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Constant Reader, Writer, Social Thinker, Manufacturing Leader
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The question should be directed more towards the direction in which we want to move and whether the current direction needs a course correction. The alarming pace with which the top 1% income is rising in the next ten years it could well be 40% of the total income. In some sectors like the financial sector, the top 1% take away already 30% of the total income in that sector. Under the garb and the veil of ignorance that an average household income is advertised and the GDP growth, even for per capita the way it is programmed, we obscure ourselves from the true reality that growth in the lower 50% has become a matter of academic discussions, drawn away from the realities it should have been subjected to.
Toggle Commented Feb 6, 2014 on 'The One Percent' at Economist's View
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My humble submission would be that we cannot ignore the problem of collinearity, something which would make high R square values completely meaningless. This is all the more reason why regression has very limited application in many of the areas that we use them.
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There is one simple test on the rationality question: Take a fortune 500 company and ask insiders to rate its stock performance (not board members) and repeat it with outsiders who are either traders and equity-holders in the stock without anyone knowing that such an exercise is being conducted. The results could be very interesting as the insiders have far better information and their estimates are more likely to be rational, whereas those of the external agents could be based on things that go beyond information alone. This is where Ernst Fehr's rational versus emotional connection comes together, which is what we see in markets.
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The interest rates have augured well for the supply side, its impact on demand has been temporal and indirect; the tuning of the demand side with interest rates going forward will be very interesting to watch for levels of growth from now on.
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The seminal paper on Price Rigidity of Nickel Coke bears testimony to the view that seventy years of single price did precious little to the assumption that sticky prices make adjustments far more difficult, on the contrary Coke made all the best of adjustments. In fact there were two world wars in this period between 1886 to 1959, while Coke prices remained same at 5 cents! Surely there could not have been more reasons for volatility to subsume all that Coke stood for, but could not do much, while prices remained rock-rigid.
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I was always fascinated by the Campbell Shiller regressions that essentially proved that stock market indices are not random walk or a product of efficient market hypothesis, but there are reasons to have doubts at least that there exists a strong negative correlation between the ratio of the real Standard and Poor Index ten years later to the real index today (on the y axis) versus a certain price–earnings ratio: the ratio of the real Standard and Poor Composite Index for the first year of the ten year interval, divided by a lagged thirty year moving average of real earnings corresponding to the Standard and Poor Index. Which essentially brings us to the understanding that the decline in the future stock market indices could be a result of much higher expected utility from the current dollar invested in the stock market and therefore the current expectation is mired in an altogether immensely reducing expectation function for the future, which is otherwise posed as massive shifts in the curvature of the representative investor's von Neumann-Morgenstern utility function. Competing assets and the release of large dosage of central bank money going into the specific stocks makes current ratios go awry, without reason. Rationality is meaningless when large chunks of money move into assets and regardless of their intrinsic potential they subsume the common available information into making gyrations that has no connection with either efficiency or rationality.
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I have always found this fascinating that Ronald Coase appears so abundantly in the ambit of a firm’s activities deep inside India, specially where acquisition of land is involved around a factory, or an expansion entails larger use of common water resource which has scarcity in summer, or the setting... Continue reading
Posted Sep 30, 2013 at ProcyonMukherjee's blog
The Dutch Auction or its variant has been extensively used where the value of the offering is not easily discernible to the bidder or the information asymmetry is acute. For example for an ‘used’ car which is on offer and there are prospective bidders, the range of bids would be... Continue reading
Posted Aug 28, 2013 at ProcyonMukherjee's blog
“The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant.”------John Stewart Mill The power of a Union stems from its ability to... Continue reading
Posted Aug 17, 2013 at ProcyonMukherjee's blog
Left tail and Right tail distributions Decision making under uncertainty has been the core subject of Kahnemann and Tversky; their thirty years of work in the formulation of the Prospect Theory and later Kahnemann’s book, “Thinking Fast and Slow” have brought new insights in the area of what constitutes the... Continue reading
Posted Aug 12, 2013 at ProcyonMukherjee's blog
The unemployment rate fell by 0.2% to 3.9% in June'13 the lowest level since 2009 and the jobs to applicant ratio now touches 0.92%, which is also the highest. These numbers need to be looked at from the point of view of a population that is ageing, not growing but actually declining, which means that the labor force participation rates cannot go up. The total number of jobs added this year so far has been 290,000. Of course this would bring in moderate to high inflation as a result, it does not require any great inquiry into 'today's short-run short-term rate and the long-run future's short-term rates', but how does that matter as the polity must survive bringing back jobs first; the secondary question of the capacity to pay back debt is not for this polity to answer.
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Wonder why $1.8 Trillion (liquid assets of U.S. Firms) plus $1 Trillion (Excess Reserves of Commercial Banks parked in Fed liability side of the balance sheet) is not good enough reason to slow down QE.
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Bandwagon behavior, and coupled to it the 'free-rider' problem has wide scale ramifications from equity and derivatives trading to public accountability in capital raising and deployment and in many other areas including the simple experiment of finding the best candidate for a job amongst a large number of applicants. The... Continue reading
Posted Jul 25, 2013 at ProcyonMukherjee's blog
I am sorry that I am caught between the urge to understand and to respond as I go through the motions of reflecting on what I gather as one of the least cultivated subjects of our time, while being the most visible one in the blogosphere. I have this nagging... Continue reading
Posted Jun 24, 2013 at ProcyonMukherjee's blog
The financial markets seem to be disliking a strong recovery that would stop the bong buying program and allow a faster unwinding, otherwise how do we explain the 'jittery' reaction of the market whenever any whisper of unwinding happens. The monetary transmission itself is rather muted going by the bloated liability side of the Fed Balance sheet which has $1.9 Trillion appearing as excess reserves of the Commercial Banks which they have parked. This rising liability has costs to the tax-payers and so far only lip-service has been paid to this element in terms of lowering interest rates on these reserves. This money although it creates an illusion of increasing the monetary base, does precious little to goods and services.
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Since the start of Quantitative Easing, which was better described by Bernanke in his famous Oct.8, 2009 speech as ‘Credit Easing’, we have seen the Federal Reserve balance sheet grow to $3.42 Trillion last week in the assets side of the balance sheet. This growth in assets from the inception... Continue reading
Posted May 29, 2013 at ProcyonMukherjee's blog
With current tendencies towards discount rates (the way they create expectations for the future versus now) our current thinking is more guided by the willingness to postpone policy decisions for making corrections into the distant future than now, what else do we expect in terms of announcements? The appearance of a change, not change itself, the way it ruffles the edges of volatility, one wonders what would happen when change would actually happen. 'Even lower numbers on inflation', would further postpone change to happen as wage-price stickiness would have more profound influence.
Toggle Commented May 17, 2013 on Fed Watch: Busy Data Day at Economist's View
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Social justice is the culmination of the principle of social equity when advancement to the living conditions are based on mutual cooperation where the least advantaged by virtue of their being so is not the reason why they should continue to be belittled when opportunities for making progress is being meted out; a sacrifice by some if it is needed should not be left to those who are already least advantaged.
Toggle Commented May 17, 2013 on 'What about Marx?' at Economist's View
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The recent example is bizarre that QE3 is pumping into the economy $85 Billion of newly created liquidity / credit and the job addition per month average is less than 200,000, which translates to a whopping $500000 per job. This leads us to reconstruct the debate that wealth effects on... Continue reading
Posted May 6, 2013 at ProcyonMukherjee's blog
Why don't we speak of government debt versus the government revenue, if that is not on strong wicket, what is the point in lamenting against austerity?
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I have been intrigued for quite some time to find the basis of a theory or law or simply a hypothesis, as in today’s world of information explosion, every event or information associated with it brings in a two sided view, almost diametrically opposing each other and if that becomes... Continue reading
Posted Apr 22, 2013 at ProcyonMukherjee's blog
To exemplify the limit of current policy, let me take the "Apple problem" to the larger arena of the S&P 500, where cash and cash equivalents are at $1.4 Trillion, which is the excess cash over investments within the ambit of their businesses. As the businesses are generating a healthy bottom line, the ROE on the capital invested in the businesses need to be compared to that excess cash invested in financial assets, and the outcome of this comparison does not need any guesses, the financial assets are returning a fraction of what the capital invested in the businesses are returning. But there is a critical threshold beyond which the last dollars invested in the businesses would be generating any better ROE and in most of these companies that threshold has been reached. There is also a need for tax purposes that limits the cash to be brought back from abroad and that is also a reason why cash is locked in financial assets off shore. Given this situation there are two ways to act, either to change through further innovation where the last dollars invested would generate still comparable returns, or else release this cash to shareholders for them to reallocate capital to those sectors that have a better return possibility. This second option seems to be dumped by the boards, for the simple reason that its impact on the stock price in recent times have been negative; it is like saying, “we are returning the money as we do not know any better use of it in the company”. Given this scenario how does the QE do any better, as liquidity is hardly the problem and how does further credit easing make businesses do any better?
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I am drawn into the inter-connectedness of the three very important parameters, that is,labor force participation rates, wage rigidity and inflation expectation, all of which have been influenced by the current monetary policy concurrently. Labor force participation rates have been falling, wage rigidities have remained steadfast and the Phillips curve appears to be moving downwards and leftward, while the inflation expectations have been kept ultra- low by the policy instruments for a protracted period of time as interest rates are negative that furthers the cause of liquidity preference. Even gold is not spared, which so far had been the harbinger of an unique one-directional upward movement for quite some time. This is a noteworthy shift propelled by a policy regime that has so far remained particularly rigid in creating and sustaining an inflation expectation, which is low. It is time we examine the critical elements of labor force participation rates around the zero lower bound interest rates that have so far stymied all inflation expectations and have ushered a downward spiral. Theoretical literature is agog with the suggestions of an ultra-low inflation rate as the optimal solution to welfare, but practically every Central Bank tries to create a positive inflation expectation regime to create a flow of jobs that makes easier adjustment to relative wages for the purpose of “greasing the wheels of the economy”, as Tobin et all in 1970 had written. But Akerlof, Dickens and Perry have also shown in 1996 that in the presence of downward nominal wage rigidity, a central bank which aims at an inflation rate which is too low will lead to higher steady state unemployment, thereby reducing welfare. Central banks have in fact now attained the limits of ultra-low or negative inflation expectation thus making the employment situation rather uncertain as wage rigidities is one single largest contributor towards making labor force participation rates dwindle for the worse. On closer inspection of the downward normal or real wage rigidities many authors have pointed out to this phenomena which is that a worker in a ultra-low inflation scenario does not agree to the wage on offer if it is too low as he is under the pressing assumption of inflation not ready to pick up any time soon and his desire to set a different wage rate than what is on offer stems more from the fear of losing the ability to get a better rate if the low rate on offer is accepted. Further to this the rigidity to not accept a low rate at the zero lower bound is due to a heightened period of inaction where workers wait for rates to stabilize in the hope that they would get better; this period of inaction is much smaller in duration when the inflation expectations are higher. More research to solve the individual and dispersed wage-setters dilemma is yet to establish the causal linkage of why the period of inaction should be longer when the inflation expectations are weak that may lead to eventual dropping out of the worker; in most cases the worker finally lands up in service sector jobs even when he is not enrolled as participating in the labor force, which is also a problem of polling and data gathering. Workers only react to inflation adjusted wages or the real wages. It is not that high inflation causes low unemployment (as in Milton Friedman's theory) as much as vice-versa: Low unemployment raises worker bargaining power, allowing them to successfully push for higher nominal wages. To protect profits, employers raise prices. So in a depressed economy when inflation expectations are negative, workers do not have bargaining power and the higher duration of inaction sets a downward spiral in wage and with further prolongation of this phenomenon the labor force participation rate falls.
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Labor force participation rates have been falling, wage rigidities have remained steadfast and the Phillips curve appears to be moving downwards and leftward, while the inflation expectations have been kept ultra- low by the policy instruments for a protracted period of time as interest rates are negative that furthers the... Continue reading
Posted Apr 15, 2013 at ProcyonMukherjee's blog
Robert Solow’s (Nobel Prize winner in Economics) note on the subject, “How to save American Finance from itself”, which came out on 8th April, has a few important implications for some of the industry sectors where investments have been intense and it is time the last dollars invested are measured... Continue reading
Posted Apr 11, 2013 at ProcyonMukherjee's blog