Gold and Anhedonia and Culling and Darwin

An interesting piece in ‘Swarajya’ on October 6 on the role of Gold. Simply put, the author says that India, with its huge cache of private gold, is on a stronger wicket as and when paper currencies implode. He thinks they will. Not implausible but fairly extreme. Fiat currencies have not lasted forever. They eventually cause inflation and lose their currency (pun intended). Timing it is hard.

Good Edit in MINT on managing exchange rate volatility. To bat for intervention is practical and sensible. To ask the central bank and the government to choose the kind of flow it wants (debt or equity) is also correct. Both can be adjusted through a good and dynamic package of incentives and disincentives. They can keep changing, depending on the flows. The real elephant in the room is the big ‘CARRY TRADE’ flows that are due to interest rate imbalances in the developed world.

Niranjan’s piece on the potential growth estimate in India has an important warning. RBI, in its Monetary Policy Report released ten days ago showed a negative output gap. That is, actual growth is below potential growth. That is usually good news for inflation. There is slack and hence the economy could be stimulated (aggregate demand stimulation) without running the risk of inflation acceleration or other forms of overheating. That is theory. In India, it may not be so straightforward. It is a stagflation prone economy (my view) with its supply rigidities, inefficiencies and extremely fragmented production. If the negative gap closed, it could get worse for India. So, in that sense, Niranjan is right to warn of the potential for potential growth to shrink with all the structural reforms and their impact remaining permanent or long-term.

Monika Halan has a comprehensive interview with Adair Turner. He bats for much higher capital ratios for banks. He bats for higher capital weights for real estate loans. This blogger raises cheers for both. Alan Taylor has shown how real estate loans from banks exploded since the Eighties (in the West) after the risk weights on real estate loans were lowered in comparison to loans to businesses because real estate loans are collateralised.

He thinks helicopter money would work in some advanced countries because central banks are independent and cannot be manipulated to resort to them frequently for political reasons and that such a risk was higher in the developing world, such as in India, for example. May be. But, independence is not to be defined only with respect to the political executive but also with respect to financial sector and financial market interests. Developed nations, nearly a decade after introducing ultra-loose (or) unconventional monetary policies are unable to exit them. So, how ‘independent’ are they and ‘independent’ from what? Is it enough to be nominally independent from the executive arm of the government? What about habit persistence? Fear of withdrawal for an economy that has been made dependent on too low rates for too long? Big gaps in his observations, in my view. But, I am happy for the two things he had batted for, as I mentioned at the beginning.

Great blog post featured in ‘Zerohedge’ on Anhedonia. Spot on. Central banks in the West are used to seeing their consumer price indices rise lower than expected and much of it is due to subdued wage trends. A good chunk is also due to ‘hedonic’ pricing adjustments which adjusts prices downward for quality improvements. The article asks correctly if prices are adjusted for quality deterioration and goes on to point out many examples. Very correct and very interesting. (ht: Sampath Kumar)

Can banks relax provisioning norms for cases referred to the Bankruptcy courts? I am not sure it is correct for the eventual haircut could be much larger, once bankruptcy is determined and repayment ratio determined. It can only be a case-by-case decision. Other thoughts welcome.

Lastly, it was fascinating to read the comments under this article by R. Jagannathan on Modinomics. In terms of economic logic, it was mostly right. But, in terms of language – ‘cull’, ‘Darwinism’ – it attracted criticism. The comment by one ‘Jataayu’ was well made. But, I do not think Jaggi was for abandoning micro, nano and small businesses and let them toss in the wind. He was batting for productivity. The economy needs it because the small and the poor need it! An unproductive economy is always inflation prone and inflation hurts the poor more than anyone else because they spend a large portion of their income on essentials.


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