most powerful men in China. But I have yet to see a proper obituary of Du in the foreign press, which is a real pity. You could make a case that Du was one of the most influential economists to have ever lived.

He was one of the primary authors of the rural reform policies China adopted in the early 1980s, which reversed agricultural collectivization and returned control of farmland to individual farm households. It is no exaggeration to say that as a result, hundreds of millions of people were able to escape poverty. If you measure influence by the sheer number of lives affected, then it seems Du would have to rank pretty high.

Shocking to  see complete ignorance..

Restricting capital account is the new thing..

October 15, 2015

You can explain much of economics thinking in terms of fashion waves. They just keep coming back and each time the new fashion designers show it as a new look of the town.

This crisis has obviously questioned pre-crisis fashions. Instead we have the post-crisis fashions which is just old wine in new packaging (which isn’t attractive). Capital account convertibility is one such fashion. It was in vogue before crisis and any talk against it was seen as anti-markets. anti -liberal and so on. Post-crisis, thinking has changed and even likes of IMF suggesting capital controls can be used though it should be the last option. From not a choice at all to using it as a last choice is some change by itself.

AV Rajwade writes on the dilemma for emerging markets (he was a member of 1997 Capital Account Committee and 2006 one as well). More interestingly, group of IMF economists suggest Mundell-Fleming model needs to be retweaked to bring this reality. It is the Mundell-Fleming model which has been used by experts to push open their capital accounts.

Actually, much of recent problems around macro today is related to capital flows. People blame advanced country monetary policy over spillovers, search for yields, volatile currency/equity markets and so on. All this is due to rise in capital flows across the world. And capital runs in both the directions seamlessly. That was also the main idea also.

The same people once advocated opening capital accounts in emerging markets strongly. Instead of accepting that they need to rethink on their worldly wisdom, the blame has been pushed to advanced country central banks.

Keep going in circles. Whenever crisis recedes, am sure it will be back to opening capital account…

How monkeys became big business in Florida?

October 15, 2015

Felix Gillette of Bloomberg Businessweek has this piece which is both interesting and troubling.

Monkeys have become a key business for medical testing and research.

Each year, roughly 20,000 or so monkeys are flown from tropical regions worldwide into the U.S. Many wind up at stateside farms. Despite the relatively small number, the monkeys play a huge role in basic scientific and medical research, says Matthew Bailey, the executive vice president of the National Association for Biomedical Research. Before a new drug or vaccine can go on the market, the U.S. Food and Drug Administration requires safety testing using animals. The use of monkeys has been essential, says Bailey, in developing cures for everything from typhus to polio and is integral to the study of currently incurable diseases such as Alzheimer’s and AIDS. “My suggestion is that if you agree with the animal rights narrative, open up your medicine cabinet and throw out all your pills, including your child’s pain reliever,” he says. “Because without animals in preclinical research and testing, we wouldn’t have them.” Clients of monkey farms won’t describe what happens to the animals they purchase. Activists allege every dark scenario from death by Ebola virus exposure to experimental surgery.

The article is around the various conflicts one has to fight in such kinds of business..

The dirty business of government trash collection..

October 14, 2015

Allen Mendenhall of Mises has a superb post on the topic., He shifted to Auburn and assumed based on his reading that the place was a libertarian and so on. He thought there will be smell of Hayek in the air but instead found smell of foul garbage outside his house (sort of resembles this blogger’s story on moving to Garden City Bangalore).

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Don’t let the Nobel prize fool you. Economics is not a science..

October 13, 2015

One of my Profs always says Blame the Swedes for all the mess in economics. First, having created the prize for economics from thin air and then each year giving it to scholars from select Universities, they have just ignored contributions of so many others. Moreover, it has fostered hubris and enormous amount of belief that the subject is indeed a science. The Prize afterall is in Economics Sciences..

Business as usual. That will be the implicit message when the Sveriges Riksbank announces this year’s winner of the “Prize in Economic Sciences in Memory of Alfred Nobel”, to give it its full title. Seven years ago this autumn, practically the entire mainstream economics profession was caught off guard by the global financial crash and the “worst panic since the 1930s” that followed. And yet on Monday the glorification of economics as a scientific field on a par with physics, chemistry and medicine will continue
The problem is not so much that there is a Nobel prize in economics, but that there are no equivalent prizes in psychology, sociology, anthropology. Economics, this seems to say, is not a social science but an exact one, like physics or chemistry – a distinction that not only encourages hubris among economists but also changes the way we think about the economy.
A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modelling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths.

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Emergence of fake wedding markets in Argentina..

October 13, 2015

As large number of people are no more marrying in the Latin American country, there is still the demand for being part of the celebrations.

So this has led to a fake wedding market in Argentina where people pay to be invited and everything is fake (HT MR Blog)!

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The Prize in Economics to Prof Angus Deaton …(a prize in bread and butter economics)

October 13, 2015

There was a time when this blog used to get caught in the Prize fever. This time it did not even realise that this year’s award has been announced. Not sure whether this explains maturity of the blog or it has become too old to remember. It is though ironical to be distributing all these Prizes in economics given the state of economics around the world. Though this year’s prize is different.

This year’s Prize is an interesting one . Given to Prof Deaton for his work on “analysis of consumption, poverty, and welfare”. I mean till all this crisis, these terms had disappeared from economics lingo. No one cared much about these old historic economic issues of consumption, poverty, and welfare barring the development economists of course. Now because of inequality and Piketty people have again started to talk about these issues.

The Prize website poll says only about 30-35% knew about Prof Deaton’s work on the subject. His work is on three questions:

To design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices. More than anyone else, Angus Deaton has enhanced this understanding. By linking detailed individual choices and aggregate outcomes, his research has helped transform the fields of microeconomics, macroeconomics, and development economics.

The work for which Deaton is now being honored revolves around three central questions:

How do consumers distribute their spending among different goods?Answering this question is not only necessary for explaining and forecasting actual consumption patterns, but also crucial in evaluating how policy reforms, like changes in consumption taxes, affect the welfare of different groups. In his early work around 1980, Deaton developed the Almost Ideal Demand System – a flexible, yet simple, way of estimating how the demand for each good depends on the prices of all goods and on individual incomes. His approach and its later modifications are now standard tools, both in academia and in practical policy evaluation.

How much of society’s income is spent and how much is saved? To explain capital formation and the magnitudes of business cycles, it is necessary to understand the interplay between income and consumption over time. In a few papers around 1990, Deaton showed that the prevailing consumption theory could not explain the actual relationships if the starting point was aggregate income and consumption. Instead, one should sum up how individuals adapt their own consumption to their individual income, which fluctuates in a very different way to aggregate income. This research clearly demonstrated why the analysis of individual data is key to untangling the patterns we see in aggregate data, an approach that has since become widely adopted in modern macroeconomics.

How do we best measure and analyze welfare and poverty? In his more recent research, Deaton highlights how reliable measures of individual household consumption levels can be used to discern mechanisms behind economic development. His research has uncovered important pitfalls when comparing the extent of poverty across time and place. It has also exemplified how the clever use of household data may shed light on such issues as the relationships between income and calorie intake, and the extent of gender discrimination within the family. Deaton’s focus on household surveys has helped transform development economics from a theoretical field based on aggregate data to an empirical field based on detailed individual data.

Just scroll the page for more resources..

Also check MR BLog for several links : one, two and three

How internet is going to shape mutual fund investing?

October 12, 2015

Much of attention of technology in finance remains on banking. However, technology has played a much more significant role in shaping and changing capital markets. Right from trading to settling billions of transactions, it is being done is a jiffy and in a seamless manner. And then in investing too. One can just buy and sell financial securities in a much easier manner now (though this has made things riskier as well, but that is how it goes).

This piece by Dhirendra Kumar of Valueresearch is  on how internet could change mutual fund investing in future. It is a much slower process now which keeps the “app” generation away. Interestingly, this time it is not the regulator but the funds which have opted for the slower process:

Even as the digital revolution is transforming every kind of commerce, investing in mutual funds seems firmly stuck in the early years of internet-enablement. Think of a youthful new investor, used to downloading an app or opening a website and getting everything done within minutes. Such an investor would be surprised to discover that face-to-face, physical verification and even paper forms are still the modus operandi for investing in mutual funds.

This seems to be the case because under the Prevention of Money Laundering Scheme, the onus of positively identifying its own customers lies with each business independently. They take the view that it doesn’t matter if someone has been biometrically identified by Aadhar, and has had an in-person verification for a bank account linked to that Aadhaar!No mutual fund will let you invest without such a process, even if you have an Aadhaar number and a netbanking-enabled bank account linked to Aadhaar. The surprising thing is that if you have these two, then you can start a new National Pension System (NPS) account and begin investing in it through an entirely online process.

But in mutual funds, no such thing can be done. Recently, in an interview with Value Research’s Mutual Fund Insight, I asked SEBI Chief UK Sinha why this was the case. His answer was a surprising one. He said that such a thing was possible and had been so for a year. However, mutual funds choose not do so.

Similar issues were seen earlier as well:

My mind goes back to 1992, when the IPO of Master Gain, a closed-end fund from the then Unit Trust of India unexpectedly got 65 lakh applications. These were paper forms which people queued up to first buy and then deposit. Most banking, cheque clearing, record keeping statements, unit transfers etc were all obviously paper-based and manual. A significant chunk of investors had long-running issues because of faulty records, signature mismatches and other problems. I know because I was one of them.

Even at the time, it was obvious that complete computerisation and networking was the only way forward. And yet, if you had told me back in the day that fully networked and computerised access to autorickshaws would arrive before it would for mutual funds, it wouldn’t even have sounded like a good joke. However, I’m sure that these days will soon pass. The kind of push that is now coming from customers as well as regulators for end-to-end digital flow for investing means that it won’t be long before the change arrives. SEBI has set up a committee under Nandan Nilekani to lay out a roadmap on the issue, and RBI is apparently onboard for bank KYCs being valid. Sinha believes that we are heading for a quantum leap in the way people get digital access to fund investing.

What is needed is a unified way for investors to start and access fund through a single interface for all funds. Of course, like all such changes, this will be disruptive for many who are part of the process now. There will no doubt be disintermediation, and there will be a levelling of the playing field between big players and small. No doubt, the big players will not like it and will resist it in some way. That’s where both customer pressure and regulatory push will play a role. The potential of the pie becoming larger should surely be the bigger attraction than fighting over slices of a smaller pie.

The point about digital transactions is not that they should be not just possible but overwhelmingly more convenient and substantially cheaper. If that is true then usage will explode. The benefits that will come through are enormous. It should be easy and quick to learn about mutual fund investing, choose an investment and then transact with minimal friction. The democratisation of investing that can come through such access can have a transformative effect on the whole activity of investing.

For all you know some funds are already on the way as some commentators have pointed. SEBI continues to do things without making much noise..

Actually more than these supposed changes, we need good cheap internet connectivity and proper electricity to run the show.  In India’s app design city, we have neither of these two things..

Issues around width of railway gauges..

October 9, 2015

Bibek Debroy’s latest column on Indian railways is again a great read.

This time it is on width of rail gauges. This blog woke up the importance of width of gauge via this superb book on history of railways. It was a major issue of contention amidst initial railway building nations.

He starts with a great story on how the gauge standard came into being which sadly is just a myth:

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Bill Gross to sue Pimco for ‘Hundreds of Millions’ over ouster..(another person of high finance has a high fall)

October 9, 2015

The ugliness of high finance world is being exposed each day since the 2008 crisis. it is shocking to see the standards all these priests of high finance.

The recent addition to the list is Bill Gross and his former colleagues at PIMCO:

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Bernanke on how the Fed saved the economy..

October 8, 2015

Bernanke, the former FOMC chair is trying to defend Fed (and of course his policy record). He has written his memoir and so expect more of this.

For the first time in nearly a decade, the Federal Reserve is considering raising its target interest rate, which would end a long period of near-zero rates. Like the cessation of large-scale asset purchases in October 2014, that action will be an important milestone in the unwinding of extraordinary monetary policies, adopted during my tenure as Fed chairman, to help the economy recover from a historic financial crisis. As such, it’s a good time to evaluate the results of those measures, and to consider where policy makers should go from here.

To begin, it’s essential to be clear on what monetary policy can and cannot achieve. Fed critics sometimes argue that you can’t “print your way to prosperity,” and I agree, at least on one level. The Fed has little or no control over long-term economic fundamentals—the skills of the workforce, the energy and vision of entrepreneurs, and the pace at which new technologies are developed and adapted for commercial use.

What the Fed can do is two things: First, by mitigating recessions, monetary policy can try to ensure that the economy makes full use of its resources, especially the workforce. High unemployment is a tragedy for the jobless, but it is also costly for taxpayers, investors and anyone interested in the health of the economy. Second, by keeping inflation low and stable, the Fed can help the market-based system function better and make it easier for people to plan for the future. Considering the economic risks posed by deflation, as well as the probability that interest rates will approach zero when inflation is very low, the Fed sets an inflation target of 2%, similar to that of most other central banks around the world.

How has monetary policy scored on these two criteria? Reasonable people can disagree on whether the economy is at full employment. The 5.1% headline unemployment rate would suggest that the labor market is close to normal. Other indicators—the relatively low labor-force participation rate, the apparent lack of wage pressures, for example—indicate that there is some distance left to go.

Not many will agree though..

Waste getting out of hand, India’s cities getting filthier..

October 8, 2015

What we usually know is being verified by numbers as well.

Barring Kolkata in the top 5 cities, growth of waste is more than growth of population. Bangalore tops both waste growth and population growth.

More than this, it is the growth of sheer inability to handle this tranisition. Even basics are not in place,,

Now emerging market debt is emerging as a new risk..

October 8, 2015

First they say open up financial markets, move to full capital account convertibility etc., One of the advantages of this will be to allow domestic firms to borrow abroad, get cheaper funds, expertise an so on.

And now, we are hearing rising emerging market debt is the new risk. First is this IMF analysis in recent GFSR and second is this piece by bunch of econs.

IMF says:

Chapter 3 of the October 2015 Global Financial Stability Report studies the growing level of corporate debt in emerging markets, which quadrupled between 2004 and 2014. The chapter finds that global drivers have played an increasing role in leverage growth, bond issuance, and corporate spreads. Higher leverage has been associated with, on average, rising foreign currency exposures. The chapter also finds that despite weaker balance sheets, firms have managed to issue bonds at better terms as a result of favorable financial conditions. The greater role of global factors during a period when they have been exceptionally favorable suggests that emerging markets must prepare for the implications of global financial tightening.

The second piece says:

Europe for the right reasons..

October 8, 2015

 

Nice interview of later Prof. Stanley Hoffmann, a longtime , professor of international relations at Harvard University.

Michal Matlak: Europe is not in good shape.

Stanley Hoffmann: Any American newspaper will tell you this. Those poor Europeans, they don’t know what they are doing! I am originally from France, and I recently went back to see some friends. It looked perfectly normal to me. They are not exactly doing brilliantly, but the notion that the whole thing will collapse, that there will be no EU, is plainly absurd. There are ups and downs—this is a period of down, but it is not the end of the story.

This is big irony really. India is one of the highest  (ok “the highest”) growing country in the world. But it feels like a recession here.

Good stuff on Europe, history, politics and so on..

 


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