No more sacrificing growth for inflation? - The 5 Minute WrapUp by Equitymaster
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No more sacrificing growth for inflation?

Nov 3, 2011

In this issue:
» US jobs data presents a gloomy picture
» Bernanke admits US recovery would be 'frustratingly slow'
» Will India support crisis-struck Eurozone?
» Pakistan set to boost trade with India
» ...and more!
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00:00
 
The monster of inflation has been plaguing the emerging economies, including India, for quite some time. In response, both India and China have responded by tightening the monetary belt. India's central bank, the Reserve Bank of India, has consecutively raised key interest rates over a dozen times since March 2010.

Inflation, in the meantime, has shown a complete disregard for all the sweat and efforts of our central banks. It continues to stand tall, close to double-digits. On the other hand, the high inflation and the correspondingly high interest rates have started to show their side-effects on the economy in the form of slowing growth.

Now 'growth' is the new macroeconomic headache for policymakers. Recently, RBI Governor D Subbarao hinted at the possibility of pause in interest rate hikes from December next month. While he maintained that inflation expectations remained high, well beyond the comfort level of the RBI, he did clearly point out that growth risks could not be ignored.

The story in the dragon nation across the border is also running along a similar plot. Chinese policymakers are also quite worried about slowing growth. And if this giant dragon faces a slowdown, it's going to spell trouble for the entire global economy.

So, while both India and China refuse to give up their battle against inflation, they both acknowledge that growth cannot be ignored anymore. There are chances that we may witness a pause in interest rate hikes next month. However, both Chinese and Indian policymakers are not in a mood to cut interest rates anytime soon.

Will pausing of interest rate hikes help India's economic growth? Share your comments with us or post your views on our Facebook page.

01:07
 Chart of the day
 
Today's chart of the days shows the US jobs and wages data over the twelve-year period from 1999 to 2010. The data shows the sluggish rate at which jobs have been created in the US. While the US population has increased by 30 million from 1999 to 2010, the number of employed workers has increased only marginally. Also, real wages also portray a gloomy trend post 2007. The frail economic situation coupled with hostile regulatory environment has played spoilsport as far as employment generation is concerned.

Data source: www.gloomboomdoom.com

01:41
 
The US Federal Reserve chairman Ben Bernanke answered a lot of questions during his press conference on Wednesday, but he didn't have a good answer for the most important one. If the Fed's forecasts are right, then the US unemployment rate will remain unacceptably high for at least three more years. And yet, inflation is not expected to be a problem. He also said that economic activity and labour market conditions will improve gradually over time but the pace of progress is likely to be frustratingly slow. Bernanke also said that the Fed was keeping its options open to provide more support for the economy by buying more mortgage backed securities. But unless the Fed was to go big, really big, none of it would do much good in this environment. The problem in the economy is not that interest rates are too high, or that there's not enough liquidity. The problem is that no one wants to buy. And the Fed cannot fix that problem. That is why Bernanke is having a tough time persuading his colleagues on the Federal Open Market Committee to try something new. With fiscal policy remaining a drag on growth and monetary policy disarmed, there's not much Bernanke can do except express his sympathy for those who are distressed.

02:14
 
Whether to keep itself afloat or rescue a drowning ship is something that Indian officials will have to contemplate over in the next few days. The Greece economy that has shown no signs of recovery despite heavy doses of bailout funds from its European peers is desperately seeking help. The growth machines amongst BRIC countries, China and India, are likely to come under pressure to contribute to Europe's bailout efforts.

Whether or not India should participate in the bailout funding will depend on a variety of factors. Besides the risk involved, the fact that India's forex reserves need to be maintained in view of the current account deficit will be important reference points. Also the fact that the Greece bailout could spur other debt defaulting economies like Italy and Spain to seek financial help is also a concern. Moreover, the Greece bailout is unlikely to bring fiscal prudence in the euro zone. Thus while Indian policymakers seem enthused to toe the IMF's command is helping out Greece, we believe that a thoughtful analysis of the same will make better sense prevail.

02:53
 
The crisis in Greece has only become acute. So much so that there has come a point where its government will have to choose whether it wishes to remain part of the euro or not. The scenario is like this. Eurozone leaders (including the reluctant Germany) are willing to contribute to the bailout package for Greece provided the latter sticks to its end of the deal i.e. moving ahead with some much needed austerity measures. Greece has not readily agreed so far and has contended that it wants to hold a referendum wherein it wants the Greek citizens to vote on this deal. This has angered other Eurozone leaders who have warned Greece that it will have to hold this referendum soon. These leaders are clear that if Greece does not agree to the conditions of the bailout deal, it will have to quit the euro.

Indeed, Germany (which has been the most reluctant so far for bailing out Greece) and France have made it clear that they want the Euro to stay and if that means not having Greece as a member nation then so be it. Greece for its part believes that its citizens would want to stay in the euro; which is why the country needs to take a decision soon and stick to it rather than dilly dallying the way it appears to do now.

03:29
 
Winston Churchill, one of the greatest statesmen that the world has ever seen, also had one more remarkable quality. He could come up with extremely witty one-liners practically from nowhere. Sample this. He is once believed to have said that democracy is the worst form of government except all the others that have been tried. This could well have been true in the day and age that Churchill lived in. But in the present times, even democracy is finding it difficult to hold itself together. Take the most recent case of Greek referendum that we mentioned above. Not only is the democratically elected Government hesitant to take any decision on its own, even a public voting on the bailout has invited the wrath of the other European nations.

Back home in India, the scene is no different. The common man is frustrated with the same very democratic institutions it voted for in the first place. And now, he is hell bent on creating parallel institutions arguing that they are more democratic. Perhaps, it is time that we build new democracies; ones that do away with the need to form parallel governments. Only then may be will Churchill be proved right once again.

04:04
 
With Pakistan conferring the Most Favored Nation (MFN) status to India, bilateral trade relations between the two hostile Asian neighbours are likely to get a boost in the coming years. It may be noted that under the MFN principle, countries do not discriminate against each other, thereby allowing free movement of goods. Free trade allows member nations to enjoy benefits of comparative advantage. While India granted the MFN status to Pakistan way back in mid 90's, Pakistan obliged recently. This move may foster economic relations between the two countries but there is a strong need to liberalise non-tariff barriers and other investment restrictions as well. This could further improve political relationship between the two countries and lay down a path for trade integration in the future.

04:30
 
In the meanwhile, the Indian stock markets continued to trade in the red with the metals sector leading the pack of losers. At the time of writing, the BSE Sensex was trading lower by 45 points (0.3%). Barring power sector, all the sectors were trading in the red. Except China, key Asian markets are trading in the negative while Europe has opened on a mixed note.

04:50
 Today's investing mantra
"In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten." - Peter Lynch

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Equitymaster requests your view! Post a comment on "No more sacrificing growth for inflation?". Click here!

9 Responses to "No more sacrificing growth for inflation?"

sn

Nov 4, 2011

my two brinjals , excuse the homophone pun, watch the gdp coming in sub 7, sensex somewhere sub 13000, dow 700 and israel nuking iran anytime before or by aug 2013. oil at $ 200, this is a black swan event with financial and geo political as well as geological upheavals in 2012

Like 

C.M.PANICKER

Nov 4, 2011

Availability of petrolium products at affordable price is one way of containing price rise which is breaking the back of everyone especially the common man.Our policy makers should look for cheap energy/oil and also provide agriculturist the much needed infrastructure for efficient storing and distribution of essential agricultural products.Look at the situation of onion and tomato being thrown on the roads in the absence of demand and storage facility when the production is very high or pleanty.In times of high inflation goverment should help to improve the supply system instead of pumping in more money which result in fueling inflation.The prsent utilisation of funds under NOREGA WITHOUT ANY CONTROL AND ACCOUNTABILITY is a case in the point.Same way the system of fixing floor prices for agricultural commodities also should be examined without considering the political fallout.Economic theory says that expansion of money supply should be backed by production/supply of goods and services.The black money should be controlled.Todays political system thrives on black money.All political acivity should be supported only by clean and accounted funds .

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Chandrakant

Nov 4, 2011

If only economists could appreciate the dependence of inflation on corruption, this could be better addressed. Policymakers are in no mood to look at it from this perspective.

I hope they do sooner than later.

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PANKAJ R SONI

Nov 4, 2011

ECONOMIC THEORY ARE TESTED TIME & AGAIN. SOLUTION TRUE FOR A DECADE / CENTURY ARE NO LONGER TRUE IN CURRENT & DAY-TO-DAY LIQUID (NOT VOLATILE) ECONOMIC SCENARIO. ON ONE HAND LOWER & MIDDLE CLASS PEOPLE ARE SUFFERING (THIS IS GOING TO BE LONG TERM SUFFERING - NOT GOOD) FOR BASIC NEED/S & ON OTHER HAND POLITICAL SITUATION IS WORSENING UNDER INDIA'S VERY LARGEST & OLDEST PARTY (WHO CLAIMS THEY HAVE EXPERIENCE OF MANAGING COUNTRY)(ADDING TO FUEL IS THIS IS ALL HAPPENING UNDER WORLD-CLASS-ACCLAIMED ECONOMIST - MR.MANMOHAN SINGH). COMMON MAN NOW SHOULD START TAKING ACTION (THINKING IS ALREADY BEEN HAPPENING WITH NO ACTION) FOR THEIR BETTERMENT & THEN BETTERMENT OF SOCIETY & THEN OF THE COUNTRY (SHOULD AVOID TAG OF COUNTRY FIRST)

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manoharkantak

Nov 3, 2011

Pausing interest rates will not do anything good as of now, the damage has already been done, the finance minister must deploy means to bring down fiscal deficit and heavily disinvest PSUS preferably try to reduce its stake. Which unfortunately will not be done. It is like treating a diabetic patient with antibiotic when he needs insulin. War with China is imminent. In such an economic crisis, the strongest economy goes for war. China is strong today so they will target India.

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nanda gopal

Nov 3, 2011

There is too much of cash in the hands of the people chasing too little resources which are reduced due to wrong policy of the Govt. in giving free bees to people making them lazy and reducing productivity.Labor is not available for productive work.Most of the officials and politicians have plenty of cash got thro corrupt means, only the honest worries about inflation the rest are showing lip sympathy.

Like 

s.athmanathan

Nov 3, 2011

That our nation is governed by a bunch of foolish politicians is well borne out by the fact that our total debt to GDP ratio is over 150 per cent and our current account deficit is also ballooning every month. Still they want to help Greece which will surely be followed by
Spain and Italy as you have rightly pointed out. When these fools will realise that charity begins at home.
One more example is the pampering of loss making PSUs
especially AIR INDIA. I would like to shoot down all these idiots and will be happy to go to the gallows.

Like 

Prejish

Nov 3, 2011

If India is really concerned to control inflation, it should seriously look at reducing the middle men cost for goods and services. Secondly, govt should have strict control on the import or export policies. No politicians should be allowed to stock produced or processed agricultural goods and then play with its import and export process for the same goods just to influence or boost the price. We have seen it in the past for sugar and onions.

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Nikhil Shah

Nov 3, 2011

Winston Churchill also said that India does not need freedom as it is not capable of governing itself. He also said that the powers will be in the hands of the goons.

How much correct he was? 100%.

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