India's 2 deficits

India’s yawning trade deficit is not a separate
problem from the government’s budget shortfall.
They are two sides of the same coin. The connection
between them becomes evident when one
looks at the current account gap not as the excess of
imports over exports, but as the difference between
the country’s investment and savings.
The twin problems started in February 2008,
when New Delhi undermined a six-year process of
deficit reduction by announcing a $15-billion
(~60,000 crore) farm debt waiver. That blunder,
compounded by several other acts of fiscal irresponsibility,
had a pernicious effect on the nation’s
savings-investment dynamics.
Fiscal profligacy encouraged households to seek
cover in imported gold as an inflation hedge. A quintupling
of household investment in “valuables”
between financial years 2008 and 2012 shrank the
pool of financial savings available to the domestic
corporate sector, which was unable to maintain the
breakneck pace at which it had been issuing debt
equity and debt securities.
That, in turn, made Indian companies increasingly
reliant on foreigners’ money to finish projects
already underway. The current account deficit shot
up to 4.2 per cent of GDP in the last financial year.
In the last two years, India’s stock of foreign debt has
shot up by 32 per cent even as the monetary authority’s
foreign currency reserves have fallen.
Unless the current account gap returns to a more
sustainable level, a repeat of the 1991 currency crisis
cannot be ruled out. In India’s case, a more sustainable
current account may mean reducing the
deficit to between 2.4 per cent and 2.8 per cent of
GDP, according to a Reserve Bank of India (RBI)
research paper.
Untangling the two deficits – fiscal and current
account – and bringing both under control will
require a three-pronged strategy: a competitive
exchange rate, further reductions in subsidies and a
frontal assault on inflation. Achieving all three simultaneously
will need deft co-ordination between the
government and the monetary authority.
Without co-ordination, subsidy reductions might
get in the way of a competitive exchange rate and
inflation control. For instance, as the government
unveils more steps like the recently announced 14
per cent increase in the price of subsidised diesel,
foreign investors will turn optimistic on Indian equities
and will try to take advantage of the pessimism
of domestic investors by buying stocks on the cheap.
That will put pressure on the rupee to appreciate —
pressure that the RBI should resist by buying the
incoming dollars for its foreign exchange reserves.
Slaying inflation, which has only once fallen
below seven per cent in the past 33 months, will be
the most difficult of the three tasks. Decades of
ignoring the country’s inadequate infrastructure
have left the economy badly supply-constrained
and prone to price upswings. Besides, as the government
pares back fuel subsidies, pump prices will
rise. If the central bank keeps the rupee weak, prices
of imported crude oil in local currency terms will
also remain elevated.
Not attacking inflation is not an option. The 13 per
cent depreciation of the nominal exchange rate in the
past year has been unable to revive exports and close
the trade gap partly because global growth is tepid
and partly because higher domestic inflation in India
is preventing the currency from becoming more competitive
in real, or inflation-adjusted, terms.
A weighted index of India’s real effective
exchange rate against 36 of its trading partners
depreciated only three per cent in the last fiscal
year. According to Nomura economist Sonal Varma’s
calculations, this year’s real depreciation – 7.7 per
cent so far – should narrow the current account
deficit by 0.8 per cent of GDP. However, if the price
of crude oil rises by just $15 per barrel, the gain will
be wiped out.
The US Federal Reserve’s money-printing tends
to make imported oil pricier in dollar terms. But
India can hardly ask the Fed to stop. Instead, New
Delhi needs to focus on combating domestic inflation
in order to improve the country’s competitiveness.
Unfortunately, there are no simple supplyside
solutions in sight. Insisting that global
large-format retailers like Wal-Mart and Carrefour,
which have only recently been allowed to set up
shop, source at least 30 per cent of their wares locally
could see more private investment in supply
chains. This will be crucial for controlling food price
inflation. But cold storage capacities and other supporting
infrastructure won’t spring up overnight.
Similarly, replacing a plethora of indirect taxes on
production, sales and consumption with a simple
goods and services tax would also be disinflationary.
But implementing the tax will require a constitutional
amendment. The legislation has already
missed so many deadlines that it’s hard to envision
it coming into force before the current government’s
term expires in 2014.
The difficulty of controlling inflation with supplyside
measures means monetary policy will have to
remain hawkish and contain aggregate demand. The
RBI recently said it would “reinforce” the government’s
pro-growth policies. That has given rise to
expectations that more rate cuts are on their way to
supplement a half-percentage-point reduction in
April. This is not the time to allow such expectations
to take hold. Rate reductions should be part of next
year’s policy agenda when the government has
demonstrated the success of its resolve to stop the fiscal
haemorrhage and after inflation has lost its sting.
Economic growth won’t be anywhere near the
central bank’s estimate of 6.5 per cent this fiscal
year. Rather than trying to reach this unrealistic
goal, the government should concentrate its energy
on surgically separating the twin deficits

SWAMINATHAN S Profit and Loss are made up

    The Comptroller and Auditor General’s (CAG) estimates of government losses and corporate gains have stirred much controversy. Supreme Court Chief Justice S H Kapadia attempted to elucidate valuation principles in a recent speech. He reportedly said, “Today, a number of controversies on valuation are discussed but the basic principle of valuation is that loss is a matter of fact and profit or gain is a matter of opinion. Please apply this test to the controversies going on. I do not want to discuss anything further. Loss is a matter of fact and profit and gain is a matter of opinion. So, if you understand these principles, we will be able to judge.”
I cannot make sense of this. I know of no principle in economics or audit that says losses are real but profits are not. One principle actually enunciated widely is “cash is a fact, but profit and loss are opinions”. That’s very different from the Chief Justice’s claim.
In 1975, the Press Club asked me to explain a puzzle. Its accounts showed a profit, but it had no money in the bank. Where had the profit gone? I soon found the answer. The accounts showed all receivables as ‘income’. But many members had not paid their bills, so the receivables had not been received! There was a paper profit, but a cash deficit. This was no error: audit rules specifically permitted this. This accounting practice was widely used by the biggest corporations. Some showed huge profits, but showed even bigger sums owed to the company by ‘sundry debtors’. Such companies had a big paper profit, and even paid taxes on this profit, yet had a cash deficit.
Beyond a point, treating receivables as profits becomes sheer pretence: the sums should be written off as unpayable. Some companies do writeoffs honestly, but others resort to ‘ever-greening’ dud loans, quite legally. Given such accounting flexibility, loss and profit are clearly matters of opinion, and can be manipulated to suit the company’s strategy. Again, a company’s balance sheet may not show all assets and liabilities: some can legally be kept off balance sheet. This enables companies to hide enormous liabilities off the books, showing a very healthy but misleading picture on their books. A classic example of this was Enron, which looked highly profitable, but accumulated such huge debts offbalance sheet that these ultimately sank the company. Citibank’s off-balance sheet activities helped sink it in the 2008 collapse.
Profit is not a clean, uncluttered concept. Operational profit is income minus expenses. But after that you have to deduct interest on loans, amortisation of old loans, depreciation and taxes. Here again, much flexibility is legally permissible, allowing a company to show profits or losses as it chooses. Contrary to Kapadia’s claim, all losses are not a fact. Back in the 1980s and 1990s, India had many large companies (notably Reliance) that paid no corporate tax. Why not? Because the government had provided several tax breaks. The old ‘investment allowance’ allowed companies to deduct a certain percentage of new investment from gross income. Investing in backward areas or highpriority industries was sometimes tax deductible. ‘Accelerated depreciation’ allowed companies to deduct up to 100% of the value of new equipment in the first year or use, even though the equipment might last decades. ‘Weighted deductions’ were given for items like R&D — that is, if a company spent . 100 on R&D, the tax law permitted the company to treat this as . 150 for tax purposes.
    In the 1990s, many companies took advantage of these tax incentives, entirely legally, and reduced their tax liability to zero. The balance sheets they presented to the taxman showed a loss after all deductions, so no tax was payable. Yet, the law allowed the same companies to present a totally different balance sheet to investors, showing bumper profits. That’s how zero-tax companies like Reliance enjoyed soaring stock market prices. This charade was finally checked by introducing a minimum alternative tax, ensuring that tax breaks could not be used to escape tax altogether.
Valuations are different from profits and losses. Profits and losses tell you about the past. But valuations are estimates of the future, and those are necessarily different from past performance. Facebook makes little profit, yet is seen as having such a huge future that it commands an astronomical price. By contrast, some profit-making companies sell at a discount because of poor future prospects. A company with good corporate governance (like Nestlé) will have a high market price relative to earnings. But a company with a poor image (Kingfisher) will have a much lower price, since investors don’t trust its accounts.
If a company is believed to have huge hidden bad debts — like Citibank in the US — its market price can be just half its book value. But a bank with a solid reputation — like HDFC Bank — is quoted at five times book value.
In sum, all valuations are opinions. The only reality is the actual market price, which fluctuates as valuations of buyers and sellers keep shifting. Whatever Justice Kapadia believes, losses are not a more solid ground for valuation than profits. Losses can be manipulated in balance sheets no less than profits. Cash profits and losses are more real, but even they are uncertain guides to the future. The CAG’s valuations cannot but be matters of opinion.

QE 3 holes From FT

When Ben Bernanke announced last week that the Federal Reserve would embark on potentially unlimited quantitative easing, the markets rallied in celebration. But the party is already coming to a close. Investors are increasingly nervous about the unintended consequences of printing more money. Meanwhile, Guido Mantega, Brazil’s finance minister, has accused the US of starting a “currency war”.
The case for QE3 rests on a combination of weak economic data and dangerous policy inaction. Despite an increasingly anaemic labour market, Congress is failing to stimulate the economy and address the “fiscal cliff” of expiring tax measures and planned spending cuts, which could plunge the US back into recession. On balance, Mr Bernanke’s decision to buy the politicians more time to fix the economy was right.
But the Fed is yet to persuade investors that this policy will deliver. First, as the economy is administered its third dose of QE, the medicine may have become less effective. As diminishing returns kick in, Mr Bernanke is having to push the economy further into uncharted waters just to make monetary policy work.
Second, there are potential longterm risks. Inflation may be under control for now, but as more money is pumped into the economy, there is a risk that prices may creep up in future. Also, some
worry that the Fed will not be able to implement its exit strategy when the economy recovers. Finally, by easing the pressure on Congress, QE3 may give politicians an excuse not to resolve their stand-off over fiscal policy.
For all these reasons, Mr Bernanke is in the line of fire domestically. But pressure from abroad is mounting too. The announcement of QE3 has weakened the dollar, as investors leave the US to seek higher interest rates abroad. As a result, foreign currencies are under pressure to appreciate.
Central banks across the world, most notably the Bank of Japan, eased monetary policy this week to reduce this pressure. But, as Mr Mantega’s remarks show, the rhetoric is becoming vicious. Emerging markets fear that their exports will become less competitive. “Hot money” flowing into the countries could lead to a credit binge. This is what happened in 2008, when the Fed launched QE1.
But emerging economies’ concerns over the impact of QE3 are overstated. Because of slower growth, countries such as Brazil are less appealing to investors than they were in 2008. This should limit QE3’s adverse impact.
Mr Bernanke has shown commendable bravery in compensating for Congress’s inaction. But his aggressive policy stance will not work forever. US politicians would be foolish not to use wisely the time the Fed has bought them.

Bank of England

EVEN following decades of show-off modern architecture in London’s financial district, the Bank of England’s headquarters in Threadneedle Street remains one of the City’s most imposing structures. It sits behind a huge neoclassical wall, dating from an era when anti-capitalist riots were a serious matter. An immense vault lies underground. Yet the edifice is not nearly big enough to house all the staff needed to carry out the bank’s remit, which is being greatly expanded by legislation making its way through Parliament. Around next April, the “Old Lady of Threadneedle Street” is expected to resume the role of supervising commercial banks that it lost in 1997. A thousand or so staff will be transferred from the defunct Financial Services Authority (FSA) to a new body, the Prudential Regulation Authority, under the central bank’s auspices. They will move into 20 Moorgate, a building recently vacated by Cazenove, an investment bank bought by JPMorgan Chase.
The Bank of England’s headquarters will continue to house its monetary-analysis wing, which provides the brainpower and number-crunching that informs the decisions of the nine-strong monetary-policy committee. Set up by the previous Labour government, the committee uses its power over interest rates and the purchase of government bonds (so-called “quantitative easing”) to hit its mandated target of 2% inflation. The central bank’s other wing, which looks after financial stability, fell into neglect until it was revived by the global crisis. The bank is to be granted new powers, such as varying over the business cycle the amount of capital banks must hold as a buffer, in order to preserve the financial system from another blow-up. The Bank of England’s overall reach will be enormous. An institution that watched a credit boom develop and was caught flat-footed in the early weeks of the financial crisis is being rewarded with an expansion of its powers. Can it handle them? Too big to nail The bank’s three main divisions will each have its own boss with the rank of deputy governor, as well as a policy committee, or board, composed of a mixture of senior bank executives and outsiders. Managing the strains that will inevitably develop between them and keeping tabs on all the bank’s many goals will ask a lot of the governor. A successor to Sir Mervyn King, who stands down next June after serving two five-year terms in the top job, is likely to be decided before the end of the year. The job will soon be advertised. The joke is that only superheroes need apply. Even the most gifted leader needs a staff with the right mix of skills. One concern is that the bank has lost too much of the tacit knowledge of the workings of the financial-services industry needed to be a good all-round regulator. When the bank took over interest-rate policy from the Treasury in 1997, it gave up its role as manager of public debt as well as its job supervising banks. That reduced the contact between bank staff and the City. And the primacy of the inflation mandate diminished the status of the bank’s financial-stability wing. Ambitious youngsters steered clear; some experienced staff left. When crisis struck, the bank was stuffed with smart economists but short of folk with a feel for finance. It will take time to restore the balance. A bigger worry now is that the proliferation of committees will lead to internal strife. What if, to halt a credit boom, the bank’s new financial-policy committee (FPC) decided to increase the sum banks must set aside against unexpected losses on home loans? Such action, if effective, would also slow the economy and might cause inflation to undershoot its target. The monetary-policy committee (MPC) ought then to cut interest rates. But that would stoke the demand for credit that its sister committee was trying to curtail in the interests of financial stability. It would be better to merge the two committees into one, say some economists, including Sushil Wadhwani, a hedge-fund manager who sat on the MPC until 2002. That way, when the two priorities come into conflict, the same group of people would be forced to decide the best trade-off between them. A single body might also find that an increase in interest rates is a more reliable way of preserving financial stability than the newfangled tools that will be at the FPC’s disposal. Academic estimates of the effect on GDP of varying capital requirements differ by a factor of ten, Mr Wadhwani pointed out to a parliamentary committee recently. Others believe the FPC’s role is largely redundant, as long as banks are forced to hold lots of capital and the payments system is ring-fenced should they fail. But the big, indeed clinching, argument for a separate body overseeing financial stability is that the cause might otherwise slip. Dangerous imbalances can build slowly in a financial system, in ways that may not be obvious to a group of economists whose main focus each month is whether the monetary-policy setting is too hot or cold to hit an inflation target. And banks are not the only source of potential trouble: AIG, a big American insurer, had to be bailed out shortly after the collapse of Lehman Brothers in September 2008. There is merit in having a committee charged with worrying solely about financial stability. Most of the time the FPC and MPC will be leaning in the same direction: credit booms that threaten financial stability will also tend to add to the pressure on inflation. But there is probably no institutional set-up which would make the goals of stable inflation and stable finance compatible at all times. Inflation is a well-understood goal and, with luck, today’s monetary-policy choices might hope to affect it within two years. By contrast, it is hard to know how much weight to give in such decisions to the remote chance of a financial meltdown. The two committees will have to slug it out. It may then be up to the bank’s governor to divine and explain the balance struck between the two. Better, though, to have such conflicts aired than for financial stability to be ignored altogether. Outside the loop Perhaps the greatest concern about the new arrangements is that they will strengthen the hand of an already mighty governor and his deputies. One potential source of power is the informational advantages the bank’s executives have over the external members of its policy committees, who are not permanent staff. The external members are there in part for their expertise but also as a check on the bank’s institutional might and the tendency of its staff to adhere to particular shibboleths (such as the notion that financial markets are always efficient) that can lead to costly errors in policymaking. Critics point to the fact that the governor and his deputies will sit on all the important committees. Perfect “if you want to pursue a policy of divide and rule”, says a former staffer. For such critics, the way the bank’s “funding for lending” scheme was announced in June is an example of how the bank’s insiders rule the roost. The scheme, which was hatched by senior bank staff in co-operation with the Treasury, gives commercial banks access to cheap money for up to four years. The cost of funds is lowest for banks that sustain their lending to businesses and householders. If it is effective, the scheme will boost spending and add to inflationary pressures. But the four external members of the MPC did not decide on its features or vote on how big it should be. If the scheme is viewed as a way to provide liquidity to banks in an emergency, it is not strictly the MPC’s business. But not everybody sees it that way. There is a case that the MPC ought to be sovereign over such a scheme since it, at least in part, relies on monetary-policy tools and influences aggregate demand. It’s personal Much of the concern about the bank’s powers and the need to keep its executives in check revolves around the present governor, a sharp intellect who can be disdainful of those who do not share his rigour or see things as he does. Sir Mervyn has a gift for rubbing external MPC members up the wrong way. Mr Wadhwani challenged him on the issue of research support for external experts, and won. Another former member, David Blanchflower, called him a “cruel tyrant”. Adam Posen, who stepped down from the MPC in August, has complained about the narrow definition of monetary policy the bank adheres to. The purist approach he grumbled about is a hallmark of Sir Mervyn’s. His successor may prove more flexible, or at least more diplomatic. If the new arrangements are to work harmoniously, each committee will have to be gently dissuaded by the governor from attempting to do the job of another. The bank’s next boss will also have to ensure that information flows freely between the bank’s three wings, as well as from bank insiders to experts. The external members of the MPC and FPC will be free to attend each others’ pre-meeting briefings given by the bank’s analysts. Spencer Dale, the bank’s chief economist, is said to be scrupulous in ensuring that external MPC members get the same access to information as insiders. It should be possible to keep the financial-policy “externals” in the loop, too, even though their committee meets less frequently. There is a reason the Bank of England has been granted so much power. Technocrats are thought to do a better job of ensuring financial and price stability than politicians, because their decisions are not distorted by the pressure to win elections. Hiving off bank supervision to the FSA in 1997 contributed to the regulatory laxity that allowed financial troubles to build up. Having handed back those powers to the bank, and added some more, politicians must hold it to account through regular parliamentary hearings and appoint top-class experts as external members of its committees. Sir Mervyn gave a parliamentary committee this response to concerns about the bank’s growing clout: “If you feel that these decisions are better taken by the elected government, then you should take the power back from us.”

ECB cant save

SOMEBODY must have put on the wrong film. In late July Mario Draghi, president of the European Central Bank, came out looking like a tough sheriff ready to take on bond-market speculators while others cringed. The euro was irreversible, he declared. “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Yet instead of a great shoot-out, Mr Draghi later said he was mulling only a limited holding action. And now he has ducked out of sight, cancelling his appearance in cowboy country past weekend at the annual get-together of central bankers in Jackson Hole, Wyoming. Gary Cooper would never have cried off because of his “heavy workload”. With the power to create money, Mr Draghi owns the biggest gun of all. Merely the hint that he is prepared to use it to buy bonds has had a reassuring effect, averting any panic over the summer. Investors are now waiting to see what he will do when the ECB’s governing council meets on September 6th. Perhaps Super-Mario needs time to saddle up. But there is a more worrying possibility: that Mr Draghi is slugging it out with deputies trying to keep the gun-closet locked. Jens Weidmann, president of Germany’s Bundesbank, says intervening in the bond market comes dangerously close to breaking the law that bans the ECB from financing states. Governments created the crisis, and governments should resolve it, argues Mr Weidmann. If they become reliant on the ECB’s power, they will never do anything for themselves: ECB money, he suggests, “can become addictive like a drug.” Mr Weidmann’s challenge is polarising views in Germany. Many worry that the euro will turn into a soft currency area with high inflation—rather like Mr Draghi’s native Italy in the days of the lira. Alexander Dobrindt, general secretary of Bavaria’s Christian Social Union, part of Germany’s ruling coalition, says the ECB risks becoming “the currency forger of Europe”. To a greater extent than outsiders might think, Mr Draghi shares Mr Weidmann’s concerns. The word from Frankfurt is that, because he has run Italy’s treasury and its central bank, Mr Draghi knows more than most how monetary financing of deficits can lead to high inflation. He also knows that past bond-buying by the ECB had no lasting impact and loaded the ECB with dubious bonds. But to him this means that the weapon should be used with care, not banned entirely. In early August Mr Draghi said the ECB was prepared to resume bond-buying under strict conditions. First, countries seeking help should make a formal request to the temporary European Financial Stability Facility or the (planned) permanent European Stability Mechanism. Second, they should commit to reforms. And third, the rescue funds should buy long-dated bonds in the primary market to bring down borrowing costs. Only then, if needed, might the ECB deploy its fire-power to buy short-dated debt in the secondary market. Action at the short end, Mr Draghi argued, was closer to conventional monetary policy. This is a narrower front than the one chosen by his predecessor, Jean-Claude Trichet, but Mr Draghi thinks he can deliver more fire-power. He said the scale of intervention would be “adequate”. And he also promised to address investors’ fears that ECB purchases would have the effect of subordinating private bondholders. He can surely get his way: mighty Germany wields the same voting power in the ECB as tiny Malta.

The real question is the extent to which Mr Weidmann has the support of the German government. There is talk of Berlin’s irritation with the Bundesbank’s fundamentalism. Tellingly, the other German on the ECB council, Jörg Asmussen, endorses Mr Draghi’s view that the ECB should intervene to assuage fears that the euro will break up. The drama is heightened by the fact that Mr Weidmann was until last year Angela Merkel’s loyal economic adviser. Yet even if the chancellor sees him as her turbulent Thomas Becket, she is careful not to seem to want rid of him. Mrs Merkel may well tacitly support Mr Draghi. After all, say senior Eurocrats, it is easier to get the ECB to prop up countries than to ask the Bundestag for more bail-out money or Eurobonds.


 Indeed, many see the ECB as the euro’s ultimate saviour. It has the independence and means to act decisively. As a guardian of the euro it sees the European interest better than national politicians and central banks. And it has a strong incentive to act: without the euro there would be no ECB. But this is too simple a view. The ECB must always perform a balancing act: between its power to print money and its unusually narrow legal mandate; between its independence and the need to maintain political consent. By placing governments in the front line, Mr Draghi seeks to avoid moral hazard of two sorts. One is the risk that debtors will abandon reforms as soon as market pressure is relaxed, as happened with Italy under Silvio Berlusconi last summer. Instead of writing secret letters, the ECB wants other European bodies overtly to enforce fiscal and structural reforms. The other, unspoken, danger is that without a fear of the euro’s collapse, creditors will shirk action to solidify the euro through greater economic, financial, fiscal and political integration and risk-sharing. The euro’s crisis is fundamentally political, not monetary or financial. The ECB cannot fix the euro; it can only buy time. In many ways Mr Weidmann is right to say that, if there is to be mutualisation of risk it should not be done through the back door of the ECB, but rather through the front door (eg, with Eurobonds) and with the agreement of national parliaments. Some in the ECB think that the crisis will have to worsen before politicians take such radical action. Either because he cannot, or because he does not want to, Mr Draghi will not be the lone ranger.

Minimum capital required

For a Private Limited company – INR 100,000
For a Public Limited company – INR 500,000
But you should not assume it as FINAL. There are certain other details that you must know before selecting the name of your company.
In order to use certain prescribed words in the ‘names’, the companies should comply with the provisions stipulated by Ministry of Corporate Affairs with regard to minimum Authorised Share Capital that needs to be fixed at.
Here’s the list of prescribed minimum authorised share capital amount for use of certain words in the name (Amount in INR):
5 lacs – For the words Hindustan, India, Bharat within the name (with or without bracket).
10 lacs – For the words Enterprise, Products, Business and Manufacturing
50 lacs – For the words International, Global, Universal, Continental, Intercontinental, Asiatic, Asia used within the name (with or without bracket).
50 lacs – Hindustan, India, Bharat, being the first word of the name
1 crore – International, Global, Universal, Continental, Intercontinental, Asiatic, Asia as first word, and the word Industry and Udhyog anywhere in the name.
5 crore — The word ‘Corporation’ anywhere in the name.
You can even refer to Circular F. No. 27/1/87 dated 13-3-1989 for further details.

Knowing too much

Called upon at the start of the credit crunch to explain the collapse in value of a Goldman Sachs investment fund, the bank’s chief financial officer did some high-net-worth headscratching: “We were seeing things that were 25-standard deviation moves, several days in a row.” Which all sounds plausibly lofty and technical until you are reminded of the observation from the economist Tim Harford that one wouldn’t expect to see three 25-standard deviation days in a row for far longer than the 13bn years the universe has been in existence. Goldman’s David Viniar was effectively saying that his models weren’t at fault; it was reality that was wrong.
Laughable though that sounds, fi nancial regulators – the people paid to protect the rest of us from overconfident financiers – have trusted the bankers and their highly sophisticated models of risk. Indeed, the watchdogs have themselves adopted ever more complex models of risk – thus taking the bankers at their own word. As the Bank of England’s Andy Haldane points out in an important new paper, The Dog and the Frisbee, the first international Basel rules on fi nance reached in 1988 ran to only 30 pages. The latest incarnation, Basel III, weighs in at 616 pages. In America, the DoddFrank act on financial regulation is more than 20 times as long as Glass-Steagall, the 1933 law that split investment banks away from savings
Euro crisis
Plenty of pain in Spain
Whether the European single currency survives its existential crisis (and the betting on that must be yes, more or less), the larger project of bringing the continent closer together has been fatally damaged.
That much was admitted by the European Central Bank last month in a bulletin titled Indicators of Market Segmentation, which found that lending across borders within the eurozone has fallen from 60% of money-market flows last summer to 40% this February. Foreigners held about 45% of all Spanish government debt in 2009; now the figure is closer to 30%. What was one continent – at least in financial terms and for over a decade at that – is swiftly coming apart.
But the Great Break-Up goes further and deeper than that: not only are European nations coming unstuck from each other, they are also breaking into regions. Clear evidence was visible in Spain  last week, with Andalucía becoming the fourth province in the country to ask Madrid for a cash rescue, after Valencia, Murcia and Catalonia. In part, this is about regions unable to bear the fiscal discipline that northern Europe has imposed on Madrid and banks. All this complexity costs: the number of people employed in the UK’s fi nancial sector has barely increased over the past 20 years (despite the lobbyists’ promises, finance does not create jobs); the number of regulators has leapt almost six fold.
Yet all this detail and sophistication is a less effective guide to regulation than the old trusty rules of thumb. As Mr Haldane effectively demonstrates, looking at how much banks had borrowed by the end of 2006 – their leverage ratio – would have been a better predictor of which would go bust than all the rest of the armoury. As the Bank’s head of fi nancial stability sums up: “Modern finance is .… too complex … As you do not fi ght fi re with fi re, you do not fi ght complexity with complexity.”
Two obvious conclusions fl ow from this. The fi rst is that financial economics is heading back towards the world as Keynes and Hayek knew it: where economic uncertainty was recognised as such, rather than mathematised and mis-sold as controllable risks. Second, that regulators really ought to deal with bankers using a regime of brutal simplicity that errs o n the side of caution. If a bank looks like it’s borrowed too much, it probably has –  and should be stopped. Mr Haldane’s view makes far more sense than that described in the Basel agreements or Vickers commission: and in its simplicity, it is pleasingly radical.

QE and Monetary transmission mechanism

Back in the old days, when dinosaurs roamed the earth and students still learned Keynesian economics, we used to hear a lot about the monetary “transmission mechanism” — how the Fed actually got traction on the real economy. Both the phrase and the subject have gone out of fashion — but it’s still an important issue, and arguably now more than ever.
Now, what you learned back then was that the transmission mechanism worked largely through housing. Why? Because long-lived investments are very sensitive to interest rates, short-lived investments not so much. If a company is thinking about equipping its employees with smartphones that will be antiques in three years, the interest rate isn’t going to have much bearing on its decision; and a lot of business investment is like that, if not quite that extreme. But houses last a long time and don’t become obsolete (the same is true to some extent for business structures, but in a more limited form). So Fed policy, by moving interest rates, normally exerts its effect mainly through housing.
Not this time, however, since housing is deeply depressed and there’s a huge overhang of excess capacity.

The transmission mechanism, such as it was, would have to operate through stocks and the dollar.
Since then, several things have happened. First, when I wrote that I don’t think I fully grasped just how big the shortfall in home construction has been, and how long it has gone on; and at this point, of course, it has gone on for another year and a half. So at this point it’s not at all clear that we have an overhang of excess housing capacity; we might even have a shortfall.
And we’re seeing a modest housing recovery starting:

This means that they actually can hope that the Fed’s new policy will boost housing as well as operating through other channels, and therefore that it can act more like conventional monetary policy in fostering recovery.
That said, I’m still skeptical about whether monetary policy alone can come close to doing enough — a skepticism shared by Ben Bernanke:

So looking at all the different channels of effect, we think it does have impact on the economy, it will have impact on the labor market but as again, the way I would describe it is a meaningful effect, a significant effect but not a panacea, not a solution for the whole issue.

THEY  still need fiscal policy. But it’s good to see the Fed doing more.

India Falls But FDI

Could be over but FDI sanction today looks to be an exclusive effort to bring up the GDP gowth of the country which has struggle through out these years recently.But India has never been a country that even ponder upon sustainable and distributive (welfare ) kind of growth forget striving for it , and for sure it will not do that in near future too.
Though if we look at the macro data closely Eurozone crisis only effects the exports part to the country. But the slow activity , poor supply,policy paralysis and inflation looks to hurt it the most. I have always said in recent times that Indonesia, Malay are the better option to put your bets and you willnot regret it. But the intial question was...
Is India heading towards the end of its much-touted growth story? A report by global credit rating agency Standard and Poor’s (S&P) released on June 11 seems to suggest so. Titled “Will India be the first BRIC fallen angel,” the report cautions that India may become the first so-called “BRIC” (Brazil, Russia, India and China) country to lose its investment grade rating.
According to the report, slowing growth and political road-blocks in policy making could lead to Indian paper being relegated to junk bond status. The report notes that “the division of roles between a politically powerful Congress president who can take credit for the party’s two recent national election victories, and an appointed Prime Minister has weakened the framework for making economic policy.” It further warns that “setbacks or reversals in India’s path towards a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality.”
S&P’s latest statement on India is in line with its earlier move a few weeks ago. In April, the agency had lowered India’s rating outlook from stable to negative and warned that further action would follow if India did not get its act together. India’s sovereign rating by S&P is BBB-, which is the lowest investment grade rating among the BRIC countries. It is also the only BRIC country with a negative outlook. S&P’s rating for China is AA- with a stable outlook. For Russia and Brazil, it is BBB with a stable outlook.

How much of this is bravado — and what measures the government will take to get back on track — will be clear in the coming weeks and months. For now, there is not much to cheer about. India’s GDP growth for the January–March quarter at 5.3% was the lowest in nine years. For the year 2012-2013, growth estimates now are at around 6% — way below the 7.6% the government had projected at the beginning of the year. The country is also facing fiscal and current account deficits.

But i dont see deficit as a problem our deficit is a good one.

According to Rajesh Chakrabarti, assistant professor of finance at the Indian School of Business, the possibility of a downgrade by S&P is not surprising, since the India brand has been taking a hit on many fronts for the past several months. However, he is not convinced by the reasoning offered by the agency. “While there is indeed a slowdown on policy initiatives and growth has slowed down, the fact that a country [could lose] its rating because some of the anticipated things did not happen is a rather strange argument. Normally, a downgrade would happen because of adverse events rather than non-happening of positive events.” He adds that growth slowing down per se is not a risk factor. “While [slower growth] may reduce the prospects of future gains, it does not make the country more risky.”
At the same time, Chakrabarti believes that the move by the rating agency could be a timely warning for the government. “If the government wakes up [as a result of S&P’s warning] it will be great for the country and the economy. But of course to what extent the government reacts to it remains to be seen.”
Others, too, believe that S&P’s move could have an upside. “I see it as a positive development for the economy and the market. This will push the government to move faster on reforms, with the RBI (Reserve Bank of India) helping through rate cuts,” said Dharmesh Mehta, managing director – institutional equity at Enam Securities, talking to the daily newspaper Times of India. Samiran Chakraborty, chief economist and head of research at Standard Chartered Bank, told business daily Business Standard: “Getting growth on track assumes more importance than ever, and a pro-growth policy stance will be critical.”

The Cabinet’s decision came as a major surprise and immediately sparked new optimism that a government plagued by scandal was finally breaking out of the political paralysis that had stifled reforms for months.
The Cabinet decided to allow foreign firms to own a majority stake in multi-brand retailers here for the first time. However, individual states would have the right to decide whether to allow the retailers to operate from their territory, according to government officials.
U.S.-based Wal-Mart, British-based Tesco PLC, French-based retailer Carrefour and others have been interested in entering India, a country of 1.2 billion people where retail is the second-biggest industry behind agriculture.

The government had agreed on the same proposal last year but then withdrew that decision because of protests from coalition partners, a capitulation that badly damaged its credibility with international investors.
Since then, economic growth has fallen, with business leaders and analysts blaming the government’s inability to make needed reforms.
The Cabinet also agreed to allow foreign investment in airlines and to sell stakes in state-owned companies. On Thursday, the government decided to reduce fuel subsidies and allow the price of diesel to rise, a move hailed by the business community but criticized by political allies and opponents.
D. Raja, a Communist Party lawmaker, said opening the door to international supermarket chains would hurt poor farmers and small shop owners.
“(It) will lead to job losses for millions of our people,” he told the NDTV news channel.
The main opposition Bharatiya Janata Party also criticized the surprise decisions.
“These things are being done in the most hurried manner,” BJP spokesman Ravi Shankar Prasad told NDTV.

 I told you they are looking here to up the ante by opening up the sectors and kicking the economy again 

The sensex ( a fake barometer ) was looking happy today gaining 450 points

Incentive Effects

From 2005 to 2008 the price of oil in world oil markets skyrocketed, the result of limited supplies together with surging demand from robust world growth, especially in China. The price of gasoline in the United States rose from about $2 to about $4 a gallon. At the time, the news was filled with stories about how people responded to the increased incentive to conserve, sometimes in obvious ways, sometimes in less obvious ways.  Here is a sampling of various stories:
•     “As Gas Prices Soar, Buyers Are Flocking to Small Cars”
•     “As Gas Prices Climb, So Do Scooter Sales”
•     “Gas Prices Knock Bicycles Sales, Repairs into Higher Gear”
•     “Gas Prices Send Surge of Riders to Mass Transit”
•     “Camel Demand Up as Oil Price Soars“: Farmers in the Indian state of Rajasthan are rediscovering the humble camel. As the cost of running gasguzzling tractors soars, even-toed ungulates are making a comeback.
•     “The Airlines Are Suffering, But the Order Books of Boeing and Airbus Are Bulging“: Demand for new, more fuel-efficient aircraft has never been greater. The latest versions of the Airbus A320 and Boeing 737, the singleaisle workhorses for which demand is strongest, are up to 40% cheaper to run than the vintage planes some American airlines still use.
•     “Home Buying Practices Adjust to High Gas Prices“: In his hunt for a new home, Demetrius Stroud crunched the numbers to find out that, with gas  prices climbing, moving near an Amtrak station is the best thing for his wallet.
•     “Gas Prices Drive Students to Online Courses“: For Christy LaBadie, a sophomore at Northampton Community College, the 30-minute drive from her home to the Bethlehem, Pa., campus has become a financial hardship now that gasoline prices have soared to more than $4 a gallon. So this semester she decided to take an online course to save herself the trip  —and the money.
•          “Diddy Halts Private Jet Flights Over Fuel Prices“: Fuel prices have grounded an unexpected frequent-flyer: Sean “Diddy” Combs. . . . The hip-hop mogul said he is now flying on commercial airlines instead of in private jets, which Combs said had previously cost him $200,000 and up for a roundtrip between New York and Los Angeles. ”I’m actually flying commercial,“ Diddy said before walking onto an airplane, sitting in a first-class seat and flashing his boarding pass to the camera. ”That’s how high gas prices are.”

A freshwater

In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he held, would just add to the confusion.
The economists trying to provide macroeconomics with microfoundations soon got carried away, bringing to their project a sort of messianic zeal that would not take no for an answer. In particular, they triumphantly announced the death of Keynesian economics without having actually managed to provide a workable alternative. Robert Lucas, famously, declared in 1980—approvingly!—that participants in seminars would start to “whisper and giggle” whenever anyone presented Keynesian ideas. Keynes, and anyone who invoked Keynes, was banned from many classrooms and professional journals.
Yet even as the anti-Keynesians were declaring victory, their own project was failing. Their new models could not, it turned out, explain the basic facts of recessions. Yet they had in effect burned their bridges; after all the whispering and giggling, they couldn’t turn around and admit the plain fact that Keynesian economics was actually looking pretty reasonable, after all. So they plunged in deeper, moving further and further away from any realistic approach to recessions and how they happen. Much of the academic side of macroeconomics is now dominated by “real business cycle” theory, which says that recessions are the rational, indeed efficient, response to adverse technological shocks, which are themselves left unexplained—and that the reduction in employment that takes place during a recession is a voluntary decision by workers to take time off until conditions improve. If this sounds absurd, that’s because it is. But it’s a theory that lends itself to fancy mathematical modeling, which made real business cycle papers a good route to promotion and tenure. And the real business cycle theorists eventually had enough clout that to this day it’s very difficult for young economists propounding a different view to get jobs at many major universities. (I told you that we’re suffering from runaway academic sociology.) Now, the freshwater economists didn’t manage to have it all their way. Some economists responded to the evident failure of the Lucas project by giving Keynesian ideas a second look and a makeover. “New Keynesian” theory found a home in schools like MIT, Harvard, and Princeton—yes, near salt water—and also in policy-making institutions like the Fed and the International Monetary Fund. The New Keynesians were willing to deviate from the assumption of perfect markets or perfect rationality, or both, adding enough imperfections to accommodate a more or less Keynesian view of recessions. And in the saltwater view, active policy to fight recessions remained desirable.

update

In 2005 the right-wing magazine Human Events listed Keynes’s General Theory among the ten most harmful books of the nineteenth and twentieth centuries, right up there with Mein Kampf and Das Kapital.

Repo rate by HDFC chief economist

As the mid-quarter monetary policy review due
on September 17 draws near, the usual speculation
about the Reserve Bank of India’s (RBI’s)
action is building up. There is a minority that hopes
that the combination of sub-six per cent growth in
the last two quarters and somewhat lower-thanexpected
inflation rates will persuade the RBI to drop
the policy rate. The majority in the markets, however,
expects no change — particularly in the absence
of any visible efforts by the government to pare the
fiscal deficit or improve the food-supply situation.
However, in fretting endlessly over whether or
not the central bank is likely to cut the policy rate by
a minuscule quarter of a percentage point, we tend
to forget the fact that the interest rate is ultimately
the price of credit — and, like all prices, is determined
by its demand and the supply. Thus, to figure
out where actual lending and borrowing rates are
headed, a quarter of percentage point change in the
repo notwithstanding, it is important to get a handle
on what the balance between the demand and supply
of credit looks like.
At the risk of stating the obvious, let me point
out a couple of things. The supply of credit is the
available pool of deposits in the banking system,
adjusted, of course, for what the RBI takes away in the
form of the cash reserve ratio (CRR) and the statutory
liquidity ratio (SLR). Of the two, the CRR is really
the binding constraint, and the easiest way to influence
the supply and hence the price of credit is to
push the CRR up or down. Given its potency in managing
interest rates, it might not be such a good idea
to abolish it after all.
Second, banks make their money from the difference
between their cost of deposits and other borrowings
and the rate at which they lend. This is the
interest margin. As profit-maximising entities
accountable to their shareholders, it is rational for
them to try and at least protect these margins to the
extent possible. The implication is that banks are
unlikely to drop lending rates sharply unless they are
able to reduce deposit rates. But can they?
A couple of things are important here. First the
supply of deposits relative to credit is fairly tight,
with the credit-deposit ratio at over 75 per cent. To
put this in perspective, it might be useful to look at
previous episodes of sharp cuts in deposit rates. In
the 2001-2003 period, when banks on average
reduced their deposit rates by three and a half percentage
points, the credit-deposit ratio was a little
less than 55 per cent. A similar reduction took place
in the period between 2008 and 2009 when plummeting
credit demand (in the wake of the financial
crisis of 2008) reduced the credit-deposit ratio by a
good five percentage points over a short span of time
This is unlikely to happen this time. Informal surveys
of bankers suggest that they are somewhat comfortable
with the 17 to 18 per cent rate of credit growth
that they see at current lending rates and do not
expect this to reduce dramatically. In fact, credit offtake
tends to pick up in the second half of the year;
come October, the credit-deposit ratio could start
moving up again. Add to this a fairly hefty government
borrowing calendar (and an overrun in borrowings
on the back of a runaway fiscal deficit), and
any potential comfort on the liquidity front could just
about evaporate. In fact, the RBI might have to step
in with both a cut in the CRR and bond purchases
from banks (to release rupees) to restore a balance.
What about the longer term? If the deceleration in
economic activity continues and GDP growth
remains sub-six per cent, it is likely to take a toll on
credit demand. These things work with a lag and
our estimates suggest that it could take at least six to
eight months for weak GDP growth to seep into the
credit market. If loan demand loses traction, banks
will certainly reduce their effort to mop up deposits
and could start lowering deposit rates.
Their response on the lending front might, however,
be far more nuanced. For one thing, given slower
economic growth and the possibility of delinquency,
it might not make sense to hawk more loans
by reducing interest rates. This is particularly true for
intensely cyclical sectors where creditworthiness is
affected the most. I would, for instance, be surprised
to see a rate war among banks in the market for truck
loans in the middle of a severe economic slowdown.
Ditto for things like unsecured personal loans. The
sole beneficiaries in terms of interest rates would
typically be large, financially stable companies
whose cash flows and ability to service loans are relatively
protected from the vagaries of the business
cycle. As banks make a beeline for these “quality”
assets, their rates could come down sharply.
There is another reason why banks might not want
to reduce margins by lowering credit rates to expand
their loan books. Various estimates including the one
released by the RBI in its recent Financial Stability
report suggest that non-performing loans are likely to
spike in 2013 as repayments of loans to vulnerable sectors
like power become due. Banks will have to provide
for these bad debts and that will entail a straight
hit to their bottom lines. To compensate, they will
have to ensure that the profitability on performing
loans does not fall; in fact, they could actually want
this profitability to increase. Thus, the legroom for
drooping margins, and hoping that volume growth in
credit somehow compensates for this against the
backdrop of falling credit demand, is limited.
Banks also need to raise large amounts of capital
to meet their capital requirements especially as the
more stringent demand of Basel-III kick in. The RBI’s
annual report points out that public sector banks
alone will need ~1.75 lakh crore of just equity capital
to meet Basel-III. This would be impossible to achieve
if profitability declines sharply.
The fundamentals of the banking market suggest
that we might be stuck in a relatively high-interest rate
regime for a while. Small cuts in the repo rate might
work wonders for market sentiment but will have
only a marginal impact on actual borrowing costs.

We the Poorest

My friends do talk about the growth of India , its positon and becoming a world super power competing the large giants China , US, Germany .......
And when you ask them about Africa they see it as very poor nation who needs help from every country to survive Is it true? Is Africa the poorest continent on earth?


Well The answer is NO. People have long tongue but they know nothing.
Africa is not the poorest continent on earth. In fact, Asia is far poorer than Africa. The Indian subcontinent alone contains nearly 50 percent of the total population of poor people in the world today. Africa and the rest of Asia contain about 40 percent of the world's poor population. Latin America and the rest of the world contain the remaining 10 percent. So as you can see, Africa contains just about 20% of the world's poor population. Asia contains at least 60-65% of the world's poor population. It depends on how you view poverty. If you are judging continents based on the number of advanced countries then you may put Asia ahead of Africa because of countries like Japan and China but if you are judging continents based on the number of poor people and the intensity of poverty then it is a huge mistake to place Asia ahead (in the good side) of Africa why because Africa is far better than Asia in terms of living conditions and the levels of poverty.
According to the new UNDP Human development multidimensional poverty Index (MPI), there are about 29 different states in India but just 8 Indian states out of the 29 contain more poor people than 26 poorest countries in Sub-Saharan Africa combined. According to the report, it is not just the number but also the intensity/level of poverty. In other words, the poor people in India live in worse conditions than the poor people in Africa. India is not the only poor country in Asia. In fact countries like Bangladesh, Nepal, Cambodia, Pakistan, Afghanistan, Burma, etc. are even poorer than India and they are all in Asia.
There are poor people in Africa and Africa needs help but there are even poorer people in Asia who need much more help than Africa. The western media always portray Africa as the dark continent full of nothing but poverty, hunger, pain and misery which isn't the case. It is true there is poverty in Africa but not all countries in Africa are poor. Some countries are poorer than others. A country like South Africa is far more advanced than most countries in the world today. Even Botswana (a middle income country), Ghana and other lower middle income countries in Africa are far better than most countries in the world today. Take China for example. China is an advanced country but there is extreme poverty in some places especially rural China. Even in America the richest country on earth, some people sleep on streets why because they have no place to call their home while the few extremely rich people continue to pile billions of dollars in their bank accounts. China is in Africa pretending to help develop but the truth is that, China is in Africa to outsource. China is in Africa because they need raw materials to feed their exploding population. China is outsourcing Africa even worse than the way the United States outsources countries like India and the Philippines.
Is Africa poor? yes Africa is poor. Are there hungry people in Africa? yes there are hungry people in some parts of Africa. Why is there still hunger in Africa? there are many reasons why some people still go to bed hungry in Africa. I came across this question online "WHAT HAPPENED TO ALL THE DONATIONS AND FOREIGN AID THEY'VE BEEN SENDING TO AFRICA?". If you want to help the poor in the society then always look for the direct means of contact so you can help the poor and the needy directly. People keep donating huge amounts of money to charity organizations to help feed the hungry people in the world today but what do we see? people still go to bed hungry. If a charity organization makes lets say $50,000 dollars a month and pays the CEO and other executives $25,000 and the remaining workers $15,000 , It remains just $10,000. The poor do not get all the 10,000 why because transportation, feeding, and other expenses cut in too. So at the end of the day, the poor gets nothing out of the $50,000 money the charity organization received in donations. That is exactly how most charity organizations work today.
What about the foreign aid? Foreign aid may appear free to some people but the truth is that, none of the foreign aid poor countries receive is free. For every dollar ($1) in aid a developing country (such as the poor countries in Africa) receives, the developing country spends around 25 dollars ($25) in repayment. Foreign aid is worse than regular loans because of the huge "hidden-interest". Some countries in Africa especially the war-torn countries like Liberia, Congo, Sudan, etc. have no where else to go for loans and that is why they still depend on foreign aid. It is like a financial trap. If you read about debt cancellations for poor countries, you may think they forgive those poor countries without getting anything in return but that is not how it works in reality. They may forgive you of the $100,000 loan but they take about $1 million worth of timber and other natural resources in return. China is in Africa building bridges and constructing roads and some people think they are doing it for free which is not true. For every road China constructs, China will take huge "tons" of natural resources in return.
Africa is blessed with abundance of natural resources yet people go hungry in Africa everyday. Why people go hungry despite the abundance of natural resources? As I mentioned earlier on, some countries (such as China) come to Africa pretending to help but end up exploiting Africa's natural resources sometimes free of charge. There are so many foreign companies in Africa today yet even some workers who work in these foreign companies go to bed hungry why because those foreign companies are in Africa just to outsource and the outsourcing in Africa is so bad to the point where even the local workers working for these companies go hungry. Those foreign companies get workforce, natural resources, etc. free of charge. People work in these foreign companies but gain very little not even enough to feed themselves and their families which is very sad.
Africa has the natural resources and what it takes to be the greatest yet people still go hungry in Africa. Why do we still go hungry? It is because we depend on western countries more than ourselves. Instead of putting our brains together and utilizing the available natural resources to better the living conditions in Africa, we give these natural resources away almost free of charge.
Take a country like Ivory coast for example. Ivory Coast is the world's leading producer of cocoa beans. Children work like slaves in cocoa farms in Ivory Coast yet most of these children working like slaves in cocoa farms have not even tasted chocolate before why because Ivory Coast sells the cocoa beans at very cheap prices to foreign countries who convert the cocoa beans into chocolate and then sell these chocolates at very expensive prices to poor countries such as Ivory Coast. Those who work like slaves in the cocoa farms to produce the cocoa beans cannot even afford to buy chocolate which is very sad. Meanwhile, if Ivory Coast imports those chocolate-making machines and start producing the chocolate in Ivory Coast, they could sell these chocolates at reasonable prices to foreign countries and make more profit.
Agriculture and education are the backbone of every country on earth yet most African governments ignore these sectors as if they are unimportant. Africa has so many fertile lands yet we still go hungry. Instead of developing Agriculture and improving education, our politicians waste money on luxurious vacations abroad with their sex partners. Instead of developing Agriculture and education, African leaders waste precious money and time developing their goat-bellies. It is time we do away with all these greedy leaders in Africa and start thinking.
So what is the New Africa? The new Africa is the Africa of hope. The new Africa is the Africa of bigger dreams. The new Africa is the Africa whereby people depend on themselves instead of depending on foreign countries. Africa has all it takes to be the greatest continent on earth in terms of fighting poverty and hunger. Africa has the brains and the power to do it. All we need to do is come together as one people. Sometimes they manipulate us to fight and kill ourselves. The new Africa is the Africa whereby people cherish peace and prosperity more than anything else. War brings nothing but destruction. War brings nothing but pain. War brings nothing but misery. There is nothing good in war and tribal conflicts yet we allow ourselves to be manipulated and we have given in to manipulation to the point where we fight and kill our own brothers and sisters for no good reason at all. It is time we start thinking. The new Africa I see is the Africa whereby people think for themselves. The new Africa I see is the Africa whereby people see reason. There is hunger in Africa today why because we spend precious time and energy fighting and destroying precious lives instead of putting that energy into good use. Africa has done it before so we can do it again. Lets come together as one people with a common destiny and fight poverty and hunger.

Iran China

Iran has also become a lucrative market for Chinese products and services. China is investing $1 billion to improve Tehran’s infrastructure. A Chinese conglomerate has already expanded the sprawling capital’s underground railway, under a contract worth $328m. Most of the Chinese in the Qazvin language class are young women. Roughly half are married to Iranians; the rest are eager economic migrants. Chun, the most gregarious, is a go-between for Chinese T-shirt manufacturers and their Iranian customers. She is an avid reader of “financial novels” with titles such as “The Get-Rich Diary of China’s Poorest Guy”, a rags-to-riches tale of an electric-cable salesman. She speaks English in slogans, having learnt the language from watching American television. “You know Chinese people only care about money,” she declares half-jokingly, sucking her teeth. “You think I come to Iran for funny? No! I come here for money. If I want somewhere fun I would have gone somewhere nice!” Adjusting her pink hijab, she explains that “China goes everywhere. Many countries want Chinese products but not every country speaks Chinese…Iran is very, very good for business because it’s not expensive like other countries.(par iran ka pani sasta nhn hai - oil) Many Chinese people are afraid to go to Muslim countries because they think they are dangerous. But that’s not true. Iran is only crazy, it’s not dangerous.” She says she makes $150 a day, seven days a week. “I go for one day, they make deal. I go. Easy.” Chun represents a new generation of Chinese entrepreneurs in the world of emerging markets. Although America inveighs against countries and firms that still do business with Iran, China has been reluctant to cut its imports of Iranian crude, which make up over 10% of its oil consumption. “China opposes any country imposing unilateral sanctions on another country pursuant to its domestic law,” the Chinese foreign ministry declared in a statement issued in June. In any event, China sees its trade with Iran as part of a wider geostrategic policy of countering American hegemony in the Middle East, while at the same time making it harder for America to “pivot towards the Pacific”. Navid, an Iranian trader, owns a midsized company that imports chemicals from China to supply Iran’s plastics industry. Five years ago his suppliers were all in Europe but, after successive rounds of anti-Iranian sanctions, he now gets most of his chemicals from China. Most Iranians, however, bear no special love for either China or the Chinese. Many think China is just another country seeking to exploit their country’s weakness. “We can’t rely on the Chinese,” says Navid. “They care only about themselves.” The quality of their goods is often poor. After several cargoes arrived with “fraudulent” chemicals inside, he has to pay for quality tests in China, adding weeks to the delivery time. “The Mongols are invading again,” he concludes.

I don't understand why business schools don't teach the Warren Buffett model of investing

. Or the Ben Graham model. Or the Peter Lynch model. Or the Martin Whitman model. (I could go on.) In English, you study great writers; in physics and biology, you study great scientists; in philosophy and math, you study great thinkers; but in most business school investment classes, you study modern finance theory, which is grounded in one basic premise--that markets are efficient because investors are always rational. It's just one point of view. A good English professor couldn't get away with teaching Melville as the backbone of English literature. How is it that business schools get away with teaching modern finance theory as the backbone of investing? Especially given that it's only a theory that, as far as I know, hasn't made many investors particularly rich.
Meanwhile, Berkshire Hathaway, under the stewardship of Buffett and vice chairman Charlie Munger, has made thousands of people rich over the past 30-odd years. And it has done so with integrity and a system of principles that is every bit as rigorous, if not more so, as anything modern finance theory can dish up.
On Monday, 11,000 Berkshire shareholders showed up at Aksarben Stadium in Omaha to hear Buffett and Munger talk about this set of principles. Together these principles form a model for investing to which any well-informed business-school student should be exposed--if not for the sake of the principles themselves, then at least to generate the kind of healthy debate that's common in other academic fields.
Whereas modern finance theory is built around the price behavior of stocks, the Buffett model is centered around buying businesses as if one were going to operate them. It's like the process of buying a house. You wouldn't buy a house on a tip from a friend or sight unseen from a description in a newspaper. And you surely wouldn't consider the volatility of the house's price in your consideration of risk. Indeed, regularly updated price quotes aren't available in the real estate market, because property doesn't trade the way common stocks do. Instead, you'd study the fundamentals--the neighborhood, comparable home sales, the condition of the house, and how much you think you could rent it for--to get an idea of its intrinsic value.
The same basic idea applies to buying a business that you'd operate yourself or to being a passive investor in the common stock of a company. Who cares about the price history of the stock? What bearing does it have on how the company conducts business? What's important is whether you can purchase at a reasonable price a business that generates good returns on capital (Buffett likes returns on equity in the neighborhood of 15% or better) without a lot of debt (which makes returns on capital less dependable). In the best of all worlds, the company will have a competitive advantage that allows it to sustain its above-average ROE for years, so you can hang on to it for a long time--just as you would live in your house--and reap the power of compounding.
Buffett further advocates investing in businesses that are easy to understand--Munger calls it "clearing one-foot hurdles"--so you can come up with more reliable estimates of their long-term economics. Coca-Cola's basic business is pretty staid, for example. Unit case sales and ROE determine the company's future earnings. Companies like Microsoft and Intel--good as they are--require clearing much higher hurdles of understanding because their business models are so dependent on the rapidly evolving world of high tech. Today it's a matter of selling the most word-processing programs; tomorrow it's the Internet presence; after that, who knows. For Coke, the challenge is always to sell more cases of beverage.
Buying a business or a stock just because it's cheap is a surefire way to lose money, according to the Buffett model. You get what you pay for. But if you're evaluating investments as businesses to begin with, you probably wouldn't make this mistake, because you'd recognize that a good business is worth buying at a fair price.
Finally, if you follow the Buffett model, you don't trade your investments just because our liquid stock markets invite you to do so. Activity for the sake of activity begets high transaction costs, high tax bills, and poor investment decisions ("if I make a mistake I can sell it in a minute"). Less is more.
I'm not trying to pick a fight with modern finance theory enthusiasts. I just find it unsettling that basic business-school curricula don't even consider models other than modern finance theory, even though those models are in the marketplace proving themselves every day.

INVESTMENT

If we cannot own our own auto plant (a real asset), we can still buy shares in General Motors or Toyota (financial assets) and, thereby, share in the income derived from the production of automobiles.
 While real assets generate net income to the economy, financial assets simply define the allocation of income or wealth among investors. Individuals can choose between consuming their wealth today or investing for the future. If they choose to invest, they may place their wealth in financial assets by purchasing various securities. When investors buy these securities from companies, the firms use the money so raised to pay for real assets, such as plant, equipment, technology, or inventory. So investors’ returns on securities ultimately come from the income produced by the real assets that were financed by the issuance of those securities.   It is common to distinguish among three broad types of financial assets: debt, equity, and derivatives.    Fixed-income    or    debt securities    promise either a fixed stream of income or a stream of income that is determined according to a specified formula. For example, a corporate bond typically would promise that the bondholder will receive a fixed amount of interest each year. Other so-called floating-rate bonds promise payments that depend on current interest rates. For example, a bond may pay an interest rate that is fixed at two percentage points above the rate paid on U.S. Treasury bills. Unless the borrower is declared bankrupt, the payments on these securities are either fixed or determined by formula. For this reason, the investment performance of debt securities typically is least closely tied to the financial condition of the issuer.

  Allocation of Risk
 Virtually all real assets involve some risk. When GM builds its auto plants, for example, it cannot know for sure what cash flows those plants will generate. Financial markets and the diverse financial instruments traded in those markets allow investors with the greatest taste for risk to bear that risk, while other, less risk-tolerant individuals can, to a greater extent, stay on the sidelines. For example, if GM raises the funds to build its auto plant by selling both stocks and bonds to the public, the more optimistic or risk-tolerant investors can buy shares of stock in GM, while the more conservative ones can buy GM bonds. Because the bonds promise to provide a fixed payment, the stockholders bear most of the business risk but reap potentially higher rewards. Thus, capital markets allow the risk that is inherent to all investments to be borne by the investors most willing to bear that risk.
 This allocation of risk also benefits the firms that need to raise capital to finance their investments. When investors are able to select security types with the risk-return characteristics that best suit their preferences, each security can be sold for the best possible price. This facilitates the process of building the economy’s stock of real assets. 
     Investment     is the   current   commitment of money or other resources  in the expectation of reaping  future  benefi ts. For example, an individual might purchase shares of stock anticipating that the future proceeds from the shares will justify both the time that her money is tied up as well as the risk of the investment. The time you will spend studying this text (not to mention its cost) also is an investment. You are forgoing either current leisure or the income you could be earning at a job in the expectation that your future career will be suffi ciently enhanced to justify this commitment of time and effort. While these two investments differ in many ways, they share one key attribute that is central to all investments: Yo u sacrifi ce something of value now, expecting to benefi t from that sacrifi ce later.