Fed chair endorses this blog!

Well, the tagline of this blog is: ‘Only questions; no answers’. That is the line that the Fed chair took when she made a speech at the Federal Reserve Bank of Boston about two weeks ago. There were some nineteen questions in her speech.

Most of the questions she poses have answers. Perhaps, posing the questions was an indirect acknowledgement of the answers that are out there and that are different from conventional wisdom.

Despite posing some seemingly challenging questions to conventional wisdom, she has scrupulously avoided asking obvious questions:

Do firms really respond to ultra-low interest rates by borrowing to invest? She touches upon this very remotely.

Does spillover on emerging economies occur through capital flows simply because uncovered interest parity does not hold for a meaningful period?

None of the comprehensive list of references are to any paper by Raghuram Rajan, William White, Claudio Borio, Stephen Cecchetti and BIS that have posed these questions and provided their answers.

The inescapable conclusion is that the posing of questions is a symbolic exercise and an end in itself but not the means to the end of seeking and accepting better answers.

Perhaps, I am being too cynical.

Shekhar’s false equivalence

A good friend recommended this piece by Shekhar Gupta in ‘Business Standard‘. I read it and these are my comments:

It is easy to agree with portions of this article and not-so-difficult to disagree with, in some other portions.

One, there is a false equivalence he draws between the US and Soviet Union and India and Pakistan. There is a reason why the former was called the Cold War. Pakistan’s actions in India have been more direct. They fall somewhere between proxy war and real war.

That said, I agree with the importance of a sustained smart, sophisticated and even silent campaign rather than a shrill one. The government appeared to have understood the need for the former in the initial days after the strike.

Second, Shekhar also appears to be vastly under-appreciating the public sentiment in this matter.

Third, India might have made a mistake in raising the matter in the BRICS Summit but I am not sure he is entirely accurate in calling India’s new-found post-May 2014 global power a far cry from the reality.

Yes, the government overstates its prestige and its international significance but Shekhar Gupta’s piece suggests that hyperbole is not the government’s exclusive privilege.

Talking to friends who know a thing or two about these matters, I got the impression that, in the highest levels of the government, there is an understanding of how the campaign needs to be conducted. It is a different matter that some do not have the discipline to follow the script of maturity and professionalism. That needs to be addressed immediately but that does not give commentators the license to paint with a broad brush.

I had already blogged on it but worth reiterating: Ashley Tellis’ piece in MINT is worth a read.

The ‘Knowhow’ gap

A long article (courtesy twitter handle of Martin Ford) from the MIT Technology Review on the technological changes that have shaped Greenville, a  town in South Carolina. The article, for the most part, strikes an optimistic note, as though it is a win-win for businesses, for workers and for the community. If only it were that simple. Tucked inside are these uneasy observations:

Some workers will be displaced. Some people will have to be retrained, even in the best of cases,” says Marco Annunziata, chief economist for General Electric, which has both a large gas-turbine factory and a new advanced-manufacturing research center in Greenville. The changes are inevitable, says Annunziata, because “the [business] incentives are just overwhelming” to take better advantage of digital technologies. Asked how communities like Greenville will manage this evolution, he says, “I am worried and optimistic at the same time.” [Link]

Are the changes really inevitable? In other words, do businesses have a choice or not? Viewed from a purely commercial perspective, perhaps, they think they do not. But, are all decisions and choices only commercial? Do trade-offs exist that cannot be measured in commercial terms in the short-term but impinge on the very viability of the economic model in the long-term? If workers feel more insecure, will it not affect the social compact that is much needed for commercial enterprises to thrive?

There are many quotable lines and passages from this long article, possibly excerpted from his book, ‘The wealth of humans’ by Ryan Avent. But, the abiding message is that it is hard to craft solutions. Many so-called experts and thinkers are struggling to come up with answers for this problem. The truth is that humans cannot cope with the complexity they create.

It is far too easy for humans to make technological progress than it is to make society a better place. The latter is more complex and humans are ill-equipped to deal with complexity. At another level, one can say that the issue is not complex but a simple question of being fair and decent. But, if only things were that simple for most of us. We tend to complicate things and call that progress – material and intellectual.

So, the gap between this technical vs. social knowhow is paradoxically not narrowed but widened by further technological progress which, humans have concluded, is inevitable. Why? I do not get it.

I think humans have a choice to make the kind of technological progress that they want to have. Some technical changes have more benefits than costs and some have it the other way around. It is up to humans to direct their attention and resources to the former while starving the latter off them.

The reluctance or failure to do so reflects a tempting ‘winner take all’ attitude – a belief that they will be better off somehow by these changes while the costs are borne by the others.

Ryan Avent may be truthful and honest but he may be speaking for a very small minority, if it exists:

Writers and thinkers, like me, try to imagine post-work utopias, in which, for example, sensibly structured social safety nets could free people of the constraints of the typical job. These people could then offer their services by the hour or the job on newfangled market-making apps, among other things, or they could even abandon labour markets altogether, as new forms of social institution encouraged them to volunteer their time to the community or otherwise engage in pro-social behaviour – while also living alongside people from vastly different backgrounds and perhaps nationalities, if some of us get our way. [Link]

Elites may be willing to live alongside people from vastly different backgrounds and perhaps nationalities but perhaps not from vastly different economic backgrounds. Second, it is not about social safety nets alone. It is about a sense of purpose, identity and belonging to a cohesive group.

Elites and the so-called writers and thinkers who think of themselves as having been freed from narrow identities and hence being in a position and willing to volunteer their time to the community or otherwise engage in pro-social behaviour might either be too naive or may be simply dishonest, cloaking their self-interest in lofty sentiments. If one does not belong to any group, may be, one just belongs to oneself and not to the world. Very few transcend identities to the higher plane. Such realised souls, by the sheer hard and stupendous nature of the passage, are rare in history.

Except for the concept of ‘Universal Basic Income’, there are no answers that Ryan Avent offers in this article. Even ‘Universal Basic Income’ is not that realistic either. We do not know how feasible it is. From where the State will find the resources to offer UBI to the affected workers, unless it chooses to take it out of those who benefit and may be, out of even those that create these technologies that cause so much social and economic anguish and uncertainty?

Even if that happens -a big IF considering that capitalists have shown no willingness to grasp the nuances of the argument – as Ryan Avent admits elsewhere in the article that it is not just about compensation for the loss of work. It is about loss of self-respect and identity that comes from work.

…. people of all backgrounds also seem to value narratives of personal ambition and responsibility. People wish to have control over their economic lives and to be seen as contributing both to society and to the wellbeing of their families. People desire agency. They do not wish to be forced into unpleasant work by the need to feed their families, but neither do they want to be written off – or assigned meaningless work as the price of a generous welfare cheque. It isn’t clear that the digital economy can provide the working conditions needed to extend the possibility of bourgeois comfort and status to a broader class of people. That will not stop them desiring it. [Link]

It is clear that we do not have answers. Then, it makes sense to stop pursuing things that give rise to the questions.

Contrition deficit

This is a long article by Sebastian Mallaby that Niranjan shared. I read it. It is supposedly a critical look at the flaws and failures of experts but ends on a predictable and familiar note berating populism and populists. The condescension and the lack of humility among the so-called experts and their friendly critics is part of the problem.

If the cult of the expert lasted some 328-30 years, the cult of populism won’t go away in half a decade.
The pejorative sense in which populism is used in the article and elsewhere assumes a trade-off between the short run and the long run and that populism trades off the latter for the former. For the most part, it is a legitimate criticism. However, some of Trump’s proposals – such as making the Federal Reserve more accountable and a flat  tax (amnesty) to bring corporate cash hoard from abroad back into America, detente if not entente with Russia are sound proposals. They may be or may not be populist but they are sound too.
Finally, the elites and the experts have not given up. Hillary’s victory might just embolden them to become more brazen and stupid. Elites refuse to acknowledge and admit their role in the rise of populism. Instead, they find it far easier to decry populists as stupid and dangerous. That won’t work.
This article leaves the contrition deficit among elites unaddressed. Indeed, whatever good work it does in the early parts is undone towards the end.

Efficient Expectations

It has been ten days since my last blog post. I did not realise that. I had to travel to the United States early Sunday morning on Oct. 23 and returned on Oct. 28 to Singapore. Been to Charleston in South Carolina. Time to get back to blogging which is a good repository of all things important or interesting or both.

Came across this story on how companies manage expected earnings. It has been meticulously put together. It confirms our suspicions that the game is manipulated or rigged. Media too – which reports these stories of gaming – eventually only reports how companies beat expectations. The comparison is not with the past nor is it about the analysis of the trends in top line and bottom line numbers. So, the media hunts with the hound and runs with the hare in these matters. Nonetheless, the Wall Street Journal story of August 4 is well researched and well put together. It is recommended reading.

This WSJ story that came a day earlier is consistent with the game of expectations management. Companies that use non-GAAP earnings measures are more likely to issue earnings restatements than those that do not.




GST fest in MINT

Vijay Kelkar, Poddar and Baskar continue with their long think-pieces on GST. They had written one last month on the formation of the GST Council. One would presume that most of what they write in this op.-ed. is backed up by some data analysis and scenarios-based analysis. For example, suppose one compensates for higher inflation rates with DBT as they recommend, would it not be a double whammy on inflation? A legislation that boosts prices one-time combined with a fiscal transfer?

Just as young economists and analysts ignore political economy, senior journalists focus more and more on political economy aspects. Wisdom for others lies in judicious combination of the two. Rajrishi Singhal focuses on the political economy aspects. For example, IRS vs. IAS.

He also talks about the possibility of ‘Federalism’ being upended if BJP ruled States win some upcoming State elections. That fear, even if it did not exist before, might be planted in some minds after this piece. The FM and his bureaucrats must go out of their ways to offer reassurances on that.

That made me think whether this exercise of implementing a completely a new architecture for indirect taxes in the country should not also have roped in behavioural science experts, coaching the MoF Officials, GST council heads, etc., in the art of persuasion, salesmanship and winning consensus, etc.

This is a drastic change involving processes that require multi-disciplinary talent.

So many angles must be kept in mind and unintended consequences must be tackled as they arise.

Remya Nair’s piece actually suggests that even as Dr. Kelkar and his co-authors wrote something, the GST council has gone ahead and decided on something else – multiple rates. The idea of cess to compensate States seems a bit whacky, at face value. The objections seem legitimate. Why not a higher GST rate on ‘sin goods’?

The people involved have my sympathies and even admiration. It is humongous exercise requiring so many skills. I wonder if human beings actually have that. The one they should have is the recognition that they do not have ’em all and seek advice, counsel and help, without shame. Will they do it?

Further, will the people concerned have the physical energy to concentrate for long hours? Will that be addressed during meetings?

Home prices and inflation in India

Karthik Shashidhar has a piece in MINT today on how inflation is generated in India. It is a good piece that shows the expected (intended) and the unintended consequences.

(1) This paragraph could have been better worded to make it clear that he was talking about rents and not home prices because the latter does not figure in the CPI.

“Both these come together to raise the market clearing price for rental homes, which then results in a higher housing index and consequently a higher CPI. In other words, given the weightage of housing, and that it is measured using rentals only, a higher policy rate can actually result in higher CPI.”

(2) The theoretical basis for this paragraph is somewhat incomplete, if not incorrect:

The idea behind monetary policy influencing prices is that higher interest rates result in higher spending on interest-sensitive factors which reduces demand for other items, which, in turn, results in a drop in inflation. In other words, spending on interest rate-sensitive expenses can crowd out spending on other stuff, which can mitigate the price rise.

He is focusing on inelasticity of interest payments since it is a contractual obligation. That too is a factor but that is not the main (theoretical) purpose of higher rates.

Interest rate is the price of money. Everything else being equal, higher the prices, the lower the demand for money. Liquidity demand will drop and spending will be lower and money will be left in banks as savings. That is, savings rise consequently.

Further, if cost of capital raises, at the margin, some projects will not clear the hurdle rate and investment demand for funds too will decline.

(3) On a different note, Urjit Patel has written a paper last year that shows that, in a world of SLR and government claim on banking resources, lower interest rates can actually decrease credit availability and hence, not meet credit demand.

That is another unintended consequence along with what Karthik writes about higher interest rates leading to reduced housing demand and hence upward pressure on rentals.

Agriculture reforms

I read this long piece published in MINT yesterday with great interest. Makes for good reading. These were my immediate thoughts:

We notice some small evidence of a welcome change and we are pleased about it. That is fair. But, as the article points out, towards the end, we touch the tip of the ice-berg.

The problem is big and the comments made by an unnamed ‘Agriculture Expert’ about the failure to reform the APMC too are telling.

In other words, the big question of whether it would scale, would the reformers have the energy and commitment to see it through fully and whether it would sustain remain very much open.

Our politicians should, in fact, make one or two such initiatives their signature initiatives and see them through to the fullest, including institutionalising it.

They fail to realise the signalling potential that such an approach would have, on other matters too. The spillover effect would be substantial. Some of them would begin to happen on their own, when bureaucrats, Minsters and other CMs notice that one person carried it through to the fullest.

Now, all those who have vested their interest in the status quo do cosmetic changes and bide their time for the politician to be distracted.

Nonetheless, as a work of journalism, it is very well done. High marks to Abhiram Ghadyalpatil.

Big risks

Look at some of these stories:

Something called ‘bird dogging’ – disrupting your opponent’s political rally by creating trouble.

Email received by Ms. Tulsi Gabbard for having dared to support Bernie Sanders in the Democratic Primaries.

Names of media organisations and the amounts they donated to the Clinton Foundation

John Podesta’s mail (wish) on the identity of the San Bernardino shooter is very troubling.

If Mrs. Clinton won, she would owe so much to so many that it would be reasonable to expect that they would extract their pound of flesh for their support all these years. People who receive support for just causes won’t owe anything back. Their cause would be their shield. Indeed, it is a privilege extended to others to support a just cause. Not so in other cases. These stories are but a sample. They indicate the risk of a massive inability on her part, if she won, to govern in the name of and for the United States of America and its people.

These revelations and campaign tactics (plus other tactics that I have not named) have diminished American democracy considerably in the eyes of the world and have vastly eroded its prestige and reputation. Most have not applied their mind to it. Duterte thumbing his nose at the United States is just a curtain-raiser. It will have very big ramifications internationally and will tilt global power balance against America, adversely. That is a big global risk, post-election.

Second, in the big picture, quite apart from the well-known risks like terrorists, rogue-nations and their supporters, the so-called liberals constitute one of the biggest risks to the world with their staggering certitude, their stupendous hypocrisy and the extraordinary immoral license they assign themselves to pursue any means to achieve their ends.

Here are some examples:

Ezra Klein’s tweet is so cringe-worthy.

This tweet has arrogance written all over it.

Here is one exception I could find: Chris Balding. At least, he understands the hypocrisy of selective outrage.

Trump deserves all the outrage for threatening to jail Clinton, however, where were you during the IRS scandal which continues? [Link]

Obama admin explicitly went after its political opponents and absolutely nothing has happened. This behavior in either party is reprehensible [Link]

If you aren’t standing up to condemn all forms of using power of the executive to target political opponents, you are a rank hypocrite. [Link]

In any case, Chris Balding is a digression. The point is about the risks to the US and the world in the circumstances and the manner in which Ms. Clinton is likely to win. I had already written about it in Swarajya.

The diminution of America, an election victory tagged with a big IOU to many, elite arrogance, hubris and hypocrisy constitute big risks to the world.


Made for each other?

Few days ago, Bloomberg had a fascinating story of how the Libyan Investment Authority had lost more than a billion US dollars on wrong investment advice from Goldman. It is a riveting read. Some paragraphs that are important, in my view, of course:

The talk at the LIA, Kabbaj learned, was that Qaddafi wanted to emulate the leaders of Qatar, who’d invested in the shares of troubled banks. One target was Citigroup, which Abu Dhabi’s sovereign wealth fund had put $7.5 billion into less than two months before. On Jan. 15, Kabbaj texted the head of the LIA’s equities team to note that Citi shares were down, creating a buying opportunity: “It is time to do the trade!!!”

The Libyans made two trades later that month, totaling $200 million. But this wasn’t a simple purchase of shares—it was a complex derivatives deal, or as Goldman Sachs described it later, “a cash-settled forward purchase agreement for Citigroup shares with downside protection in the form of a put option at the same price as the forward.” More simply, if Citi shares rose, as the LIA was betting, the fund stood to gain many times its initial investment. If the shares fell by a certain amount, the fund could lose everything. The structure was potentially more lucrative than a conventional purchase of equity and also significantly riskier—while resulting in far higher profits for Goldman.

Whether the LIA understood it wasn’t actually investing in Citi is disputed. Whatever the case, the fund proceeded a few weeks later with another large deal, a similar wager on the French utility EDF Group that cost it almost €120 million (then $175 million) in premiums…..

…. Like the Citi and EDF deals, they were “synthetic”—the LIA wasn’t actually buying shares in the companies concerned, in this case Banco Santander, Allianz, Eni, and UniCredit. Kabbaj later called it “one of the biggest orders that GS has ever been given on single names.” [Link]

Bloomberg has updated the story to reflect the development that a US court has dismissed the claims brought by the Libyan Investment Authority against Goldman Sachs.