Not a good "job"!

The unemployment report released by US Bureau of Labor Statistics(BLS) is so depressing and worrisome. The unemployment rate was unchanged at 10% in December from a month earlier. Non-farm employment dropped by 85,000 in December. I have been hearing many economists and government officials saying that the recession is over and the US economy would grow in the coming quarters. It is true that the recession in the US is technically over and the economy would grow in the coming quarters. But my question is how sustainable is that growth? When we look at the BLS report, we have some very clear indications. First of all, 10% unemployment rate is very very high (total number of persons unemployed currently = 15.3 million and this is without taking into account the persons who are unemployed but have given up searching for work). There was a decrease in unemployment rate from 10.2% to 10% in November from October and it remains unchanged in December. But when you look at the individual sectors, I find this marginal decline in unemployment rate with zero-significance. Infact the 10% unemployment rate worries me to the same extent as I was worried during the peak of the recession.

I looked at the past 5 months trend (from August to December) and I can see that the core sectors that include construction, manufacturing, wholesale trade, goods-producing sector (durable and non-durable), leisure and hospitality have all shown steady decline in terms of employment (there are some minor up ticks in these sectors here and there but on the basis of a straight August-December comparison we have had a steady decline in employment and an increase in unemployment). In December alone, construction has shed further 53,000 jobs; manufacturing-27,000 jobs and wholesale trade-18,000 jobs. The increase in employment was seen in temporary help services and health care. But here, as the name suggests it is only temporary and the increase in the number of physicians reported in health-care only adds to the scare. If it is true that more number of people are needed in health-care (read supply) then can we assume here that the demand is high (which means more sick people) and can we further assume that a measurable percentage of the increase in sickness in individuals is due to recession? If my assumption is true then this doesn't look good for the sick individuals and the for the country.

So to put it bluntly, all the stimulus programs introduced by the US government have simply not had the effects that were expected. Yes it decreased the unemployment rate but did NOT create efficient and sustainable jobs. The US government rightly spent $700 billion in rescuing the troubled banks but at the same time committed the biggest mistake of not nationalizing the banks. The government has poured billions of dollars of taxpayers' money and is now begging (should i say literally) the banks to lend to businesses in need. Not just businesses but the country as a whole needs that to. But in the meantime, the banks have gone to the old system of speculative-trading in the secondary markets. And with the global economic system currently being so volatile, so fragile and so awash in liquidity, it only makes it easier for these banks to speculate and earn profits. And this speculation only leads up to higher commodity prices thereby causing a further slack in consumer-demand. At the same time, these banks, saved by taxpayers money, are caught in a fever of suspicion to lend. If only the government had nationalized these bailed-out banks after their rescue, we would have had an efficient lending to businesses that would have then added jobs and created demand. The government stimulus then working in parallel would have helped to boost further demand. Some might argue and actually did argue that nationalization of banks would mean socialism, but pouring hundreds of billions of dollars of taxpayer money into private banks that played with the taxpayer money, on the principle of, as Dr.Paul Krugman would say, heads bankers win, tails taxpayers lose, without nationalizing the banks is the ugly side of capitalism. Some good capitalists would call this "bad capitalism". (Please note: I am NOT a socialist but I would like to be a good capitalist). And I am not talking about permanent nationalization of these banks but I would have preferred a short-term nationalization of these banks till we reached a point of sustainable recovery.

But let's look ahead and see what could/should be done. Currently we face a difficult situation of a shortage in supply of credit and an all-time low aggregate demand. And the current situation looks like demand must be created before supply for which jobs need to be created by the government. Programs like the "short-term work" program introduced by Germany need to be considered. Special loan programs to small and medium enterprises (SME), direct incentives to American export industries etc are some of the other things that need be considered. I might prefer the federal government to borrow from private banks and then set-up something like a federal-loan institution which would lend money directly at subsidized interest rates to businesses and consumers. This might increase the willingness of the banks to lend and at the same time we can have a check on the money supply in the system without printing anymore money or atleast printing less money. I have not looked/studied all the pros and cons of the above suggested programs but the stimulus program that will be inevitably extended should be something on this line and thinking. Some economists keep saying that if the "jobs" part is not taken care of then the economy might face another recession (double-dip). I don't know if I would agree that a double-dip recession is likely but if the jobs part is not taken care of then there might be an inevitable and prolonged slump in the economy.
So far, it's not been a good job by the US government but let's hope they the get the job done, WITH PERFECTION!

India's food crisis (Part-2)

This post is a continuation of my first article, "India's food crisis", since the situation in terms of food price inflation has evolved further and needs a newer look on the case. The food price inflation has reached 19.83% in the 12 months to the December 19, 2009. We have to remember that the oil prices were down below normal levels this time last year. So the food price inflation of 19.83% looks very high and considering that this is only a WPI measured inflation, the prices of the food products in the retail market will be much higher. In a country where almost half the population live on marginal incomes this situation is totally unacceptable. But nothing could/should be done on the monetary policy side to control this food price inflation. I agree that it is a genuine concern that this increase in food prices might slip into broader inflation. But we have to keep in mind that this food price inflation is due to a shortage in supply and is sector-specific. The only way to reduce price rise is by increasing supply and the way to increase supply is through imports and offloading some food stocks from the storage. I was assuming that a decent proportion of price rise of food products was contributed by speculation. So I was wondering if imports would increase the price of food products in the retail market above what could be achieved by controlling speculation. But the situation looks like the food price inflation is shooting above acceptable levels of real food price inflation minus speculation. I know that the Government of India was in direct talks with other governments to import essential food items but I am not aware of the results of the actions by the government. In any case, it is time to import food items and offload some amount of food stocks in storage. I have been hearing about the success of winter crops harvest. So a small amount of imports of essential food items along with offloading a measured amount of food stocks from the storage should reduce the food price inflation for few months before we come across the next monsoon season. And if the next monsoon season is a success then the government can offload a further measured amount of food stocks from the storage without importing any further to keep a tight lid on the food prices till we reach the next harvest season. Currently if the import costs are very high then the government might be forced to sell the food products at more-than-expected subsidized rates which may increase the government's deficit. But that's fine, the government must go ahead and import food for the sake of preventing this sector specific inflation from falling into the broader inflation. So yes I think it is time for the government to take some of the above mentioned measures (if they have not started already).

Again, no amount of monetary tightening should be done now to control food price inflation or in the fear to control broader inflation. Again, this is sector specific and is due to shortage in supply and is not because of excess demand or excess liquidity in the system. So all the great personalities talking about exiting monetary stimulus, I kindly urge them to think again.

By the way, considering the benefit of the people of India, I am confused as to why some top government officials OTHER than RBI Governor, Deputy Governors, Prime Minister, Finance Minister and Finance Secretary are even talking about monetary policies. Some are not just talking but are hinting and strongly predicting about monetary policies. Those officials will do a great favor by not talking about monetary policies. I hope they are aware that their on-the-run interviews in the media is unnecessarily hurting the financial markets and I also hope that the Indian media will in the future better know about whom to ask what questions.

Update 1:
Update Date : January 13, 2010
Good News - as per the news on January 13, 2010 the Agriculture Minister of India after a cabinet-level meeting today announced the release of 3 million tons of wheat and rice from storage into open markets. But he said that the Govt. has decided not to import rice.
Well, I am atleast glad that the release of wheat and rice is done. This should ease the price to a considerable level. The enormously high cost of sugar in recent weeks was an area of concern during the meeting and some political problems in one of India's state (which has not processed raw sugar that's imported and is sitting idle in its ports due to local political problems)was quoted as a reason and some measures have been taken to address this issue. I am not going into this political issue now but one thing that I can say is the - it is festival time in many parts of South India. And one of the highlights of this festival is consuming more sugarcane and making sweets at home. So this would have shooted up the prices of sugar. Once the festival ends this week, the demand should go down and I am expecting the sugar prices to come down a little. And the other measures taken by the government should reduce the price of sugar further more. So it looks like we are in a good situation. The food price inflation in December was near 20% and I am expecting it to come down a little in the coming weeks. I will keep this case posted.

Update 2:
Update Date : February 11, 2010
Food-inflation was 17.94% during the week that ended January 30, up from 17.56% in the previous week.

Complaints on Chinese mercantilism? Again? Oh No!

Dr.Paul Krugman, a Nobel prize winning economist and a NYTimes columnist in his recent article (http://www.nytimes.com/2010/01/01/opinion/01krugman.html), talks about how China's policy of not allowing its currency to appreciate is hurting the world markets and the US in particular. He also argues that in any kind of trade confrontation with China there is little to lose for the US. He has some valid arguments that with the interest rates already at an all time low in the US, any kind of slow down in buying American treasury bonds by the Chinese is not going to affect US interest rates in the short term(since the interest rates are already very low and will not be increased at the current economic scenario. Chinese used to do this to keep their currency artificially low against US dollars which benefits Chinese exports). Also, Dr.Krugman argues that the protectionist policies will follow if China doesn't allow its currency to appreciate. Dr. Krugman also says that his back-of-the-envelope calculations show that China's current currency policies will reduce US employment by around 1.4 million jobs in the next couple of years.
I agree with Dr.Krugman that the policy of keeping the Chinese yuan (renminbi) artificially low is affecting many other export markets and I can see that particularly many other developing economies' export markets are severely affected. Say if Chinese yuan appreciated in value, this would facilitate exports from other countries where the currency is naturally low. And when exports from these other markets go up, their currency gains in value (if its floating) and that market will become a market for US exports. Also, with the Chinese yuan's value going up, Chinese consumers will have a better purchasing power and China will be another big US export market. When the exports occur from one market and if that market's purchasing power is kept artificially weak then we are stuck in a one-way road.
But I should also say that I have some disagreements. As I have mentioned in my previous post (China's economy and the Yuan), Chinese economy grows mainly on exports. So, any drastic increase in the value of the Chinese yuan (renminbi) will seriously affect the cycle of money flow in China (refer to my previous post) and will cause huge amount of job loss in China. So we cannot even dream of China appreciating its currency drastically as some in the western counties urge it to.
Also, I disagree with Dr.Krugman's 'don't care' attitude even if China doesn't buy American bonds. America doesn't expect China to buy its bonds just to keep its interest rates low but to fund its budget-deficit every year. If China doesn't buy American treasury bonds then the interest rates in the treasury bonds will surely go up and this will only add up to the budget deficit every year. And if this continues, US government will reach a saturation point and will be forced to cut down on the services that it provides to its people.
And Dr.Krugman's point that he would send a "thank you" note to Chinese if they start selling the dollars is very scary. Did Dr.Krugman forget that the US dollar is the international reserve currency and that major commodities are bought and sold in US dollars in the international markets? The export-oriented manufacturing plants in China will not go anywhere overnight. There will still be a large number of goods that need to be bought from China and this will result in an enormous increase in the input costs for American companies that have setup manufacturing plants in China. This will shoot up the prices (read inflation) of the products bought in US and as a result of this the consumer-demand might become weaker which is already at an all time low. And with the world's economies decoupling itself from the western world more and more day by day, the Chinese manufacturing plants will still be needing enormous amount of oil and other commodities. So, if they sell US dollars then this will result in the value of the US dollar going very low and this in-turn will result in inflation in many parts of the world. With the global economy remaining very fragile, this might even cause stagflation in many countries. The loss that will be incurred through the world economy facing such catastrophic economic scenarios will NOT be offset by a weaker dollar that will help American exports.
Another point to consider is, the US interest rates are near zero and the economy is awash with liquidity. We are already fearing inflation if monetary easing is not cut back at the right time. If dollar falls in value in the international currency markets because of China selling its huge reserves then this might result in inflation in the US economy.
Above all there is already a talk in the global stage about replacing US dollar with some other currency (like Euro) as the international reserve currency in the longer-term( Note: Japan and other East-Asian economies are already talking about a common currency). I agree that US dollar cannot be replaced by any other currency as the international currency now and no country is ready to face the economic disadvantages that this action of replacing US dollar will bring. Particularly this will be very damaging to the US economy. But if the weakness of the US dollar in the international currency markets goes beyond a certain amount then this will result in favor of those who argue to replace the US dollar with some other currency as the international reserve currency (again I am talking in the longer-term). Let's say, for example, if OPEC countries think of selling oil in Euros or other currency then this will be very damaging to US.
So yes China should immediately start to change its economic structure. They have started it well with their response to global economic slowdown. And at some point in time, China has to allow its currency to appreciate in value but we need to wait for some more time till China changes its economic structure. China has already introduced a massive stimulus package and this is driving consumer spending. So we need to give China time to appreciate the value of its currency and this is to the advantage of both China and US. But in the meantime, we must think of how we can assist American exports by introducing some incentives. From China's part, as I mentioned in my previous post (China's economy and the Yuan), investment in vital areas such as rural health and education are needed to move the country from being an export oriented economy to an economy driven by domestic factors.