RRE causes instability and vulnerability: Amongst emerging markets,India is the most macroeconomically
vulnerable, with a deadly combination of high fiscal deficits, close to double digit inflation, and high external deficits financed by short-term foreign capital inflows that may even now be starting to flow out of the country. How did we get here, though? Much of the blame must lie with the redistributional zeal of this
government. The ultimate cause of macro-vulnerability is the high fiscal deficits in turn caused by the fact that government spending per capita (intrinsic to RRE) has increased by nearly 75 per cent by under this government.
This spending contributed to instability directly, because it pushed up rural wages and procurement prices,thereby stoking inflation; and indirectly, because it put aggregate demand on steroids, even as supply
capacity was left to languish, weak and under-nourished.
For some time, the macro-economic damage caused by RRE remained obscured. Headline fiscal deficit numbers actually declined during UPA-I, because its tenure witnessed a dream combination of high growth and low interest rates which should have resulted in headline deficit numbers substantially below actual ones. Similarly,headline fiscal debt numbers have declined throughout the UPA’s tenure,but for bad reasons — India has reduced its debt through sustainedly high inflation. The government may have gained by this, but the aam aadmi has suffered, since his capacity to hedge against inflation is limited. And now, the underlying damage to the overall economy has been exposed now that international investors have become less willing to finance India, as reflected in the plight of the rupee.
2. RRE legitimises atrocious policies:If one were asked to single out the worst economic policy in India, energy subsidies – for diesel, kerosene and above all power – must be a strong contender.Consider the bad outcomes that power subsidies cause or abet: bad crop mix, depleted water resources, unprofitable
and mismanaged state electricity boards, under-investment in power, lower economic growth and higher carbon emissions.Now, politicians promising subsidised power for electoral reasons is understandable. That is part of the hurly-burly of grubby politics. But intellectuals providing legitimacy to these policies is another matter. Intellectuals on the Left cannot expect to be exonerated on the grounds that they have not explicitly advocated subsidised power. After all, if there is a right to cheap food and education why sn’t there one also to basic energy needs and hence to subsidised power for the poor? And this is not a slippery slope argument — because India has slipped already, finding itself at the slope’s bottom which is the shambolic
mess that is the power sector in India
3. RRE undervalues opportunity costs: Governments have limited political capital and must hence prioritise actions, choosing those that maximise bang for the buck. In this view, RRE is problematic because it leads to sub-optimal policy choices. So, instead of enacting a right to education act, why not focus on getting teachers to show up for work, that would have a far greater impact on educational outcomes? Similarly, instead of an employment guarantee scheme, why not create sustainable opportunities for employment creation by eliminating regulatory impediments?
The government could defend its choices by invoking political constraints: absentee teachers in rural India cannot be fired because they are also party apparatchiks, and labour laws cannot be amended because of vested interests. But the problem with votaries of the RRE approach is they don’t apply the same analysis to their preferred policies. Will RRE not run into the same political and bureaucratic constraints?
4. RRE overburdens state capacity:
Indeed, one of the supreme ironies of the Left in India is that it has been so disrespectful to its core belief in a strong state. Several commentators have noted the problems of creating rights without the ability of the state to honour those rights. The public distribution system is broken but instead of being fixed or
replaced, it is being asked to do more. It is as if an emaciated, old man struggling to carry a load of stones is asked to carry another load because that will strengthen his muscles.What is worse is that the Left has been ambivalent about or even hostile to the one genuinely important and far reaching attempt at building state
capacity in India: the Aadhaar scheme (yes, it is really hard to think of any other state capacity-building initiative). Regardless of the merits of direct cash transfers (which is only one potential application of the biometric identification project), the important point is tht Aadhaar seeks to harness technology to
strengthen the ability of the state (and also the private sector) to deliver services in the long run. The Left in particular should be celebrating rather than griping about it.
5. RRE undermines the state:
Intellectually, the most damaging consequence of RRE in India, and least recognised, is that it does not just burden the state, it has the potential to fatally undermine it. How so? The evolution of the state provides one important lesson pointed out recently by Professor Indira Rajaraman of the National Institue of Public Finance and Policy.
The history of Europe and the US suggests that typically, states provide essential services (physical security, health,education, infrastructure, etc.) first before they take on their redistribution role. That sequencing is not accidental. Unless the middle class in society perceives that it derives some benefits from
the state, it will be unwilling to finance redistribution. In other words, the legitimacy to redistribute is earned through a demonstrated record of effectiveness in delivering essential services.
A corollary is that if the state’s role is predominantly redistribution, the middle class will seek – in Professor Albert Hirschman’s famous terminology – to exit from the state. They will avoid or minimise paying taxes; they will cocoon themselves in gated communities; they will use diesel to obtain power; and they will send their children overseas for higher education. All these pathologies are in evidence in India. By reducing the pressure on the state, middle class exit will shrivel it, eroding its legitimacy further, leading to more exit
and so on. A state that prioritises or over-emphasises RRE, risks unleashing this vicious spiral. For this admirer of Professor Sen’s exceptional academic work two ironies stand out. His Nobel-winning insight was about the importance of broad purchasing power rather than the narrow (physical) availability of food in avoiding famines and mass starvation. It is curious, even mystifying, therefore, to see him forcefully advocate, through morbidity-laden polemic, the physical provision of one type of food – cereals, which are rapidly declining in people’s consumption basket – to help reduce malnutrition.His second major insight was that development was about freedom, especially the freedom to exercise choice.
Yet, the RRE approach has privileged paternalism – by determining that the poor need specific assistance – over expanded choice in the form of “untied” cash transfers or broader employment opportunities that
enhance purchasing power. If there is a tension, even contradiction, between Sen, the academic and Sen, the advocate, this government might, in the twilight of its tenure, do well to ask itself: did we draw our inspiration from, and put faith in, the wrong Sen?
Tuesday, July 9, 2013
Redistribution through Rights and Entitlements (RRE)
Monday, July 1, 2013
El Dorado
good advice rarely changes, while markets change constantly. The
temptation to pander is almost irresistible. And while people need good
advice, what they want is advice that sounds good.
The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em.
In practice, for most of the media, that requires telling people to buy Internet stocks in 1999 and early 2000; explaining, in 2005 and 2006, how to “flip” houses; in 2008 and 2009, it meant telling people to dump their stocks and even to buy “leveraged inverse” exchange-traded funds that made explosively risky bets against stocks; and ever since 2008, it has meant touting bonds and the “safety trade” like high-dividend-paying stocks and so-called minimum-volatility stocks.
It’s no wonder that, as brilliant research by the psychologist Paul Andreassen showed many years ago, people who receive frequent news updates on their investments earn lower returns than those who get no news. It’s also no wonder that the media has ignored those findings. Not many people care to admit that they spend their careers being part of the problem instead of trying to be part of the solution.
My job, as I see it, is to learn from other people’s mistakes and from my own. Above all, it means trying to save people from themselves. As the founder of security analysis, Benjamin Graham, wrote in The Intelligent Investor in 1949: “The investor’s chief problem – and even his worst enemy – is likely to be himself.”
One of the main reasons we are all our worst enemies as investors is that the financial universe is set up to deceive us.
From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.
But humans perceive reality in short bursts and streaks, making a long-term perspective almost impossible to sustain – and making most people prone to believing that every blip is the beginning of a durable opportunity.
My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.
There’s no smugness or self-satisfaction in this sort of role. The competitive and psychological pressure to give bad advice is so intense, the demand to produce noise is so unremitting, that I often feel like a performer onstage before a hostile audience that is forever hissing and throwing rotten fruit at him. It’s hard for your head to swell when you spend so much of your time ducking.
On the other hand, you can’t be a columnist for The Wall Street Journal without a thick skin. I have been called an ignoramus, an idiot and dozens of epithets unprintable in a family newspaper;
accused of front-running or trading ahead of my own columns;
assailed as being in the pockets of short-sellers betting against regular investors; described as being a close friend of a person I’ve never met in my entire life;
decried as being biased in favor of high-frequency traders and as being biased against them;
and told, almost every week, that I lack even the most basic understanding of how the financial markets work.
The perennial refrain from critics is: You just don’t get it. Internet stocks / housing / energy prices / financial stocks / gold / silver / bonds / high-yield stocks / you-name-it can’t go down. This time is different, and here’s why.
But this time is never different. History always rhymes. Human nature never changes. You should always become more skeptical of any investment that has recently soared in price, and you should always become more enthusiastic about any asset that has recently fallen in price. That’s what it means to be an investor.
When, in the fourth quarter of 2008 and 2009, I repeatedly urged investors to hold fast to their stocks, I was called a shill for Wall Street and helplessly naïve.
When I took a skeptical look at Congressman Ron Paul’s gold-heavy portfolio in December 2011, angry readers called me “weak minded,” “ignorant,” “pathetic” and a member of “the big bank lobby.” (Gold was around $1,613 per ounce then; it was last sighted this week sinking below $1,230.)
When, only a few weeks ago, I warned that any hints of a tighter policy from the Federal Reserve could crush recently trendy assets like real-estate investment trusts, high-dividend stocks and “low volatility” stocks, readers protested that I didn’t even know the difference between a rise in interest rates and “tapering,” or a decline in the rate at which the Fed buys back bonds. I know the difference – but, with many of these assets down by up to 10% since then, it isn’t clear that all investors knew the difference.
Every columnist knows that if you ever write something that didn’t make anybody angry, you blew it. People don’t like having their preconceived notions jolted, and doubt and ambiguity are alien to the way most investors think.
That’s why I’m realistic. I don’t ever expect to convert all my readers to my viewpoint. I would be a fool to think I could. But I’d be a worse fool if I ever stopped trying.
So you can understand exactly where I am coming from, I will tell you a story.
On one of my last visits, even as my father was in severe pain, he asked me the same question he always did: What are you reading?
I fluffed my feathers a bit and said: Kierkegaard. “What is he telling you?” asked my dad. I had just been reading a volume of Kierkegaard’s journals on the train, immersed in the poetic ruminations of the great Danish philosopher. So I immediately spouted, verbatim and with the appropriate pauses for world-weary effect, the words I still remember to this day: “No individual can assist or save the age. He can only express that it is lost.”
Without a moment’s hesitation, my dad retorted: “He’s right. But that’s exactly why you must try to assist and save the age.”
In that one moment, my dad put a callow youth gently in his place, out-existentialized the great existentialist and gave me words to conduct a career by.
Only years later did I understand fully what he meant: We can’t assist or save the age, but the attempt to do so is the only way we have of even coming close to realizing some dignity and meaning for our lives. The longer the odds, the greater the obligation to try to beat them. That’s why I keep at it, even though I have profound doubts that most people will ever learn how to be better investors. I never expect everyone to listen; all I ever hope for is to get someone to listen.
I felt this firsthand in a former job in 1999 and 2000, when I wrote column after column warning people not to fling money at technology stocks and, in return, got hundreds of hate emails a week (often hundreds per day). It was grim, contrarian work, constantly refusing to tell people what they desperately wanted to hear – it was like trying to stop a hurricane by pushing against it with your hands.
The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em.
In practice, for most of the media, that requires telling people to buy Internet stocks in 1999 and early 2000; explaining, in 2005 and 2006, how to “flip” houses; in 2008 and 2009, it meant telling people to dump their stocks and even to buy “leveraged inverse” exchange-traded funds that made explosively risky bets against stocks; and ever since 2008, it has meant touting bonds and the “safety trade” like high-dividend-paying stocks and so-called minimum-volatility stocks.
It’s no wonder that, as brilliant research by the psychologist Paul Andreassen showed many years ago, people who receive frequent news updates on their investments earn lower returns than those who get no news. It’s also no wonder that the media has ignored those findings. Not many people care to admit that they spend their careers being part of the problem instead of trying to be part of the solution.
My job, as I see it, is to learn from other people’s mistakes and from my own. Above all, it means trying to save people from themselves. As the founder of security analysis, Benjamin Graham, wrote in The Intelligent Investor in 1949: “The investor’s chief problem – and even his worst enemy – is likely to be himself.”
One of the main reasons we are all our worst enemies as investors is that the financial universe is set up to deceive us.
From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.
But humans perceive reality in short bursts and streaks, making a long-term perspective almost impossible to sustain – and making most people prone to believing that every blip is the beginning of a durable opportunity.
My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot. Instead of pandering to investors’ own worst tendencies, I try to push back. My role is also to remind them constantly that knowing what not to do is much more important than what to do. Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.
There’s no smugness or self-satisfaction in this sort of role. The competitive and psychological pressure to give bad advice is so intense, the demand to produce noise is so unremitting, that I often feel like a performer onstage before a hostile audience that is forever hissing and throwing rotten fruit at him. It’s hard for your head to swell when you spend so much of your time ducking.
On the other hand, you can’t be a columnist for The Wall Street Journal without a thick skin. I have been called an ignoramus, an idiot and dozens of epithets unprintable in a family newspaper;
accused of front-running or trading ahead of my own columns;
assailed as being in the pockets of short-sellers betting against regular investors; described as being a close friend of a person I’ve never met in my entire life;
decried as being biased in favor of high-frequency traders and as being biased against them;
and told, almost every week, that I lack even the most basic understanding of how the financial markets work.
The perennial refrain from critics is: You just don’t get it. Internet stocks / housing / energy prices / financial stocks / gold / silver / bonds / high-yield stocks / you-name-it can’t go down. This time is different, and here’s why.
But this time is never different. History always rhymes. Human nature never changes. You should always become more skeptical of any investment that has recently soared in price, and you should always become more enthusiastic about any asset that has recently fallen in price. That’s what it means to be an investor.
When, in the fourth quarter of 2008 and 2009, I repeatedly urged investors to hold fast to their stocks, I was called a shill for Wall Street and helplessly naïve.
When I took a skeptical look at Congressman Ron Paul’s gold-heavy portfolio in December 2011, angry readers called me “weak minded,” “ignorant,” “pathetic” and a member of “the big bank lobby.” (Gold was around $1,613 per ounce then; it was last sighted this week sinking below $1,230.)
When, only a few weeks ago, I warned that any hints of a tighter policy from the Federal Reserve could crush recently trendy assets like real-estate investment trusts, high-dividend stocks and “low volatility” stocks, readers protested that I didn’t even know the difference between a rise in interest rates and “tapering,” or a decline in the rate at which the Fed buys back bonds. I know the difference – but, with many of these assets down by up to 10% since then, it isn’t clear that all investors knew the difference.
Every columnist knows that if you ever write something that didn’t make anybody angry, you blew it. People don’t like having their preconceived notions jolted, and doubt and ambiguity are alien to the way most investors think.
That’s why I’m realistic. I don’t ever expect to convert all my readers to my viewpoint. I would be a fool to think I could. But I’d be a worse fool if I ever stopped trying.
So you can understand exactly where I am coming from, I will tell you a story.
On one of my last visits, even as my father was in severe pain, he asked me the same question he always did: What are you reading?
I fluffed my feathers a bit and said: Kierkegaard. “What is he telling you?” asked my dad. I had just been reading a volume of Kierkegaard’s journals on the train, immersed in the poetic ruminations of the great Danish philosopher. So I immediately spouted, verbatim and with the appropriate pauses for world-weary effect, the words I still remember to this day: “No individual can assist or save the age. He can only express that it is lost.”
Without a moment’s hesitation, my dad retorted: “He’s right. But that’s exactly why you must try to assist and save the age.”
In that one moment, my dad put a callow youth gently in his place, out-existentialized the great existentialist and gave me words to conduct a career by.
Only years later did I understand fully what he meant: We can’t assist or save the age, but the attempt to do so is the only way we have of even coming close to realizing some dignity and meaning for our lives. The longer the odds, the greater the obligation to try to beat them. That’s why I keep at it, even though I have profound doubts that most people will ever learn how to be better investors. I never expect everyone to listen; all I ever hope for is to get someone to listen.
I felt this firsthand in a former job in 1999 and 2000, when I wrote column after column warning people not to fling money at technology stocks and, in return, got hundreds of hate emails a week (often hundreds per day). It was grim, contrarian work, constantly refusing to tell people what they desperately wanted to hear – it was like trying to stop a hurricane by pushing against it with your hands.
JOBS
The
Food Corporation of India (FCI) is in the process of hiring more than
11,000 new staff, including hundreds in managerial positions, ahead of
the enactment of the Food Security Law.
The FCI will need to meet increased requirements of storage and movement of food grains for the Public Distribution System (PDS) after the passage of the Food Security Bill, which seeks to provide legal entitlement for cheap grains to almost 67 per cent of the Indian population.
The FCI will need to meet increased requirements of storage and movement of food grains for the Public Distribution System (PDS) after the passage of the Food Security Bill, which seeks to provide legal entitlement for cheap grains to almost 67 per cent of the Indian population.
Life after easy money by RANA
Warren Buffett once said, "only when the tide goes out do you discover who's been swimming naked." That is very much the case now, after the Federal Reserve's June 19 announcement that it might start scaling back its program of buying up assets from financial institutions--to the tune of $85 billion a month--later this year. The news prompted a roller-coaster ride in the markets. Stocks plummeted, commodities crashed, bond yields jumped and credit tightened as investors began to realize that the low interest rates from this easy-money party could finally come to an end. Some types of assets have since stabilized, but we're facing a summer of volatility as investors begin to unwind positions they took to benefit from the Fed's multitrillion-dollar program of quantitative easing (QE). The Fed's approach successfully buoyed markets and boosted confidence, but it has also created bubbles in areas like emerging markets, commodities and corporate junk bonds.Dallas Fed president Richard Fisher said as much in a recent interview with the Financial Times, in which he also defended the Fed's decision against critics who claim that the money spigots were being turned off too soon and that the shock would derail the economy's recovery. Fisher accused these complaining Wall Streeters of being "feral hogs" and said the Fed can't prop up markets indefinitely. The question, of course, is whether markets can now stand on their own. The end of QE is a market sea change, the biggest since the financial crisis. "The era in which central bankers are able to impose stability on a still inherently unstable set of global economic and financial fundamentals is coming to an end," PIMCO CEO Mohamed El-Erian told me. Here are three trends to expect once the dust clears. Risk looks less attractive. The whole point of QE was to push investors into riskier assets, thereby propping up markets (and, to a certain extent, the economy). The Fed kept interest rates low, which meant investors looked for higher yields wherever they could be found--at times, in dicey places. Commercial real estate and C-grade corporate bonds, for instance, will likely be down for the count. Safer bets like high-dividend-paying, blue-chip multinational stocks will likely spring back. "The end of QE won't be the end of the world for the stock market," says Capital Economics chief markets economist John Higgins, but don't expect the sort of jumps we've seen in recent years. Markets fall out of sync. For the past few decades, there has been a tendency for markets to move in concert: emerging markets would rise and fall together, as would developed nations and various industrial sectors. Things were either up or they were down. Statistics now show that these correlations are breaking down, requiring investors to focus on the stories of individual nations and companies. Europe, for example, is probably going to be in recession or flat for years, while the U.S. shows signs of a stronger recovery. Overhyped developing nations like Brazil and Turkey will be at economic and political risk; others with sounder stories will fare better. Indeed, it may be a good time for investors to start cherry-picking around the world: with the MSCI emerging-markets index down 19% since the beginning of the year and emerging-market stock valuations below their long-term averages, plenty of companies and countries are looking cheap. Rebalancing happens. A constant refrain of the past several years has been that the global economy is too unbalanced--the West has too much debt, China doesn't have enough consumer spending and so on--and the old growth models don't apply. Well, now that we can see everyone in their skivvies, there's a real impetus to change. In China, for example, the state is trying in fits and starts to clamp down on a credit bubble by forcing banks to stop making so many loans. If successful, it could be a step toward a more sustainable economic model, which is desperately needed now that growth is slowing. The big question is what will happen in the U.S. The Fed signaled its intent to taper off QE because it sees evidence that the U.S. is finally in a real recovery. And there are reasons to think so. Consumer confidence has reached levels not seen since before the financial crisis, housing continues to strengthen, and unemployment is slowly but surely falling. Yet pessimists can point to just as many opposing data points: First-quarter GDP was recently revised down to 1.8%, wages are flat, middle-income jobs are scarce, and long-term issues like education and health care reform loom. Markets may not always reflect the real economy, but over time, they ultimately converge. The coming post-QE era will reveal much about the health of both--and who went swimming with their trunks on.
Sunday, June 30, 2013
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.
Saturday, June 29, 2013
“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.
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.
Monday, June 24, 2013
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.
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.
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