BAnKs

Banking will be a terrible sector to own in coming months. We have a very negative view on banking, because we don't expect banks to deliver 15-20% earnings and lending growth, going forward, at a time when the economy is growing at 5%. If any bank is growing at that pace, then it is taking excessive risks. Banks have 30-35% weightage on Nifty, and 40% of Nifty's earnings growth this fiscal will come from banks, and we estimate 12% earnings growth for Nifty. The stricter (hopefully) KYC norms, post the money-laundering expose, are likely to hit banks' growth. Banking is the worst business in the world, because the core business of borro--wing and lending does not make any sustainable money ever, because core banking is a pure commodity business. So you have to use exce--ssive leverage, venture into hugely risky areas like prop trading, derivatives, sub-prime, money laundering. Most major banks in the world have done and are still doing this, to make a living and juice up earnings. And then, all you need is a small cut on your asset value to wipe out your net worth. It's not the banks' fault. It's just a trash business. I pity all the folks who will get a bank licence now. It's going to be exactly the same situation as telecom aspirants found themselves post 2008. Half the industry wound up in jail. I just hope folks don't go to jail like in telecom.

“Don’t panic.” Animal spirits will be revived

Indian officials have been wheeled out to utter the dreaded words: “Don’t panic.” Asia’s third-largest economy expanded by 5% in the year to March, a decadal low and far shy of the 8% its leaders still claim is its potential growth rate. The prospects of a revival have only been complicated by the possible winding down of quantitative easing (QE) in America. India has been a voracious consumer of the hot money that has sloshed around the world in recent years, using it to plug its balance-of-payments gap. On June 26th the rupee hit a record low of 61 per dollar (see chart 1). It has been the weakest emerging-market currency in the past month. Credit-default swaps on State Bank of India, a proxy for the riskiness of India’s government debt, have risen towards the levels of a year ago. India is the riskiest big emerging economy on this measure that is true as far as i am concerned better of investing in other parts of the world than this place. Today gold lost sheen again from 32200 to 25000 journey is historic but its a long term buy we all know,  the strong  currencies are throwing pressure on the bullion pack .(there is article on the pricing of gold) 
Coming back to the the dont panic situation An apocalyptic scenario is that equity investors and multinational firms head for the exit. They form the vast bulk of the stock of foreign capital in India. This is unlikely. India is still growing faster than most countries and plenty of outsiders remain beguiled. In April Unilever offered $5 billion to buy out minority shareholders in its Indian unit. Net outflows of equity investments have been small so far. Foreign bondholders are far less loyal. They have withdrawn $6.5 billion since mid-May. But the stock of external debt is a lowish 21% of GDP. Providing existing equity investors and multinationals stay put, India can probably handle a debt-buyers’ strike. Foreign reserves are 1.6 times likely financing requirements in the next year (defined as the current-account deficit plus short-term debt). And although the world has got less forgiving as the end of QE looms, India’s stability has improved in some ways since last year. The government’s one unambiguous success is the public finances. Borrowing is still high but under Palaniappan Chidambaram, the finance minister since last August, it is no longer reckless. Control of spending and cuts in subsidies of fuel should mean the overall deficit in the year to March 2014 is 7% of GDP, according to Chetan Ahya of Morgan Stanley. For a while a deficit of 10% seemed possible. At this lower level India’s ratio of debt to GDP should be stable. With an election due by May 2014, there will be pressure to boost spending. A proposed policy to give more food to the poor could add 0.2 of a percentage point to the deficit, analysts reckon. Still, the hope is Mr Chidambaram will see off his wilder colleagues. When other ministers float populist policies that would “devastate the economy”, Mr Chidambaram “says unpleasant things”, in order to shoot them down, according to Prithviraj Chavan, an ex-minister who now runs Maharashtra, a big western state. Inflation also looks less scary, largely due to easing commodity prices. Wholesale prices rose by 4.7% in May year on year, about half the rate at the peak. Consumer-price inflation, at 9.3%, remains more stubborn, as do Indians’ expectations of inflation. But both are moderating. A rout is unlikely, then. The one-quarter decline in the rupee since 2011 may eventually help boost India’s competitiveness and spark a long-awaited boom in Indian manufacturing that makes Godot seem punctual. This is probably the view of India’s central bank, which has not intervened much to support the currency. But in the short term the currency gyrations do make life harder. Firms that have taken a punt and borrowed in dollars will struggle. Dearer fuel imports will raise inflation and the government’s subsidy bill; both effects are manageable but unhelpful, says Rajeev Malik of CLSA, a broker. The central bank will find it harder to ease policy to spur growth. On June 13th its counterpart in Indonesia raised rates, partly to stabilise its currency. What of that elusive economic revival? It has proved even harder to spot than a tiger in an Indian nature reserve. In the quarter to March GDP grew by 4.8%, with exports, consumption and fixed investment all sluggish (see chart 2). More recent data, such as car sales, industrial-production figures and surveys of purchasing managers’ intentions, have been slack. Exports fell in May. Few firms say activity is picking up, according to Sanjeev Prasad of Kotak, a broker. Consumption could bounce as the public-spending cuts ease and lower inflation raises Indians’ purchasing power. But capital spending is what really matters—it boosts current growth and the economy’s potential. At first glance it is hard to discern a problem. Gross domestic savings and gross fixed investment have dipped but are still about 30% of GDP. This is healthy enough, even by East Asia’s robust standards. Indian officials, Mr Chidambaram included, often suggest that abundant funds and capital spending almost preordain fast growth. Drill down deeper, however, and things are less reassuring, says Sajjid Chinoy of J.P. Morgan. Almost half of all savings are now directed into physical assets that bypass the financial system—people buying gold, for example. The quality of capital investment has fallen, with almost half now spent by households, mainly on construction. The most productive kind of capital investment, by private firms that build factories and buy machinery, has dropped from 14% of GDP in the year to March 2008 to below 10% today. How can the animal spirits of India Inc be revived? Firms are miffed by a lack of land, power shortages and a surplus of red tape. Too many have shot balance-sheets. A third of India’s corporate debt sits in firms with interest costs in excess of operating profits, according to Credit Suisse. State-controlled banks are grappling with bad debts. Bosses are paranoid about anti-graft probes. On June 11th investigators searched the office and home of Naveen Jindal, the head of Jindal Steel & Power, a big industrial firm, and a legislator for the ruling Congress party. India’s national auditor claims the firm was one of many to benefit unduly from the allocation of coal mines. Its shares have since fallen by 25%. The reform charade One possible response to this malaise is a big burst of liberal reform to restore faith that India is on the right track. Don’t hold your breath. When the government announced its package of measures last September optimists hoped it was a moment to rival 1991, when India opened its economy to the world. It is now clear that deep reforms are not going to happen in the near future, reflecting both the profound ambivalence of India’s ageing rulers and a tricky political climate, with a weak coalition and an election looming
A new tax to replace a mess of local levies on goods and services has been shelved until after the poll. The liberalisation of coal mining and electricity distribution, both government-run bottlenecks, is not discussed. A landmark decision to let foreign supermarkets into a backward food industry still stands in theory, but fluid and onerous fine print means Walmart, Tesco and others are not investing yet. If deep reform is off the agenda, the government can still try the old approach of cranking the bureaucratic machine harder. Mr Chidambaram, once viewed as insufferable, is now praised by Mumbai’s tycoons for taking notes as they grumble about stalled projects. Since December a new committee headed by the prime minister, Manmohan Singh, has tried to push forward projects tangled in red tape: Mr Singh now personally reviews the rules for digging mud near road projects, for instance. But the committee has not made a meaningful difference. On The Economist’s count, the fresh capital investment it has sanctioned (rather than discussed or delegated to other bodies) amounts to 0.4% of GDP, spread over several years. Other measures are useful. To resuscitate the power industry the government is trying to allocate scarce domestic coal more efficiently among power plants and allow them to recover the cost of expensive imported coal. This is a sticking-plaster: for plants commissioned after March 2015 it is still unclear where fuel will come from, says Amish Shah of Credit Suisse. But it should help. Regulated gas prices are likely to be lifted to encourage more investment in offshore fields. Foreign-investment rules are being further relaxed, at least in theory. The government has yet to recapitalise dud state-run banks but that would make a difference, too. None of these measures will get India back to an 8% growth rate. Some are a throwback to the pre-1991 “licence Raj” era, when officials tinkered incessantly with the rules. But they might just keep India’s economy chugging along for a couple of years as the world adjusts to the end of ultra-loose monetary policy. When the dust settles, the hope is that India’s politicians will finally be more serious about fighting graft and enacting reform.

Crisis Chronicles: 300 Years of Financial Crises (1620–1920) James Narron and David Skeie

As momentous as financial crises have been in the past century, we sometimes forget that major financial crises have occurred for centuries—and often. This new series chronicles mostly forgotten financial crises over the 300 years—from 1620 to 1920—just prior to the Great Depression. Today, we journey back to the 1620s and take a fresh look at an economic crisis caused by the rapid debasement of coin in the states that made up the Holy Roman Empire.


The Kipper und Wipperzeit (1619–23)
The Kipper und Wipperzeit is the common name for the economic crisis caused by the rapid debasement of subsidiary, or small-denomination, coin by Holy Roman Empire states in their efforts to finance the Thirty Years’ War (1618–48). In a 1991 article, Charles Kindleberger—author of the earlier work Manias, Panics and Crashes and originally a Fed economist—offered a fascinating account of the causes and consequences of the 1619–23 crisis. Kipper refers to coin clipping and Wipperzeit refers to a see-saw (an allusion to the counterbalance scales used to weigh species coin). Despite the clever name, two forms of debasement actually fueled the crisis. One involved reducing the value of silver coins by clipping shavings from them; the other involved melting the coins, mixing them with inferior metals, re-minting them, and returning them to circulation. As the crisis evolved, an early example of Gresham’s Law took hold as bad money drove out good. As Vilar notes in A History of Gold and Money, once “agriculture laid down the plow” at the peak of the crisis and farmers turned to coin clipping as a livelihood, devaluation, hyperinflation, early forms of currency wars, and crude capital controls were either firmly in place or not far behind.





From Self-Sufficiency to Money and Markets
The period preceding and including the early 1600s was marked by a fundamental shift from feudalism to capitalism, from medieval to modern times, and from an economy driven by self-sufficiency to one driven by markets and money. It is within this social and economic context that various states in the Holy Roman Empire attempted to finance the Thirty Years’ War by creating new mints and debasing subsidiary coins, leaving large-denomination gold and silver coins substantially unaffected.

    In a simple example, subsidiary coin might initially be minted using only silver, then gradually undergo a shift in metallic content as a growing percentage of copper was added during re-mintings, until the monetary system was effectively on a copper rather than a gold or silver standard. This shift in metallic content created a divergence between a coin’s nominal value and its intrinsic metal value, which led to the rapid debasement of coin. As Kindleberger notes, “Bad money was taken by debasing states to their neighbors and exchanged for good [money]. The neighbor typically defended itself by debasing its own coin.”

    Owing to trade and the easy circumvention of laws that forbade the removal of coin from a city, states found that early forms of capital controls were ineffective and that a large portion of circulating coin originated elsewhere. Given this porosity, individual states determined that reforming their own minted coinage by returning to a silver standard did not necessarily allow them to reform the currency circulating within the state. So states sought greater revenue through seigniorage—the difference between the cost of production (including the price of the metal contained in the coin) and the nominal value of the coin—by minting more money and by taking debased coin abroad, exchanging it, and bringing home good coin and re-minting it.

    The rapid debasement up to 1622 created a European boom, which turned to mania by early 1622 when average citizens turned to coin clipping as a livelihood, then hyperinflation in 1622 and 1623. Many became rich by exploiting the unknowing—typically peasants. This ultimately led to a widespread breakdown in trade as peasants, fearing that they would be paid in debased coin, refused to bring products to market, creating the spillover to the broader economy.


Cry Up, Cry Down, or Call In
One response to the crisis was for states to “cry up” good coins by raising the denomination or “cry down” bad coins by lowering their denomination. Another response was to “call in” coin and re-mint it. A third response was to enforce minting standards. But central authority was so weak that no one state could solve the crisis without the help and support of neighboring states. States were finally able to solve the crisis through mint treaties and by setting exchange rates, with hyperinflation subdued by a return to the Imperial Augsburg Ordinance of 1559. Because the public became so wary of clipped and debased coin, it took months to convince the masses that coin was good once it was restored.


History Repeating Itself
Like markets and money, crises evolve easily but lessons learned often last only a lifetime and are easily forgotten. Over the coming year, we’ll share with you how elements of this crisis were repeated during the Great Re-Coinage of 1696, the Mississippi Bubble of 1720, the Dutch Commodities Crash of 1763, and the Continental Currency Crisis of 1779, with each crisis adding a unique twist.

    In the meantime, as we reflect upon the states’ struggles to manage their domestic economies of the 1620s at a time of evolving money, markets, and trade, and amid pressure to finance the Thirty Years’ War, we pose the following question: Is it possible to draw any parallels between the events of the 1620s and the current objectives of the Group of Seven to meet “respective domestic objectives using domestic instruments”? Tell us what you think.

A Valuable Tool That Was Greatly Oversold

Value at risk is the most prominent of a set of risk measurement tools to be developed in response to a series of huge, widely publicized losses at large financial firms in the 1980s. Like almost all other risk measures developed over the last 25 to 30 years, value at risk (VaR) relied on classical statistical techniques to measure short-term volatility. Some analysts, such as Nassim Nicholas Taleb, argue that this entire risk measurement enterprise was simply wrongheaded and positively dangerous. I beg to differ. VaR is a good starting point for some risk management discussions. The problems arise when VaR is also the end point for all risk management discussions.
Market risk controls consisted of a complex web of micro position limits. In the fixed income arena, these included:

• Controls on total net duration-adjusted open positions
• Limits on duration-adjusted mismatches at multiple points along the yield curve 
• A limit on the sum of the absolute values of such tenor specific mismatches
• Gross position limits
• Issuer concentration limits.

Very importantly, this maze of limits conveyed no instinctive sense of how much risk they allowed. Market risk committees were repeatedly asked for higher limits despite having no real sense of the risks inherent in the limits already in place. In this context, VaR emerged as the first effective communication tool between trading and general management. For the first time it was possible to aggregate risks across very different trading activities to provide some sense of enterprise-wide exposure.
Like all useful innovations, however, VaR had notable weaknesses from the beginning. One weakness was that, inadvertently or deliberately, it was oversold to senior management. Financial risk managers must bear some responsibility for creating a false sense of security among senior managers and watchdogs. For far too long, many were prepared to use the sloppy shorthand of calling VaR the "worst case loss." A far better alternate shorthand description is to call VaR "the minimum twice-a-year loss." This terminology conveys two things. First, it indicates the approximate rarity of the stated loss threshold being breached. Second, it begs the right question, namely, "How big could the loss be on those two days a year?" To put it bluntly, VaR says nothing about what lurks beyond the 1 percent threshold.
In order to say anything about dangers lying beyond the 1 percent threshold, however, VaR requires some method of estimating the probability of rarely observed events. The standard practice among risk professionals is to use observed returns over some period to estimate a statistical distribution, often the normal distribution. One of the most important lessons Nassim Taleb has driven home is that theoretical statistical methods have an inherent but often unrecognized bias when attention turns to the issue of tail risk.
To be tractable mathematically, statistical distributions, even those with infinite tails, need to have moments that converge. The key characteristic that allows such convergence is rapid attenuation of the probability in the tails. If we measure the standard deviation, skewness or kurtosis of a normal distribution using ever-wider segments of the real number line around zero, these estimates will converge toward limiting values. Absent sufficiently rapid thinning of the tails, moment estimates can diverge indefinitely, being effectively infinite. When we overlay a theoretical distribution on a finite sample, we typically choose a mathematically tractable distribution that "fits" the sample observations we have available based on minimizing some measure such as a squared error penalty function. Thus, by the very act of limiting ourselves to a mathematically tractable distribution, we have implicitly imposed rapidly diminishing probability density in the tails.
Having imposed (or fitted) a theoretical distribution on a finite sample, we then use the tails of that theoretical distribution to make assertions about behavior of the underlying process being examined. As I note in an earlier article, Taleb's essential contribution is to hammer home the point that this is both an invalid and a positively dangerous line of reasoning. An important implication of this is that improving our understanding of tail risk will require some difficult cultural changes rather than some minor adjustments to our distributional analysis. Both line and risk managers will need to accept that no single number or even set of numbers can completely summarize a position or a firm's risk exposure.
The key to understanding why no one number can be sufficient is to recognize that the process generating financial returns does not assure that the first, the 1,000th, and the 1 millionth observations are all drawn from the same underlying stochastic process. Such a stable process is often a realistic assumption when dealing with physical processes. It is virtually never the case, however, in a social scientific setting. Structural change is the constant bane of econometric forecasters. Such changes are driven by a wide variety of influences, including technological advances, demographic shifts, political upheavals, natural disasters, and, perhaps most importantly, behavioral feedback loops.
Structural change creates a fundamental dilemma for socio-statistical analysis. Classical statistics argues that the more data, the better, since, assuming stochastic stability, this results in smaller estimation errors. For analysis based on time series, however, a larger data set implies incorporation of a greater range of structural changes that undermine the classical assumption of stochastic stability.
This makes it all the more important for risk managers to focus obsessively on what I call "statistical entropy." Like water, information can never rise higher than its source. In the case of information, that source is the set of data on which an analysis is based. In assessing the reliability of any risk estimate, including such things as credit ratings, always start with a review of the volume and quality of the available data. No amount of complex mathematical/statistical analysis can possibly squeeze more information from a data set than it contains initially.
VaR clearly is subject to the constraint implied by "statistical entropy." VaR still can be useful as an easily computed shorthand measure that is employed in day-to-day communication and risk aggregation. VaR is not capable, however, of delivering on managers' need to have a comprehensive understanding of their organization's exposure to loss. An effective process for assessment of loss exposure must be more holistic but also much softer, more amorphous, and less easily defined than the things risk managers do currently. Such a process will require dealing with more unstructured information that is not amenable to precise quantification. Inputs from country risk officers, industry analysts, and macroeconomists must be integrated into regular deliberations about risk. The success of such a process also will require senior managers to abandon the comfortable idea that all forms of risk, including fundamental Knightian uncertainty, can be reduced to a single summary statistic like VaR.
If organizations are to have a reasonable chance to avoid the worst effects of the next crisis, executives and board members must be willing to devote the time and energy to grapple with risk in all its messy multidimensionality.

QE myths and the Expectations Fairy

All the links tries to throw light on the finance and economics technical parlance.

There are perhaps more myths about QE than almost any other monetary policy instrument. Here are five of the most pernicious QE myths:

Myth 1: QE raises inflation. Despite the considerable evidence that it does nothing of the kind, people still persistently believe that it does - that "eventually" inflation will come. This is because of the widespread misrepresentation of QE as "printing money". Numerous people have painstakingly explained what QE is and how it works, but inflationistas aren't listening. To them, QE is printing money, and everyone knows that printing money causes inflation. (That isn't necessarily true either, but as I said, they aren't listening). An alternative view proposes that because QE props asset prices, eventually the increase in asset values would feed through into an increase in the money supply as asset holders take profits and spend the proceeds, increasing inflation. This is perhaps more reasonable, but again there is little evidence to support this.

Myth 2: QE stimulates the economy by forcing banks to lend. This is based on the idea that if you throw money at banks they will lend. But banks only lend if the risk versus return profile is in their favour. At the moment banks don't want to lend, because their balance sheets are a mess. QE increases reserves, but it does little to repair bank balance sheets. No amount of excess reserves will force damaged banks with weak balance sheets to lend.

Myth 3: QE stimulates the economy by persuading corporates to invest. This is similar to Myth 2. It is based on the idea that if you make borrowing ridiculously cheap for corporates (i.e. throw money at them) they will invest. But corporates only borrow to invest if the risk versus return profile is in their favour. At the moment they don't want to invest, because the economic outlook is very uncertain and profitable investment opportunities look few. They are very happy to borrow to refinance debt or to buy back equity - but that doesn't help employment or incomes. I should make it clear, too, that this only applies to larger corporates that have access to the capital markets. Small and medium-size businesses are much more dependent on bank lending, and they are living in a financial desert - see Myth 2.

Myth 4: QE encourages households to increase spending. This is by means of the "wealth effect", whereby people who have assets that are increasing in value feel wealthier so spend more. Why the esteemed economists in charge of central banks seem incapable of understanding that having illiquid assets (such as houses) that are increasing in value doesn't make people who are income-dependent spend more is beyond me. Furthermore, NO amount of propping up asset prices will compensate for downward pressure on wages due to poor economic performance, or for benefit cuts and tax rises from austere fiscal policy. Nor will it compensate for reduction in the real incomes of people living on income from savings - which is certainly an effect of low interest rates and possibly also of QE. When ordinary people find their incomes being squeezed they cut spending, even if their houses are increasing in value. When ordinary people find their savings for their old age being eroded by low interest rates they save more, not less. Why these esteemed economists, not to mention the politicians designing fiscal policy, don't understand this is a mystery. Maybe they are all so wealthy that income-dependence is a foreign concept to them.

Myth 5: QE debases the currency. Whether this is seen as a positive effect depends on your viewpoint: devaluing the currency is supposed to help exports, but hard-money enthusiasts are appalled at the very idea of debasing the currency - they regard it as theft (I saw an article recently that described QE as the modern equivalent of coin-clipping). Actually there is very little evidence that QE has significant effects on the value of the currency - indeed as it doesn't raise inflation it is highly unlikely that it debases the currency. Though as a recent article at VOX pointed out, when a large part of a country's GDP is made up of global industry, devaluing the currency has little effect on exports, because exports are dependent on imports. The idea that devaluing the currency always helps exports is another of those economic myths, it seems.

When the transmission mechanisms of bank lending and corporate investment are not working properly, QE does not reach the wider economy in any particularly helpful way.

When central banks do QE, inflation expectations rise: this is shown by higher bond yields at the start of QE programmes, usually coupled with a rise in the price of gold. As the programme continues and inflation fails to appear, expectations moderate, bond yields fall back and the price of gold collapses.  We have seen this effect most recently in Japan: high inflation expectations at the start of the Bank of Japan's current QE programme have now fallen back to where they were in early April, the currency has recovered its value and asset prices have fallen. Not one QE programme has ever generated significant inflation. Not one. In fact no central bank in history has ever succeeded in deliberately creating inflation. And yet every time there is QE, inflation expectations rise. It's magical thinking.

Those who believe that QE achieves its effects through raising inflation point to index-linked bond spreads (which are a measure of inflation EXPECTATIONS) as evidence that QE works. But expectations and reality are not the same thing. Just because markets EXPECT inflation doesn't mean it is going to happen. Frankly, since the reason markets expect inflation is based on a misunderstanding of QE and its effects, it would be amazing if expectations did turn into reality.

Inflation expectations from active QE are illogical enough. But now we are seeing even greater illogicality. The Fed starts to talk about tapering off QE. And TIPS yields rise - considerably. So it seems that talking about NOT doing QE also raises inflation expectations. There seems to be some kind of belief that when the Fed stops doing QE all the excess reserves will leak out into the economy and cause inflation. Why, for goodness' sake? The banks are in no better shape than they were before (and reserves aren't "lent out" anyway). Yes, there could be a huge credit bubble - but as we saw in the mid-2000s, that can happen just as easily when there aren't excess reserves. And as corporates are not much more positive than they were before, and household incomes are no higher than they were before, and unemployment is still uncomfortably high, where on earth is this credit bubble and inflation going to come from? It's more magical thinking.

There is zero chance of domestically-generated inflation while wages are falling, contractionary fiscal policy is depressing real incomes, banks are not lending and corporates are failing to invest. Externally-driven inflation is possible, and we are of course seeing inflation in asset prices as a consequence of QE. But the core trend is disinflation in developed countries - I hesitate to say "deflation", since inflation is still above zero, but core inflation is on a downwards trend in nearly all developed countries. Some people think that the UK is an exception, but I disagree with this: UK CPI is currently distorted by rises in student fees and by above-inflation price rises in privatised utilities that could and should have been prevented by government. Strip out those, and the UK's core inflation rate is heading for the floor like everyone else's.

Belief in inflation caused by QE is therefore irrational. So is belief in inflation caused by NOT doing QE. In fact belief in ANY of the myths I describe above is irrational. But markets are responding to central bank signalling on the basis of those myths. More importantly, governments are constructing fiscal policy on the basis of those myths. And this is poisonous.

When banks aren't lending and corporates aren't borrowing to invest, QE does not affect the wider economy in any very helpful way: its effects if anything are contractionary, because of the hit to aggregate demand for some groups caused by the depression of interest rates on savings. But politicians construct fiscal policy in the belief that it does. Therefore - in their view - fiscal policy can be directly contractionary, because it will be offset by expansionary monetary policy. The UK's Chancellor has pursued an austere fiscal programme for the last three years, cutting both out-of-work and in-work benefits, raising taxes and - most unhelpful of all - cutting capital investment to the bone. He has done so (and continues to do so, despite concerns expressed by a number of institutions including the IMF) in the expectation that the Bank of England's loose monetary policy, including its large QE programme and other initiatives such as extended-term repo and Funding for Lending, will protect the economy from the contractionary effects of fiscal austerity. The Expectations Fairy will wave her magic wand and Gideon will get the economic recovery he desires despite his considerable efforts to prevent it......

Sadly the reality is different. QE and its relatives do not protect the wider economy from the effects of fiscal austerity. There has been a considerable hit to aggregate demand in the UK, firstly due to recession (which as the Institute for Fiscal Studies (IFS) notes has caused significant falls in nominal wages), and secondly due to ill-considered fiscal policy. I have to ask whether, in the absence of supposedly supportive monetary policy, the Chancellor might have adopted a more relaxed approach to fiscal consolidation.

The political situation in the US is different: there, fiscal tightening has occurred more because of political gridlock than deliberate policy. But the effects are much the same. And it is a real pity. The US was doing well: it was the one country that appeared to be getting the balance of monetary and fiscal policy about right - helped by a disintermediated banking system, which improves monetary policy transmission - and it was starting to recover. But then the payroll tax cuts were allowed to expire...and now there is the sequester....It remains to be seen whether the US's nascent recovery will survive this idiocy. Given the downwards path of US inflation and its stubbornly high unemployment, I am not hopeful.

The most idiotic policies of all have to be in Europe. Though they aren't doing QE. They are relying on everyone else's QE to stimulate the Eurozone economy, while screwing down aggregate demand all over the place. I'm not about to advocate QE in the Eurozone - the banking system is severely damaged, so I strongly suspect it would be either ineffective or actually contractionary. But fiscal austerity is doing immense and possibly permanent damage to some Eurozone countries. A better way of revitalising the Eurozone periphery really has to be found.

And then there is Abenomics.....I don't pretend to understand Japan, but it seems to me that to have any chance of success, monetary and fiscal policy must complement each other. All monetary stimulus is likely to do in a moribund and savings-dominant economy is blow up asset bubbles, which then of course burst spectacularly..... Not that I am necessarily suggesting fiscal stimulus either. The Japanese problems run deeper. Structural fiscal and social reforms are needed - but whether there is the political will to make such changes remains to be seen.

Central bank heads around the world have expressed concern about over-reliance on monetary policy alone to fix economic ills. Mervyn King commented that "there's a limit to what monetary policy can hope to achieve", a view echoed by Shirakawa, the former head of the Bank of Japan, in a speech in 2012. Bernanke, in his testimony to Congress's Joint Economic Committee in October 2011, observed that "Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy." And the ECB's Draghi, in an interview with the Financial Times in December 2011, bluntly remarked that "Monetary policy cannot do everything".

But Shirakawa has already been replaced with Kuroda, who has embarked on a massive QE programme: the Bank of England's Mervyn King is about to be replaced by Mark Carney, who is known to favour forward guidance (which amounts to greater reliance on the Expectations Fairy): and Bernanke's term as Fed chief will be up soon, though his replacement has yet to be named. And meanwhile governments in the US, UK and Europe continue their catastrophic fiscal consolidations while praying every day to the Expectations Fairy, who seems to have replaced the Confidence Fairy as the principal policy goddess.

Paul Johnson, Director of the IFS, complained in a recent presentation that the problem with recovery from the 2008 recession is that, unlike the deep recessions of the 1930s and 1980s, there is no clear vision. I disagree with this: I think there is a vision, but it is based upon mistaken economic ideas and is therefore doomed to fail. The 1930s recovery was led by massive housebuilding programmes, and the 1980s recovery by radical supply-side reforms. In contrast, the main feature of the years since 2008, after a brief period of fiscal stimulus early on, is fiscal consolidation coupled with what the UK's Chancellor terms "monetary activism". The last five years have seen what the FT describes as the "largest economic experiment in history". And the results are stagnant economies, falling real incomes, increasing insecurity and uncertainty for the majority of people (especially the young), and a catastrophic drop in both private and public sector investment in many developed countries. The "vision" is an illusion. That is why there is no lasting recovery.

The Expectations Fairy is no more real than the Confidence Fairy, the Inflation Monster or the Bond Vigilantes. It is time for all of them to be consigned to the realm of mythology, and for monetary and fiscal policy to be grounded firmly in reality and redirected towards achieving the best quality of life for ordinary people

Martin WOlf's Assessment of Austerity

Austerity has failed. It turned a nascent recovery into stagnation. That imposes huge and unnecessary costs, not just in the short run, but also in the long term: the costs of investments unmade, of businesses not started, of skills atrophied, and of hopes destroyed.
What is being done here in the UK and also in much of the eurozone is worse than a crime, it is a blunder. If policymakers listened to the arguments put forward by our opponents, the picture, already dark, would become still darker.

How Austerity Aborted Recovery

Austerity came to Europe in the first half of 2010, with the Greek crisis, the coalition government in the UK, and above all, in June of that year, the Toronto summit of the group of twenty leading countries. This meeting prematurely reversed the successful stimulus launched at the previous summits and declared, roundly, that “advanced economies have committed to fiscal plans that will at least halve deficits by 2013.”
This was clearly an attempt at austerity, which I define as a reduction in the structural, or cyclically adjusted, fiscal balance—i.e., the budget deficit or surplus that would exist after adjustments are made for the ups and downs of the business cycle. It was an attempt prematurely and unwisely made. The cuts in these structural deficits, a mix of tax increases and government spending cuts between 2010 and 2013, will be around 11.8 percent of potential GDP in Greece, 6.1 percent in Portugal, 3.5 percent in Spain, and 3.4 percent in Italy. One might argue that these countries have had little choice. But the UK did, yet its cut in the structural deficit over these three years will be 4.3 percent of GDP.
What was the consequence? In a word, “dire.”
In 2010, as a result of heroic interventions by the monetary and fiscal authorities, many countries hit by the crisis enjoyed surprisingly good recoveries from the “great recession” of 2008–2009. This then stopped (see figure 1). The International Monetary Fund now thinks, perhaps optimistically, that the British economy will expand by 1.8 percent between 2010 and 2013. But it expanded by 1.8 percent between 2009 and 2010 alone. The economy has now stagnated for almost three years. Even if the IMF is right about a recovery this year, it will be 2015 before the economy reaches the size it was before the crisis began.

The picture in the eurozone is worse: its economy expanded by 2 percent between 2009 and 2010. It is now forecast to expand by a mere 0.4 percent between 2010 and 2013. Austerity has put the crisis-hit countries through a wringer, with huge and ongoing recessions. Rates of unemployment are more than a quarter of the labor force in Greece and Spain (see figure 2).
When the economies of many neighboring countries contract simultaneously, the impact is far worse since one country’s reduced spending on imports is another country’s reduced export demand. This is why the concerted decision to retrench was a huge mistake. It aborted the recovery, undermining confidence in our economy and causing long-term damage.

Why Fiscal Policy

Why is strong fiscal support needed after a financial crisis? The answer for the crisis of recent years is that, with the credit system damaged and asset prices falling, short-term interest rates quickly fell to the lower boundary—that is, they were cut to nearly zero. Today, the highest interest rate offered by any of the four most important central banks is half a percent. Used in conjunction with monetary policy, aggressive and well-designed fiscal stimulus is the most effective response to the huge decrease in spending by individuals as they try to save money in order to pay down debt. This desire for higher savings is the salient characteristic of the post–financial crisis economy, which now characterizes the US, Europe, and Japan. Together these three still make up more than 50 percent of the world economy.
Of course, some think that neither monetary nor fiscal policy should be used. Instead, they argue, we should “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” In other words, sell everything until they reach a rock-bottom price at which point, supposedly, the economy will readjust and spending and investing will resume. That, according to Herbert Hoover, was the advice he received from Andrew Mellon, the Treasury secretary, as America plunged into the Great Depression. Mellon thought government should do nothing. This advice manages to be both stupid and wicked. Stupid, because following it would almost certainly lead to a depression across the advanced world. Wicked, because of the misery that would follow.

Austerity in the Eurozone

Some will insist that the eurozone countries had no alternative: they had to retrench.
This is true in the sense that members have limited sovereignty, wed as they are to a single currency, and had to adapt to the dysfunctional eurozone policy regime. Yet it did not have to be this way.

1. The creditor countries, particularly Germany, could have recognized that they were enjoying incredibly low interest rates on their own public debt partly because of the crises in the vulnerable countries. They could have shared some of this windfall they enjoyed with those under pressure.

2. The needed adjustment could have been made far more symmetrical, with strong action in creditor countries to expand demand.

3. The European Central Bank could have offered two years earlier the kind of open-ended support for debt of hard-pressed countries that it made available in the summer of 2012.

4. The funds made available to cushion the crisis could have been substantially larger.

5. The emphasis could then have been more on structural reforms, such as easing labor regulations and union protections that restrain hiring and firing and raise labor costs, and less on fiscal retrenchment in the form of reduced spending. Reduced labor costs could have made these nations’ export industries more competitive and encouraged domestic hiring.

It is possible to admit all this and yet argue that without deep slumps, the necessary pressure for adjustment in labor costs that is inherent in the adoption of a single currency (which is a modern version of the gold-standard-type mechanism that once ruled the advanced nations and helped bring on the Great Depression) would not have existed.
This, too, is in general not true.

1. In Greece, Ireland, Portugal, and Spain, at least, the private sector was in such a deep crisis that additional downward pressure as a result of rapid fiscal retrenchment simply added insult—and more unemployment—to deep injury.

2. In Italy, the pressure from years of semi-stagnation, with many more to come, would probably have been sufficient to restructure the labor markets, to bring about lower labor costs, provided structural reforms of the labor market were carried out, measures allowing companies to reduce their workforces and adjust wages more easily.

In short, the scale of the austerity was unnecessary and ill-timed. This is now widely admitted.

Austerity in the UK

The UK certainly did have alternatives—a host of them. It could have chosen from a wide range of different fiscal policies. The government could, for example, have:

1. Increased public investment, rather than halving it (initially decided by Labour), when it enjoyed zero real interest rates on long-term borrowing.

2. It could have cut taxes.

3. It could have slowed the pace of reduction in current spending.

It could, in brief, have preserved more freedom to respond to the exceptional circumstances it confronted.
Why did the government not do so?

1. It believed, and was advised to believe, that monetary policy alone could do the job. But monetary policy is hard to calibrate when interest rates are already so low (at or close to zero) and potentially damaging particularly in the form of asset bubbles. Fiscal policy is not only more direct, but it can also be more easily calibrated and, when the time comes, more easily reversed.

2. The government believed that its fiscal plans gave it credibility and so would deliver lower long-term interest rates. But what determines long-term interest rates for a sovereign country with a floating exchange rate is the expected future short-term interest rates. These rates are determined by the state of the economy, not that of the public finances. In the emergency budget of June 2010, the cumulative net borrowing of the public sector between 2011 and 2015–2016 had been forecast to be £322 billion; in the June 2013 budget, this borrowing is forecast at £539.4 billion, that is, 68 percent more. Has this failure destroyed confidence and so raised long-term interest rates on government bonds? No.

3. It believed that high government deficits would crowd out private spending—that is, the need of the government to borrow would leave less room for private borrowing. But after a huge financial crisis, there is no such crowding out because private firms are reluctant to invest, and consumers are reluctant to spend, in a weak economic environment.

4. It argued that the UK had too much debt. But the UK government started the crisis with close to its lowest net public debt relative to gross domestic product in three hundred years. It still has a debt ratio much lower than its long-term historical average (which is about 110 percent of GDP).

5. The government argued that the UK could not afford additional debt. But that, of course, depends on the cost of debt. When debt is as cheap as it is today, the UK can hardly afford not to borrow. It is impossible to believe that the country cannot find public investments—the cautious IMF itself urges more spending on infrastructure—that will generate positive real returns. Indeed, with real interest rates negative, borrowing is close to a “free lunch.”

6. The government now believes that the UK has very little excess capacity. But even the most pessimistic analysts believe it has some. Of course, the right policy would address both demand and supply, together. But I, for one, cannot accept that the UK is fated to produce 16 percent less than its pre-crisis trend of growth suggested. Yes, some of that output was exaggerated. There is no reason to believe so much was.

Assessment of Austerity

We, on this side of the argument, are certainly not stating that premature austerity is the only reason for weak economies: the financial crisis, the subsequent end of the era of easy credit, and the adverse shocks are crucial. But austerity has made it far more difficult than it needed to be to deal with these shocks.
The right approach to a crisis of this kind is to use everything: policies that strengthen the banking system; policies that increase private sector incentives to invest; expansionary monetary policies; and, last but not least, the government’s capacity to borrow and spend.
Failing to do this, in the UK, or failing to make this possible, in the eurozone, has helped cause a lamentably weak recovery that is very likely to leave long-lasting scars. It was a huge mistake. It is not too late to change course.

70 stocks all time low

Key equity benchmarks lost over 2 percent in trade on fears of the cheap liquidity coming to an end that was fuelling the equities for some time now. Federal Reserve Chairman Ben Bernanke overnight said if the economy continues to improve the asset-purchasing program could start winding down towards the end of 2013 and wrap up in 2014. Asian market plummeted in the range of 1 to 2 percent Thursday.

Back home, the local currency has also crumbled to record low of 59.93 on unwinding by the FIIs in the debt market. The carnage continues on the Dalal Street in largecaps as well as midcaps. BSE Midcap index is down close to 2 percent. Many stocks have touched record lows creating panic among investors. Here is a list of stocks that have slumped to record lows.

Scrip Name	All Time Low Price	Group
JPINFRATEC	25.75	A
Oberoi Realty	193.2	A
Bharti Infratel	144	A
MCX	818.2	A
BITS	0.08	B
JCT Electronics	0.31	B
DJS Stock	0.58	B
Pennar Alum	0.22	B
Cyberscape	0.24	B
RISHABHDEV	1.4	B
ASSAMCO	3.88	B
Santowin Corp	0.41	B
SUP TANNERY	1.45	B
Padmalaya Tele	1.26	B
VIRGOGLOBAL	0.54	B
GTL Infra	1.35	B
Porwal Auto	3.98	B
Fact Enterprise	0.66	B
Prabhav Inds	0.87	B
VAISHNAVI	1.92	B
Aishwarya Tele	3.46	B
PRADIPOVERS	4.43	B
KS Oils-$	1.34	B
Sujana Metal	0.8	B
Archies	13.6	B
Arss Infra Proj	21.8	B
Varun Shipping	6.11	B
Sowbhagya Media	7.7	B
Classic Diam	1.61	B
Gemini Comm	1.18	B
Dynamic Port	2.79	B
Ashutosh Paper	3.8	B
Subex	6.5	B
Indiabulls Infra	2.53	B
REISIX TENR	1.32	B
Gayatri Sugars	1.68	B
BIOGRPAPER	1.82	B
SYNCOM HEAL	6.81	B
Ambica Agarb	2.7	B
Crew Bos	6.1	B
Royal Orchid	21.25	B
Acropetal Tech	4.75	B
GUJNREBNDVR	7.36	B
Pochiraju Inds	6	B
Varun Inds	6.13	B
Tijaria Polypipes	3.71	B
Everest Kanto	15.75	B
Gol Offshore	51	B
Punj Lloyd	36.2	B
JHS Svendgaard	9.69	B
Shriram Epc	44.5	B
Rushil Decor	27.1	B
VASCON ENG	22.95	B
Simplex Proj	19.55	B
Bajaj Hind	15	B
DQ Entert Intl	5.91	B
Jay Mahesh Infra	14.1	B
KGN Enterprises	38.95	B
Hira Ferro	8.8	B
Jubilant Inds	78.1	B
Dwarikesh Sugar	23	B
Zylog Systems	24.95	B
Delta Leasing	45.95	B
Allcargo Logistics	95	B
Titagarh Wag	117.7	B
Orissa Minerals Development	2105	B
OTML	6.55	M
Paras Petro	0.22	T
Gujarat State Fin	1.37	T
Exelon Infra	2.41	T
Prithvi Info	6	T
KINGSINFRA	6.89	T