Why is America so strong ?

The simple answer is their “knowledge”

Take a recent example.  The price of oil is going sky high. India has no clue how to manage the situation. The inflation has soared to 11% and Govt can do NOTHING. I repeat, NOTHING. They can only sit and watch.  Its same as a tsunami, you can do NOTHING to stop it.

Comparing it with USA, there are loads of discussion and research in trying to understand why its happening. Some of the best minds in economics are coming to a common platform and discussing the fundamentals.

Paul Krugman ( A nobel prize prospect)

Steve Randy Waldman

Mark Thoma 

Dean Baker

Thomas Palley  and

the best in the oil/commodities business , Jim Hamilton

 

 

 

Financial Prudence

This is a guest post from my friend Nick who is a financial consultant in UK.

I take this oppurtunity to quickly present some ground rules for these turbulent times in financial markets.  Make your own judgement w.r.to risk-reward profile of yours.

- Do not commit to any long term debt, most particularly buying a house 
- Do not bottom fish in assets for a long time 
- Reduce family fixed cost base: rent house on a short contract, downsize expenses 
- Delay purchase of any big ticket goods in anticipation of sales Q3 2008 
- If a contractor, try to go permanent 
- If a City worker, avoid front office volume-driven jobs 
- If you have a relatively secure position at work, do not be lured away for more money, especially if it’s heavily weighted towards a bonus 
- Liquidate all assets. Hold cash across many banks below insured limit, and preferrably in different currencies 
- Save now on the assumption you will lose your income at any moment

 

US Economy round up.

By now everybody knows that US economy is faltering.   There were clear signs yesterday in the auto sales numbers

Ford’s US sales down 14 percent in March

GM March U.S. sales fall an adjusted 13 percent
GM Blames Consumer Confidence

Toyota says U.S. March sales down adjusted 3.4 percent

 Elsewhere, “More than 20,000 Vietnamese workers have walked off the job at a Taiwanese-owned plant that makes shoes for Nike Inc., demanding higher pay to keep pace with skyrocketing prices, officials said today. The workers at Ching Luh plant, in southern Long An province, went on strike Monday. They want a 20 percent bump to their $59 average monthly salaries along with better lunches at the company cafeteria, said Nguyen Van Thua, an official with the province’s trade union.”
 

 

India can be an Iceland easily

There has been lot of news about Iceland recently

 Prime Minister Geir Haarde tells the FT that the island’s financial system is being unfairly and perhaps illegally weakened by hedge funds “who just want to make a profit by hook or by crook”. He says: “The central bank and the government have several means at their disposal to influence this situation and we have not used all of them yet. We would like to see these people off our backs and we are considering all the options available.” He declines to be more specific about what measures the government and central bank might undertake, saying “a bear trap needs to be a surprise”.

My Point :If Iceland can undergo a massive run, why can’t it happen to an emerging country like India ? Today’s financial system is troubled and nearly pernicious

 

China Day

Today is April fools  China day.

Deposit rates are 4.1%

Lending rates are 7.5%

Inflation 8+%

Can any country run such high negative real rates ? China is clueless at the moment (And that shows in the stock market chart)

 

Indian Economy : Solutions for short term.

In an article in Business Standard titled How to combat inflation , the author provides the simplest of solutions to tackle Indias problems for the short term.,

a. Allow a 10% appreciation in INR  (to USD/INR = 36) to quell inflation

b. Reduce Interest rates by 3% (to say 4% p.a)

 My Take : I wish the policy makers were this straight forward. They always want complicated untested methods employed like the below

a. Ban Rice exports

b. Subsidise maize imports

c. Cut Steel prices

All the above activities are naive and useless. I wish the policy makers knew,

“If the prices of volatile commodities are rising, and the prices of finished goods and services are rising at a slower rate than would be warranted by their commodity content (which is to say, the price of value added above those component commodities is not rising, at least not any faster than is considered normal), how does this resemble a balloon blowing up? Most of the balloon is not expanding.”

 

India 2008

For those of you who are wondering what is happening with Indian Economy, here is a quick update.

We know inflation is alive and kicking. Food prices are at a high.
Growth has slowed down from 9% (which we saw over this year).

A slowing growth and rising inflation is called STAGFLATION.  

S-T-A-G-F-L-A-T-I-O-N is the word that I am humming now. I was discussing this with an eminent economist here in the US and he quickly told me… “In order for stagflation to really take hold, you would need some concrete evidence that unemployement is increasing — otherwise, we’re just talking about inflation.”

A very good point indeed. The trouble I have is, Indian govt doesn’t produce the unemployment numbers like US. I won’t be able to make a reasonable judgement with unemployment.

OK, now govt has two things to do. (it always had a twin mandate)

a. Keep up growth (And hence employment to masses).
b. Contain Inflation.

For (a), the easiest thing that Govt can do is to lower interest rates but that will hamper (b).

Now its all about playing the cards right, which of the above is important now ? (b) seems to be the priority now ****, contain price rise, ward of Communists wrath, put up a good face in the elections next year.
Now that the direction is clear, here are my predictions

a. If US situation continues to detoriate, govt could let lose the USD/INR a bit more. USD/INR = 38 looks a possibility in the near term
b. Once (a) plays out and US situation continues to detoriate and goes past the recession zone, inflows into India go pale and USD/INR could appreciate past 40.

So USD/INR volatility is here to stay which is why FM is worried.  ****** ( How nicely a straddle can work )

In short, India is in the problem zone which I have been talking about for the last 2 years.
We are COMPLETELY at the mercy of US / Global growth.

How is this going to affect us ? Thats a topic for the next article.

 

Economic Divide

Business is obviously booming in India and China.  This is the common perception, India ranks 2nd in IPO, 4th in M&As.   Villages don’t seem to be left behind. Last week, I heard from one of my friends that a barber (usually considered a lower class of economic strata) has put his son on the “management seat” in an engineering college. 

Ysterday, On my way to office, I went past the American School , a FORD Endevor (costs around 15L ?) pulled up near the school gate. There was a lonely looking girl who got out and went inside the school. The driver parked the vehicle there and had to wait.

 When I rode few yards further, there was an MTC bus which had around 70 passengers broke down. All of them were stranded and shouting. I could only think of the time the passengers were wasting and they trouble and tension they had to undergo when they reach their work locations (or anyother destinations they were set to). Productivity !!!

Two Inferences :

1.  Economic Divide is massive.  A ford Endevor for a school girl vs a dilaphitated MTC bus for masses.

2. India and Productivity growth are Antonyms

 

What is WEALTH

I asked an economist and a realist….

 His reply – “there is no best measure of wealth. It is entirely subjective. you can define wealth however you see fit, but that doesn’t mean your definition is the same as mine. “

 

Interesting argument.

David R. Henderson and Charley Hooper argue that most of us are rich.

Except for the few hundred thousand who are homeless, the Americans whom the U.S. government defines as poor live exceptionally rich lives. In most ways, their lives are better than those of kings and queens just 200 years ago. Consider the quality and quantity of our food, clothing, refrigerators, televisions, washing machines, stereo systems, and automobiles. King Louis XIV of France had a greenhouse so he could eat oranges. The poor in this country can eat an orange every day, regardless of season. King Edward III of England could summon the royal musicians to play music. The poor in this country have a wide variety of music at their command, 24 hours a day, played note-perfect every time. Edward III lived in a dark, smelly, cold castle. Even the worst houses in this country are more comfortable and have electric lights, too. Care to live without showers and flush toilets? The kings of England and France had to. Next time you see a Shakespeare play in which kings and princes cavort, remember that royalty in Shakespeare’s day had rotten teeth, terrible breath, and body odor that would make you keel over.