Thursday, December 27, 2007

Depression, Recession, Stagflation, Hyperinflation, Life as usual

We are living in an interesting time. Depending on who you read, you can conclude that the US economy is going to experience

  1. Depression
  2. Recession
  3. Soft landing. i.e cooling of the current growth. with no major problems. Life would be as usual
  4. Stagflation
  5. Hyperinflation
The proponents of each of these scenarios have convincing arguments. Surely some one is right and the rest are all wrong.

Here is my take on what will happen.
The Fed seems more comfortable fighting inflation than deflation. So they would rather err on the side of inflation. So scenario 4 or 5 is more likely. Ideally they would like to pull off a scenario 3, but given the extent of the losses in the banking and the shadow banking system, the over stretched consumer debt, the tottering real estate sector and very high trade deficit, Scenario 3 seems more of a hope. The Fed is more likely to let the dollar depreciate further ( By increasing money supply to ward of any deflation and cutting rates to stimulate growth ) . The resulting high inflation will probably need a Volcker like response down the line, but that would be a battle for another day.

Occurrence of Scenario 4 or 5 is going to depend on how much confidence the rest of the world has on the US dollar( A rapid fall of the US dollar can trigger hyperinflation), the extent to which the foreign holders of US dollars/ exporters to the US can break away from the impact of the fall of the US dollar, and how quickly the US economy will get back on its feet & start producing goods & services needed by the rest of the world.

What does this mean for an investor in India ? I do not know. Just make sure you only have that much money in the stock market that you can afford to lose.

Wednesday, December 19, 2007

Cassandra's predictions for 2008

Cassandra's predictions for 2008. Good stuff.
Link via naked capitalism

Friday, December 14, 2007

Callous leaders -2

From The Telegraph

“I told them I had been invited to come here and I should be given a chance to speak,” she told The Telegraph later. “The event is held each year to honour the men who saved Parliament, but no minister has the time to even speak to us. What is the point of calling us all this way, if they don’t even want to ask us how we are?”

She levelled a graver — but not unusual — charge. “There were ministers who were laughing during the function. How can they do that? This is about dignity.”

Is too much to expect that these folks will behave in a dignified manner? I thought the example on my blog was an one off. Apparently it isn't. And of course none of the national newspapers reported any one laughing.

From Times of India
Petroleum Minister Murli Deora was quoted as saying that the retail outlet allotted to Ganga Devi was commissioned on January 25, 2007. In the statement, Deora said that the "outlet is functioning smoothly...and the allottees has not approached BPCL (Bharat Petroleum Corporation Ltd) officials with any problem so far.''

Insisting that the government had given "top priority'' in providing relief to the families of the victims, Deora said out of nine cases, three retail outlets were commissioned in 2003, one in 2006 and four in 2007.
Why does it take the government 5+years to allot a petrol pump? BTW who among these nine "cases" has not yet been provided relief ? and why ?

Wednesday, December 05, 2007

Combating competitive tissue papering

The RBI appears to have done a good job in limiting the amount of tissue paper denominated securities that it holds. The worry is that the other currency denominated securities that it holds may soon turn to tissue paper if the US can convince all the central banks to drop rates. What should RBI (or rather India ) do to hedge against this scenario ?

  1. RBI can follow the follow the policy of competitive tissue papering ( Thanks Nitin). This would result in high inflation. A politically unacceptable solution for a government that always seems to be on the verge of an election.
  2. Slow down the growth of forex reserves. It could choke the inflows or increase the outflows. Choking inflows through blunt weapons like Tobin Tax or curtailing investments comes with its own set of problems. Encouraging outflows seems to be a better option.
What can RBI do to encourage outflows without hurting the Indian industry too much.

  1. RBI/GOI could encourage outflows on the capital account by removing the current investment caps for individuals & firms. There will not be any immediate impact for these moves ( I doubt if a large number of people are even investing to the current limit of 100,000 dollars ) but it will create some uncertainty in the minds of FIIs who are making a one way bet on the rupee.
  2. Remove wealth tax on gold. Indian gold demand would go up & we would end up exchanging tissue papers for gold, which is not a bad bargain
  3. Increase the strategic reserves of oil. India is doing that, may be it is time to accelerate the whole process.
  4. Lower customs duties. Domestic industry seems to be doing well. It is probably a good time to usher in more competition

Added on Dec 6th 14:20 PM IST
Disclosure : I have some investments in gold through ETF & some oil company stocks