Where are we heading?

Some say the worst is over, some say the worst is yet, to, come, some say we are nowhere and there are some who say the world is going to end 2012. Ok I am not promoting the movie 2012; I am talking of the current scenario of the economy.

Ok I come back to the same question where are we heading? There is a lot of air filled with optimism saying everything is fine. But how can one say everything is fine when nothing is fine? Ok its confusing right.

Over the past two years or so, I have been closely following the world economy, more so, I have been following the bank policies and actions and as a result GDP and its performance. They say history once not learned, is often repeated. But then, no one likes to learn history. We are humans and bound to make mistakes, but does anyone know what is the mistake that is often repeated ?

Murder, Rape, Doping? None of them. But to forget to use basic sense over greed for money something that has kept on continuing centuries after centuries. In Vatican, on the coins it’s written “money is the root cause of all evil” which is very true.

I being an infant to the world in terms of knowledge of economy and GDP and banking products and practices, I remember this very question which struck me in 2006, when I read an article on subprime, which said the way ahead was Subprime loans. But I asked many this question, if a person can’t pay at lower rates of interest or doesn’t qualify how can they pay this? All gave me answers and kept notion that this kid is dumb and simply arguing. But last year, I guess all understood what I was talking about. In one way, the effect was not as huge as I earlier thought it would be, and that is good in a way, but it did reach to where I thought. So what is that people can’t understand that too much of anything good is bad? Human want is unlimited, which is why they want more and more money.

The big mistake lies in the education system, financial regulators and world leaders who run under the corporate magnets, which recently has slightly changed. I blame the education system for allowing unwanted alphabet soup products of finance creep into the system like CDO’s, Asset Backed Securities (ABS) etc... who wants all these? Ask a common man, and he will say he is not interested. But the person, who knows that this is the way to trick the system and get money, will say it has to continue. But I will debate on this some other time.

But Let me start on the great financial regulators. They think they know everything, in reality nothing. In simple words, they don’t even know what 1+1 is, and the best thing, is that they know what is to be portrayed. Good Public Relations Officers they are.

The role of any good regulator is to ensure they can implement the fiscal and monetary policies they have framed. But where does that happen, it always contradicts or falls in confusion, where it selects the wrong practices over the right one.

Amy good governance would have been able to curb this crisis from their respective end by not having allowed speculative trades take place, put a stop to the subprime loans given, selling of the subprime loans as packages between countries and so on. Yes, USA is the financial capital, doesn’t mean that they are always right. They can also make mistakes. We have to understand the grave situation which we are in now.

I talk of all this for the fact that, the large rate of unemployment luring around, and yet false reporting. As in my previous article, I stated, Stats truly do not reflect the exact situation, what exactly reflects is the feeling you get from the street. Someone once said, you got to be in the field to know what it is like. People on the ground know more than who is sitting in the office. Last week, UK reported the economy has not improved and this week, USA has reported consumer spending is still down, so what does this point? We are no far better from where we are. One thing we all learned from the crisis is that we all are linked and interdependent with all the countries. So if two of major economies in the world are still in deep waters, how come others have swam their way out of trouble? Here comes the answer.

Wait for it.

Wait for it.

They are lying. In a little sense, yes they must have improved from where they were last year, but that is a tiny percentage. Because when two of major economies are struggling, how can others perform? If it so, why people are still unemployed? Why consumer spending is still low?

The bailouts purpose was to allow flow of money in the economy, but in reality it was flow of money from govt. to corporations to pay huge bonuses to their directors as the recent Goldman Sachs story is the best example. Goldman says it’s not our business, to interfere in their matter, but I would like to have a reality check, Boss, your bonus is our money. You’re using tax payer’s money to fill your pockets!! Look at the arrogance of such an institution. Lehman Brothers, once the fourth-largest US investment bank, filed for Chapter 11 bankruptcy protections in the early hours of 15 September 2008. Governments around the world subsequently had to pump trillions into their financial systems through bank bail-outs, central bank actions and huge stimulus plans to save their economies from collapse.

Let’s be true to ourselves, as we know or what it should be that, the world economy is still in bad shape. The figures that are reported are false, it’s just being reported to show that their respective economies is improving in order to create false air of optimism and bring more investment to their economies. This is bad, as I said earlier, History once forgotten; it’s often easy to be repeated. We are making matters more grave, worse, and bringing forth a further troublesome crisis on our hand which can be more damaging, that ,social order can be toppled and there would be clash of people with money and with the people who don’t. It’s an ugly scene to think, but all actions are leading towards there.

The stimulus is producing growth but saying that it’s not “genuine” growth because … it was caused by the stimulus. The basic economic logic says that the stimulus should aim to close the output gap. And it’s obviously not remotely large enough to be doing that right now

But there is now concern that as the banks starts to recover; they have not taken the necessary steps to prevent a repeat of the crisis. Alarm bells should be ringing with the early signs of a 'back to business' attitude in the City and little evidence that policymakers are taking measures to ensure the next economic recovery is better balanced than the last one

But today governments have to work out when - and how - to clean up the mess that those emergency measures have left behind. That could be even more challenging than the crisis itself. Trust me the crisis is not over yet, as it is being reported out by various sections because if it was, you can definitely see the unemployment fall, income increase, value of properties increase and so on.

But realities check nothing is yet over. Maybe yes, we can say we are not in the depression stages, but I would like to say that we are not in it now, because for the simple reason that, in depression policy doesn’t work.

But whatever it is or wherever we are, the poorest countries will still suffer. Even though some big international banks are returning to profit earlier than expected, IMF figures on total unrealized losses on bank balance sheets as a result of the crisis suggest that there is room for plenty more bad news.

Unemployment will remain high across the developed economies, and public debt ratios will continue to rise, even several years into economic recovery

So many actions and very little outcome, why is it so? No fundamental change where it is required has not been taken. As they say vanilla doesn’t cut it anymore, it’s all about what chocolate sauce, whipped cream and cherry you can put on top. So if the world wants to avoid another economic disaster, it has a doubly hard task now.

I have something for the leaders which is can be explained by these lines from theory of deadman -not meant to be song

“There's still time to turn this around
Should we be building this up
Instead of tearing it down
But I keep thinking
Maybe it's too late.
It's like one step forward
And two steps back”

I come back to the same question I started with where are we heading? To a double dip or W- shaped recession / recovery? economy may be improving, but with so many people still searching for work, a return to prosperity looks like a distant dream for many.

Bottom line is that we’re not going back to the good old days without fixing our banks and fundamentals.

A year After the Shock, Challenges Remain

The problem is easy to grasp. The solution is anything but

Just six months ago it seemed quite possible that we were going to find that out the hard way. We still might. But by common agreement, the risk of a global slump on a par with the 1930s has fallen substantially since the start of the year.

The extraordinary policy steps taken by governments and central banks since the Great Panic of September 2008 - the bank bail-outs, the record interest rate cuts, the trillions of dollars in budget stimulus - all of that seems to have worked. At least for now.

But today governments have to work out when - and how - to clean up the mess that those emergency measures have left behind. That could be even more challenging than the crisis itself. Trust me the crisis is not over yet, as it is being reported out by various sections because if it was, you can definitely see the unemployment fall, income increase, value of properties increase and so on.

But a realty check nothing is yet over. Maybe yes, we can say we are not in the depression stages, but I would like to say that we are not in it now, because for the  simple reason that, in depression policy doesn’t work.

GROWTH RETURNS

Its a news that has been capitulating most of the people around the world stating growth has been returning. Yes i agree to that, but growth has not returned back in the US or UK, the countries at the centre of the financial maelstrom, but France, Germany and Japan all supposedly grew in the second quarter of 2009.

Also supposedly China also has grown or bounced back to rapid levels of growth, far quicker than anyone expected at the start of the year among the developing economies.

But whatever it is or wherever we are, the poorest countries will still suffer. But, now we are all in Lehman's anniversary mode, considering the events of the past year, things could surely be looking much worse. The US economy may well have started to grow in the last few months and even the UK will surely not be too far behind is all what i can say supposedly based on the figures out there.

Challenges??

Yes challenges remain which keeps the midnight lamp burning for the ministers, economists, reformists etc.. So then, you might say not much is there, right? Well then you are wrong if your thinking that. Because there is a lot. How and when to start unwinding all of that policy stimulus is the one we hear about most often, but there are two other big ones.

The most important one is the current situation or state of the banks.

Even though some big international banks are returning to profit earlier than expected, IMF figures on total unrealized losses on bank balance sheets as a result of the crisis suggest that there is room for plenty more bad news.

There are particular fears about Continental Europe (notably France and Germany). Officials fear that French and German banks have been allowed to remain in denial about a large chunk of their bad assets. Ministers there live in dread of new requests for expensive help.

Even where governments have engaged in extensive stress-testing to ensure that banks have enough capital to survive (as in the US and the UK), the big worry is that they still have too much debt - and too little capital - to want to lend. And we all know, what it means when there is too much of debt and less capital. Very bad combination. An ideal self destruction tool in itself.

Savings?

Very important parameters used by economist in order to find the growth of the economy. A big worry is that not enough is being done to lay the foundations for more balanced global growth. Personal saving in the US is now about 5% of gross domestic product (GDP) - up from roughly zero last year.

To get its house in order, the US needs saving to remain at least that high, so the US can stop building up mountains of foreign debt.That is only consistent with rapid global growth if other countries step up to the plate, and promote domestic demand in their own countries as an alternative to exporting to the US.

Savings is an integral part for the development of the economy. Earlier it used to be an exclusive feature of the developed economies where they had good saving and income. But now all have come to par with rest of the world.

Most countries really need to focus on generating domestically generated demand, but I guess that is still a difficult task and it is difficult to predict how and when the commitment will bear the fruit.

If there is no rebalancing of growth in favour of domestic demand in "saver" economies such as China and Germany, there will almost certainly not be enough growth. It is as simple as that.

Unemployment will remain high across the developed economies, and public debt ratios will continue to rise, even several years into economic recovery

having said all, one thing is sure in my point of view. You cant expect the domestic demand to grow when unemployment rates keeps on growing,  as a result neither savings will increase, neither there will be any disposable income in the hands of people. So my question is how come all are reporting everything is improving, worst is over? we are at end of recession and all? I think it might be for the company’s who got the bailout money, because so far that has not yet been transformed to the common man.

I am person who don't take statistics into account because a fundamental reason is that it can be manipulated. When you jolt down all the dots saying GDP is growing, I don't get it? Because 1/5th of your GDP is always linked with consumption. So when your unemployment rate increases, people don’t have much money to spend and simultaneously they are not earning. SO then people will reduce spending and spend on essential commodities. When GDP is closely linked with consumption and that pattern is downwards how can one say its over? And moreover if you look the unemployment rate, it’s classically the same as one described in text books for DEPRESSION.  I still feel we are no where better than last year, but a little improvement is there with the false air of information passing around the world. But if you really want to really know if anything has improved, then I suggest go and ask the common man on the street and you will get your answer.

As i said in the beginning , The problem is easy to grasp. The solution is anything but

Overall A Break-Even Budget

It has been a long day of reviewing the budget by several individuals around India and the World. The Union Budget of India 2009-10 is in many ways playing through the traditional in-roads that have been established and taught in our Economics classes. I have been seeing lot of review of the budget and all seem to have given thumbs down for the budget except a few. Moreover, the media anchors who are supposed to be playing role of moderator when the guest comes seems to be fueling the problem by sedimenting a complete negative notion of the budget in the minds of the people.

Well if you ask me, I say the budget is fine balanced and in all sense it is a break even budget where there is no profit no loss in a literal sense. The budget covered several aspects of the economy considering the economic scenario. When I was listening to most of the comments people had to say, it gave me a complete notion that people are thinking only of their own benefit. I saw NDTV and was shocked to see Pranoy Roy who I have huge respect for seemed to be angered in every sense. But I would like to suggest all his guests and Pranoy who were speaking against the budget that most of you are not thinking from a Macro-Economic perspective. It's a complicated topic and area, but has almost a definite answer and 99.99% achievable solution.

First of all, a hue and cry why not disinvesting loss making sector by the government? All of you on TV screens were screaming money should be flowing in the economy so reduce taxes,allow private sector etc… But what about the people employed over there? During this recessionary period it is very important, to not dismiss people especially by the government. Because these people are having their jobs, they earn some income and this would be spent. Only then, expenditure of one becomes the income of another, and if you want government to sell off and give it to private sector who would implement firing of people who exceed the surplus requirement, then I would like an answer from all sitting and saying where would you give these people money? How can they spend when they don't have money? Where flow of money takes place in the economy? A coin has two sides. We have to look both the sides before giving a verdict simply against the government. So I give thumbs up for this move especially when the unemployment is around 6 % and not further aggravating the problem.

Secondly, disinvestment of 10 % is not enough? There is a common say in economics which says human wants are unlimited and always dissatisfied. Also there is another quote which we hear always,we have a problem with whatever is told or given. We have to understand the budget is now for these 9 months before the next one comes. Having said that, what is wrong with 10% disinvestment? In a way government is taking a bigger risk by losing 10% of profit making companies if it goes to private sector because they are losing the profits they can earn and use. I don't need to cite examples of private sectors profit oriented techniques that led to closure or insolvency of many companies and economic downturn round the world. This topic you look anyway can give you any argument. But I think its more than enough 10% disinvestment.

Thirdly, taxes are areas where government earns revenue and the corporate sector can't cry on not reducing the taxes or argue of perquisites being taxed. See for one thing, the corporate sector never pays the correct amount of tax to the government. They manipulate the books and accordingly pay the tax. If the government would get the tax that is lost through book rigging, I guess there would be substantial amount to fund many, many more schemes importantly. And when the government can't receive their revenue properly, why should they reduce the tax? Because whatever may come, the corporate sector has made sure they will continue to manipulate their books. So my suggestions are that corporate pay correct amount of taxes to the government and then only start blaming government. Until then, please maintain silence

Nextly, government expenditure on infrastructure is very important and a very good one. Because this again improves the standards in India on one hand and on the other ensures flow of money in the economy. When a country has good infrastructure there is chance of attracting others into the economy . There was a huge cry saying private sector has not got any chance of growth or they have been put aside. For a simple fact, the government is not going to be doing the infrastructure projects by themselves. They would call for tenders where all parties would be welcomed to participate and the best one would be selected. So please to all ignorant out there, remember not to forget the private sector has huge opportunity out there and if they do quality work, they would be rewarded.

And indirectly most of the people have problem of the governments stand on rural programs undertaken. People wearing suits on TV screens speak a lot of rural development, but in reality it's a complete lie. They don't care. They are interested in their sector and areas improving than the entire country. Most of the hosts and guests didn't say its bad, but they were using the phrase BUT, OR etc… it doesn't require rocket science to understand their displeasure. For once I see government doing something good for the rural people and I would be the first one to congratulate the government with all my heart if they implement it without any delay. If this becomes successful, we can say atleast the poor are not being poorer or not looked after. And for an award,atleast Congress is keeping upto the promise of the election to take care of the aam admi who elected them .

There are several more things I would like to add, but due to constraints I am not going to prolong it anymore. One thing we should understand that we should not compare the Economic Survey with the budget. That was just a survey giving its suggestions. If you say everything has to be implemented suggested by it, then I would like the corporate sector and the media to implement all the suggestions without any failure given by any of their employees. We have to understand there would be screening and different areas to consider before preparing the budget.

Moreover, budget is just a budget; there would be several other measures and reforms taken by the government in due course of time without just looking into the budget. For once, all out there, please keep confidence in Prime Minister Manmohan Singh for he has sufficient knowledge of what decisions are to be taken when the need comes. The government would keep on implementing several policies in the coming days and months.

Finally to all people who are blindly believing the media, a caution- they speak for their interest and for people who promote their shows. If not, they would have been able to protect your investments because they knew the economic downturn and which stocks are doing bad. Because most of us blindly follow them, they tried to pass on wrong information. This was recently exposed by Jon stewart of The daily show exposing and making Jim Cramer of CNBC come out and tell the truth on his show. Google it , you will find the videos and articles. I feel media should report like Jon Stewart.

TO all out there,if you look at an individual point of you, as an individual nothing much of benefit would be there. But atleast, start to be happy for the fact it is considered at aiming at reducing gap between the rich and poor. We always tell kids, to share and help others and support others to grow. If we are not going to stick to our words, then please don't tell all these lies.

Overall a break-even budeget. Further review in due course of time. So stay connected…

A Quick Glance at the Budget - Proposed tax changes in 2009/10 budget

India's finance minister on Monday proposed increasing the minimum alternate tax on firms, but scrapped a tax on commodity transactions.
Following are some of the proposed tax changes:

DIRECT TAXES

* No changes in corporate taxes
* Raises Minimum Alternate Tax (MAT) to 15 percent from 10 percent. The MAT was earlier introduced to make sure companies do not totally avoid taxation by claiming various deductions that cancelled out their tax liability altogether.
* Extends tax credit carry-over period under MAT to 10 years from seven years.
* Scraps Commodity Transaction Tax
* Scraps Fringe Benefit Tax
* Extends sunset clause on tax holidays for export profits by one year to 2010/11
* Tax holiday for natural gas production
* Increases personal income tax exemption to senior citizens by 15,000 rupees, by 10,000 rupees for others
* Elimiates 10 percent surcharge on personal income tax

INDIRECT TAXES

* Maintains overall structure of customs, excise duties and service tax
* Increases customs duty on gold bars to 200 rupees per 10 grams from 100 rupees per 10 grams
* Increases customs duty on other forms of gold, excluding jewellery, to 500 rupees per 10 grams from 250 rupees per 10 grams
* Restores 8 percent excise duty on manmade fibre and yarn
* Raises excise duty on several items to 8 percent from 4 percent, broadly exempting food items and medicines
* Exempts bio-diesel blended petrol, diesel from excise duty
* Cuts customs duty on bio-diesel to 2.5 percent fron 7.5 percent

NON-TAX REVENUES, REFORMS

* Intends to move to a system of direct subsidy transfer to farmers
* To set up panel to advise on a viable and sustainable fuel price policy
* To retain 51 percent government holding in state-run firms
* To encourage people's participation in stake sales in state-run firms
* State-run banks, insurance firms to remain with government, will be funded to grow
* Expects 497.50 billion rupees ($10.26 billion) from dividends, profits of state-run firms in 2009/10
* Targets 11.2 billion rupees from stake sales in 2009/10
* Expects 3G wireless spectrum auction to net 350 billion rupees in 2009/10

FeDeReR Breaks Hearts of 2 Americans- Pete & Roddick

This post was published to faris at 11:55:21 PM 7/5/2009


On and on they held serve as the fifth set of the Wimbledon men’s final endured beyond all precedent. On and on, with shadows encroaching on the grass, Andy Roddick kept pace with Roger Federer on Centre Court as Federer attempted to close in on a record 15th Grand Slam singles title.
But as cruel as the concept began to seem as both players continued to invest in the outcome, Wimbledon’s latest epic had to finish. And as poignant as it should seem to those who know how long Roddick has been chasing sunlight in Federer’s shadow, Federer was the one who again ended up holding the trophy.
Roddick, in the midst of a resurgent season, had hoped to postpone Federer’s record-making, but despite playing what looked very much like the match of his life, Roddick could succeed only in turning Sunday’s final into Wimbledon’s latest classic as Federer won by the remarkable score of 5-7, 7-6 (6), 7-6 (5), 3-6, 16-14.
Roddick held his serve 37 times in a row before being broken in the last game. When Roddick’s last shot, a forehand, missed its target, Federer roared and walked to the net all alone in the record books after breaking his tie with Pete Sampras, who is now second on the career men’s list with 14 major singles titles.
“Sorry, Pete; I tried to hold him off,” Roddick said to Sampras, his American compatriot, who was sitting in the front row of the royal box after flying in from Los Angeles on Sunday morning.

Federer, who claimed a first French Open title last month, has now won Wimbledon six times, the US Open five times, the Australian Open three times and Roland Garros once.
Sampras was the last man to set a new mark in Grand Slams when he beat Pat Rafter in an emotional final at Wimbledon in 2000, and the American chose to return to the All England Club to witness Federer's achievement
The 37-year-old arrived to applause during the changeover after the third game and, with his wife, took his seat alongside Manuel Santana, Rod Laver, Bjorn Borg and Ilie Nastase.
With so many tennis greats on hand, Roddick appeared to be very much the support act as Federer attempted to make history, but the American has been a rejuvenated force this year and played one of his best ever matches in beating British hope Andy Murray in the semi-finals.
He went into the final having won just two of his previous 18 matches against Federer, but with the confidence of having arguably the world's best serve and a new variety to his game brought out by coach Larry Stefanki.
Both men started strongly on serve but it was the Swiss who put the pressure on first, forcing four break points in a tense game at 5-5.
GRAND SLAM TITLES
15 - Roger Federer
14 - Pete Sampras
12 - Roy Emerson
11 - Rod Laver
11 - Bjorn Borg
10 - Bill Tilden
8 - Ken Rosewall
8 - Ivan Lendl
8 - Andre Agassi
8 - Jimmy Connors
8 - Fred Perry


Federer was twice denied by Hawkeye, while Roddick saved two break points with trademark heavy serves, and the five-time champion was quickly made to regret the missed chances.
Moments later he was under pressure as he leaked a forehand into the tramlines to give Roddick a set point from seemingly nowhere, and when the Swiss made the same mistake in the following rally the American's supporters were on their feet applauding as their man took a shock lead.
The second set followed the same pattern, with neither player able to fashion a break point and Roddick now making 80% of his first serves.
It came down to a tie-break and, knowing his title hopes were under serious threat, Federer made a nervous forehand error to hand over the mini-break before the Roddick serve took over, sweeping the American to 6-2 and four set points.
An imperious Federer backhand and two service winners cut the deficit before Roddick had a chance on his own serve, but he put a high backhand volley well wide.
Federer fired a cross-court backhand pass to win a fifth straight point and earn a set point for himself, and Roddick pushed a backhand well over the baseline to bring Federer level at one-set all.
It was a body blow for the American and he headed straight to the locker room on the changeover before marching to the wrong end on his return to Centre Court.
Roddick's head cleared sufficiently for him to get a foothold in the third set and he saved a break point in game five with a serve.
The 26-year-old could win only two points on the Federer serve throughout the set but he forced another tie-break, and a chance to amend for the disaster of the second set.
A backhand approach into the net gave Federer the mini-break though and, although Roddick did well to close the gap to 6-5, the Swiss converted his third set point with a thumping forehand
If anyone thought that the smooth coronation of Federer was now back on track, Roddick had other ideas, playing a magnificent volley at 2-1 to earn two break points and taking the second with a backhand pass that Federer could not handle.
Roddick served out valiantly from 0-30 in game nine, thrilling the Centre Court crowd who were about to enjoy a fifth set that few had expected to see.
Federer had the first chance at a break in the decider but again Roddick served his way out of trouble, and the Swiss had still not broken his opponent after nearly three hours.
Both men appeared to be getting stronger and stronger and they were well and truly in the groove on serve, with Federer ahead in the ace count as the fifth set rolled on.
Roddick made his move at 8-8, firing a spectacular backhand winner down the line for 15-40, but five-time champion Federer responded magnificently with a service winner and a nerveless drive-volley.

The fifth set Sunday was by far the longest in a Grand Slam singles final in terms of games played, which is quite a statistic considering that Wimbledon began in 1877. The previous longest was in 1927, when René Lacoste of France beat Bill Tilden of the United States, 11-9, in the fifth set at the French championships.
But this year’s final certainly deserves a place on the shortlist of great Wimbledon matches.
The set became the longest in a men's singles final when Federer fired three aces in a row to move ahead 13-12, and Roddick began to look the more tired - but he refused to yield until the 30th game of the set.
The American looped a forehand long at deuce, and when he did the same on championship point Federer had his first service break of the day - and a historic victory after four hours and 17 minutes that takes him to the top of the Grand Slam list.
But there was some small consolation. The Centre Court crowd, accustomed to seeing Federer with the trophy, was in no mood to forget the man who finished second. The chants of “Ro-ger” were followed by chants of “Rodd-ick.”
Legends are legends, and performance is performance and from what we have witnessed here today was the highlight of how great the game has reached and yet I think we will have to hold on to our judegement regarding which is the best final we have seen recently because at the end of last year, it was last years final at Wimbledon, but after seeing today’s match, it will be this year for many. But, for me, I reserve my judgement after I see next years final. SO congratulations Roger Federer and commensurations Andy Roddick. I think we got to see the best tennis of the year and if Andy continues to play like this, he is surely in a league of champions who would have a say where the title would go at this years US Open.

All Saying Different Things, All of Them Correct

This is going to be one of those rare blog posts where I agree with everyone. There has been a lot of great economics related content on the web the past few days.

In the New York Times Allan Meltzer  worries that we will soon have a great deal of inflation:

Milton Friedman often said that “inflation was always and everywhere a monetary phenomenon.” The members of the Federal Reserve seem to dismiss this theory because they concentrate excessively on the near term and almost never discuss the medium- and long-term consequences of their actions. That’s a big error. They need to think past current political pressures and unemployment rates. For the next few years, they cannot neglect rising inflation.

Whereas Paul Krugman believes we need to fear deflation:

Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: “The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period.” And a rise in the effective interest rate is the last thing this economy needs.
Concern about falling wages isn’t just theory. Japan — where private-sector wages fell an average of more than 1 percent a year from 1997 to 2003 — is an object lesson in how wage deflation can contribute to economic stagnation.

Who is right? They both are - here is how it is possible:
Right now the economy is walking a tightrope act, and the statistics do not lie( i don’t accept it always, but people do,so can put the argument from that perspective) - we are not in a 'balanced' state and we risk falling off the rope onto the deflation side. At least in theory monetary policy and fiscal policy can be used to push us towards being balanced again by increasing the rate of inflation. I say in theory, because I believe fiscal stimulus is unlikely to work well in the real world. Monetary policy, of both the conventional and unconventional sorts can certainly increase the money supply leading to increased rates of inflation. But it is easy to push to far, risking falling off the other side of the tightrope in the long run - for the reasons Meltzer gives. We need to fear falling off of either side of the tightrope.
And why is deflation harmful in a recession? Krugman gives one reason, though I also agree with an argument made by Arnold Kling:

Workers view wage rates as signals of their employer's long-term commitment to their welfare. Thus, a wage cut is a particularly negative signal, and it is difficult to cut wages in a downturn without causing major problems.

More specifically, it is difficult to cut nominal wages in a downturn. We can however, a cut real wages is possible (which is what in reality needs to happen) by leaving nominal wages unchanged and having a positive rate of inflation.
Of course, there is also the issue of the unemployed, who no longer have wages to cut and require jobs. I agree with Mark Thoma's take:

Artificially restraining wages from falling is not the correct response, the key is to drive the unemployment rate down so that the labor market tightens and wages rise in response. That is why it's essential that stimulus programs provide a boost to employment, and I've wondered from the start if the stimulus programs we enacted have focused enough on providing employment opportunities.

One policy that would help accomplish this, is to cut the payroll taxes paid by firms, as to reduce the costs of employing workers.

Dim and distant, but a glimmer nonetheless!

My views on the economy, the stock market, the problems with the banks, the Geithner plan and whether there's light at the end of the tunnel.

The rate of economic contraction will slow from the -6% of the first quarter to a figure closer to -2%. And next year the economic recovery will be so weak--growth below 1% and the unemployment rate peaking at 10%--that it will still feel like a recession even if we may be technically out of it. So, compared with the bullish consensus that sees positive growth at 2% by the third and fourth quarters of this year and a return to potential growth by 2010, my views are consistently more bearish.

Still, compared with the sharp contraction in U.S. and global growth in the first quarter of this year, the rate of economic contraction will slow down for the U.S. and other advanced economies by year-end. That is only a mild improvement in what is still a severe U-shaped recession, with a very weak and tentative recovery by 2010.

The stock market has predicted six out of the last zero economic recoveries. For the last 18 months, we've had six bear market rallies, and at the beginning of each one of these suckers' rallies the delusional perma-bulls repeated that this was the beginning of a bull market rally. And for six times these perma-bulls were totally wrong as the rally fizzled and new lows were reached. And for six times I correctly pointed out that these were bear market rallies.

But such perma-bulls have no shame in showing up over and over again on CNBC and talking up their books and being proved wrong over and over again. As I have never been a "perma-bear," in spite of the "Dr. Doom" nickname, I will be the first one to call the bottom of this severe recession and the bottom of the bear market when I see sustained evidence of robust and consistent economic recovery.

I see the latest rally as another bear market rally, as over the next few months, the news--macro news, earnings news, financial news, corporate default news, financial firms insolvency news and so on--will be worse than expected by the consensus. Look how wobbly the stock market was on Monday when the expected news that the Big Three are in Big Trouble led to a 3% to 4% market fall. Do you listen to Tim Geithner, who says that some banks need "large amounts of assistance," and who is now pushing--like Bernanke--for fast-track Congressional approval of a law that will allow the takeover of systemically important financial institutions and bank holding companies? This market recovery has still very shaky legs, and it will continue to lurch until the U.S. and global economic recovery does occur and is more robust and sustained.

The global economic contraction is still very severe: In the Eurozone and Japan there is no evidence of "green shoots" or positive second derivatives; and in the U.S. and China such evidence is still very, very weak. So investors and markets are way ahead of actual improvements in economic data. And the idea that stock prices are forward-looking and bottom out six to nine months before the end of a recession is incorrect.

First, we've already had six bear market rallies and, despite the "prediction" of stock prices, not a single economic recovery. Second, in 2001 a short and shallow eight-month recession was over by November, but stock prices kept falling for another 16 months until March 2003. This time around, the recession will be of at least 24 months duration--three times as long and five times as deep, in terms of GDP contraction, as the one in 2001. This time the deflationary forces are global, not just in the U.S. and Japan. This time we have the worst financial and banking crisis since the Great Depression, while in 2001 there was no banking crisis. This time we've got the worst housing recession since the Great Depression, with home prices still bound to fall another 15% to 20% for a cumulative fall of 40% to 45%. This time corporate default rates on junk bonds are predicted by Moody's to peak at 20%, not the 13% of the previous recession.

Thus, the idea that a weak U.S. and global recovery with massive deflationary pressures and a severe financial crisis and massive corporate defaults will lead to a robust recovery of earnings and a sharp persistent bull-market rally in equities is totally far-fetched.

As I have argued before, the risk of an L-shaped near-depression will be significantly reduced if aggressive policy actions were undertaken. That risk of near-depression is now lower than it was three months ago--but not gone altogether--as policy makers in the U.S. and globally have finally gotten religion and taken out all their policy bazookas, missiles, rockets and artillery and started to use them.

These more aggressive and front-loaded policies include massive monetary easing and zero policy rates; quantitative easing; unconventional monetary and credit actions to reduce the spread between market rates and government bond yields; significant--if in some cases still insufficient--fiscal policy stimulus; policies to restore credit growth and reduce the credit crunch; policies to clean up toxic assets of banks; policies to recapitalize banks and take over the insolvent ones; policies to reduce the tsunami of foreclosures and reduce the debt servicing and debt burden of distressed households; policies to support emerging market economies under stress; and policies of appropriate regulatory forbearance to restore credit and liquidity in financial market.

These policies will not restore positive growth in advanced economies until next year, but will reduce the rate of economic contraction to a more moderate pace by the end of 2009. Thus, as I noted earlier, the rate of the advanced economies' economic contraction will slow down from the peak contraction of this year's first quarter (-6%) to a more modest contraction in the fourth quarter (-2%) and a very weak positive growth (0% to 1% in U.S., Europe and Japan) in 2010 with still sharply rising unemployment rates peaking at 10% in these advanced economies. This will be an improvement compared with the fourth quarter of 2008 and first quarter of the 2009 collapse of global economic activity, but still a much more bearish scenario than the bullish case of positive and high (2%) growth by the third and fourth quarters and return to potential growth by 2010.

So the road ahead is still very, very bumpy. The worst for the degree of economic contraction may be behind us by the second or third quarter of this year, but there will not be any robust and sustained recovery as the damage of the financial and real excesses of the last few years will have lasting effects on actual and potential growth for the U.S. and global economies. And the burden of trillions of dollars of additional fiscal deficits and debts in advanced and emerging economies will be a drag on actual and potential growth for years to come.

But if aggressive policy actions are accelerated after the G-20 meeting in London, one can expect a slow and painful process of mending the U.S. and global economy that will still take a long time. That will, however, allow us to see the light at the end of the tunnel some time next year, first for the real economies, next for financial markets and finally for the financial system and its wounded institutions

Slowdown in Economic Growth in GDP Growth in 2009

In Q4 2008, economy expanded 5.3%, slowest pace since Q4 2003, (Q3 2008: 7.6%, Q2 2008: 7.9%) due to contracting manufacturing (-0.2%), agriculture (-2.2%) and exports

Growth forecasts revised down: 2008: 7.8% (IMF), 7.4% (ADB), RBI: 7.5%; Govt: 7.1%, i-banks: 5.6-8%, RGE Monitor: 6%. Forecast for 2009: 7.1% (govt); 5.1% (IMF); 7% (ADB); I-banks: 4.3-6.3%, RGE Monitor: 5%

Since December 2008 Govt and central bank have been giving fiscal stimulus package aimed at non-bank financial corporations, infrastructure, housing, SMEs, exporters; reducing taxes, easing credit access. Since September 2008: Central bank continues inject liquidity, ease capital inflows and cut policy rates. Further rate cuts and credit easing, and fiscal stimulus expected in 2009 though close to 10% of GDP of fiscal deficit will limit the latter

Growth, capital expenditure and consumer spending in 2007/08 was fueled by global growth and liquidity boom, capital inflows and asset bubbles. But global credit crunch, risk aversion and Foreign Institutional Investor (FII) sell-off have severely affected domestic liquidity for banks, stock market and real estate correction, bank lending to finance consumer spending and investment. Domestic slowdown will aggravate asset market correction during 2009 and put bank performance at risk

Consumers hit by high inflation, tight lending standards, job losses, slower income growth, negative wealth effect from correction in stock and home prices

Recent boom in capital expenditure (37% of GDP) is being hit as manufacturing and industrial production are declining since December 2008; several investment projects are being canceled/postponed due to capital crunch; corporate earnings have also taken a hit since Q4 2008 on slowing domestic demand, tighter credit, volatile stock market and drying Initial Public Offerings (IPOs), global liquidity crunch that is limiting access to external finance (major source of capital); corporate savings will run down domestic savings while government runs a deficit

External Sector: Exports have been contracting since late-2008 since major export markets (US and EU) are in recession and high growth markets (Asia, Middle-East) are slowing. Financial sector woes in the West are affecting IT service exports. Vulnerability to trade and current account deficits (expected to exceed 10% and 3% of GDP respectively) on high oil import bill of 2008, contracting exports, slowing remittances from the West and Gulf. These factors pose risk to the current account while slowdown in capital inflows (FII outflow, easing FDI on risk aversion, global liquidity crunch) poses risk of financing external deficit. These factors have pushed rupee to a 5-yr low

Food and oil subsidies, pre-election and fiscal stimulus spending are expected to push fiscal deficit to 10% of GDP in FY ending Mar 2009 and over 9% in FY ending Mar 2010; S&P and Fitch have cut ratings to 'negative'. This may raise govt debt issues to over US$70 billion in 2009 raise interest rate and depress bond prices,putting risk of financing twin deficits at a time when capital inflows are already drying up

What others are saying

JP Morgan: Targeted 7.1% GDP growth in 2009 by government would not achievable, since fiscal packages in December 2008 and January 2009 and monetary easing in late-December 2008 need 6 or 9 months to show up in the growth rate

IMF: Significant downside risks to GDP growth in 2008 (6.3%) and 2009 (5.3%) but government measures could be an upside though constrained by the fiscal deficit and large public debt, thereby increasing dependence on monetary policy

Citi: While trend in auto, cement, steel and retail sales in February 2008 expected to be positive, real estate, freight and port traffic as well as march data are still worrisome; hard to achieve 7.1% growth in 2009 

EIU: 7.1% growth in 2009 targeted by government is overly optimistic; Global deleveraging and risk aversion will limit the availability of financing for investment and consumption, which will increase the pain on industrial and services sectors; Despite of struggling by govt. to create enough jobs for labor force, number of unemployed workers would increase (500,000 jobs were lost in Oct-Dec-08); It will play the important role for election in April-09  

Deloitte: India economy has been impacted by four different ways; weak manufacturing, falling exports, revenues of software companies and closing credit tap in banking sector

Morgan Stanley: Recent growth trend above sustainable levels was driven by capital inflows. Stimulus measures won't prevent a deeper slowdown in domestic demand, cost of capital, industrial production and exports

Kotak: India in a two-year cyclical slowdown with slowing saving and investment, but this phase may be short and shallow unless the global economy deteriorates more than expected. But new capacities in mining coming on-stream, large consumption stimulus, high domestic saving base will help sustain reasonable growth. The sharp deterioration in activity Q4 2008 may have got arrested in Jan 2009; fiscal package too small to sustain the current investment and growth cycle and is constrained by fiscal deficit; monetary stimulus will help reduce interest rates but pace of rate cuts will ease

Goldman Sachs :growth will reach a trough in Apr-Jun-09  before recovering by end-FY10; Stimulus would support specific sectors amid the downturn but not enough to reduce impact of slowdown on aggregate demand

WEF: Dependence on capital flows to finance current a/c deficit is a risk; global crisis could cause sharp capital outflows, fall in share and asset prices, reduction in availability of finance

 

Please do leave your comments. Would like to hear from your perspective also.