Mr. Modi wants to stop wasting money and Nomura says bad for Growth

Economictimes reported yesterday that PM Mr. Modi wants avoid wastage of money as shown below.

The finance ministry issued a circular today instructing government departments to cut discretionary spending by 10 per cent. As part of these measures, it banned first class travel by government officials, meetings in five-star hotels, purchase of cars and froze new appointments.

It was for the following reasons as they are expecting more money infusion needed in broken state banks.

Government is looking at an additional capital infusion of upto Rs 11,000 crore into state-run banks, this could be undertaken with an eye on additional spending needs, it said. "Overall, these measures reaffirm the government's commitment to fiscal consolidation and its ability to meet the budgeted target of 4.1 percent of GDP in FY15," it said.

The Japanese Financial Company Nomura however thinks its bad. Bad because if govt spends less then it is bad for our economic growth.

It is not that our govt has any budget surplus that it is not spending. Our govt is already spending more than it earns and is in deficit. But Nomura thinks if govt borrows more and spends, it is better for economy. Of course no one cares what happens to the debt afterward.

The crux is that if govts and to a great extent everyone including you and me spend the money we don't have, by borrowing then it is good for the economy. It doesn't matter, as per Nomura, if the money is spent in a productive activity like building a factory whose goods are in demand and which will earn an income for the investor or babus flying first class in flights and doing meetings in five star hotels or you and me buy a flat screen TV with borrowed money.

It is a twisted world now. We always thought savings when used for capital investment helps growth in economy. Now 'spending' is the new 'saving'.

Reminds me of George Orwell who said in 1984: "WAR IS PEACE, FREEDOM IS SLAVERY, and IGNORANCE IS STRENGTH".

Here original economictimes report.

21st century worldwide financial experiments on the way.

October 2014 issue of Foreign Affairs magazine, published by Council on Foreign Relations(CFR), calls for a bold new financial experiment. CFR is the premier political think tank in US and where anybody who is somebody in the western world is a member including Federal Reserve chairs as well as high ranking politicians. Even our PM Modi gave a speech there during last visit to the US.

It basically says the money printing bond buying program of central banks since 2008 financial crisis hasn't been effective. This has created income inequality and banks who received the new money aren't loaning it out.

We now have slowing growth in EU, USA, Japan and even China.

So this is what the authors of the article suggest.

"Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality."

This seems not like a radically new idea. In history many empires have tried this before to grow by printing more money. I wonder if govts could print money and give it to the people, and everybody becomes well off, what would be the need to do any work? Anyway, here is what FA goes on to say further.

"Ideology aside, the main barriers to implementing this policy are surmountable. And the time is long past for this kind of innovation. Central banks are now trying to run twenty-first-century economies with a set of policy tools invented over a century ago. By relying too heavily on those tactics, they have ended up embracing policies with perverse consequences and poor payoffs. All it will take to change course is the courage, brains, and leadership to try something new."

If you understand how important CFR is, you would know what is coming in future.

Here is the full article.

US Fed ends QE3. Effects on India

1. Dollar rises and rupee falls.
2. FII money slows down in India. Growth in stock prices in India may be limited.
3. Gold price may not fall much in rupee terms as both rupee and gold fall in terms of dollar.
4. RBI may not reduce interest rates to avoid rupee falling further.
5. Due to global slowdown, oil prices may stay low and with our 8% interest rate in India, inflation may fall or not go up.
6. When Fed talks of raising rates in US in 2015, rupee may fall even further and our FM Mr Jaitley may stop asking RBI to lower rates to avoid fall in rupee further.
7. Stock market volatility will increase. With already low central bank cheap money and high valuations in stocks, we may see lot of swings. If Fed does decide to raise rates in 2015, we may even see dramatic collapse in stock market.
8. If you are a retired person with fixed return investments, it will be good for you. If you are younger and are in stocks, then not so good.

But, I doubt Fed and other Central Planners can really allow stocks to fall badly. They may then reduce the rates again or announce another bond buying program or QE4. We will see.

Is Hillary Clinton having Communist Ideas?

Recently Hillary Clinton said the following.

"Don’t let anybody, don’t let anybody  tell you that, ah, you know, it’s corporations and businesses that create jobs. You know that old theory, trickle-down economics. That has been tried, that has failed. It has failed rather spectacularly."


She also said the following when talking about universal health care system in America.

"We can’t afford to have that money go to the private sector. The money has to go to the federal government because the federal government will spend that money better than the private sector will spend it."

If she were true Soviet Union would have survived and prospered. Even in India 50 years of our socialist structure would have survived too and there would be no need for opening up of our economy as happened in 1991. Why do all communist regimes collapse, all totalitarian govt controlled economies collapse?

Something to think about considering that all such govt destroy individual freedom where govt decides everything you do from birth to death, what you eat, what you wear, what job you do, who you marry, what you buy, what are the "facts" you believe in, what is best for your children etc and etc.

How our Monetary System works.

This is how our monetary system works. This explains the system in USA but ours is essentially same with slight differences.

One is unlike the private Federal Reserve in US, our Reserve Bank of India was nationalized in 1949. But the all central banks including Fed co-ordinate and have a bimonthly meeting in Bank of International Settlements (BIS) in Basel Switzerland and kind of run a closed banking system and that we are told that RBI is essentially "independent" of Govt of India in policy decisions.

Also consider the fact that most of what we call money is created in the commercial banking sector and not by central banks.

This will also explain why the value of rupee constantly keeps going down.

Taking advantage of India's credit fuelled growth.

Here is India's interest rate chart from 1978. As you see, from around 1991 till today we have had a generally declining interest rate. I remember 20 years back, we heard about govt deposit schemes like Indira Vikash Patra that doubled money in 5 years which means they had 15% annual rate.

Low interest rates spur burrowing by businesses and individuals. 20-25 years back the loan industry(home, car, personal etc) wasn't as big as it is today. Considering that each rupee comes to life as debt, more rupees have come to life hand in hand with burrowing. Following is the India M3 money supply chart.

Since 1991, as shown above, M3 money supply has grown exponentially. Assuming the year 1991 value from above as 2000, so far M3 money supply as grown 100000/2000 = 50 times.

Now lets see how far our per capita GDP has grown since 1991.

Assuming 1991 value from above as 1800 and 2014 value as 5300, growth is 5300/1800 = 2.94 times. If you consider salary/wage growth as keeping pace with per capital gdp growth, we see that when money supply has grown 50 times, wealth of individual people has grown only 2.9 times.

We certainly have more millionaires and billionaires now than before but income inequality has increased hugely in India. The reason for that is that the credit growth or loans have gone to people who know how to make more money out of cheap money such as businessmen who are well connected with politicians and can get large loans. Also we have been great rise in asset prices due to large money supply which basically devalues rupee. Such assets are house, land, consumer prices, stocks, gold etc.

It would seem that we are growing by depreciating rupee. However, the rupee depreciation or money supply is far ahead of gdp or wealth growth. Part of the difference goes to asset price increase as well. People who get the initial injection of money or loan are ahead of the curve in acquiring assets.

If you are a poor person with bad credit, no access to loans or uses loans to spend consumer goods rather than acquiring assets then you will fall further and further behind.

Good time to buy Stocks or not?

In year 2000 during dotcom bubble sensex P/E was 22.69. Then it started collapsing all the way till 2003 when P/E fell to 13.74.

Then again it rose to 20.18 just before the US subprime collapse when it fell to 12.68 in 2009.

After that, as per the data above, 2010 peak was 21.05. Since sensex has gone up from about 20000 to 26000 or about 30% more, extrapolated P/E now must be around 21.05*1.3 = 27

Similarly, P/BV now is above 4.

Here is the sensex chart from 1998.

Should you buy stocks now when P/E is around 27 and P/BV of 4? I don't think it's a good idea. Even if you accept the central bank manipulations around the world, the safety band is now too low at such high valuations of the stocks.

Can it go even higher? May be but the risk is too high. Can you find some individual beaten down stock that offers good value? May be, but probably there is a reason why that stock's valuation is so low now even when market is at record high.

But that's just my opinion.