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

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

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.”
 

 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

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)

Average wage = 48L per annum.

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.”

A week ago, Joshua Hager was despondent. Laid off by a mortgage company, he has looked for jobs ranging from bank teller to risk analyst. He was sending out as many as 10 resumes a day but was getting barely a nibble from employers or recruiters.

Hager has joined nearly 125,000 others on Wall Street and at mortgage firms and other financial companies who received pink slips since the start of 2007. It seems that nearly every week another financial firm lets go of thousands of workers at all levels. With the market flooded, it’s hard for the unemployed to land a job, experts said.

Every time he turns on the television, Hager worries that he’ll hear of more layoffs. He shuddered when he learned that JPMorgan Chase would acquire Bear Stearns, which employs 14,000 staffers.

“How many people will be swamping the job market?” he said. “Everybody in finance will be looking for a job.”

My Take : Rightnow the problem is with the Finance jobs. If the economy continues to detoriate, we might soon see other sectors also getting affected. If that continues for a prolonged period, other countries also could affected.

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.