No link between money printing and job creation

Jan 21, 2014

In this issue:
» Jim Rogers bullish on Japan, China
» Mr Narayan Murthy's advice to AAP
» China's oil demand slows down
» Speeding up infra projects face hurdles
» ...and more!

The unemployment scenario the world over does not paint a pretty picture. Indeed, for all the talks of a recovery in the developed world doing the rounds, the fact remains that job prospects continue to remain bleak. This was further reinforced by the International Labour Organisation (ILO) in an article in the Mint. It reported that global unemployment climbed by 5 m people in 2013 to 202 m despite green shoots in the economy. This means that the unemployment rate has remained unchanged at 6%. More importantly, it effectively points to a jobless recovery.

The policy making of most of the governments of the developed world has been highly ineffective since the 2008 financial crisis. Be it the US, Europe or Japan; all of them have only turned on the printing presses hoping that people with more money in their hands will consume more and this will drive growth of their economies. But this strategy was always going to backfire when job growth was poor. In an uncertain job environment, people can hardly be induced to consume more. They will look to save instead.

What more, it looks like the unemployment situation will continue to stay grim. According to the ILO, by 2018 about 215 m people worldwide are expected to be unemployed. The youth unemployment figures are even worse. The jobless rate among people aged between 15 and 24 reached 13.1% last year, almost three times the adult jobless rate.

This is something that India needs to worry about as well. India has largely been banking on its demographic dividend as its key growth driver in the longer run. But it needs to ensure that most of the youth entering the workforce are equipped with the required skills that will enable to land jobs. Plus, there will also have to be enough jobs available that can absorb such a large workforce. At present, this looks like quite a tall order. The education system is in need of a major overhaul and the reforms process so far has also been sadly lacking.

As far as the global economy is concerned, the problem according to the ILO is that while there have been certain sectors that have been making profits, these were largely being channeled into asset markets and not into the real economy. Hence, it goes without saying, that there needs to be a shift in policy making. Rather than banking on quantitative easing programs, the key item on the policy making agenda should be on improving job prospects. What is more, it is pertinent that governments and central bankers realize as soon as possible that money printing and job creation do not go hand in hand. The last 5 years more than reinforce this fact. And growing unemployment has not only economic but social repercussions as well. Growing discontent among unemployed youth has sowed many a seed for revolutions in the past. This is not a scenario that most countries would want to contend with.

Do you think that unemployment rate in the global economy is likely to come down anytime soon? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
Given the prolonged sluggishness in the manufacturing sector, the auto industry has been bearing the brunt of the slowdown as well. For the first nine months of FY14, growth in auto volumes has been quite tepid. Only two wheelers managed to report some growth during the period. The rest of the segments reported a fall in volumes. The steepest decline has been in the commercial vehicles (CV) space as growth in this segment is dependent on the performance of the construction and industrial sectors; both of which have remained stagnant. The rest of FY14 is expected to remain tepid as well with some recovery expected in FY15.

Slowdown in the Indian auto industry continues
*Passenger vehicles, **Commercial vehicles

"The painful resolution of this distortion, like the dot-com bubble, the technology bubble, and the housing bubble, is yet to unfold". These were the words of Jim Rogers about the unwinding of monetary stimuli; as quoted by Moneynews. In his typical style, Rogers compared the activity of central bankers in the West to those arranging deck chairs on the Titanic. The legendary investor believes that the correction in the aftermath of monetary tightening will be a long and painful one. However, he interestingly believes that stocks in Japan and China could offer substantial upsides in the meanwhile. The Japanese stock market, for one, is still 70% off of its all-time high. Secondly, a new law in Japan makes it tax-free to invest in stocks. Chinese stocks too offer attractive valuations according to him. Thus while investors globally are hoping for a soft landing, Rogers suggests that investors get prepared for a hangover of the ultra loose monetary policies.

Infosys chief Mr. Narayana Murthy is the latest person to be added to the list of people not happy with the Delhi government's decisions. In an interview with a business channel, Mr. Murthy was of the opinion that the Aam Aadmi Party should leverage the power of new economic policies to make positive changes for bringing about improvement in people's lives. One such example cited by him includes leveraging the power of foreign direct investments (FDI). As we have also mentioned earlier that while FDI in retail may cause unemployment in certain sections of the society, it is bound to create more jobs in the process. Not to mention that fact that the improving infrastructure would augment our supply chain distribution and curb infrastructural bottlenecks. Mr. Murthy also suggested that the party make the use of modern business models, globalization principles and technology to bring and implement about positive change.

A decade ago the world saw commodity prices shooting through the roof as China's economy grew at a scorching pace. Its massive energy appetite drove global oil demand during the previous decade. But in recent times the Chinese economic growth rate has been slowing down. And correspondingly, its oil demand has also moderated. As per an article in Moneynews, China's oil demand in 2013 registered the slowest growth in at least 22 years. For a country like India that depends heavily on oil imports, the fact that China oil demand has entered a period of moderate growth is good news. China's slowing oil demand has capped oil prices. Despite supply disruptions last year oil prices did not jump up.

In order to revive an ailing economy, the government decided to uptick the pace of infrastructure spending. In fact, a panel was appointed by the Prime Minister to ensure speedy approval of projects in order to boost the investment climate. However, this measure of speeding approvals has met little success. That's because even this fast track channel is working at snail pace. Till date, hardly any major project has been sanctioned. Large projects like the Mumbai Elevated corridor and Navi Mumbai airport are still in a limbo. However, in the power space a couple of ultra mega power projects have gathered some momentum and are in the competitive bidding process. Except for that the situation is status quo. In short, government has been able to do very little except forming committees. There is nothing happening on the ground. Red tapism and regulatory hassles are impeding infrastructure investments. And this has led to waning private sector participation. Unless the government takes some quick fix measures investment cycle will continue to lag. And this would impact economic growth.

Ultra-low inflation in the Eurozone has sparked a divide among officials and analysts over whether the risk of deflation is a real 'ogre' or just a phantom menace. The head of the IMF, Christine Lagarde, warned this past week of the rising risks of deflation, which she called as a great threat to the global recovery. However most of the market economists disagree with her. They argue that if consumers and businesses start to expect prices of goods and services to fall in future they will postpone spending, depressing the economy and causing prices to fall further. But this is not happening. In-fact consumers are increasing their spending. While inflation will remain weak through this year for most developed countries, most of the economists do not see deflation as a major concern.

After a positive opening, the Indian markets pared gains but remained in the positive territory in the post-noon trading session. At the time of writing, the BSE-Sensex was trading higher by about 22 points or 0.1%. Stocks from the banking and auto spaces are amongst the most preferred today, while those from IT and power spaces are not in favour. Mid and smallcap stocks were trading positive with their respective indices higher by upto 0.4% each. Stock markets in other parts of Asia are trading on a firm note with Japan, China and Hong Kong up by about 1%, 0.9% and 0.6% respectively.

 Today's investing mantra
"In my early days as a manager I, too, dated a few toads. They were cheap dates - I've never been much of a sport - but my results matched those of acquirers who courted higher-price toads. I kissed and they croaked" - Warren Buffett

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5 Responses to "No link between money printing and job creation"

Prof H.S. Kalra

Jan 22, 2014

I do not entirely agree with the view expressed in the article. The strategy of Quantitative Easing has reduced unemployment in USA because low interest rates encourage new businesses to sprout and create employment. Unfortunately it dies not happen in countries like India because 1. Setting up new businesses takes much longer and businesses cannot be shut down fast.



Jan 22, 2014

When Government prints money, how is this money getting circulated into the economy. They buy back the bonds issued allowing a free float into the economy. But the sad part is, these Government Bonds are in the hands of various investment houses and financial institutions who are benefited by this liberal issue of liquid cash. Government is not giving out doles to unemployed people or common persons who ultimately will start consuming which will start the engine of the economy. The modern industry is more mechanized employing lesser persons which again more goods but less people with purchasing power. There is something wrong with our policy makers or our economists!!!!!!!!


vipul jasani

Jan 22, 2014


Some times I am surprised with your articles on real estate and unemployment!!
Since ages, good economists (Not so called economists by Media) know that money can never create employment / job creation.
Money printing only help rich people become more rich. Hope you must have read yesterday's news that 85 people have 50% of the global wealth.



Dr. Arun Draviam

Jan 21, 2014

The Hindu Undivided Family is slowly fading away in India especially in the urban centers. Yet at a household level, the family is united. The children even after they have attained age of majority continue to live under parental love and care, till they settle in life. They do not therefore become vagabonds. Even in economically weaker sections the children who are sent to work (not as child labour) and earn for the family behave responsibly. They do not take to drug and/or find a live-in partner to lead a separate life, as one sees in foreign countries. India should not allow the present life style at the family level to decay.


Rasikbhai Gandhi

Jan 21, 2014

I can not agree with Mr. Narayanmurthy about his views on FDI taking part in retail trade. I fail to understand why the current arrangement should be disturbed at all. The new method of marketing raises overheads which ultimately consumers have to pay. Which also contribute to inflation. And if at all you wish to make it ultramodern why can't we depend upon our own industrial houses? Is there any technology involved which our Indian industrialist donot know? I think our greed for foreign exchange plays the role behind FDI idea.

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