Archive for September, 2017

Did Reserve Bank of New Zealand outgoing chief give himself a big pay rise? On what grounds?

September 29, 2017

Michael Reddell, the ever alert commenetator on NZ economy and their revered central bank has a startling piece:

….someone emailed me suggesting that the Reserve Bank Annual Report implied that the (now former) Governor, Graeme Wheeler had had a big pay rise.  And that did interest me, because outside the halls of the Reserve Bank Board it isn’t clear who would have thought that Wheeler had done something even approaching a stellar job as Governor.

Wheeler started at the Bank in September 2012, so we can’t get a read on his initial salary in the (June year) 2012/13 accounts.   But there are four years of annual reports when he will clearly have been the top earner in the Bank.    The relevant tables show the top earner received as follows during these financial years:



Bitcoin vs Dollars: Which One is a Fraud? Which One is a Ponzi Scheme?

September 29, 2017

Mistalk blog reflects on Jamie Dimon calling Bitcoin a fraud:

Dimon’s statement on Bitcoin represents the irony of the year. Euros, dollars, etc. are precisely fabricated out of thin air.

That was not always the case for dollars. They were once exchangeable for gold. But euros right from the start were a complete fabrication.

The Eurozone problems we see today are a direct result of the fraudulent nature of Target2 guarantees on top of the fraudulent nature of the euro itself.

🙂 Even if thin air is not fully right, all these currencies are just based on government order. One can increase and decrease the currency at govt will and create mega monetary theories to justiify whatever they do: inflation target, Taylor rules and so on.

He says things like modern finance are a bigger fraud:

In an article that I wish I had written myself, Viktor Shvets, head of Macquarie’s AsiaPac equity strategy, accurately explains “Modern Finance”, Not Bitcoin, Is The Real Fraud.

If one describes Bitcoin as a fraud, how would one describe a ‘financial cloud’ that is at least 4x-5x larger than the underlying economies? It is unlikely that US$400 trillion+ of financial instruments circulating around the world would ever be repaid and most are now backed by assets that are already either worthless or are diminishing in value. How does one describe rates and the yield curve that are either directly determined by Central Banks (BoJ or PBoC) or heavily influenced by them (Fed or ECB)?

While we maintain that despite the presence of US$7.5 trillion of excess reserves (amongst G4+Swiss central banks), global deflationary pressures are so strong that break-out of inflationary pressures is unlikely. However, if public sectors continue to insist on suppressing business/capital market cycles, then some form of full credit market nationalization and/or currency debasement becomes inevitable.

Even fractional reserve lending:

If someone had a Yap Island stone and wanted to lend out three of them, that would not be possible. Nor can one have $100,000 worth of gold or Bitcoin and legally lend out $1,000,000 of it.

If someone tried to do so they would be convicted of fraud. Yet, via fractional reserve lending, banks can lend out money they do not have, and few think anything of it.

There are two distinct problems with fractional reserve lending as it exists today.

  1. Duration Mismatches
  2. Money Creation Out of Thin Air

CDs provide an easy to understand example duration mismatches. A person buying a 5-year CD gives up the right to use his money for 5-years in return for an agreed upon interest rate. Bank can and do lend out such money for 20 years.

Historically, borrowing short and lending long caused numerous bank runs and financial crises. Note that there are no reserves on savings accounts. Banks can lend that money out while guaranteeing you availability. If everyone tried to get their money at once, the system would implode. We have seen numerous examples in Europe recently.

It is a pity that much of this so called modern finance tools have become so ingrained in our textbooks and thinking, that we hardly question them. Infact these are the most admired jobs and calling anything which challenges the status quo is called as fraud. But then those whose houses are made of glass should not throw stones at others..


Anthropologists analyse India’s demonetisation

September 29, 2017

These should be interesting series of articles (HT: Mumbai Paused):

On November 8, 2016, Prime Minister Narendra Modi demonetized 86 percent of the cash circulating in India. While citizens were allowed to deposit and exchange notes for a limited (and shifting) period of time, the fallout of the executive order included a large-scale cash crunch and an atmosphere of crisis throughout the nation. This Hot Spots series analyzes demonetization as a critical event that revealed and produced changing relations of citizenship and sovereignty. Contributors analyze the immediate aftermath of and the longer temporalities through which demonetization arose in order to consider the effects of executive decision-making, the meanings people draw from it, and local attempts to grapple with the transition from informal to formal finance. The series also critically comments on the relation of finance and banking to a political anthropology.

Will try read them over the holidays..

Given the technology at hand, why don’t the equity markets move to a T+0 settlement cycle?

September 28, 2017

This blog pointed earlier to how US is moving to a T+2 settlement in equity markets whereas India had it more than a decade ago.

JP Koning asks why don’t we move to a T+0 settlement cycle given we have the technology now? He says there is a reason why these systems are slower. The idea is to settle and net transactions at the end of the day rather than immediate to avoid repitition:


Confusions and Emptiness in RBI Board continue…

September 28, 2017

Ira Dugal just tweeted about how we do not have a Deputy Governor after nearly 2 months of Mr Mundra’s term getting over.

This led me again to the RBI Board webpage which has been under intense pressure ever since they decided on the note ban.

It says currently following are the Central Board members (accessed on 11 AM ,28/9/17):


We need to talk about how female economists are treated

September 28, 2017

Caroline Freund a senior fellow at the Peterson Institute for International Economics has a damning post on state of affairs in economics.

Economists have this habit of talking of talking about diversity, inclusion etc. But fail to look within:


Hindi imposition in Bihar and relevance of regional language in teaching

September 28, 2017

Politics of language is always an issue in India.

Just a few days ago, Rosha Kishore of Mint wrote on how a Bihari lost his mother tongue to Hindi. This was least expected as when we talk of Hindi imposition we mean how the Northern States of UP, Bihar MP etc are pushing Hindi down the throat of other States. But not really. Infact, the regional languages of Bihar have felt the imposition too:


Why study Economic History?

September 28, 2017

Anton Howes. Prof of Economic History at King’s College has a piece based on his first lecture:

What is Economic History? It is about asking some of the biggest and most interesting questions imaginable. Why are we, today, so rich compared to our ancestors? Why are some countries so rich and others so poor? Why were a handful of European countries able to conquer much of the rest of the globe? Those are just a few of the questions we will explore this year, together.

You see, Economics is not just about money, or exchange, or the distribution of resources. It is about human action, and interaction. It is a science of society. And History — the record of human experience — provides us with the raw data. It is the source of all of the models, all of the theories of how society works. And it is their test. History is the evidence — it is the rock upon which an economic theory survives, or is broken.

But humans are complicated: we are diverse and unpredictable. The challenge for a social science is thus far greater than that for the physical, natural sciences. We will thus be asking big questions, but we will not always find answers. This is something I hope you will get used to at university, where we hope to push at the boundaries of human knowledge, not just to learn what is already known.

I have also tried to make the scope of this course as broad as possible — I have tried to be ambitious! We will not only be looking at the West, and we will not only be looking at the recent past. The course will take us as far back as the Neolithic — to over ten thousand years BC — all the way to the present. And the breadth of subjects will be vast: from looking at the causes of the Great Depression in the 1930s, to investigating the institutions that sustained long-distance trade in medieval North Africa. We will look at sweeping theories of Economic History covering entire continents; and we will look at studies of very specific instances that still shed valuable light on the biggest and broadest of questions.

At the same time, we will use economic principles to understand history. This will not be history as you know it — one king or queen after another, one politician after the next. Instead, we will explore the fundamental forces that give rise to empires, and destroy nations; the institutions that give rise to trade, and the fundamental sources of human prosperity.

I can’t wait to get started.


Here is the course outline.

Ashok Gulati snub and Yashwant Sinha spake…

September 27, 2017

This morning two articles are buzzing around Indian economy.

First, Prof Ashok Gulati does which one wishes is done by other economists as well. Indian economic policy is so much around committees that one has no clarity on what happened to previous ones. So he declines to be on another agri reform panel:

Economist Ashok Gulati has declined to become part of a NITI Aayog panel on reforming the agriculture sector by 2020. He has reasoned that unless the earlier recommendations made by such committees are implemented, another similar exercise is unlikely to yield any results.

“The main reason is that there are already 3-4 committees who have made recommendations and hardly anything is implemented. So the question is, how many more committees we want, there is nothing new.

“They should focus on 4-5 things they want to do and implement them well, rather than going in circles… committee after committee,” Mr. Gulati said.

He added that he was not informed, or asked if he wanted to be a part of the committee. “If you are forming an official committee, the minimum courtesy is to check with the member. Nobody checked with me and suddenly I found my name there,” he said.

One also learnt that the panel was part of this India@75 exercise which aims to make India a developed nation at its 75th year of independence.

Second is by Yashwant Sihna who says I need to speak up now on the slowing economy otherwise he shall fail on national duty.

I shall be failing in my national duty if I did not speak up even now against the mess the finance minister has made of the economy. I am also convinced that what I am going to say reflects the sentiments of a large number of people in the BJP and elsewhere who are not speaking up out of fear.


The prime minister claims that he has seen poverty from close quarters. His finance minister is working over-time to make sure that all Indians also see it from equally close quarters.

Strong words!

How quickly the narrative has changed from shining economy to dooming one.

Aurangabad restaurants using dog meat to prepare biryani?

September 27, 2017

This piece in ToI caught my eye:

A member of center government’s Animal Welfare Board has alerted the Aurangabad Municipal Corporation (AMC) expressing concerns that some restaurants are using dog meat in their biryani.

Mehar Matharani has instructed the officials to remain vigilant in this regard. On Union minister for women and child development Maneka Gandhi’s suggestion, Mehar visited the AMC. She also met AMC Commissioner D. M. Mungalikar and other senior officials regarding the issue.

Mehar then accompanied the AMC’s dog squad to supervise the process of capturing dogs in the city.

She expressed her concern to the media saying that many dog heads were found in the city. Even their body parts were missing. She continued saying this is a dangerous issue. Some restaurants are serving biryani at cheap rates and most probaby they might be using dog meat to prepare it. 

How have humans decided which animal’s meat is suited to eat or not? Why is it that eating chicken, mutton, fish etc do not evoke negative reactions? But the dog’s meat does? How have these meat eating behaviors shaped over the years?

Takes you to Al Roth’s work on repugnant markets/goods where he talks about how eating horse meat has this serious repugnant feeling.

The real hero in GST is the small entrepreneur…(How did this change in sentiment happen?)

September 27, 2017

One of the most unfortunate narrative during demonetisation was how the informal sector full of small businesses is this dishonest tax cheating fella. History of tax tells you how it is big corporations which are the real culprits in this tax game. There was nothing more ironical than see likes of CEOs of Silicon Valley giants telling us how digital world will make us more tax compliant. Really? Why not look withing first? It was also really disappointing to see not one CEO of a top Indian firm defending the Indian SME sector.

With GST implementation, the sentiment seems to be changing. Not sure what has resulted in the same. One just pointed to a superb interview of how SMEs are reacting to the challenges of GST with very limited resources at disposal. Sudipto Banerjee and Sonia Prasad of EPW have a similar piece detailing how GST has led to disruption in SME sector.

Though this piece from Sundeep Khanna of Mint takes the cake for calling the small businesses as heroes:


Why small businessmen in Gujarat are quitting industry and turning to financial speculation

September 26, 2017

M Rajshekhar reports in Scroll:

He says there are two major trends are playing out in Gujarat’s economy. One of closing industries and other of rising financial speculation..


Uruguay to launch its digital currency platform…

September 26, 2017

Yday I learnt about Ecuador launching its digital currency in 2014 (more here). Though, it seems the initiatove has barely worked.

Now, there is more news that Uruguay is planning to launch its digital currency as well:


Learning about GST and SME issues….

September 26, 2017

Here is a superb interview Anil Bhardwaj, Secretary General of Federation of Indian Micro and Small and Medium Enterprise. He explains how GST has hit the SME sector.

More importantly,  he also tells you how these units actually function, the several constraints and challenges. This is something which most of us neither understand nor care to understand. Most of the articles dubs the SME sector as unorganised (which has come to mean corrupt of late) failing to realise that it forms 90% of economic activity in India (and other parts of the world as well). Most of our economic debates are for 10% of the Indian economy.

Weren’t there problems arising from the conception of GST itself?
One of the problems MSMEs [micro, small and medium enterprises] encountered pertained to those dealing with engineering items. In the B2B [business-to-business] sector, I get an advance, meaning that if you want me to customise a machinery costing, say, Rs 10 lakh, I will take an advance of Rs 2 lakh to Rs 3 lakh at the time you place the order for me. You will pay me another Rs 3 lakh at the next inspection and the remaining amount at the time of delivery.

The funny thing about GST is that you have to pay tax on an advance also. Most machines come under the 28% tax slab. So out of Rs 3 lakh paid as installment, 28% of it would go to the government. But I am not earning anything, I have to buy raw material to customise the machine you want. A little less than one-third of my working capital is gone.

What about the issue of reverse charges?
According to the reverse charge mechanism, if I am buying from a non-GST compliant entity, I have to prepare his invoice and pay the tax and then file yet another document to claim it back.

Though the charges are reversed next month, your capital is locked nevertheless.
You have hit the nail on the head. GST has put pressure on working capital. Typically, the payment schedule in the MSME [micro, small and medium enterprises] sector is two to three months. But I have to pay tax monthly. Big companies, unlike MSMEs, are in the B2C [business-to-consumer] sector. As soon as they supply to the distributor, they take a draft.

But those manufacturing machinery parts get their payments in two to three months. In GST, the moment I supply I have to create an invoice and pay tax. But I haven’t yet received my payment. I will receive it three months later. I am therefore paying the tax out of my working capital. And to think, the biggest problem of MSMEs is working capital.

Superb stuff. Lots of stuff in the entire interview…

Nigeria Central Bank’s Acting as Piggy Bank, MPC Member Says

September 26, 2017

Meanwhile in Africa, the old games between government and central banks continue.

In Nigeria, an MPC member accuses the central bank funding govt’s deficits calling former a piggy bank!

Nigeria’s central bank is acting like a “piggy bank” with its funding of the government, according to a member of the Monetary Policy Committee who said he struggles to understand the regulator’s economic rationale.

 Monetary data showed a “sharp rise” in the Central Bank of Nigeria’s financing of the government deficit this year, Doyin Salami said after the MPC’s July 24-25 meeting, according to a central bank statement published Tuesday. The regulator’s claims on the government had risen “twenty-fold” to 814 billion naira ($2.26 billion) from the end of 2016, while its purchases of government T-bills increased 30 percent to 454 billion naira, he said.
 “It is clear that the CBN has provided piggy-bank services to the federal government,” Salami said. “Whilst I still wonder what the underlying economics is, I sincerely hope it works.”
The MPC statement is here and the statement of the member is on page 36:
Perhaps the most challenging of the present characteristics of the economy in Nigeria is the adoption of a quantitative easing stance by the management of the Central Bank. Monetary data shows a sharp rise in the extent of CBN financing of the government deficit.
Highlights  of CBN financing of the Federal Government since Dec. 2016 are as follows–
  • CBN‟s claims on Federal Government (FG) at N814bn is twentyfold higher while the claims of Commercial Banks rose marginally by 0.4% to N4.6 trillion;
  •  30.0 per cent increase to N454bn in CBN‟s purchase of government T-Bills;
  • 5percent increase in FG Overdrafts to N2.8 trillion; and 
  • Increase in the „mirror account‟ from N3 billion at the end 2016 to N1.5 trillion in April 2017.
It is clear that the CBN has provided „piggy bank‟ services to the Federal Government.
That is some statement to make!

Indian economic advisory team gets bigger…

September 26, 2017

No matter how much the current Government tries to show itself doing new things, it keep picking old ideas from the previous government.

Previous government had economic advisors everywhere but it did not show in the economy results. We had Chief economic advisor, PM”s honorary economic advisor, PM’s Economic Advisory Council, Planning Commission, Principal Economic Advisor and several others. Not to forget the Prime Minister himself was a distinguished economist.

The new government in 2014 gave us some signs that there will be no such army of economists. Out went all these positions starting with dismantling of Planning Commission, not having a Chief Economic Advisor for many months and so on.

But then soon we had Niti Aayog, CEA, PEA and now we have Economic Advisory Council as well:


Was an economic theory behind the Vietnam war?

September 25, 2017

Keynes had famously quoted:

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”

Just that influence is beyond economics and extends to even warfare…

Prof. Peter Hilsenrath of University of the Pacific has piece on how W.W. Rostow’s economic idea was key to US taking on Vietnam:


How Shekhar Kamat created State Bank of India’s iconic logo

September 25, 2017

Superb video where Mr. Shekhar Kamat narrates his tale of how SBI logo was created…

Contrary to popular internet theories, it was not inspired by the shape of Kankaria Lake in Ahmedabad.

Karachi: A case study of an unsustainable city (Just replace Karachi by Mumbai in the article..)

September 25, 2017

As I was reading this piece by Jawaid Bokhari of Dawn, one was struck by the amazing similarity in State of the two financial capitals of Pakistan and India.

So much so, one could just replace Karachi with Mumbai in the article, and same piece could as it is apply to Mumbai woes as well:


Supporting central banks and local currencies in the Western Balkans

September 25, 2017

Central Bank of Bosnia and Herzegovania celebrated its 20th anniversary recently.

ECB Member Benoît Cœuré gave a speech on the occasion and touched on an issue we hardly think much about. It has been seen that in small countries the balance sheets are not in the local currencies but in currencies of a dominant currency.

Any shock hits these small countries which run on unofficial currency as we saw in South East Asian crisis. The loans were in US Dollars and as crisis hit and the local currency depreciated, the value of  these liabilities increased manifold.

Even  in Balkan countries most of the balance sheets are in Euro. It is called as unofficial Euroisation. Euro is not an official currency but what happens in Euroarea plays a major role in these economies.

How does one work around this issue?

Let me therefore spend a few minutes on the one recommendation that is specific to candidate and potential candidate countries, albeit not uniformly to all, namely that the use of local currencies be strengthened.

As you know, the high degree of unofficial euroisation is a striking feature of the banking systems in the Western Balkans. In the region as a whole, on average 56% of total loans and 52% of total deposits are denominated in, or indexed to, foreign currencies, in most cases the euro.[3] This phenomenon, also known as currency substitution, is driven by many factors, such as low confidence in the domestic currency, which is often the result of not-so-distant memories of monetary instability.

Another factor relates to the fact that the risk premium on loans in the domestic currency is higher, thereby providing an incentive to take out foreign currency loans. Lower funding costs, in turn, are often supported through strong integration with the euro area via trade and financial channels, but also via migration and remittances, which contribute to the holding of bank deposits in euro. All this is conducive to widespread unofficial “euroisation”.

But a high degree of foreign currency use also has serious drawbacks. For example, unofficial euroisation, while being a sign of trust in the euro as a stable store of value, constitutes a financial stability risk in the event of sudden and substantial exchange rate fluctuations. Households and firms may suddenly no longer be able to service their foreign currency-denominated debt, creating credit risk for banks. The same holds true for dollarisation in other parts of the world, as the Asian financial crisis vividly demonstrated.

Unofficial euroisation also impedes monetary policy transmission and may limit the overall room for manoeuvre of monetary policy. In Albania and Serbia, for instance, where central banks have adopted inflation-targeting frameworks, exchange rate flexibility remains relatively limited as policymakers are mindful of adverse balance sheet effects resulting from sudden and substantial exchange rate fluctuations. In countries that have opted to stabilise the exchange rate in the first place, such as Bosnia and Herzegovina, maintaining the credibility of the framework remains central to keeping financial stability risks contained.

Prospective EU countries that have their own legal tender and monetary policy have recognised these risks and constraints, and are thus making efforts to promote the use of the local currency, in line with the ECB’s recommendations. This is certainly not an easy task. Success crucially hinges upon the track record of the domestic monetary authority in maintaining monetary stability. To this end, central banks in the region have made laudable progress in recent years. Efforts need to be channelled towards extending this track record.

History teaches us that central banks’ success in sustainably maintaining confidence in the currency critically hinges on two elements: political independence and a clear mandate. The ECB was successfully built on these principles. Independence and a clear stability-oriented mandate ensure that central banks are not overburdened with pursuing other, potentially conflicting objectives, and that monetary policy makes the best possible contribution to growth and employment. They are therefore also a necessary condition for strengthening the use of local currencies.

Experience in other regions of the world – in Latin America, for example – suggests that targeted prudential measures as well as deeper local capital markets in domestic currency can reinforce the use of local currencies.[4] Such advances should ideally be embedded in a carefully designed comprehensive strategy involving all relevant stakeholders. Serbia adopted such strategies in 2012, and Albania has done so more recently, while other countries have started to put in place measures of this nature or are considering designing similar strategies.

So progress is clearly visible, in particular on the lending side, but more remains to be done. There are certainly no quick fixes, as currency substitution tends to be a sticky phenomenon. But the drawbacks of unofficial euroisation deserve policymakers’ attention. The expectation that countries will at some point join the EU, and eventually also the euro area, should not divert attention from such policy efforts.



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