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.

Cassandra's predictions for 2008

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

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 ?

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

Where are the dollars ?

The RBI has been furiously buying dollars to stem the rise of the rupee. It has bought over 84 Billion since Jan 2007. Where are these dollars going ?
From the historical data from US treasury India had about 15 Billion US dollars invested in US treasuries. The latest data shows that India is not even on the list. So it has less that 11 billion dollars of US treasuries.
So where are the dollars going ? Is RBI buying other countries treasuries and thus insulating itself from any weakening of the dollar ? If RBI is doing that, hats off to it. It is passing on the role of managing the dollar depreciation to other central banks, while keeping the rupee from appreciating.

Michael Lewis on "Why I'm Ready to Be New Citigroup CEO"

Micheal Lewis column: "Why I'm Ready to Be New Citigroup CEO".
Fun stuff! Here is an excerpt.

The Wall Street CEO must possess an extraordinary ability to be paid huge sums of money each year without losing composure.

This isn't as easy as it sounds, especially when the firm is losing billions. Imagine if some board handed you $40 million or so a year (before benefits) and tossed in a nine-figure severance package. If you're like most people, you'd dance around the kitchen naked with the drapes wide open -- until you realized what people who raised you would say when they read about it in the paper.

AP tops the chart

Andhra Pradesh has the distinction of topping the chart on the number of NGOs blacklisted by CAPART. Of course the data can be interpreted in many ways. May be the blacklisting criteria was tougher for AP, the AP based NGOs were stupid enough to get caught etc. The lesson to be learnt from this exercise is, if you plan to donate to NGOs, do your homework before giving away the money.

Here is the state wise list that I have compiled.

Andhra Pradesh	176
Bihar	123
Tamilnadu	75
Karnataka	71
Uttar Pradesh	69
Kerala	33
Rajasthan	33
Delhi	21
West Bengal	21
Haryana	20
Maharashtra	19
Orissa	19
Madhya Pradesh	14
Manipur	11
Nagaland	10
Gujarat	8
Jharkhand	8
Himachal Pradesh	6
J&K	4
Mizoram	4
Assam	2
Pondicherry	2
Chattisgarh	1
Meghalaya	1
Uttaranchal	1

Erosion of core constituency ?

How much the CPI(M)/CPI's core constituency has been eroded can possibly be gauged from the JNU elections . Its student wing ( SFI-AISF) supported candidates finished 3rd in three of the four central panel posts and just about managed to cling on to second position in the other post. JNU has always considered a bastion for SFI, with both Prakash Karat & Sitaram Yechury being past presidents of the JNU students union. Does this election provide a pointer to the direction in which the wind is blowing ?

Mr Prime Minister, Did you sleep well last night ?

Mr Prime Minster,
Did you sleep well last night ? If you did , was it because you stopped watching television? Was it because the Indian media chose not to highlight the plight of families of over 4000 workers detained in Dubai ? Was it because these 4000 odd people were not accused of terrorism and therefore did not deserve to have their share of your sleepless nights ? Was it because these poor workers had no articulate English speaking wives, to explain their viewpoint to media?


ps : Is it surprising to see that the BBC does not seem to report that any one was detained. It has a bland news item. What a contrast to its coverage of the Gurgaon Honda Strike