Economic Growth and the Policy Imperatives--by Dr. K.C. Chakrabarty

A Very Good Article by Dr. K.C. Chakrabarty on Prospects for Economic Growth and the Policy Imperatives for India. Here he talks about the past,present and future growth of Indian economy.

• The transformation to the high growth phase
• The impact of the crisis & the V-shaped recovery
• The near term growth prospects and the challenges 
• The long-term growth prospects
• Making growth process more inclusive.

I had a question for him..from 1991 BOP to 2007-08 Recession..by seeing at the instances of Rise and Fall of economy is it possible  for the Central Bank to Foresee the Problems in economy. If yes when are they likely to turn up...if not then when is that you people are going to create :)

The Last statement in reference to my conclusion of recession.. "Root cause of  Crisis in west is by investing money into Real Estate as if real estate prices never come down,,,,and now see what happened over there....And i believe the same thing is happening over here now.. people speculating that real estate value will always go up...and investing as if there is no tomorrow...and RBI is not interfering to arrest the up move" ..Will see how it turns up in coming years :)

Jagdish Bhagwati on Free Trade

Jagdish Bhagwati can be called as The Globalization Guru Here are his views on Indian Economy in a Globalized World.  He talks about reforms in India and also distinguishes between Free Trade of Goods and Services with Free Trade in Capital Flows.He talks about financial innovation which is leading to creative destruction like forcing people to take more risks. What are the strucutral problems in the world economy?.

How is Outsourcing jobs to India and china is helping the world economy?Is US really taking a protectionist position related to International Trade.?Not much but to some extent ,cause it has to protect the incomes of people over there. He says "If income falls ..Trade falls and sometimes it will lead to financial collapse". I guess that's is what is worrying uncle helicopter Ben

 

Note: I am reading few of his works..so expect couple of posts on Trade related stuff and also if anyone finds this please share it with me

Five Frontier Issues in Indian Banking...by Dr. Duvvuri Subbarao

Excellent address by RBI Governor to  bankers at  the BANCON 2010, here he talks about the way indian banks withstood during crisis and regulatory change which is going to happening in form of BASEL 3 accord.

He put forward some ideas and asked banks to discuss on it .

First Issue : Are Indian Banks Prepared for Basel III? 

The building blocks of Basel III are by now quite well known: higher and better quality capital; an internationally harmonized leverage ratio to constrain excessive risk taking; capital buffers which would be built up in good times so that they can be drawn down in times of stress; minimum global liquidity standards; and stronger standards for supervision, public disclosure and risk management. 

 The Basel III package includes capital buffers to contain the pro-cyclicality of the financial sector. Building capital buffers will entail additional costs for banks with consequent implications for investment and hence for overall growth.

Building Buffers will make the capital ideal and will not add anything into productive, it is meant to use at bad times(its like putting more money in savings deposit(RBI) for interest rate...there by curtailing the lending power of banks to some extent.

To effectively deploy countercyclical measures, we also need to improve our capabilities to predict business cycles at the aggregate and sectoral levels, and identify them in real time. This will require better quality of economic and financial data as well as improved analytical capabilities.

 In India the data collected from Ministry of Statistics is sometimes inadequate to predict the right conditions across the economy as well as markets, we need a more reliant  streamlined data from each  sector across the eonomy . I guess this can be done only when government makes a regulation for mandatory data submission from each  department where it works...example:Collect all the land registrations across Pan India to get a feel of real estate sector pricing, collecting pricing from companies which manufacture the products etc..

Estimates show that the leverage in the Indian banking system is quite moderate. Notwithstanding the fact that the SLR portfolio of our banks will be included in computing the leverage ratio, Indian banks will not have a problem in meeting the leverage ratio requirement since the Tier 1 capital of many Indian banks is comfortable (more than 9%) and their derivatives portfolios are also not very large

 Indian banks will not have problem in meeting the ratio as long as real estate value goes up,but once it starts coming down, we might feel the pinch.Though the derivatives positions of banks are not large our banks show significant revenue from trading.

Second Issue:  Should Indian Banks Aim to Become Global?

The second issue I want to address is one that comes up frequently - that Indian banks should aim to become global. Most people who put forward this view have not thought through the costs and benefits analytically; they only see this as an aspiration consistent with India’s growing international profile.

 Are our banks ready to become global and ready to meet the demands of global citizens..( Can Mittal bank on Indian bank to fund a major acquisitions across the globe?). Though SBI missed the boat of acquiring Citi Bank when it was trading at 1$ at the hieght of finanacial crisis due to government inefficient bureaucracy.

Can Indian banks aspire to global size?

As per the current global league tables based on the size of assets, our largest bank, the State Bank of India (SBI), together with its subsidiaries, comes in at No.74 followed by ICICI Bank at No.145 and Bank of Baroda at 188.  It is, therefore, unlikely that any of our banks will jump into the top ten of the global league even after reasonable consolidation.

 Should Indian banks aspire to global size?

Opinion on this is divided. Those who argue that we must go global contend that the issue is not so much the size of our banks in global rankings but of Indian banks having a strong enough global presence. The main argument is that the increasing global size and influence of Indian corporates warrant a corresponding increase in the global footprint of Indian banks.

The opposing view is that Indian banks should look inwards rather than outwards, focus their efforts on financial deepening at home rather than aspiring to global size

Third Issue: Should We Mandate Foreign Banks to Come in Only as Subsidiaries?

 Here he talks about the subsidiaries role in indian context

Fourth Issue:  Why Do We Need to Rewrite Laws Governing the Banking Sector?  

Infact banking laws helped us to maintain a orderly banking system during crisis. 

Requirement of minimum paid up capital and reserves, restrictions on payment of dividend, transfer of a percentage of profits to reserves, maintenance of SLR, restrictions on connected lending, maintaining a percentage of domestic liabilities as assets in India have all helped the Reserve Bank in preventing crises and maintaining financial stability.

 Fifth Issue : Where Do Indian Banks Stand on Efficiency Parameters?

There has been a particularly discernible improvement in banks’ operating efficiency in recent years owing to technology upgradation and staff restructuring 

 One such is Core Banking System which helped banks to offer more services and reduced the time lag in delivering the services

He advised the banks to raise the interest rates offered to depositors and reduce the lending rates charged on borrowers - in other words, reduce their intermediation costs, or in technical terminology, reduce the net interest margin (NIM).

This will lead to decreasing margins for banks and i beilive this lead to Bank Sector tanking down 3%  in today's market.

Inclusive Growth – Role of Financial Sector

Below are some excerpts from a lecture at a University by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India on Inclusive Growth – Role of Financial Sector

• Here he talks about Inclusive Growth what it means ? why is it important ?. Inclusive growth means allowing people to contribute to and benefit from economic growth.
• Off late it has caught policy makers attention because the benefits of economic growth happened in the past few years are not shared equally among people.
• Growth is inclusive when it creates economic opportunities along with ensuring equal access to them.
• The Indian economy, though achieved a high growth momentum during 2003-04 to 2007-08, could not bring down unemployment and poverty to tolerable levels.
  
• Further, a vast majority of the population remained outside the ambit of basic health and education facilities during this high growth phase
• Over 25% of Indians continue to live in abject poverty. As a result, Inclusive growth has become a national policy objective of the Union Government.
  
• Govt has identified agriculture, infrastructure, health care and education as critical areas for achieving higher inclusive growth.
  
• The policies aim at increasing the income and employment opportunities on the one hand and on the other; it tries to finance programmes which are capable of making the growth more inclusive.

Financial Inclusion--Financial inclusion is the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low income groups at an affordable cost in a fair and transparent manner by mainstream institutional players

Role of Financial Sector

• Banks and other financial services players largely are expected to mitigate the supply side processes that prevent poor and disadvantaged social groups from gaining access to the financial system.
  
• Access to financial products is constrained by several factors which include: lack of awareness about the financial products, unaffordable products, high transaction costs, and products which are not convenient, inflexible, not customized and of low quality
• The empirical evidence shows that countries with large proportion of population excluded from the formal financial system also show higher poverty ratios and higher inequality.
• However, we must bear in mind that apart from the supply side factors, demand side factors, such as lower income and /or asset holdings also have a significant bearing on inclusive growth.

Bottlenecks

• The gigantic nature of the task, keeping in view the number of financially excluded people.
• Lack of proper Business Models. Banks still perceive this as a burden and an imposition and not as a viable Business Model
• The costs of administering low value transactions and of financial intermediation are perceived to be on the higher side.
• Lack of cost effective scalable Delivery Models.

Strategy

• Banks must view Financial Inclusion as a huge business opportunity and perfect their Delivery Models. BC based delivery model has been made more flexible and inclusive
• Involve all the stakeholders in the process. Governments, both Central and State, NGOs, technology vendors, Industry Associations, Insurance and Mutual Fund companies, society at large

Myths about Financial Inclusion

• It is not their willingness but the lack of ability to deliver which is coming in the way

And he concludes that current policy objective of inclusive growth with stability is not possible without achieving universal Financial Inclusion.

Whats Ahead for Markets from Options Data

Concerns of Debt Crisis in Ireland along with expectations of a Rate hike in China in coming days(might be this week) prompted investors across the market to liquidate there positions and looking  for safer assets.

Irish banks have there own problem of debt caused by the housing bubble and similar is the case with portugal. Even EU and IMF are trying for bailout but markets are concerned that the problems might be spread to other peripharel countries.

Nifty Shed 132 points and settled at very crucial support point of 5980 . On the Equity Side we have

FII

16-Nov-2010

3157.02

3353.71

-196.69

DII

16-Nov-2010

1542.54

1092.95

449.59

FII were Net Sellers and DII were Net Buyers.
On the other Side if we see the options Data where all the action happens moreover most of the action over there is done by FII's.

• Nifty call options added 57.75 lakh shares in open interest whereas put options shed 4.00 lakh shares in open interest.

Options Data on 16-10-2010

There is lot CALL Writing happened at 6000 Levels with increase of  Open Interest of 27Lakhs meaning it will take RESISTANCE at these levels in coming days and also OI got increased for 6100 and 6200 means in coming days it will be tough to reach those positions.

In the PUT Side we have increase of OI at 5900 with Put Writing seen at 5900 and 5800 coupled with increase in OI expecting market not to go down and Taking a SUPPORT at these levels, though 6000 PUT writing happened many positions were closed as can be seen with decrease in OI of 8 Lakhs,similarly 6100 PUT and 6200 PUT had seen Decrease in OI .That means many PUT Writers closed there positions expecting that market might head south and there by limiting there loses.

Similarly we have seen Lot of CALL Writing at 6100,6200 meaning thatWriters are not expecting to go above in coming days...

Looks like it might Trade in 5900+ to 6100 in coming days

On making good decisions..Norway Bank

Norway Central Bank Deputy Governor Jan F. Qvigstad gives a superb speech on the "On making good decisions". The speech revolves around how central banks make decisions and what makes a decision good or bad .
It cover the following areas:

• Independence provides a sound framework for interest rate decision

Most countries have now delegated the task of ensuring price stability to the central bank. The government has set an inflation target for monetary policy and delegated the operational conduct of monetary policy to Central Bank

The Norwegian economist Finn Kydland received the Nobel Prize for economics in 2004 for having shown that on the whole, monetary policy decisions are better if policymakers delegate interest rate setting to an independent central bank under a clear mandate

• We make decisions under uncertainty

Independence alone does not guarantee good decisions. Even if an independent central bank is better positioned to avoid having short-term expediency and changing preferences dictate interest rate policy, its decisions must be made under considerable uncertainty.

“Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape”....Alan Greenspan

• Groups often make better decisions than individuals

Contestants on the television game show Who Wants to Be a Millionaire? have various so-called “lifelines”, including telephoning a smart friend or asking the studio audience for help. It has transpired that the studio audience is the contestants’ absolute best bet. The majority of the studio audience votes for the correct answer nine out of ten times, beating out smart friends, who provide the correct answer only 65 per cent of the time

• But groups are no guarantee for good decisions

The deliberative process does not necessarily lead to a better decision. When the group members share the same world view and thinking, groupthink can lead the members astray. There is typically little dissent in discussions where participants think alike. The group can therefore be convinced that their common standpoint must be right.

• How do we arrive at a decision?

There two approaches: premise-based or conclusion-based. The two approaches may have different outcomes. Many will favour the premise-based approach because it gives weight to the underlying basis for the decisions we make.

• Was the decision good?

The objective of monetary policy is a natural place to begin our assessment. Have we or have we not achieved price stability? Even if we make our best efforts, there is no guarantee that we will succeed in reaching this objective. The key policy rate is not the only factor affecting the economy and that can disturb the outcome.

Telecom Scam---Part1

Though am not interested in reading political news (waste of time) this particular telecom scam made to look a bit into Google and find what happened and happening with scam. It’s high time to look into evidence of Telecom Scam which is rocking the parliament for couple of days.

Here is article by Canary Trap time line of events:

August 28, 2007: In 2001, there were only 4 million cell phone subscribers; whereas by 2007-2008, the number of cell phone subscribers was around 350 million. Thus by fixing license fees at 2001 prices, the Telecom Ministry enabled companies that were allotted licenses to command huge premia.

Company	License Paid	Sold to
Swan	1537	45 % sold to Etisalat for 4200 cr
Unitech	1661	60 % sold to Telenor
Tata	--	26 % sold to Docomo

Based on the aforesaid sale of shares by Unitech and Swan, the market value of these 9 new 2G licenses amount to a total of Rs 70,022.42 crores, for which these 9 companies/conglomerates had paid DoT a total of Rs 10,772.68 crores.

October 21, 2009: The CBI registered an FIR in the scam.

April 28, 2010:Details of tapes establishing Raja’s dubious role in the scam surfaces in the media. Opposition parties demanded that the PM sack Raja.

A little bit of digging the information led me to this page where the reporter of magazine gave confidential information which main stream media never talked.

Some excerpts from it:
Radia close associate of Raja has been key in getting license and spectrum to the following telecom companies 1) swan2) aircel3) Unitech wireless4) Datacom

• Datacom was setup by HFCL group along with Mr.Dhoot of Videocon is alleged to be having funding through Mukesh Ambani group through a employee Manoj Modi

•  Swan on paper is backed by Mumbai based real estate Company Dynamix Balwas group of companies and it was moved up the priority list of spectrum allocation by DOT

•  UAE telecom giant Ehtisalat controls about 45% of swan telecom and for this they paid $900million.

•  This deal make Swan at $2 Billion and at present Mumbai based Delphi investments holds 9.9% stake in Swan.90.1 stake in Swan Telecom is owned by Tiger Trustees which in turn is 99.8% owned by Dynamix Balwas Ltd.

•  Seems that Raja and Radia have interests in Swan and there associates are on board of Swan

CBI registered a case against conspiracy between few public officers and private persons in grant of telecom license in 2007-08.It is learnt that certain individuals like Ms Radia of Noesis consultancy were involved in the above mentioned criminal case and DGI and Income Tax authorities tapped the wires of Radia to get some information.

The companies which she and co consult are not only for telecom, aerospace, power and infrastructure but also influence and change policies of government to suit commercial requirements of various clients.
From the conversations it appears that she had role in telecom license and guides a newly formed telecom company to delay the stake sale and not to look at it as a windfall gain. There are some direct conversations of her and telecom minister. In some other conversations she boasts of herself for obtaining telecom license for few companies.
June internal evaluation report from DGI
Totally 9 lines were kept under surveillance during the month of June 2009 belong to two separate groups. First group relates to a PR agency.

• The conversations indicate money laundering and structured payoffs transactions and liaison for projects of telecom and power.

•  Also indicate cross borer transactions related to telecom, petroleum and media.

Second group comprises of 3 members

•  And calls to this group appear relate to financial transactions ranging in crores including foreign bank accounts

• Unauthorized international derivative transactions

• In fact there appears some calls related to cricket betting and some other sports (ohhh I was under impression that betting happens only in cricket, seems now cricket has a rival)

July internal evaluation report from DGI
First group: As per conversations

• The associates have apparently fronted for someone (Mukesh Ambani) to acquire a news channel (9X) in India and there appears some cross border transactions.

•  Conversations of target (Radia) with a businessman (Tarun Das FICCI Chair and Government Nominee…Mukesh Ambani) who is also a government nominee on a State PSU (haldia Petro) appears to suggest that a target along with business man is trying to facilitate a take over of this PSU by a large client (RIL) of target.

•  The Target as per telephone conversations facilitated for a few filing PILs by NGO to hurt the business interests if the rival clients (Anil Ambani ADAG)

Reports on news in whispers in Corridor:

•  Reports that Sunil Mittal is also banking on with Radia to make peace with Raja on foreign take over and his interests in spectrum

•  Neera Radia is chief of Vaishnav Corporate Consultants Pvt Ltd, Noesis Consulting Vitocom and Neucom Consulting. Vitocom has been handling the business of NDTV Imagine.

• Neucom was set up to handle affairs of Mukesh Ambani Group.

• Vaishnav handles the affairs of Tata, Unitech, and Star TV along with other clients.

• Noesis officially comprises of retired senior bureaucrats and controlled by Radia.

• There is long conversation between Ratan Tata and Radia which establishes that Tata does not want Maran to be Telecom Minister at any cost.Tata felt the need to exit telecom if Maran becomes Minister.

•  Looks like Radia is also in touch with Neera and Ratnam CA of Karunandhi wife (wovvvv…first time I heard of this…).

•  Radia and Kanimozhi behalf of Burhka Dutt(NDTV fame..I guess now she is in CNN IBN) and Vir Sanghvi (Not Sure of this Person) were negotiating minister berths for DMK members.

•  Sunil Mittal lobbied to prevent Raja to become telecom minister and Tata Lobbied to prevent Maran from becoming Telecom Minister. (Another wovvv)

•  In Jharkhand Tata’s need lease of to extend for which the great madhu koda (1000 crore scam) asked for 180 crores. Radia got the lease extension from governor for which ratan Tata sanctioned 1 crores as reward for the team

• FICCI chief Tarun Das is chairman of haldia petro corp. and Mukesh wants to take over it. With help of Radia they are handling the matter

•  As per conversations there appears RIL purchasing a house for VK Duggal, Director General of Hydrocarbons News

•   9X was controlled by Mukesh Ambani

If this is real then all credibility gained by Mr Clean MM Singh are thrown into dustbin.
Moreover none of the news papers are willing to post the news related to it. Seems government is denying that it never allowed wire tapings.

An Open Letter to Ben Bernanke

This is Open Letter to Chairman Ben Bernanke

Dear Mr. Chairman:

We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.

We subscribe to your statement in The Washington Post on November 4 that "the Federal Reserve cannot solve all the economy's problems on its own." In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed's purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Respectfully,
Cliff Asness

Michael J. Boskin

Richard X. Bove

Charles W. Calomiris

Jim Chanos

John F. Cogan

Niall Ferguson

Nicole Gelinas

James Grant(yes u saw it right he is from Grants interest rate observer)
Kevin A. Hassett

Roger Hertog

Gregory Hess

Douglas Holtz-Eakin
Former Director, Congressional Budget Office
Seth Klarman

William Kristol

David Malpass

Ronald I. McKinnon

Joshua Rosner
Dan Senor

Amity Shlaes

Paul E. Singer

John B. Taylor yes you saw it right he is the one who  proposed the Taylor rule, which provides a guide to central banks on how to determine interest rates.

Peter J. Wallison

Geoffrey Wood

Ireland debt crisis

After some months calmness in markets a storm is starting to intensify. Few of the factors leading causing turmoil in markets are Ireland banking problems..unlike Greece debt problems but eventually will come there in some time in 2011. Korea increased interest rate to tame inflation and markets expect china may fallow the suit. and last but not least QE2 and its effects on currency war

Below are some links related to Ireland Crisis

• Dublin is facing huge pressure from the financial markets 

• Ireland told: Take EU bailout or trigger crisis

Ireland's minister for European affairs, Dick Roche, hit the radio waves this morning, telling the Today programme that the situation is under control, and there's no need to panic:

"There is a problem with liquidity in banks, there is no doubt about that, but I don't think that the appropriate response to that would be for European finance ministers to panic.
"Ireland doesn't need to trigger any mechanisms because of sovereign debt and the problems in banks are being dealt with."

European Central Bank vice president Vitor Constancio has also been talking this morning, just before he headed off to Brussels. Constancio argued that Spain and Portugal might still be secure, even if Ireland does buckle. Quotes via Reuters:

Euro zone ministers meet to discuss Ireland's debt crisis

There is no necessary link in this respect. All situations are different from each other...it depends of course on market developments, which cannot be predicted," he said.

"Several countries have been under some pressure from the markets, that is well known. But as you have seen, there are differences. The market really discriminates (between) the different situations that exist."

In the bond markets, the yield (or interest rate) on Irish government debt has leapt again to 8.542%, up from 8.17% overnight. That's a clear sign that the markets are more concerned about the possibility that Ireland will restructure its debt, or even default.

With Ireland's economic crisis centre stage, look at the characters involved in bringing Irish banking to its knees

This is a very interesting editorial in the FT, which says that the root of the problem in Ireland is the government’s total commitment to bank bondholders, which translates into a total risk for the taxpayer. Unless the Irish government changes that, its sovereign bonds will be under pressure.  

4 Types Of Indicators FX Traders Must Know

Here is article from investopedia which talks about important technical indicators one must follow while trading, though it talks about forex i feel same set of indicators and analysis can be followed for Equities also.

4 Types Of Indicators FX Traders Must Know

Of which i personally like :
A Trend-Confirmation Tool:MACD,
An Overbought/Oversold Tool:RSI,
A Profit-Taking Tool:Bollinger,
Non correlated Overbought/Oversold Tools can be used in comparision with RSI:Stocastics,Williams-R

Ayn Rand on money

From ATLAS SHRUGGED, by Ayn Rand, page 387: 

Rearden heard Bertram Scudder, outside the group, say to a girl who made some sound of indignation, "Don't let him disturb you. You know, money is the root of all evil—and he's the typical product of money." 

Rearden did not think that Francisco could have heard it, but he saw Francisco turning to them with a gravely courteous smile. 

"So you think that money is the root of all evil?" said Francisco d'Aconia. "Have you ever asked what is the root of money? Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil? 

"When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others. It is not the moochers or the looters who give value to money. Not an ocean of tears nor all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow. Those pieces of paper, which should have been gold, are a token of honor— your claim upon the energy of the men who produce. Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money. Is this what you consider evil? 

"Have you ever looked for the root of production? Take a look at an electric generator and dare tell yourself that it was created by the muscular effort of unthinking brutes. Try to grow a seed of wheat without the knowledge left to you by men who had to discover it for the first time. Try to obtain your food by means of nothing but physical motions—and you'll learn that man's mind is the root of all the goods produced and of all the wealth that has ever existed on earth. 

"But you say that money is made by the strong at the expense of the weak? What strength do you mean? It is not the strength of guns or muscles. Wealth is the product of man's capacity to think. Then is money made by the man who invents a motor at the expense of those who did not invent it? Is money made by the intelligent at the expense of the fools? By the able at the expense of the incompetent? By the ambitious at the expense of the lazy? Money is MADE—before it can be looted or mooched—made by the effort of every honest man, each to the extent of his ability. An honest man is one who knows that he can't consume more than he has produced. 

"To trade by means of money is the code of the men of good will. Money rests on the axiom that every man is the owner of his mind and his effort. Money allows no power to prescribe the value of your effort except by the voluntary choice of the man who is willing to trade you his effort in return. Money permits you to obtain for your goods and your labor that which they are worth to the men who buy them, but no more. Money permits no deals except those to mutual benefit by the unforced judgment of the traders. Money demands of you the recognition that men must work for their own benefit, not for their own injury, for their gain, not their loss—the recognition that they are not beasts of burden, born to carry the weight of your misery—that you must offer them values, not wounds—that the common bond among men is not the exchange of suffering, but the exchange of GOODS. Money demands that you sell, not your weakness to men's stupidity, but your talent to their reason; it demands that you buy, not the shoddiest they offer, but the best your money can find. And when men live by trade—with reason, not force, as their final arbiter—it is the best product that wins, the best performance, then man of best judgment and highest ability—and the degree of a man's productiveness is the degree of his reward. This is the code of existence whose tool and symbol is money. Is this what you consider evil? 

"But money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. It will give you the means for the satisfaction of your desires, but it will not provide you with desires. Money is the scourge of the men who attempt to reverse the law of causality—the men who seek to replace the mind by seizing the products of the mind. 

"Money will not purchase happiness for the man who has no concept of what he wants; money will not give him a code of values, if he's evaded the knowledge of what to value, and it will not provide him with a purpose, if he's evaded the choice of what to seek. Money will not buy intelligence for the fool, or admiration for the coward, or respect for the incompetent. The man who attempts to purchase the brains of his superiors to serve him, with his money replacing his judgment, ends up by becoming the victim of his inferiors. The men of intelligence desert him, but the cheats and the frauds come flocking to him, drawn by a law which he has not discovered: that no man may be smaller than his money. Is this the reason why you call it evil? 

"Only the man who does not need it, is fit to inherit wealth—the man who would make his own fortune no matter where he started. If an heir is equal to his money, it serves him; if not, it destroys him. But you look on and you cry that money corrupted him. Did it? Or did he corrupt his money? Do not envy a worthless heir; his wealth is not yours and you would have done no better with it. Do not think that it should have been distributed among you; loading the world with fifty parasites instead of one, would not bring back the dead virtue which was the fortune. Money is a living power that dies without its root. Money will not serve that mind that cannot match it. Is this the reason why you call it evil? 

"Money is your means of survival. The verdict which you pronounce upon the source of your livelihood is the verdict you pronounce upon your life. If the source is corrupt, you have damned your own existence. Did you get your money by fraud? By pandering to men's vices or men's stupidity? By catering to fools, in the hope of getting more than your ability deserves? By lowering your standards? By doing work you despise for purchasers you scorn? If so, then your money will not give you a moment's or a penny's worth of joy. Then all the things you buy will become, not a tribute to you, but a reproach; not an achievement, but a reminder of shame. Then you'll scream that money is evil. Evil, because it would not pinch-hit for your self-respect? Evil, because it would not let you enjoy your depravity? Is this the root of your hatred of money? 

"Money will always remain an effect and refuse to replace you as the cause. Money is the product of virtue, but it will not give you virtue and it will not redeem your vices. Money will not give you the unearned, neither in matter nor in spirit. Is this the root of your hatred of money? 

"Or did you say it's the LOVE of money that's the root of all evil? To love a thing is to know and love its nature. To love money is to know and love the fact that money is the creation of the best power within you, and your passkey to trade your effort for the effort of the best among men. It's the person who would sell his soul for a nickel, who is the loudest in proclaiming his hatred of money—and he has good reason to hate it. The lovers of money are willing to work for it. They know they are able to deserve it." 

"Let me give you a tip on a clue to men's characters: the man who damns money has obtained it dishonorably; the man who respects it has earned it. 

"Run for your life from any man who tells you that money is evil. That sentence is the leper's bell of an approaching looter. So long as men live together on earth and need means to deal with one another—their only substitute, if they abandon money, is the muzzle of a gun. 

"But money demands of you the highest virtues, if you wish to make it or to keep it. Men who have no courage, pride, or self-esteem, men who have no moral sense of their right to their money and are not willing to defend it as they defend their life, men who apologize for being rich—will not remain rich for long. They are the natural bait for the swarms of looters that stay under rocks for centuries, but come crawling out at the first smell of a man who begs to be forgiven for the guilt of owning wealth. They will hasten to relieve him of the guilt—and of his life, as he deserves. 

"Then you will see the rise of the double standard—the men who live by force, yet count on those who live by trade to create the value of their looted money—the men who are the hitchhikers of virtue. In a moral society, these are the criminals, and the statutes are written to protect you against them. But when a society establishes criminals-by-right and looters-by-law—men who use force to seize the wealth of DISARMED victims—then money becomes its creators' avenger. Such looters believe it safe to rob defenseless men, once they've passed a law to disarm them. But their loot becomes the magnet for other looters, who get it from them as they got it. Then the race goes, not to the ablest at production, but to those most ruthless at brutality. When force is the standard, the murderer wins over the pickpocket. And then that society vanishes, in a spread of ruins and slaughter. 

"Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion—when you see that in order to produce, you need to obtain permission from men who produce nothing—when you see that money is flowing to those who deal, not in goods, but in favors—when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you—when you see corruption being rewarded and honesty becoming a self-sacrifice—you may know that your society is doomed. Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot. 

"Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it becomes, marked: 'Account overdrawn.' 

"When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, 'Who is destroying the world?' You are. 

"You stand in the midst of the greatest achievements of the greatest productive civilization and you wonder why it's crumbling around you, while your damning its life-blood—money. You look upon money as the savages did before you, and you wonder why the jungle is creeping back to the edge of your cities. Throughout men's history, money was always seized by looters of one brand or another, but whose method remained the same: to seize wealth by force and to keep the producers bound, demeaned, defamed, deprived of honor. That phrase about the evil of money, which you mouth with such righteous recklessness, comes from a time when wealth was produced by the labor of slaves—slaves who repeated the motions once discovered by somebody's mind and left unimproved for centuries. So long as production was ruled by force, and wealth was obtained by conquest, there was little to conquer. Yet through all the centuries of stagnation and starvation, men exalted the looters, as aristocrats of the sword, as aristocrats of birth, as aristocrats of the bureau, and despised the producers, as slaves, as traders, as shopkeepers—as industrialists. 

"To the glory of mankind, there was, for the first and only time in history, a COUNTRY OF MONEY—and I have no higher, more reverent tribute to pay to America, for this means: a country of reason, justice, freedom, production, achievement. For the first time, man's mind and money were set free, and there were no fortunes-by-conquest, but only fortunes-by-work, and instead of swordsmen and slaves, there appeared the real maker of wealth, the greatest worker, the highest type of human being—the self-made man—the American industrialist. 

"If you ask me to name the proudest distinction of Americans, I would choose—because it contains all the others—the fact that they were the people who created the phrase 'to MAKE money.' No other language or nation had ever used these words before; men had always thought of wealth as a static quantity—to be seized, begged, inherited, shared, looted, or obtained as a favor. Americans were the first to understand that wealth has to be created. The words 'to make money' hold the essence of human morality. 

"Yet these were the words for which Americans were denounced by the rotted cultures of the looters' continents. Now the looters' credo has brought you to regard your proudest achievements as a hallmark of shame, your prosperity as guilt, your greatest men, the industrialists, as blackguards, and your magnificent factories as the product and property of muscular labor, the labor of whip-driven slaves, like the pyramids of Egypt. The rotter who simpers that he sees no difference between the power of the dollar and the power of the whip, ought to learn the difference on his own hide-as, I think, he will. 

"Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to be the tool by which men deal with one another, then men become the tools of men. Blood, whips and guns—or dollars. Take your choice—there is no other—and your time is running out."

Pulse of Commerce Index

Here is another Leading Indicator in which tracks US Economy.

 The Ceridian-UCLA Pulse of Commerce Index™ is based on real-time diesel fuel consumption data for over the road trucking and serves as an indicator of the state and possible future direction of the U.S. economy. By tracking the volume and location of fuel being purchased, the index closely monitors the over the road movement of raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers.

October Month report signals economy is not going in right direction for now.
 Here is the October Report.

The Ceridian-UCLA Pulse of Commerce Index™ (PCI) by the UCLA Anderson School of Management, adjusted for season and for monthly workdays, fell 0.6% in October following a decline of 0.5% in September and a decline of 1.0% in August, which was the first three consecutive months of decline since January 2009, when we were still deep in recession

October is especially important because it is the peak month for holiday shipping, with a seasonal factor of 1.029 compared with 0.978 in November and 0.941 for December. The October decline in the PCI can be summarized in a single word: worry. Worry about the strength of sales in the holiday period has apparently caused a slowdown in trucking in October which might be only a postponement to November if consumers show a little more exuberance.


The PCI this month is disappointing because the growth in the economy in the first three quarters of this year if sustained would have made the holiday even better.The declines in the PCI in the last three months suggest further slowing of growth of industrial production.


There is a one to one relationship of GDP and IIP with PCI and also  PCI report comes before IIP and GDP report . Looks PCI is a Good indicator to keep Track in future

HSBC October Purchasing Managers Index

The latest PMI data pointed to a marked expansion of Indian private sector output. Activity in both the manufacturing and service sectors grew at faster rates in October, with the headline HSBC India Composite PMI posting 58.4, from 56.5 in September

Commenting on the India Services PMI survey, Frederic Neumann, Co-Head of Asian Economics Research at HSBC said:

“India's service sector picked up steam in October, with firms continuing to add jobs. The details, however, suggest that services might cool in the coming months, with new business growth decelerating slightly and backlogs contracting. The RBI may take comfort in the fact that both output and input price pressures are easing, although this is not sufficient to raise a definitive green flag on inflation.”

Key points
• Expansion of new business in the service sector continued to slow.
Contribution of Service Sector to GDP is huge and it might act as drag on 8% growth rate
• Overall employment rose, after remaining unchanged in September.
• Falling charges in services offset an increase in manufacturers’ output prices.
Increase in manufactured product prices will add the already high inflation

 Previous Posts:
hsbc-india-services-pmi-economic.html

Macroeconomic and Monetary Developments --RBI Second Quarter Review

RBI in its 2nd quarter review is more concerned about the inflation  and the capital inflows coming into EME which might lead to currency appreciation and asset price bubbles. Also talks about Current account deficit and Capital Account surplus and going forward how its going to be. One can get a Good understanding of Economics by reading this Report

The output growth of the Indian economy has started to consolidate around the trend
after a sharp recovery and the headline inflation also shows signs of peaking off. Going
forward, various forward looking surveys conducted in the recent period suggest strong
y-o-y growth. The Industrial Outlook Survey of the Reserve Bank also points to
continuation of the growth momentum. The professional forecasters’ survey of the Reserve
Bank registered a marginal upward revision in the GDP growth rate for 2010-11, on the
back of higher growth forecasts for agriculture and services sector. The overall outlook
suggests that notwithstanding some recent moderation in headline inflation, the level of
inflation remains above the comfort level. The Reserve Bank’s policy stance is likely to
be shaped by dual goals of maintaining the growth momentum in an atmosphere of
global uncertainty, while striving to moderate inflation further

Will the Reserve Bank of India (RBI) raise policy rates for the sixth consecutive time this year to tame inflation? Wait for Tomorrow...looks like they are bit uncomfortable in controlling inflation

Market slipped into red at the last hour

Equity Markets closed on bad note by the end of day , today being expiry in F&O was bit amused at the lightening speed by which market changed direction from Green to Red in mater of few mins.

Vertical Drop in Nifty

 And this is what happened at Reliance Counter at around the same time.

 A More Detailed look at the time span and the Volume in Nifty .See the Slide in Nifty started from 2.55 pm.
And also i am bit surprised on the volume in Nifty at the end of day , still i have doubts on the contributions to huge volumes at last few minutes of trading

Here is what happened at the reliance counter at the same time around 2.55 pm , Infact its the other way round , since this slide happened at the reliance counter i believe entire market went into some sort of panic mode for few mins.

 Its obvious since of the all 50 stocks in Nifty50  reliance stock  having maximum weightage in Nifty we can expect this sort of correlation . It only amused me cause being today a expiry day and market tanked in few mins made me to believe that market participants are  trading more in heavily traded and large cap companies.

I haven't seen the rollover into November series may be will try analyze. I guess November will be a Make or Break for Markets.Will try to post another before QE2 comes

QE2 is coming...This November

Now a Days its mostly debated about QE2 across the boards and its implications on world economy.QE2 is nothing but Quantitative Easing a form of monetary stimulus which involves buying bonds from public.

Who is doing this ?  Managing the Federal Reserve's Balance Sheet

The central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis.

 QE1 happened during crisis and they reacted in a number of ways,like purchases and reducing fed rate to near zero (0.25%) etc..

So what will happen if it buys back bonds from public?

The aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates. It hopes that would spur more investment and spending and liven up the recovery.

The announcement is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday.

So what are its implications?

 Growth will stay below trend, inflation below target and unemployment uncomfortably high—albeit with reduced risk of a double dip. For the Fed to come close to fulfilling its dual mandate of full employment and price stability, QE3 or QE4 may be needed in 2011.

 How about EM are like India?

EM is the main focus of the U.S. capital outflow. Leveraged carry-trades may pause for breath now that so much has been priced-in, but the real-money portfolio shift is likely to continue, causing near-term out performance, but sowing the seeds of future bubbles.

The talk of Fed going for QE2 brought huge inflows into indian Equity markets with FIIs investing a record $6.11 billion in October 

"FIIs see better rate of returns in emerging markets and India is set to attract a disproportionate share of inflows," Reliance Mutual Fund's head of equities Sunil Singhania said

 But with this FII flows its  obvious that rupee will appreciate and this inturn will hinder growth in exports which can be a cause of worry in near future.

           No FII inflow cap, but Re checks possible: FM

At this time, I am not thinking of putting any cap on FII (foreign institutional investment) inflows.

 The government ruled out curbs on foreign portfolio investment into the equity market, but said the central bank may intervene in the forex market to check rupee appreciation that was hurting exports

The current levels of capital inflows, which exceed financing requirements of the current account deficit, have put pressure on the rupee, resulting in its appreciation over the last few months.


The RBI has already expressed concerns over rising capital flows, which could further increase after further monetary tightening, which looks imperative in view of the sticky inflation.

Lets welcome November we will see a new game across countries related to forex,interest rates.inflation,unemplyement.

HSBC India Services PMI-Economic Indicator

 About the PMIs
Purchasing Managers’ Indices (PMIs) have been specially developed to provide economic analysts, purchasing professionals, business decision-makers and policy makers with accurate and timely data to help better understand business conditions. In particular:

• central banks in many countries use the data to help make interest rate decisions;
• analysts in the financial markets use PMI data to reliably forecast official data such as GDP;
• forecasters and planners in the corporate sector use the PMIs to help anticipate changing business conditions and to benchmark performance.

The indices are based on monthly questionnaire surveys of carefully selected companies which provide an advance indication of what is really happening in the private sector economy by tracking changes in variables such as output, new orders, stock levels, employment and prices across the manufacturing, construction, retail and service sectors.

The HSBC India Services PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in around 350 private service sector companies.

The HSBC India Composite PMI is a weighted average of the Manufacturing Output Index and the Services Business Activity Index, and is based on original survey data collected from a representative panel of over 800 companies based in the Indian manufacturing and service sectors.

Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. For each of the indicators the ‘Report' shows the percentage reporting each response, the net difference between the number of higher/better responses and lower/worse responses, and the ‘diffusion' index. This index is the sum of the positive responses plus a half of those responding ‘the same'.

Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change. An index reading above 50 indicates an overall increase in that variable, below 50 an overall decrease.


October Month PMI report

Growth of activity in the Indian private sector economy slowed to weakest pace in
ten months in September

India's service industry is stepping off the throttle. Along with the manufacturing sector, growth is slowing, although the expansion continues. Price pressures, however, have not eased meaningfully, which represents a challenge for the central bank. The pace of hiring has slowed as well,even if it remains in positive territory. All this suggests a mild easing of demand growth since the red-hot pace earlier this year, but is hardly enough to relax the guard on inflation. Monetary officials may still need to tighten further to avert price pressure from becoming entrenched

It shows the growth which happened from the start of this year is slowing a bit and next month report will give a confirmation for this trend.With the Hot money coming into India it will be tough task for RBI to maintain exchange rate ,interest rate and inflation all Hitting at the same time .

What is Beige Book

There is economic indicator called Beige Book.It is a  report published eight times per year and Two Wednesdays before every Federal Open Market Committee (FOMC) meeting.

Each Federal Reserve Bank gathers informal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.

The Beige Book report is a lagging indicator, in that it is a report of what already happened in the districts, not what the Fed Districts think is going to happen. On the other hand, many economists consider it a leading indicator, in that it could get the Fed to change the Fed Funds rate which is, in itself, a leading indicator

Reports from the twelve Federal Reserve Districts suggest that, on balance, national economic activity continued to rise, albeit at a modest pace, during the reporting period from September to early October

 Latest beigebook

The Beige Book aims to give to give a broad overview of the economy, bringing many variables and indicators into the mix. Discussion will be about things such as labor markets, wage and price pressures, retail and ecommerce activity and manufacturing output. Investors can see comments that are forward-looking; the Beige Book will contain comments that look to predict trends and anticipate changes over the next few months or quarters.


More can be found at this location:
http://www.investopedia.com/university/releases/beigebook.asp

FII's are Holding the Frontiers and DII's on a Killing Spree

My Recent posts on FII vs DII positions are the below links

September 15th : 19000 crossed...Whats next for Markets
July 4th : FII and DII investments in India
May11: Buying and Selling of FII vs DII

As we are now into 20000 need to look the flow direction and it looks like the flow direction from DII side is not changed as well as flow of funds from FII side is not changed.


FII flows into Indian Market is very Strong and this led to NIFTY cross 6000 mark,as FII believed India has growth story even when the rest of world is struggling and this led to more funds coming into India.I think the same Thing happened in 2007-2008 times before we came crashing down due to liquidity crisis. And this time chance of happening the previous crisis is very less cause there is abundant liquid in market .

At the same time governments across the world(US,EU) are ready to put more work at there printing presses.Especially US going for QE2 which might increase global liquid and there is good possibility that FII might be attracted and pour money  into EM which has growth story and specifically India.But there is a small tension across the rooms of currency war brewing in some parts of world, investors need to be cautious before they go for full fledged war

DII are on selling spree for a very long time and it looks like they aren't tired for now and especially the month of October the net position is very huge on negative side

Now comes  another intresting question? who are these DII which are on selling Mode in Indian Market.

For one thing DII are local people and they know the local conditions and there companies much better than FII. But when FII are Buying mode why are these people on selling mode.Yes one can understand that valuations might be a little stretched and they dont want to take risks or they might be taking profit and churning the portfolia. 

If thats the case why Retail investors are pulling money from MF from very long time. Is it purely because of SEBI banning entry and exit loads on MF products and distributors not selling them. I strongly believe that retail investors are bit intelligent and they know the mistakes they have done in past and looks like there are redeeming there units from MF as market looks a bit stretched .I don't have Data to support this. But my friend with whom i had a heated arugment will provide data for me:).

Will post on this more some time later 

Emerging Market Economies Leading Global Growth...But for how long?

Over the weekend lot of discussion happened at IMF,Washington DC and below RBI governor's comments on Role of Emerging Economies Going Forward and Key Policy Challenges

Here he talks about the Role of Emerging markets played in pulling the global markets from near depression and how its going to make impact to the rest of world going forward.

I guess when the EM was at peak in 2007  and rest of developed countries at the start of downward direction i  remember few saying that EME are decoupling from the rest of developed economies and EM will go up..but what happened  after that...every one knows....and same set of people after the crash in 2008 said that EM are  recouping with the rest of the world....Now fast forward from there to 2010 the same set of people :) are again started to say that we are decoupling again from the rest of the world..as rest of world is still struggling from the wounds it got from the crash and are growing near 2 % to 3% when EME are going at near 8% to 9% .

So how is this happening ? Basically there is plenty of Liquidity across the developed nations which is sitting idle as there are very less opportunities in there regions for growth so a whole lot of money is being pumped to EME. Now Question is how much more can they pump into these economies? It depends if US going for another round of QE2 (probability of happening this is high...as there wounds are not healed enough...same with the case of EU....) then i strongly believe that EME are going to see huge inflows which are never seen or heard. At least in India FII inflow is going to touch 1 trillion for the first time..

Another question coming to my mind..What if due to a policy decision are another unknown reason if money starts flowing out of EME..what is going to happen? Ob..markets and economy as such will go in South direction.

But before that happening can our regulators or persons with power can make some decisions to arrest the flow if such kind of event happening in near future and RBI governor said this at IMF over weekend

Furthermore, in evaluating the level of reserves and the quantum of self insurance of a country, it is important to distinguish between countries whose reserves are a consequence of current account surpluses and countries with current account deficits whose reserves are a result of capital inflows in excess of their economy’s absorptive capacity.

India falls in the latter category. Our reserves comprise essentially borrowed resources, and we are therefore more vulnerable to sudden stops and reversals as compared with countries with current account surpluses

I doubt it...cause one reason might be RBI going soft under the pressure from Ruling parties and key allies  are going for elections in some states...

It would be interesting to watch the policy makers game on tacking inflation,BOP and Exchange rate  in coming days ...

Competitive Non Appreciation?

It has been two months since i last posted something on exchange rate stuff...but off late things are heating up across the Central Banks about related to currency.Almost all the developed economies are struggling to reduce the unemployment rate and trying hard to increase there GDP rate.

 They attribute much of current exchange rate stress is emergence of china and its willingness to peg Yuan to American dollar at a undervalued value. Which is giving unfair advantage to Chinese producers to export more out of china and making other countries suffer job loss and loss of export competitiveness 

 Here are the comments from Secretary of Treasury Timothy F. Geithner Remarks at the Brookings Institution

Two years ago, the world economy was in the grip of an economic crisis on a scale not seen since the Great Depression.The United States and its partners in other leading economies, in an unprecedented feat of peacetime economic cooperation, joined forces to launch a powerful, dramatic response.    

Together, we put in place a powerful program of financial support – classic fiscal measures of tax cuts and investment, combined with monetary policy actions by central banks, and a variety of creative actions to stabilize our financial systems – to bring the global economy out of freefall and on a path to growth. 

We mobilized hundreds of billions of dollars in financial support for and through the international financial institutions for investments in emerging and developing economies.We committed to keep markets open to trade and investment, and together we honored that commitment in the face of strong political pressure.

We passed sweeping reforms of the U.S. financial system, and the world's central banks and supervisors reached agreement just two weeks ago on a very tough set of global standards for capital to limit leverage in the major global financial institutions. 

He is talking about Basel III norms which got finalized some time back and here is the link of my previous post to understanding-basel-iii-accord

These decisions required considerable trust and political resolve.  And they have been effective in restarting economic growth and stabilizing financial markets.  Global trade is now almost back to pre-crisis levels.

Look at the Baltic Dry index over which tracks the movement of ships in Sea which is pseudo indicator for economic activity or trade happening and clearly its not up to the levels of pre-crisis 

Each of our economies is stronger today than would otherwise have been possible, because of the effectiveness of this joint strategy. And the financial reforms now underway will substantially reduce the risk of damage from future financial crises.

Financial reforms which they made are just delaying the crisis and passing it on to future. Reforms in fact made money into pockets of rich and as long as Global imbalances are there we can expect another crisis any time from now :)

The Growth Challenge

What are the main challenges ahead?

The most important policy question we confront together is how to strengthen the pace of growth and repair, and how to do so in a way that provides the basis for a more balanced and therefore more sustainable global economic recovery.

I guess he is talking about the employment growth which is not happening in US can be seen in the latest ADP report  which says The decline in private employment in September confirms a pause in the economic recovery already evident in other data. 

And that is what is worrying economists across the globe as they think this is period is growth led recovery with no improvement in unemployment. Which is very dangerous and crisis may be back with a bang if this continues  

This is not a challenge that is best resolved by nations acting independently.  In the heat of the crisis, we all recognized that our actions would be more powerful if we acted together.  Even though the most dangerous part of the crisis is behind us, we are still in a place where we can achieve better overall growth outcomes if we make policy in a cooperative framework.

 a few suggestions on the policy challenges ahead in three areas: growth, exchange rate cooperation, and reform of the architecture of economic cooperation.

First, on economic growth.  The IMF forecasts the world economy will grow at a respectable annual rate of around four percent in 2011.  Growth is very strong in many of the major emerging economies.  In the major advanced economies, however, output and employment are still substantially below the pre-crisis levels, and the pace of recovery has been slower, with economic growth now running at a pace that is close to potential growth rates and not rapid enough to repair quickly the substantial economic damage remaining from the crisis.

Economic recoveries that follow financial crises are typically slower than those that follow other types of recessions.  This is because of the headwinds to growth that are generated by the necessary adjustments in asset prices and in reducing financial leverage.  As financial institutions rebuild their balance sheets and households reduce debt and raise savings, spending is slower to recover.  Firms, cautious after being burned by the financial panic, are less willing to invest and to hire because of uncertainty about future strength in demand for their products.  

The greatest risk to the world economy today is that the largest economies underachieve on growth.  We need to continue providing well-targeted support for the recovery in the near term even as we put in place plans to help ensure fiscal sustainability over the longer term.

And for the recovery to be sustainable, there must also be a change in the pattern of global growth.  For too long, many countries oriented their economies toward producing for export rather than consuming at home, counting on the United States to import many more of their goods and services than they bought of ours.

From here on he started talking indirectly about China and other developing countries 

The United States will do its part to achieve this adjustment.  Private savings have increased significantly, and, as the recovery strengthens, we will bring down our fiscal deficits to a sustainable level.

But as America saves more, countries overly reliant on exports to us for their own growth will need to change their policies, or else global growth will slow and all of us will be worse off.  Countries that chronically run large surpluses need to undertake policies that will boost their domestic demand.

I guess he is specifically talking about Chinese policy of keeping Yuan undervaluation and there by giving added advantage of Chinese exporters. How can too much export oriented markers like china ,japan increase domestic demand? I only knew of one thing which is lower taxes and there by keeping more money in public pocket and asking them to spend . Other than that anything else? no idea for now

That brings me to the second policy challenge: we believe it is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange rate systems.  This is particularly important for those countries whose currencies are significantly undervalued.

Like China which is pegging its yuan to dollar at a fixed rate from 2004 and here is the previous post related to it  basket-band-and-crawl-(BBC)

This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same.

Yes looks like when China can do this why cant i do (JAPAN). Japan recently made jump into the bandwagon of group which is depreciating there currencies there by giving advantage to there export oriented companies. This is one kind of protectionist measures which are illegal according to WTO conventios

This sets off a damaging dynamic, described first by my former colleague Ted Truman, as "competitive non appreciation." Over time, more and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies. The collective impact of this behavior risks either causing inflation and asset bubbles in emerging economies, or else depressing consumption growth and intensifying short-term distortions in favor of exports.

This is a multilateral problem.  It is unfair to countries that were already running more flexible regimes and let their currencies appreciate.  And it requires a cooperative approach to solve, because emerging economies individually will be less likely to move, unless they are confident other countries would move with them.

Japan acted on its own without a coordinated effort  into the currency market  for the first time in six years, buying dollars to weaken the surging yen  

This problem exposes once again the need for an effective multilateral mechanism to encourage economies running current account surpluses to abandon export-oriented policies, let their currencies appreciate, and strengthen domestic demand.  This is a necessary complement to the adjustments being undertaken by countries running current account deficits.  A cooperative re balancing of policy in this direction would be better for overall growth.

 An an attempt to fight off worsening deflation and prevent the economy from falling into another recession, the Bank of Japan (BoJ) announced its largest foray yet into the realm of quantitative easing (QE).

This issue was well-known to the group of economists who gathered in Bretton Woods, New Hampshire, to refashion the war-ravaged global financial system in 1944.  The Articles of Agreement of the IMF, drafted at that conference, contain a now-obscure paragraph calling on the Fund to issue reports on countries with "scarce currencies"--what today we would call countries running persistent surpluses--"setting forth the causes of the scarcity and containing recommendations designed to bring it to an end."  That clause now reads like a relic of a bygone monetary era.  But the problem it was drafted to address--the threat to global financial stability posed by persistent, large surpluses--is as salient today as it was then.

This brings me to a third issue on the international agenda, the reform of the architecture of economic cooperation.

The Framework, called the "Framework for Strong, Sustainable and Balanced Growth," was designed to create stronger incentives for rebalancing growth, as the world recovered from the crisis, with higher savings in countries like the United States, complemented by reforms to strengthen domestic demand in surplus countries like China, other emerging economies, Germany, and Japan.


We agreed to pursue these two paths in parallel.  Each involved a change in the rights and responsibilities of the major economies, both emerging and advanced.

We have moved aggressively to do our part to help bring the world out of crisis.  We are working very hard to repair our financial system, to fix what was broken, and to reduce the future risk of financial crises here at home.  We have seen a very significant increase in private savings by households.  Our external deficit has fallen sharply, and we are financing at home a much larger share of the fiscal deficits we inherited.

We still have a lot of challenges ahead of us to strengthen growth and to restore fiscal sustainability.  And we expect to work closely with Congress in the months ahead on how best to move forward.   

 Mr. Geithner said that “China will be less likely to move, to allow its currency to appreciate more rapidly, if it’s not confident that other countries will move with it.”

His warnings were echoed, in crucial respects, by the I.M.F., which released its latest World Economic Outlook on Wednesday.

sources:

http://www.morganstanley.com/views/gef/index.html

http://www.imf.org/external/pubs/ft/weo/2010/02/index.htm

http://www.underpaidgenius.com/

http://www.brookings.edu/