tag:blogger.com,1999:blog-68235433682135103452024-02-08T05:26:32.685-05:00Global ThoughtsUnknownnoreply@blogger.comBlogger76125tag:blogger.com,1999:blog-6823543368213510345.post-24584088831214351822017-11-02T22:46:00.001-04:002017-11-02T22:50:57.096-04:00House Republicans’ Tax Plan Proposal<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: ".sfuitext"; font-size: 17pt;">The House Republicans unveiled a new tax plan today. At first glance, I thought the plan was decent. At second glance, I thought the tax structures proposed were not bad. But when I looked the third time, I felt that this tax plan, though looks good at a couple of places, is not the plan that is needed for the 21st century. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">While the reduction in the number of income brackets, capping mortgage interest rate deduction at $500,000, capping property tax deduction at $10,000, doubling the standard deduction, increase in the child tax credit - are all very welcome steps in the plan, the overall plan itself fails to put more money in the hands of lower and middle-income people. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">I have a fundamental disagreement in the concept behind which this plan seems to have been devised. This tax plan clearly is built around the principles of supply-side economics. While I have nothing against supply-side economics in particular, that is not where the problems of today’s slow growth in middle-income citizens lie. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">The problem, from the time of the Great Recession in 2008, has been clearly on the demand side. So to address a problem that has to do with low national (even global) aggregate demand, a tax plan based on the principle of demand-side economics should have been followed. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">Yes, demand has picked up a lot from the years immediately after the Great Recession. But the wage growth has been very meager. Why so? Economists are still breaking their heads on this, and there are very many factors for this, some local and some global, but in my opinion, there is undoubtedly a critical factor: pace of demand growth. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">The pace of demand growth has been moderate at best. That moderate pace has prevented companies from aggressive investments, especially on the labor side. Now couple this with companies coming out of over-production in the past years, along with a commodity bust period. Yes, the global labor pool has gone up, which is another critical factor in slow wage growth in advanced economies, but the best way to address that, slow pace of demand growth and wage growth sluggishness is by directly putting more cash in the hands of the poor and middle-income people. And that is best done by revamping the tax structure around the principles of demand-side economics rather than supply-side, which the current proposal seems to be based of. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">Now what do I mean by all this as it relates to the current proposal? Well, to begin with, I am not in favor of cutting the corporate tax rate to 20% from the current 35%. My friends have been very persuasive in trying to make me understand the positive effects of cutting the corporate tax rate. Among other things, they say that this would increase the “global competitiveness” of American companies, but I am not persuaded. I am yet to see any evidence of American companies not being globally competitive because they have a higher statutory corporate tax (keep in mind: the effective federal tax rate for corporations, after various deductions and loopholes, is not anywhere near 35%. It’s much less than that.) I would instead prefer to expand the earned-income-tax-credit option that would put cash directly in the hands of lower-income people. And whenever you put more cash in the pockets of poor and middle-income people, they tend to spend a big chunk of it, if not all, that goes directly into small, medium and large companies’ revenue buckets. Rather than a trickle-down, this will be a trickle-up economic model, which is what is needed in the 21st century’s globalized world. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">Other than that, I have mixed feelings about the estate tax, so let me put it aside from commenting for now. But I am not glad to see the deductions go away for medical expenses, people over 65, or people who retired on disability. That doesn’t make much sense to me. Also, I am surprised that the tax plan proposal doesn’t address the carried-interest loophole that hedge funds have been using to pay so little in taxes than an average middle-income worker - as a percentage on their respective incomes. The tax plan proposal also doesn’t seem to touch capital gains tax at all - which I think is a mistake, as capital gains tax needs to be reformed to better suit the 21st century investment practices. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">To conclude: at a glance, it looks some good, some bad, but at a closer look, overall, the principle behind the plan is flawed. A different road needs to be taken to reach the desired destination smoothly. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">Reference:</span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;"><a href="https://mobile.nytimes.com/2017/11/02/us/politics/tax-plan-republicans.html?action=click&module=Top%20Stories&pgtype=Homepage">https://mobile.nytimes.com/2017/11/02/us/politics/tax-plan-republicans.html?action=click&module=Top%20Stories&pgtype=Homepage<span style="color: #e4af0a; font-size: 17pt;"></span></a></span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-76652445663700815732017-08-15T01:08:00.000-04:002017-10-01T04:29:48.789-04:00India turns 70! <div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: ".sfuitext"; font-size: 17pt;">Today marks the 70th anniversary of independence for the people of the Republic of India from the British colonial rule.</span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">After 70 long years, filled with famine, wars, drought, terrorism, communal riots, socialism, and forays into globalization, capitalism and budding nationalism, I take a look back at a time period from what was a major turning point in the history of humankind, where more than half a billion people on the Indian subcontinent breathed a combined sigh of relief and a sigh of fear - for the joy of independence they gained from the British empire was equally stitched with a fear of unknown - because for the first time ever in human history, peoples of all known human religions, castes, creed, color, hundreds of languages, cultures, customs, likes, dislikes, priorities, and frankly, unknown number of human feelings were stitched together as ONE nation called "India".</span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">70 years on, and for all the miraculous achievements India has attained, I still see India as a country that has partially succeeded and terribly failed. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">70 years on, India, which was richer than China and South Korea on a per capita basis in the 1960s and 1970s is poorer than those countries today. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">70 years on, corruption is still rife, well alive and glorious in all aspects of Indian life.</span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">70 years on, malnutrition and disease could be seen in every street corner. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">70 years on, India still struggles to find peace with the country with which it shares common history -- Pakistan.</span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">70 years on, India still struggles to find peace in the border with its other gigantic neighbor -- China.</span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">70 years on, Nepal, another neighbor hates India more today than ever in its history. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">70 years on, Sri Lanka, for all its atrocious racism that it has encouraged in its society, has never been so less fearful, or less concerned about India and its power.</span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">70 years on, India, which was the light for poorer African nations in the global stage, is the dimmest ever today. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">70 years on, chronic illiteracy, broken infrastructure, gross inequality in access to opportunities fills the streets and hearts of Indians.</span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">So is there is no hope? No, there is! For it is this country that prides itself in its millennia old slogan of </span><span style="font-family: KohinoorDevanagari-Regular; font-size: 17pt;">वसुधैव</span><span style="font-family: ".sfuitext"; font-size: 17pt;"> </span><span style="font-family: KohinoorDevanagari-Regular; font-size: 17pt;">कुटुम्बकम्</span><span style="font-family: ".sfuitext"; font-size: 17pt;"> (Sanskrit for: One world, one family). </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">And it is this country where cultures clash to uphold a very universal human principle of </span><span style="font-family: "tamil sangam mn"; font-size: 17pt;">யாதும்</span><span style="font-family: ".sfuitext"; font-size: 17pt;"> </span><span style="font-family: "tamil sangam mn"; font-size: 17pt;">ஊரே</span><span style="font-family: ".sfuitext"; font-size: 17pt;"> </span><span style="font-family: "tamil sangam mn"; font-size: 17pt;">யாவரும்</span><span style="font-family: ".sfuitext"; font-size: 17pt;"> </span><span style="font-family: "tamil sangam mn"; font-size: 17pt;">கேளிர்</span><span style="font-family: ".sfuitext"; font-size: 17pt;"> (Tamil for: Every town in this world is my town; every citizen of this world is my relative). </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">And it is in this land where a physically weak, but morally strong Gujarati, who asked Indians of all religions and cultures to die in non-violence and never kill in violence, even during the height of oppression, is hailed as the "Father of the nation".</span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">And it is in this land, where not a single incidence of persecution of Jews was ever reported to have to taken place in its entire history. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">And it is in this land, where logic goes out of the window, leaving everyone scratching their heads to find a definition for "entrepreneurs". Are they people with skills and ideas? Or are they just otherwise called Indians? </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">And it is in this land, of almost 80% Hindus, electing an Italian catholic woman for the top most office in the country, only for her to voluntarily give way for a Sikh man to assume the office. An office he was sworn in by a Muslim President. </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">And it is in this land, where the very national flag holds the sacred colors of Hindus (saffron) and Muslims (green) living in peace together (white), while upholding the Buddhist principles of dharma (the wheel). </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">And it is in this land, where when the tricolor flag is hoisted proudly across the nation today, more than half the Indian population, who don't understand a word of the national anthem, that was written by a Bengali, in Bengali, and translated peacefully into Hindi, will sing it with patriotic fervor and with a deep sense of belonging. Though almost half the population might not understand the meaning in the anthem, they do understand one thing deeply: that the spirit that they hold inside them transcends boundaries and holds humanity together. </span></div>
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<span style="color: #e4af0a; font-family: ".sfuitext"; font-size: 17pt;"><a href="https://en.m.wikipedia.org/wiki/Philostratus">Philostratus</a></span><span style="font-family: ".sfuitext"; font-size: 17pt;">, in his book <a href="https://en.m.wikipedia.org/wiki/Life_of_Apollonius_of_Tyana"><span style="color: #e4af0a; font-size: 17pt;">Life of Apollonius of Tyana</span></a>, written in 2nd century AD, recognized the experience of <a href="https://en.m.wikipedia.org/wiki/Apollonius_of_Tyana"><span style="color: #e4af0a; font-size: 17pt;">Apollonius </span></a>in India, and he wrote Apollonius describing: </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">In India I found a race of mortals living upon the Earth, but not adhering to it. Inhabiting cities, but not being fixed to them, possessing everything but possessed by nothing.</span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">And that India, and that Indian spirit is still alive and well! And that gives me hope! </span></div>
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<span style="font-family: ".sfuitext"; font-size: 17pt;">Happy Independence Day to all Indian brothers and sisters :)</span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-79814203993866603772017-01-05T00:25:00.001-05:002017-01-05T00:25:38.014-05:00India's Supreme Court rulings<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="color: #1f497d; font-family: "verdana" , sans-serif; font-size: 15px;">Recently, there have been a couple of rulings from India’s apex court that should trouble or atleast make every Indian citizen ponder on the effects of these rulings. Before I say anything, I must admit that I have tremendous respect for the Supreme Court of India, a court whose rulings in the past have inspired ethical judgments not just in India but outside its borders too. That being said, I am sad to say that some of their recent rulings have caused a concern as to whether they are going beyond their powers and jurisdiction and functioning with a parental touch rather than as the dispenser of justice and upholder of the constitution in a country of more than a billion individuals.</span><br />
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<span style="color: #1f497d;">The first ruling, in hearing a petition filed by an individual, by a single judge in the apex court, mandating cinema theatre owners all across the country to play the national anthem before the movie starts and mandating the movie-goers to stand when the national anthem is played with the theatre doors closed (unlocked) is frankly a ridiculous ruling. The ruling, among others, read – </span><i style="color: #1f497d;">“Be it stated, the time has come, the citizens of the country realize that they live in a nation and are duty bound to show respect to the national anthem,”</i><span style="color: #1f497d;">. Now, frankly, this is a mockery of intelligence and spirit of the citizens of the country. As far as I know, there is no law that mandates this, nor is there a violation of any fundamental right enshrined in the constitution when a theatre doesn’t play the national anthem. For me, personally, this issue goes beyond that – the idea that the apex court of the country thought that it was necessary to instill patriotism, through whatever means it may be, on its citizens, is an issue of serious concern to me. Because anytime we talk about “patriotism”, it borders on “nationalism”. And to me, nationalism is the enemy of humanity. We have seen repeatedly in history that whenever the concept of nationalism is trumped up, it leads to a violation of individual rights – which is what I believe is happening here too. By ordering when to play the national anthem and how its citizens should respond to it, the Supreme Court of India has strayed too far away from its powers and authority, and frankly, has behaved in a dictatorial way.</span></div>
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<span style="color: #1f497d;">The other ruling that had come out just this week, by a panel of seven judges in the apex court, with four of them ruling, on the basis of the secular nature of the Indian constitution, to ban all political parties and persons seeking to occupy a public office from using religion, race, caste and language to seek votes during election campaigns, is an issue that I invite all Indian citizens to ponder carefully. On the surface, this ruling must look like something we all should welcome. After all, we dream for a secular society where religious, caste and linguistic based lines are erased and people unite as humans who care for each other and live an ethical life. But sadly, that is still a dream, and the reality is far different. And hence, unfortunately, in this case, I might have to side with the other three judges in the panel who voted against this ruling by citing that this ruling would violate the free speech right enshrined in the constitution. And I agree with them. Many social progresses in the country have come by mobilizing people on these grounds. Yes, I do feel awkward to say this because I am well aware of the fact that many social backwardness have also resulted in the country by mobilizing people on these grounds, but that’s not to say that we could take away a tool that can be used and has been used to make social progress and correct historic injustices in the country.</span></div>
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<span style="color: #1f497d;">If such a ruling existed in the 1950s and 1960s, then the people of the state of Tamil Nadu might have not been able to understand the negative implications of the attempt to impose the Hindi language on them by the central government during that time. Politicians and political parties mobilized people on linguistic basis to stop the domestic colonial attempts of giving unwarranted extra-importance to Hindi in a state that has spoken Tamil for millennia. Or take this case - The man who is credited to writing the secular Indian constitution, Dr. Ambedkar, had raised genuine issues during his time surrounding the plight of Dalits, the lowest-caste society or the “untouchables”, a caste group to which he himself belonged. If he contested today for election by mobilizing people of his caste on some of the injustices that still seem to occur to Dalits, would he disbarred from contesting or would his election be disqualified by the Supreme Court of India? And today, in Tamil Nadu and many other parts of the country, there are genuine social issues and problems faced by the “Brahmin” or the upper-caste society members. So would it be wrong for someone from that society to contest for office and speak publicly about those problems or promise to correct them if he/she is elected to the office? Would the Supreme Court void his/her election for speaking the truth?</span></div>
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<span style="color: #1f497d;">Whether we like it or not, India is a country that is rooted in diversity – diversity in religion, race, caste, language etc. And what unites all these people is the ability and the inherent culture to speak freely, debate freely, and in the process evolve into a continuously tolerant and accepting society by embracing all these differences and diversity. Curtailing that free speech, however good that intention may be, will not give us anything other than piled up anger and frustration. Allowing to speak freely, though at times may annoy and even harm us, will ultimately be more beneficial to all individuals living in the society. And lastly, the Supreme Court can leave this matter to the intelligence of the people of this country rather than taking it in their own hands, because it is in that country, where religion-based and caste-based parties are repeatedly defeated in elections. One just has to look at the last election, both at the state and at the national level, in the state of Tamil Nadu, where even in constituencies where their religion or caste were the majority, the parties and politicians who campaigned on them, were handsomely defeated. They won less than 2% of the votes in some instances and less than 10% of the seats in total. What more evidence do you need, honorable judges of the Supreme Court? Let the free-speaking and free-thinking people take up this matter. Leave it to them!</span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-19175670501231443882016-12-30T09:46:00.000-05:002016-12-30T09:46:52.684-05:00What the!!!! 'Terror' tax!!?? Really!!??<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">One of the weirdest news headlines I came across today was – “France raises ‘terror tax’ to support victims of attacks”. The Associated Press news article further read – “<i>French citizens will contribute an extra 1.60 euros ($1.67) on their property insurance policies to help finance a fund for victims of the extremist attacks that have recently hit the country</i>.</span><span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #351c75; font-family: verdana, sans-serif; font-size: 15px;">” (</span><a data-saferedirecturl="https://www.google.com/url?hl=en&q=https://www.yahoo.com/news/france-raises-terror-tax-support-150757323.html&source=gmail&ust=1483194370405000&usg=AFQjCNH8cvBQ_M5l7kPuRXmhENtlL1B_cw" href="https://www.yahoo.com/news/france-raises-terror-tax-support-150757323.html" style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1155cc; font-family: verdana, sans-serif; font-size: 15px;" target="_blank">here is the link to the article</a><span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #351c75; font-family: verdana, sans-serif; font-size: 15px;">). I mean, I don’t think I have to write a blog post on how stupid this sounds. If anything, it is the responsibility of the government to prevent terror attacks on its citizens. Failing to do so should result in holding the government accountable and not in punishment for the citizens who have entrusted the government to keep them safe from such attacks. Moreover, how can a government raise such a tax that sounds and looks like a permanent or long term policy? Is this like France acknowledging – oh, we are going to have attacks every year from now on, so let’s raise taxes and setup a fund to pay the victims on a regular basis? Sigh! Frankly, it is disgusting! Instead, how about every time a terrorist attack happens in France, a thousand euros is automatically deducted from the monthly pay check of all federal lawmakers in that country and that money goes into the fund that helps the victims? </span><br />
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-47728673991117799852016-12-08T23:41:00.000-05:002016-12-10T18:55:38.225-05:00India's cash ban: A royal intention, a reckless move<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #1f497d; font-family: "verdana" , sans-serif; font-size: 15px;">As many who follow international news would know by now, the Indian government recently banned all 500 rupee and 1000 rupee notes that were in circulation (these notes constituted 86% of the total cash that was in circulation in the economy). I had been trying to not comment on this for sometime because there are clearly pros and cons to this – and I was waiting to see which will outweigh the other. And to be frank, I am still waiting to see how this plays out, but in the meantime, I just couldn’t stop myself from commenting on what seems to be, in my opinion, a grand move with goddamn repurcussions for the most honest, hard working people in the country, who frankly built that country despite the government and not because of it.</span></div>
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<span style="color: #1f497d; font-family: "verdana" , sans-serif;">First of all, let’s take the pros of this sudden action by the central (federal) government. India is one of the most corrupt countries in the world. Period. No ifs. No buts. And this action of banning or making the 500 and 1000 rupee notes invalid has basically made all that corrupt money to become worthless – well, atleast the ones that were held as cash. Putting aside the fine points of the economic arguments aside for a minute, this is a huge positive to the quality of life for the Indians in the long run – because all the corrupt money (or illegally obtained money) that was in the economy was the root cause of various law & order issues – including growth of land mafia, gangsters related to political parties and so many more illegal activities across the country. And to make things worse, these illegal activities were becoming a business where younger generation Indians found a way to make money rather than confront it. So in other words, all this corrupt money was changing the culture of the country itself. So rooting out this gives a fresh opening to make things better in a country that has so high potential with a billion plus individuals. </span></div>
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<span style="color: #1f497d; font-family: "verdana" , sans-serif;">But what are the cons? Well, consider this: how would it be if in order to confront an illegal activity going on in a house in the street, the entire street is destroyed? That is how this sudden policy action seems to be. And in that same street where the illegal activity was taking place, poor farmers were residing, migrant construction workers who buy their lunch with the money they earned that morning were residing, rural women entrepreneurs who learnt a skill through a cash based micro-finance loan and were giving their best to escape poverty were residing, older generation of grandparents who thought that the most responsible thing they did for their future generation was saving and hoarding cash that they earned so hard throughout their life were residing, children whose parents have never even seen the gates of a school but were ambitious enough to get a school or college degree through a loan or their parents savings were residing, patients who have saved every paise (penny) their entire life in order to finally have their life-saving surgery were residing, small business owners who have risen through decades despite the government policies and not because of them were residing, and so many other innocent, hardworking, wonderful people were residing. In other words, more than 90% of India was residing in the same street.</span></div>
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<span style="color: #1f497d; font-family: "verdana" , sans-serif;">Why did the government had to do such a drastic move? Well, they provided two reasons and I don’t buy both of them. Here they are:</span></div>
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<span style="font-family: "verdana" , sans-serif;"><span style="color: #1f497d;">1.<span style="line-height: normal;"> </span></span><i><span style="color: #1f497d;">National Security concerns due to the prevalence of fake/counterfeit currency flooded in by foreign countries (a.k.a Pakistan) to destabilize India:</span></i><span style="color: #1f497d;"> Well, I am not a national security expert and let us assume (and most likely) this is true. But, common sense says, this amount, if anything, has to be so minimal relative to the overall huge Indian economy and the cash that was in circulation that it doesn’t warrant destroying the entire street (like I mentioned above). Moreover, fake currency doesn’t cross borders itself. Someone is bringing it in. So a responsible government would try to identify the source through which the counterfeit currency travels and would work on preventing it instead of…again, what is it? – that’s right! – destroying the entire street.</span></span></div>
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<span style="font-family: "verdana" , sans-serif;"><i><span style="color: #1f497d;">2.<span style="font-style: normal; line-height: normal;"> </span></span></i><i><span style="color: #1f497d;">Unearthing black money: </span></i><span style="color: #1f497d;">So the money that was legally or illegally earned but haven’t been reported and paid taxes on is called black money. Again, it is legally or illegally. Considering just the legally earned portion for now, for some reason, in a country like India, the officials fail to understand the concept that black money is not fake money. When we pay taxes, the government collects it as revenue and spends it back in the economy. When we don’t pay taxes, the individuals who have been hoarding that cash spend it back in the economy. Was that clear? In both ways, the money comes back to the economy. Now, I strongly believe we all should pay taxes so that we can build a safer and equitable society that covers all sections of the population. But in a country like India, where governments have either been inefficient or corrupt since independence, people have accustomed to under-reporting their income or have accustomed to not understanding the benefits of paying taxes. And this is 99% India. I re-iterate and I am not exaggerating – this is 99% India. So, in a country where tax revenues have been slowly going up every year, tax-base widened every year through gradual policy changes (like increasing the bond paper value on real estate transactions, mandatory income tax reporting on gold purchases above a certain amount at the time of purchase, or on other expensive transactions, or bringing more and more sectors into formal category through globalization and opening up to foreign investments), why on earth, in the name of “I know better, so I want to spend your money”, would the government disrupt and…..what is it again? right, right – destroy the entire street where more than 90% of Indians live?<i></i></span></span></div>
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<span style="color: #1f497d; font-family: "verdana" , sans-serif;">So as good as the intentions are, as bad are the repercussions of such a drastic move in a country where billionaires and below-poverty-liners live side by side. At a time when tax revenues were going up, fiscal deficit was coming down, global crude oil prices down, gold imports shrinking, tax base widening, rupee being one of the weakest currencies in Asia (second weakest after the Malaysian Ringgit), and foreign investors once again eyeing and salivating to pour money into the country, why on earth would the central government decide to make such a bold, irrational move is beyond me. I really, really don’t understand because the timing of this move is terrible. Well wait, not just the timing, but the move itself seems to be terrible – like reaching for a fantasy in a country where people die in hunger because they didn’t get to work in the fields that week. </span><br />
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<span style="color: #1f497d; font-family: "verdana" , sans-serif;">But now that this disastrous move has been done, what next? Well, it all depends on what kind of fiscal policies the government comes up with? And the fiscal policy I would like to see and recommend is a tax holiday for a significant amount of time for all income below 50 lakh rupees (approximately $ 80,000) annually. And a moderate tax on the next 50 lakh earned. Income beyond that could be taxed at regular rates. With all the extra revenue that the government has obtained with the unearthed black money, this shouldn’t be a problem for the government to do. But it is extremely important for people to start generating and accumulating wealth again (legally). Without accumulation of wealth, because of this drastic move, the psychological damage that will be incurred by the sudden reduction in the monetary value of all currently held wealth will significantly dent demand growth for years to come. Without demand growth, local and foreign investments will slow – thereby resulting in further rupee weakness and inflation – which will once again hurt the poorest of the poor much and will suffocate them beyond what they can bear. The middle class will also shrink significantly while the rich will start to park and grow their money abroad. So a major policy, this time not just a bold one, but also a rational one, is urgently needed on the fiscal front. And I sincerely hope that the government uses tax-holiday as that fiscal weapon instead of government spending. There is never a time in today’s world where a government can better spend people’s money than people themselves. Governments can only facilitate growth, but ultimately growth itself has to come from people. </span></div>
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<span style="color: #1f497d; font-family: "verdana" , sans-serif;">The government has been royal in their intentions, but reckless in their moves. It’s time for the government to correct that mistake – by first acknowledging the problem and the work before it, and stop being cocky, and build the street back up again! </span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-25253753130785590452016-12-05T21:29:00.000-05:002016-12-06T09:00:41.299-05:00A daughter to two, a mother to millions<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="color: #1f497d; font-family: "verdana" , sans-serif; font-size: 15px;">Today marks an end of an era in the politics of the great state of Tamil Nadu in India. Jayalalithaa Jayaram (or more popularly called as ‘Amma’ (Mother) by the millions in that state), a leader of a major political party, and the current chief minister of Tamil Nadu has passed away at the age of 68 following a cardiac arrest. When I heard the news this afternoon, there were no mixed feelings. Instead, I had just one feeling – a feeling of sadness. Or more appropriately, a feeling of loss.</span><br />
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<span style="color: #1f497d;">I don’t associate myself with any political party in any part of the world and I frankly am not a fan of any politician. And when it comes to Indian politics, it can be written in stone that <i>almost</i> every politician in India is corrupt in one form or the other. Jayalalithaa was not an exception. I have lived under her administration in Tamil Nadu and things were not always clean (though under these circumstances one cannot say for sure if anything directly relates to her. She was convicted of corruption in some court cases, acquitted in many, and acquitted in few through appeals and some cases and appeals still pending before the courts). That being said, one also cannot deny the fact that she has been a force – of some good and some bad – in the lives of nearly 70 million Tamils who live in that state. She entered politics in early 1980s and has administered that state for nearly 15 years in four different terms (sworn 5 times as Chief Minister (akin to a Governor in the United States)).</span></div>
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<span style="color: #1f497d;">Of the nearly 70 million people in Tamil Nadu, there will not be a single person who wasn’t affected by her or influenced by her. Affected – by the various policies she put forth during the many years of her administration; Influenced – by the courage, perseverance, grit and political calculation she displayed over the course of her lifetime. </span></div>
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<span style="color: #1f497d;">For all the court cases before her, and for all the judgments against her, people continued to elect her to represent them as the top elected official of the state – as recently as 2016 when she beat the anti-incumbency wave and rode to electoral victory for a second consecutive term in the state (the only politician in the state to have done that in 30+ years). She had a mass following. She was looked upon with awe and inspiration by her followers, and with fear by people who stood opposite to her. Even her arch political enemies have at times praised her courage and boldness with which she carried on her government. </span></div>
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<span style="color: #1f497d;">This is not to say that I liked everything about her. In fact, I hated so much about her. Corruption was still rife in the society and government under her administration. Work and progress in the state was slow at times because of the iron grip she had on all sections of the government. The ministers who worked under her were terrified of her. So terrified that they would literally fall at her feet and get her blessings when they see her. It was frankly disgusting to watch. But at the same time, the same iron grip quality of her is the quality that maintained law and order in the state far better than many other administrations. The courage she displayed was the quality that made her make bold political calculations where today 37 seats in the Indian parliament, the second largest by a single party in the whole of India, are being held by her party. And this came at a time when the nation was swept by the ‘Modi’ wave (when Mr. Modi became the prime minister of India). The grit that seemed like an inborn quality of her was the quality that made her daringly take neighboring state governments of Kerala and Karnataka to courts to make sure that the people of Tamil Nadu get their fair share of water from various water and dam treaties. The boldness that radiated from her like a light from the sun is the quality that made her the strongest voice of the time against the plight of the innocent Tamil civilian population in Srilanka at the height of the final civil war there.</span></div>
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<span style="color: #1f497d;">Yes, she had her flaws. She was no more than a shrewd politician. Every policy she put forth had an electoral calculation in her mind. But that’s not to say that many of her policies – though politically calculated they might be – hadn't actually helped the people who needed help the most. Take the ‘Amma canteen’ policy for example that she implemented few years back. On one hand, it was a huge waste of tax payers’ money because it provided subsidized meals to all people of Tamil Nadu in various canteens setup across the state. But on the other, in a state where millions go hungry everyday, it was a Godsend. This policy literally eliminated hunger in the state. </span></div>
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<span style="color: #1f497d;">Or take the fact that under her administration, Tamil Nadu, which was an electricity deficit state, turned into a surplus state. Or the fact that in 2016, under her administration, Tamil Nadu exceeded the ‘Renewable Purchase Obligation’ target from the central government, and was looking for ways to sell surplus wind power to other states where they haven’t met the requirements. At a time of rising nationalism in India, she pushed against the ‘Sanskrit week’ initiative by the central government, and strongly voiced against the central government directive that called for the compulsory use of Hindi in twitter by all central government officials - a group that included officials from Tamil Nadu and other non-Hindi speaking regions. </span></div>
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<span style="color: #1f497d;">And when many people and frankly many leaders across the country were busy trying to (or not) understand the details and complexities behind the bills like the anti-corruption ‘Lokpal’ bill, she displayed her brilliance by calling for an exclusion of the office of the Prime Minister in the Lokpal bill, even when she was in the opposition to the then prime minister's party, citing reasons of dangers involved in foreign powers using such a national law to undermine the office of the Prime Minister at critical times. Or when the entire country stood behind the recently passed Goods and Services tax bill, that completely revamped India’s age-old tax system, she displayed her courage and brilliance by being the sole voice in opposing some fine sections of the bill – by citing the disadvantages and potential loss of revenue and state autonomy in fiscal policies that she considered her state, which she rightly pointed out as a ‘producer’ or ‘manufacturing state’, would incur due to the fact that Tamil Nadu consumes less than what it manufactures. And as much as her political life was filled with complaints of corruption and what-not, it was equally filled with many such brilliant endeavors. </span></div>
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<span style="color: #1f497d;">Jayalalithaa was born to an actress, she herself was an actress, never married, spoke six languages, was a topper in her school, well-read, a lady of immense knowledge on various state and global matters, a ‘lioness’ to her opponents, an ‘Iron Lady’ to her supporters, ‘Amma’ to her followers, and a stateswoman to many people, including me, who saw her objectively within the Indian context. Given the times, it is a huge loss to Tamil Nadu and frankly to India itself. </span></div>
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<span style="color: #1f497d;">She will be missed. May her soul rest in peace. </span></div>
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<span style="color: #1f497d;">Further references:</span></div>
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<span style="color: #1f497d;">1.<span style="font-family: "times new roman"; font-size: 7pt; line-height: normal;"> </span></span><span style="color: #1f497d;"><a data-saferedirecturl="https://www.google.com/url?hl=en&q=http://indianexpress.com/article/entertainment/regional/jayalalithaa-passes-away-tamil-nadu-chief-minister-biography-see-pics-3059429/&source=gmail&ust=1481077350790000&usg=AFQjCNHuhXmP4qAciuB2Cgvuez8-4r2Plg" href="http://indianexpress.com/article/entertainment/regional/jayalalithaa-passes-away-tamil-nadu-chief-minister-biography-see-pics-3059429/" style="color: #1155cc;" target="_blank">http://indianexpress.com/artic<wbr></wbr>le/entertainment/regional/jaya<wbr></wbr>lalithaa-passes-away-tamil-<wbr></wbr>nadu-chief-minister-biography-<wbr></wbr>see-pics-3059429/</a></span><br />
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<span style="color: #1f497d;">2.<span style="font-family: "times new roman"; font-size: 7pt; line-height: normal;"> </span></span><span style="color: #1f497d;"><a data-saferedirecturl="https://www.google.com/url?hl=en&q=http://indianexpress.com/article/india/jayalalithaa-dead-heart-attack-amma-tamil-nadu-4412542/&source=gmail&ust=1481077350790000&usg=AFQjCNFIxY81n1scFi_yoGHkhDDd0rvKpA" href="http://indianexpress.com/article/india/jayalalithaa-dead-heart-attack-amma-tamil-nadu-4412542/" style="color: #1155cc;" target="_blank">http://indianexpress.com/artic<wbr></wbr>le/india/jayalalithaa-dead-hea<wbr></wbr>rt-attack-amma-tamil-nadu-4412<wbr></wbr>542/</a></span><br />
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-13381492575349814832016-06-17T22:11:00.000-04:002016-06-17T22:11:03.606-04:00The Charge of the Light Brigade<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-size: large;"><span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif;">When I see the world’s central banks misdiagnosing the root causes of the anemic global growth today and treat the problem with a heavy dose of poisonous zero interest rate policy (ZIRP) and negative interest rate policy (NIRP), with a heavy bias toward increasing the dosage at all costs if the not-so-sick patient (global economy) doesn’t recover as they expect it to, I just couldn’t help myself from remembering the narrative poem written by Lord Alfred Tennyson in 1854, which I had to memorize and write in my English class exam when I was in the middle school –</span></span><br />
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<span style="font-size: large;"><span style="color: #1f497d;">From Wikipedia: Lord Alfred “Tennyson's poem written on December 2, 1854, published December 9, 1854 in <i>The Examiner</i>, praises the Brigade, "<i>When can their glory fade? O the wild charge they made!</i>", while mourning the appalling futility of the charge: "<i>Not tho' the soldier knew / Some one had blunder'd.</i></span>”</span></div>
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<span style="font-size: large;"><span style="background-color: #f9f9f9; color: #1f497d; font-family: Arial, sans-serif; line-height: 16.100000381469727px;">Half a league, half a league, Half a league onward, (<i>anemic</i> <i>global</i> <i>growth</i>)</span><span style="color: #1f497d; font-family: Arial, sans-serif; line-height: 16.100000381469727px;"><br /><span style="background-color: #f9f9f9; background-position: initial initial; background-repeat: initial initial;">All in the valley of Death (<i>global deflation</i>)</span><br /><span style="background-color: #f9f9f9; background-position: initial initial; background-repeat: initial initial;"> Rode the six hundred. (<i>global middle class</i>)</span><br /><span style="background-color: #f9f9f9; background-position: initial initial; background-repeat: initial initial;">"Forward, the Light Brigade!</span><br /><span style="background-color: #f9f9f9; background-position: initial initial; background-repeat: initial initial;">"Charge for the guns!" he said: (<i>global central banks</i>)</span><br /><span style="background-color: #f9f9f9; background-position: initial initial; background-repeat: initial initial;">Into the valley of Death</span><br /><span style="background-color: #f9f9f9; background-position: initial initial; background-repeat: initial initial;"> Rode the six hundred.</span></span></span></div>
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<span style="font-size: large;"><span style="background-color: #f9f9f9; color: #1f497d; font-family: Arial, sans-serif; line-height: 16.100000381469727px;">When can their glory fade?</span><span style="color: #1f497d; font-family: Arial, sans-serif; line-height: 16.100000381469727px;"><br /><span style="background-color: #f9f9f9; background-position: initial initial; background-repeat: initial initial;">O the wild charge they made!</span><br /><span style="background-color: #f9f9f9; background-position: initial initial; background-repeat: initial initial;"> All the world wondered.</span><br /><span style="background-color: #f9f9f9; background-position: initial initial; background-repeat: initial initial;">Honour the charge they made,</span><br /><span style="background-color: #f9f9f9; background-position: initial initial; background-repeat: initial initial;">Honour the Light Brigade,</span><br /><span style="background-color: #f9f9f9; background-position: initial initial; background-repeat: initial initial;"> Noble six hundred.</span></span><span style="color: #1f497d;"></span></span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-73746508393775609572016-06-10T21:16:00.000-04:002016-06-11T12:55:42.849-04:00To my friends in Britain...<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="color: #1f497d; font-family: "verdana" , sans-serif; font-size: 15px;">My dear British friends,</span><br />
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<span style="color: #1f497d;">I am writing this blog post sitting thousands of miles away from your beautiful island at a time of increased uncertainty concerning your decision on whether or not you would like to stay in the European Union. I am not a European. And I am not British. But that doesn’t matter – in the sense that the world is so interconnected today that everything has a ripple effect. And those ripples go back and forth. It affects us all. Positively or negatively. We are living in a world of increased financial uncertainty. We all fell together in 2008 during the onset of the recession. And nothing should stop us from getting up and marching together as we build a financially secure world for every good human being on this planet. </span></div>
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<span style="color: #1f497d;">Over the weekend, I met an elderly couple from Scotland. I asked them how they would vote in the upcoming referendum. They said that they will vote to leave the EU. And when I asked them why, they gave me two reasons – 1. Homelessness is on the rise in Aberdeen and other places in Scotland. 2. They want to use this opportunity to send a message to the elites, bankers and financial markets about how angry and disappointed they are with the status quo. I felt their genuine frustration. And there was validity in the concerns that they expressed. The National Health Services (NHS) is under stress; the housing markets are over-priced due to the influx of foreign money; public services are under stress due to a surge in immigrants. </span></div>
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<span style="color: #1f497d;">And here I am telling you the same thing that I tried to tell them - that leaving the EU will not really solve any of these problems. Voting to leave will not affect the elites or the bankers. The elites and the bankers make money when the world is great; they also make money when the world is not great. But you leaving the EU will affect the rest of us all. I respect that it is your sovereignty. And it is your decision. But undoubtedly, a Brexit will cause ripple effects that will be far reaching - ripples that will only be exacerbated and intensified by the very financial markets that have let you down in the past…and that will let us down again. </span></div>
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<span style="color: #1f497d;">There is too much uncertainty here. No one really knows how the day after the Brexit will look like. But I cannot imagine that some of you think that you would be able to get full benefits of the single EU market even without being in the EU and by not allowing the free movement of people. Though your argument that EU will need the British market as much as the British need the EU market might be true, think for a second why would the EU members accept any proposal that will benefit the U.K more by staying out of the EU than in the EU? Why would the EU volunteer itself for its disintegration? - because that is what will happen if the U.K. gets sweet deals after deciding to opt out of the EU. Every other member of the EU would then be tempted to ask for such sweet deals. So however economically punishing it might be, EU countries, especially Germany and France will have every motive to bear their economic pain in order to stop that temptation by causing economic pain to the U.K. Doesn’t matter how severe that pain is, but it will undoubtedly hurt. And when it hurts, who do you think it will hurt more? I am afraid it is not the elites. Nor is it the bankers. But the very working people of your country. That will have economic consequences that will send ripples across your shores – the ripples that will tear into the heart of the global financial system and can jeopardize any progress we have made since the financial crisis caused by the bankers and the financial engineers. </span></div>
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<span style="color: #1f497d;">In my humble opinion, considering how the world’s future is shaping out to be, the U.K. would be stronger in the EU than outside the EU. In a world where China is five times the size of your economy and India’s total output is almost the same as yours, size matters - the size of the nation; and the size of the market. For all its flaws, EU is still a formidable single market. It is the world’s largest free trade zone. It is a market which everyone wants a share of – China, India, the US and all other nations. It is a market which produces some of the best and brightest talent and technology. </span></div>
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<span style="color: #1f497d;"><span style="font-family: "verdana" , sans-serif;">I want a German car; a French designer clothing; and may be a Nobel prize in Sweden</span><span style="font-family: "wingdings";"> :)</span><span style="font-family: "verdana" , sans-serif;"></span></span><span style="color: #1f497d; font-family: "verdana" , sans-serif;">. But to even dream of success, I still would want to be able to access the London financial services. So please Britain, stay in the EU. As an English speaking country, we want you as the gateway into Europe and all that excellent opportunities that Europe provides. In this small planet, we are all in this together…and let us continue to be in this together. Let our theme be better integration and not disintegration. </span></div>
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<span style="color: #1f497d;">Sincerely,</span></div>
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<span style="color: #1f497d;">A common citizen, a Commonwealth citizen, a global citizen. </span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-84436201705798901592016-06-08T22:34:00.000-04:002016-06-08T22:34:09.490-04:00The Fed is making a grave mistake! ... again!<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">For the last two years, the Federal Reserve officials are all over the place. Now their jumps across the walls have suddenly become very intense starting from this year. One month, there are some officials of the central bank talking in one direction. Within a matter of weeks, they do an about-turn and speak in the other direction (i.e. hawkish vs. dovish).</span><br />
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<span style="color: #1f497d;">And with regard to the fed funds rates, the Fed should have raised them by 25 basis points in March. But they missed it. Not only did they miss it, but they started speaking in extreme dovish voice. And they claimed that none of their fundamental analysis of the economy has changed and that they were merely being cautious. That is baloney. Last September, when they should have raised the rates, they feared the stock market crash in China and held back, only to move further in December to raise rates. And then in January, a devaluation of renminbi along with Japan going into negative interest rate territory caused financial market volatility. They again got scared. This is getting tiresome. If they are going to expect a smooth financial market without any volatility before they can raise rates, then they are never going to get that. </span></div>
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<span style="color: #1f497d;">Then one might ask – why the hurry in raising rates? We don’t even have enough inflation, right? Well, because the global economy is no more about just maintaining price stability in goods and services. It is also about maintaining price stability in assets. And more importantly, it is also about preventing misallocation of capital across assets. And when you keep interest rates at zero for so long, it seriously messes up with the loan-to-savings ratio and savings-to-investments ratio. The deposits in banks are going down globally. And productive loans (where a loan is used to create a good or service) has been going down as well and instead is used in share buy-backs and refinancing/servicing debt.</span></div>
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<span style="color: #1f497d;">It’s not even just about all the above. We have actually come to a point where monetary policy is becoming ineffective by the day. In the US, for example, cheaper interest rates have already made many Americans to buy houses and cars. Beyond that, however cheap the interest rate on a loan is, what do you expect them to buy with a loan? Furniture? Well they won’t! Why would they? Their incomes haven’t gone up; they don’t get any interest on any form of savings anymore. So without that additional income, why would they take a loan and buy something that will not appreciate in value in the future? This is scaring the heck out of them regarding their future financial stability (a.k.a future financial obligations). This in turn makes people want to save for their future rather than spend. And they are saving it in the form of hard cash. And the experts wonder why people aren’t spending? And they wonder why we have a deflation scenario? And they try to fight this deflation by further lowering rates (even negative in some countries). </span></div>
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<span style="color: #1f497d;">Folks – there is a floor to how low you can take the interest rates? Up to a point in the downward direction, a lower interest rate is inflationary/reflationary. Beyond that point, it triggers disinflation/deflation. </span></div>
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<span style="color: #1f497d;">The other argument that lower interest rates will help corporations to borrow and invest is another baloney. Corporations have a lot of cash. The only reason that they aren’t spending is because they don’t see enough demand – or more importantly, they don’t see a reason to invest when there is such a skewed monetary and fiscal policy that is deflationary rather than inflationary (especially when the demand is looked from the consumer side).</span></div>
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<span style="color: #1f497d;">Sorry to say, but the current Federal Reserve members seem so weak to me with regards to taking the tough decision. They are following the financial markets in whatever direction they take them. This is totally skewed. An interest rate increase at this point when the US economy is doing relatively well will bring back many sections of the economy that has been built over decades and that are totally out of whack now. For example: the insurance and pension sectors are suffering from the low interest rates; seniors are suffering from the low interest rates; savers are suffering from the low interest rates; banks are suffering from the low interest rates. Misallocation in search of higher yields is becoming a common phenomenon all across the globe. And with every misallocation, the risk of a bubble burst or crash in the future increases. </span></div>
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<span style="color: #1f497d;">In my view, an equilibrium fed funds rate in not one common point, but rather a range. And few 25 basis point increases this year should not impede the mortgage loan growth or vehicle loan growth or corporate debt servicing. The effects on this front should be minimal and manageable. Instead, majority of the poor and middle-income consumers who aren’t in the financial markets but are instead dependent on fixed income with an anticipated reward for savings will be benefited directly through additional income through their fixed income investments, including any savings. And these are the people we depend upon for demand growth. Once we have more demand, then we should see more corporate spending in the form of capital investments – which is what is lacking today and is the main reason for the weak growth worldwide.</span></div>
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<span style="color: #1f497d;">So you want to fight weak inflation or deflation? – increase the fed funds rate. On the fiscal front – address the excessive debt with a long term strategy and reform taxes to put more money in the hands of the poor and middle income people. Without these two changes, we will just keep chugging along with a very weak growth worldwide and wondering why people aren’t spending. Extreme low interest rates = deflation (beyond a point). Negative interest rates = Deflation (immediately). </span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-59390039282873466172016-06-06T20:09:00.000-04:002016-06-06T20:09:14.910-04:00In Brexit, a diamond for India<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">No, I don’t mean the Koh-i-Noor diamond that was siphoned away from India by the British during the colonial era. Or as some recent commentators have pointed out, it was not taken but rather given to the British under the Treaty of Lahore after the end of the second Anglo-Sikh war. For the record, I personally don’t see much of a difference between the words “taken” and “given” given the colonial history of those times. And I personally think that this diamond in some ways represents the ugly truths of the European colonialism of the mercantilist era – and therefore it is better left to stay in the crown of the British queen where it currently resides.</span><span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;"> </span><br />
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<span style="color: #1f497d;">The diamond I am instead talking about is – is the opportunity that would fall at the doorstep of India if Britain decides to leave the European Union (EU). From the 1990s onwards, globalization has drastically changed the global economic landscape. The size of a market matters more today than at any other point in time in history. And sadly, if Britain decides to leave the EU and thereby pull itself out from the larger EU market, then there will be a need for Britain to find larger markets for its goods and services. Britain will undoubtedly try to maintain the same market share in its exports to the EU. But my opinion is that the EU countries will give it a tough time before agreeing to any sort of trade agreement – especially given the fact that Britain wants to limit immigration from the EU countries – which is one of the main reasons why a Brexit referendum is being held in the first place.</span></div>
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<span style="color: #1f497d;">In that case, a U.K-India trade agreement of some sort will definitely start to interest policy makers on both sides. From the U.K standpoint, the British will be under pressure to show that even after a Brexit, they can seal important bilateral trade agreements – agreements that will provide British goods and services access to bigger markets like that of India. From the Indian standpoint, it is much easier to seal a deal with a single country in Europe than with the EU bloc as a whole. For example, a free trade agreement is already in the discussion phase between EU and India for almost ten years now. And they are still not able to seal the deal because of various regulations and restrictions – mainly coming from the EU side. Traditionally, EU governments have stricter regulations and stringent requirements and when one has to negotiate with all those EU countries as a bloc, then the negotiations are tougher for a developing country like India – which desperately needs both the EU market and the EU capital. </span></div>
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<span style="color: #1f497d;">But when it comes to U.K, what India would require more is the U.K capital than the market itself. Not to get me wrong, the British market will still be important for India, but given the size of just 60 million people, India’s immediate preference will be to the British capital and technology more so than their market. And given this fact, India will have an upper hand when it comes to trade negotiations with the British. The whole world is currently desperate for access to the Indian market given its enormous size. U.K. would just be one among them. But for the U.K. itself, a concluded trade agreement with a country like India would be absolutely necessary to keep its economy shining – even after leaving the EU. With this being the case, India would be well suited to pull more British capital into India, along with obtaining guarantees for more high-skilled immigration of Indians into Britain in any trade agreement. And in my opinion, the British will come along for such a deal. </span></div>
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<span style="color: #1f497d;">One of the problems that is currently a hot issue in Britain is the flow of low-skilled immigrants from the EU countries (mainly eastern European countries) into Britain – and the benefits and welfare that is given to them. But in India’s case, India will be looking to boost high-skilled immigration of Indians into Britain and not low-skilled. And these immigrants are generally not welfare recipients. Initially, Britain will try to resist any kind of immigration. But I believe, if a Brexit happens, and if Britain initiates a trade agreement dialogue with India, India should use that opportunity to hold steady in asking for more high skilled immigration from India to Britain. India has the upper hand here and it shouldn’t miss if such an opportunity presents.</span></div>
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<span style="color: #1f497d;">Similarly, Britain might resist some flow of capital into India – especially if the trade agreements involve domestic sourcing or setting up of local manufacturing units. But here too, I believe India has the upper hand. While simultaneously negotiating agreements with EU and the U.K., India can successfully leverage the size of the market it has with the priority to U.K vs EU or vice versa by successfully getting a good end of the deal.</span></div>
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<span style="color: #1f497d;">And that is why I say that there is a diamond for India in the event of a Brexit scenario. Though from a global economic standpoint, I still would like to see Britain in the EU, if in case the British voters decide to leave the EU, then there could be one country that might benefit immensely from such a scenario if played right. And that country could very well be India. </span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-24622445804909234612016-04-17T03:08:00.000-04:002016-04-17T03:08:47.669-04:00The Brexit - from dilemma to damage<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">In one of my recent posts, I had already opined on the Brexit dilemma facing the UK voters and my opinion of it as far as I can see and understand the issue. But in this post, I am going to opine from the other side – that is, how important it is for the rest of the world (and that includes Britain in my opinion) for the UK to stay in the European Union.</span><br />
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<span style="color: #1f497d;">First of all, as I have already stated in my previous post, this Brexit referendum comes at a worse time for the global economy. And one of the worse spots of the global economy today is Europe. Their recovery from the Great Recession is still very much incomplete and a British exit from the EU would make matters much worse. To put things in perspective, the unemployment rate in countries like Spain is still in double digits. When one cannot blame the UK for that, this is what would happen if the British voters decide to leave the EU – The British pound would weaken drastically due to a fear of the future status of trade between the UK and EU (which is a significant portion of UK’s overall trade). While British voters might not be too worried about this – as there seems to be a common consensus that some kind of trade agreement could be worked with the EU, we still do not know the extent of damage it can do the British economy over the short and long run. </span></div>
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<span style="color: #1f497d;">But more importantly, from the EU side – this could drastically weaken the euro; and significantly increase the yield-premiums of some euro-area government bonds – especially those of countries like Spain and Portugal where this is a high level of double-digit unemployment. This will once again trigger the worse memories of sovereign-debt crisis and fear of sovereign defaults. Not only that, this could once again trigger the question of the longevity of the entire EU project and the euro currency.</span></div>
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<span style="color: #1f497d;">And today, I see this Brexit scenario as a greater threat to the stability of the global economy than China, oil, deflation or negative interest rates. I think it is important for the other EU leaders to state clearly how their relationship with UK would be if Britain were to decide to leave the EU. This fantasy that Britain can just leave the EU and work out all agreements to their benefit – even while threatening the stability of the entire European Union project and the euro currency – needs to addressed (and probably killed) in clear and unequivocal terms by the rest of the EU countries. </span></div>
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<span style="color: #1f497d;">Because of the anger that is simmering from weak global growth, there is a general trend going around the world today by the public to requite against the (career) politicians by voting against whatever those politicians say or propose. While this anger is clearly understandable and might be justified in many cases, it is also vital to not just vote against something or someone, but also to clearly understand what you are for! Becoming emotional and deciding to vote against something by voting for something even more terrible will ultimately act against all of us. </span></div>
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<span style="color: #1f497d;">And while we all respect the sovereignty of the British voters to decide about their future path, it is also important that we speak out against the dangers that are posed to us by an adverse scenario that might emerge from a British exit from the European Union. And I think it is about time for the world leaders to speak up too!</span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-1685815573162441892016-03-10T22:38:00.000-05:002016-03-10T22:38:58.634-05:00European "Corporate" Bank<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">I will keep this post short - I welcome today’s decision by Mario Draghi, the chief of the European Central Bank (ECB), to pump some of the new quantitative easing (QE) money into high quality corporate bonds. In general, I wouldn’t have favored this because this has a potential to set a wrong precedent and exacerbate complaints of crony-capitalism, but given the fact that there aren’t much new debt to buy from euro area governments, and the fact that no amount of bond-buying makes some of these governments to utilize that money to stimulate demand by efficient fiscal policies, and given another fact that many of these governments are waiting for private demand to catch up without any public investments or increase in public debt (in other words, they just don’t believe in Keynesian economic model), it makes sense for the ECB to pump money directly into the private sector by buying some of their non-bank corporate debt.</span><br />
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<span style="color: #1f497d;">Now, how and who decides which company’s bonds to buy, how much to buy, when to buy etc..are still not very clear. And questions like if there will be a preference for one sector over another still exist (atleast in my mind, as I am yet to see all the details). But as a general theme, and given the precarious situation they are in, I welcome the ECB’s decision to start pumping QE money directly into the region’s corporate bond market.</span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-78516721667653444162016-03-06T01:25:00.000-05:002016-03-06T01:25:43.293-05:00Europe! I am exasperated! <div dir="ltr" style="text-align: left;" trbidi="on">
<span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">From the onset of the Great Recession in 2008, one continent exasperates me more than any other in their effort to come out of the slump. And that is Europe. (And I am mainly referring to the </span><span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">EU countries). In the last 7 years, they have made a series of policy blunders and have handled things in a terrible way. First, many of their major banks were so badly regulated that worsened the crisis that began with the</span><span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;"> US and European banks. Then there was the sovereign debt crisis of some of the countries – Portugal, Ireland, Greece and Spain – that rocked the world and worsened the global recession with a lot of uncertainty. Then there was the mishandling of the debt crisis and the bailout of Greece – which led to riots in the streets of Athens and extreme economic hardship. Then there was the austerity program introduced by many major countries during the depth of the recession (meaning, at the wrong time). In essence, rather than working to generate internal demand, they were trying to free ride on the demand generated from the stimulus programs of China, the </span><span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">US and the rest of the world (U.K. was the only country to have realized the mistake of introducing austerity programs at the wrong time and reversed it after it being a failure).</span><br />
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<span style="color: #1f497d;">Then the European Central Bank (ECB) increased interest rates prematurely, only to reverse them later and in fact take them in the opposite direction – and they have been going in the opposite direction ever since – to the level that they are in the negative interest rate territory right now. And like many mistakes in the past which they realized them well after the fact, I am afraid that they will realize the mistake of taking benchmark interest rates into negative territory after the negative effects start to show. Let’s hope that doesn’t happen, but let’s wait and see how it goes.</span></div>
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<span style="color: #1f497d;">Oh and then the repeat of the Greek debt crisis last year – with almost Greece coming to the brink of getting out or being pushed out of the Euro currency. And there is still no light at the end of the tunnel for this crisis. </span></div>
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<span style="color: #1f497d;">And now, there is the Brexit dilemma – the question of if Britain should leave the European Union - coming at a time when there is so much uncertainty already in the European economies.</span></div>
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<span style="color: #1f497d;">I am a great admirer of Europe and their strenuous efforts to form an “ever closer union”. I love their social climate, many of their economic policies and love them for being a strong defender of individual freedoms and common sense in today’s complex global geopolitical systems. But I also have to say that their policy mismanagement during the past 7 years, in both on the monetary and fiscal fronts, have caused the global economic growth dearly by constantly being a source of uncertainty in the global economic sphere, rather than being a guiding light for global growth and prosperity.</span></div>
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<span style="color: #1f497d;">I hope that many of the European countries will make better fiscal policies that will give more weightage to internal demand rather than looking outside to stimulate their growth. In the process, if they could also address some of their debt burdens, that will be a huge contribution to the global economic growth by eliminating the constant economic uncertainty that arises from that region. </span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-12122839627720153362016-02-22T23:30:00.000-05:002016-02-22T23:30:09.975-05:00The 'Brexit' dilemma <div dir="ltr" style="text-align: left;" trbidi="on">
<span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">Before I write anything on this topic, let me just tell that I am not an expert on this particular scenario that is unfolding in Britain and the European Union (EU). Should Britain exit the European Union? – is what all this is about. There is a referendum to be held on June 23</span><sup style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif;">rd</sup><span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">, during which the British people will decide whether or not to stay in the European Union.</span><br />
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<span style="color: #1f497d;">Like I said, I haven’t read into the minute details surrounding this question, but as far as I have read on this topic and analyzed some data points, it looks like there is validity on both sides – those who say Britain should exit the EU; and those who say that Britain should stay in the EU.</span></div>
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<span style="color: #1f497d;">But when I looked at some of the arguments from both sides, to me it looked like Britain would be better off staying in the EU and making some of the changes to the whole EU policies and format by working from within the system, rather than just opting out of EU altogether.</span></div>
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<span style="color: #1f497d;">For example, Britain is rightly concerned that some of the immigration rules of the EU favor EU citizens a little too much over the non-EU citizens, and that Britain would be able to tap into diverse non-EU talent if not for the strict quotas and restrictions of the EU immigration policy. As a very wealthy country, it makes perfect sense today for Britain to have full independence over its immigration policy and the kind of benefits that it would give to the immigrants. But at the same time, over the long run, a single common market cannot be achieved without free movement of labor. So it would be wise for Britain to influence immigration policies, welfare policies to immigrants and other such policies by staying inside the EU, rather than outside it.</span></div>
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<span style="color: #1f497d;">But why stay inside and suffer trying to influence? Good question! And here is one of the reasons – As in any developed economy, Britain will start to become an aging population within the next half century. It will need immigrants. While I understand that Britain would like to have full control over its immigration policies, it should also be noted that EU has 28 member states with more than 500 million people. Over the course of the long run, the free movement of these 500 million people within the EU will bring natural benefits to labor shortages and capital investments. It has to be noted here that out of total British exports, 45% of the goods and services are exported to the European Union. And more than a million Britons already live in the EU countries outside of the UK.</span></div>
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<span style="color: #1f497d;">The free movement of people, goods and services across these 28 countries (and possibly more in the future) will create a dynamic economy that will outweigh the control and independence that Britain is trying to seek for itself by exiting the EU. Staying in the EU also brings a common platform of regulations for businesses to move goods across, deliver services and tap into the available labor pool that exists within the massive 500 million people. Here too, some British businesses have preferred to exit the EU because of the historical fact that Britain regulates its businesses much less than the EU. But here again, my view is that Britain can influence and streamline the regulations by staying within the EU, rather than completely opt out of it.</span></div>
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<span style="color: #1f497d;">Some British businesses could be living in a fantasy that they could use the arbitrage in regulations, and profit more from it than their EU counterparts. But if they think that they can get away with such a simple strategy, then I am afraid that they are terribly mistaken. In my view, EU countries will still stress that British businesses follow and comply with EU regulations if they want to trade with EU. And in fact, I wouldn’t be surprised if the rules become a little stricter for a non-EU country in that case. But it should also be noted that a majority of the British businesses would like to stay in the EU – and they have openly advocated for it.</span></div>
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<span style="color: #1f497d;">All the discussions about implementing a free trade deal with the EU, independent control over its immigration and regulatory policies – all that seem to be things that could be worked out by staying inside the EU – after all, what is good for Britain should also be good for Germany, France, Poland and Slovakia on a macro level - and for many other such countries.</span></div>
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<span style="color: #1f497d;">I would be willing to change my opinion if I see more data that supports a Brexit from the EU, but so far what I have seen all point to the wisdom of staying in the EU – by looking at the EU membership benefits over the long run. And not to mention that the potential benefits of an “ever closer union” – both at the monetary front and at the political front – is a dream to be achieved in the future. If and when such a dream is realized to the full extent, it would be unfortunate to see Britain not be a part of that dream.</span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-7673270691852180642016-02-17T21:37:00.000-05:002016-02-17T21:37:05.703-05:00 China, oil, panic and recession….(Part 2)<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">In this post, I am going to opine on another panic-spot in today’s global economy: </span><b style="-webkit-tap-highlight-color: rgba(0, 0, 0, 0); color: #1f497d; font-family: verdana, sans-serif; font-size: 15px;">Oil</b><br />
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<span style="color: #1f497d;">Global crude oil prices have fallen more than 150% within the last year. And this has been a major source of concern throughout the world. People looking from the supply side are frightened at the prospect of supply spinning out of control and reaching levels that could crush many oil-exporting countries and companies – resulting in massive bankruptcies and sovereign defaults – which could then lead straight to banks that are highly exposed to the debt of these countries and companies. </span></div>
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<span style="color: #1f497d;">People looking from the demand side are even more frightened at the thought that the global demand is so weak that oil could plunge to such low price levels within such a short time frame. And then there are people who look from both the supply side and demand side and are equally frightened – especially from the threat of global deflation. </span></div>
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<span style="color: #1f497d;">Now, putting the supply and demand dynamics aside for a minute, I would like to look at this whole situation from a different viewpoint. This collapse in global crude oil price is the single largest wealth and cash transfer, in the order of trillions of dollars, from not-so-productive, not-so-innovative and not-so-creative economies to productive, innovative and creative economies. And that is a HUGE positive for the global economy which will pay off in the longer run.</span></div>
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<span style="color: #1f497d;">For years, a country like India that is quite dynamic, creative and a demographically favored nation has suffered due to high oil prices. It suffered in the form of very high inflation in the last decade – to the point where millions of Indians literally went hungry because of soaring food prices – which was directly linked to soaring global crude oil prices (remember the $130 per barrel oil?). It suffered in the form of its government wasting hundreds of billions of dollars in subsidies and welfare programs to cushion the impact on the poor from sky high inflation. It suffered in the form of massive wealth-inequality. It suffered in the form of reduced demand for global products from these poor and middle-income Indians as all the productivity and income was spent on buying oil and other price-inflated basic necessities. </span></div>
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<span style="color: #1f497d;">But now, this fall in global crude oil prices have managed to reverse, to-an-extent, some of the problems that I outlined above. Billions of dollars of diesel subsidies have now been eliminated. Billions of dollars of losses on transportation of products have now been reversed. Inflation has come down considerably. Poor and middle-income people are rewarded through low diesel and petrol prices at the pump. All this savings has led to (and will lead to) an increase in demand for quality products – like motor-cycles, fans, air-conditioners, healthier food, better education, cars, mobile phones etc. From the government standpoint as well, these savings from diesel-fuel subsidy elimination and reduced welfare programs has given it the room to invest in public infrastructure like highways, rail lines, airports, sanitation infrastructure etc. </span></div>
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<span style="color: #1f497d;">Now compare what I said above to a wealthy oil exporting country like Saudi Arabia – which already has world-class infrastructure and where the population is so low that the many hundreds of billions of dollars of foreign-exchange from high oil prices in the past was just sitting in its coffers without any productive investment. That money mostly ended up as freebies to its people – who were already well-off and were generating less demand for global products. </span></div>
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<span style="color: #1f497d;">The case of India I presented above will also fit the narrative of many other productive/innovative nations – both developing and developed – like China, ASEAN nations, the United States and many European nations. These are also some of the nations that have a larger population with a considerable amount of middle-income people who will directly benefit from these low oil prices – and who will create an increase in demand for global products. </span></div>
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<span style="color: #1f497d;">Now, all this doesn’t mean that I discount the fear that many global investors have today – especially the threat of deflation – which stems primarily from the twin scenarios of oil crash and a slowing Chinese economy. But this threat, in my opinion, is manageable, and in fact, over the medium to long term, I believe the benefits that I outlined above from low crude oil prices will outweigh any negatives we might see today. </span></div>
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<span style="color: #1f497d;">Now, with respect to banks’ exposure to defaulting oil companies and sovereign-defaults (Russia, Brazil and Venezuela come to mind) – that is indeed a real concern, albeit something that can be contained. I don’t think that any of these default scenarios will affect the global economy as a whole and it possibly, in my opinion, will be contained to one particular sector and few possible companies and countries. </span></div>
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<span style="color: #1f497d;">I would urge that many of these oil exporting countries also take this opportunity to diversify their economies – especially Brazil, which has a sizeable population with a tremendous talent-pool. And I think that the G-20 countries should come together sometime this year and co-ordinate some of their fiscal policies. Such a move will once again inspire confidence in the global markets and more importantly, will help abate the fear that exists in the global markets today. And in my opinion, that fear elimination should act as a priority for these G-20 countries now if they want to sail through the current muddy waters of global economy without pushing any of its members down the ocean. Will they do it? – is the billion-dollar question. If they do, they can sail smoothly, and if they don’t, the ride might be a little rough this year, but I still believe that they will sail through and reach the shores. </span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-77364857393049219782016-02-11T21:38:00.000-05:002016-02-11T21:38:13.867-05:00China, oil, panic and recession….(Part 1)<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #1f497d;">The global equity sell-off has been brutal so far in the year 2016. Many global equity indexes have plunged into bear territory. There is enormous panic and fear about a forthcoming global recession. Are we going to have a recession? I don’t know. But I don’t think so. But then, I don’t know. And this is how investors worldwide are feeling right now – they don’t know. This “don’t know” phase is quite a dangerous phase for worldwide capital investments – because companies will be unwilling to commit to major investments if there is uncertainty, especially if there is uncertainty in global asset prices. </span></div>
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<span style="color: #1f497d;">But let’s examine some of the major panic-spots, as I would like to call it, right now:</span></div>
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<b><span style="color: #1f497d;">China</span></b><span style="color: #1f497d;">: Chinese economy is growing slowly. Now, there is a difference between growing slowly vs. no-growth or negative growth. In this case, Chinese economy is still growing, albeit quite slowly and understandably so. Because of this slowdown in the Chinese growth, there is a worldwide re-pricing of many major assets. For example, China consumed almost half of the global iron-ore production in the past decade. Now that China is growing slowly, how much will the fair value of a metric ton of iron ore be? And that question is exactly what is being answered by the markets right now – meaning, there is a strong re-pricing of assets going on globally, particularly of many commodities, based on supply and demand. And many global companies made a classic mistake of over-producing commodities during the boom time without forecasting a slowdown in the demand growth. This along with the often-generated market over-reaction, not to mention the gazillion modern leveraged financial products that have been created in the market, has caused an extreme downward spiral of many commodity prices. But if you wither out the market over-reactions, I believe that some of the slowdown in China will actually be compensated with a slight growth in a handful of other countries like India, Indonesia, South Korea etc. </span></div>
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<span style="color: #1f497d;">Now, with respect to the Chinese retail investors chasing the equities higher without any fundamentals to support them over the last two years – I think this is in the rear-view mirror now. After a more than a 50% plunge in the Chinese stock markets within the last year, the needed correction is almost done. There may be a little more shakeout, but I believe most of the correction on this front with respect to the crowding retail investors has been done already.</span></div>
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<span style="background-color: white; color: #1f497d;">My biggest fear when it comes to China is their banks’ exposure to high risk loans within their domestic economy that could turn into bad debts. While China has massive forex reserves, with almost $2 trillion of them in liquid assets to handle any risk to their money-supply and credit markets, with sufficient capital controls in place, a mere sign of any major trouble to any major Chinese financial institution could have enormous unintended consequences with ripple effects across the globe. It is in this space one has to watch carefully, though the communication from the Chinese authorities has been almost nil, if not incomplete, in this space to re-assure global investors.</span></div>
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<span style="background-color: white; color: #1f497d;">Now with regard to US banks, I don’t think there is much direct exposure on the loan-front to the Chinese economy. So any talk of a US banking crisis due to China is unwarranted.</span></div>
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<span style="color: #1f497d;">The other major concern I have is how the Chinese authorities will manage their currency this year. China cannot steer its economy to its growth target this year without devaluing their currency. How they would devalue their currency is the billion-dollar question? If it is a major one-off devaluation, then there is a high probability that that will cause a jolt to world financial markets; and panic and competitive devaluation could follow, thereby risking global growth. If it is a gradual devaluation over the course of the year, then they might be able to sail through the muddy waters. This is something that we need to wait and see to get a little more data and to understand where exactly they stand with respect to their transformation to a more private retail consumption and services based economy. </span></div>
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<i><span style="color: #1f497d;">I will continue with my discussion on the current status of global crude oil prices and its effects in my next</span></i></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-67982522176664146382016-02-11T21:10:00.000-05:002016-02-11T21:10:10.455-05:00Negative? Nah, nah, Janet!<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #1f497d;">The topic of negative interest rate is back again. The equity markets are getting pounded all across the globe. And the primary reason for this is: Panic! There is enormous investor panic out there about the ability of the global central banks to steer the world economy; about China; about oil; and about nations that rely primarily on commodity exports; and about banks that might have high exposure to some of the bad debts associated with all of the above.</span></div>
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<span style="background-color: white; color: #1f497d;">And what is the one thing that central bankers should avoid doing during this climate? - Causing further panic! But that is exactly what some members of the Federal Reserve have been doing recently. They are succumbing to this investor panic and panicking themselves in some respect. They are worried if they will be blamed if something goes awry. But I also have to give them some leeway as markets, some economists and experts have been pulling them in all directions to do this, do that, say this, say that. And in that course, the words “negative interest rates” have been pulled out, rather forcefully, from the mouths of some members of the Federal Reserve, including its chairwoman Janet Yellen.</span></div>
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<span style="background-color: white; color: #1f497d;">In my opinion, a negative interest rate, or a talk of it, will send the financial markets into a dizzy spin of chaos and panic, if not already - because a negative interest rate will seal the final nail in the credibility-coffin of the Federal Reserve and its ability to steer the US economy without causing another massive recession. Instead, I would suggest that the Fed keep its tongue steady and assure markets that they are in control; and that they would be flexible with regards to the timing of any further interest rate hike. Now, I have to admit that they have been saying that they are flexible, that they are data driven and have tried to assure that the US economy is in solid footing. But my problem is that in the same breath, they also talk of things like negative interest rates – which unnerves global investors – because this tells those investors that there could be something that they don’t know or don’t see that could be lurking behind the shadows of the global economy. And this has caused a flight to safety with all global equity indexes plunging into bear market territory in recent weeks. Ironically, in today’s sentiment driven financial markets, if the Fed panics about the state of the global economy, they will ultimately be blamed as I fear that their panic would be the trigger for the real panic in the real economy.</span></div>
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<span style="color: #1f497d;">Bottom line: The Fed should weed out the noise from the panicking equity markets and communicate with a steady tongue.</span></div>
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<i><span style="color: #1f497d;">In the next post, I will discuss about China, oil and their relationship to the current global panic in equity markets. </span></i></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-63928607286615221662015-12-16T23:38:00.000-05:002015-12-16T23:38:34.729-05:00It happened!<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="color: #351c75; font-family: Trebuchet MS, sans-serif;">The Federal Reserve lifted the federal funds rate by 25 basis points today - the first in almost a decade. Congratulations. Good job. Right decision. </span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-27022523634319398252015-10-14T21:25:00.000-04:002015-10-14T21:25:52.549-04:00Zigzag Fed!<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #1f497d;">I am really starting to doubt the credibility of the members of the Federal Reserve. Every serious policy maker should have known and did know that China was overheating this year, especially their stock markets. And predictably, the Chinese stock markets took a severe hit this year. And everyone should have known that such a hit in the Chinese stock markets would expose the excesses and balance sheet weaknesses in their state-owned enterprises. But all along, the heads at the Federal Reserve kept saying that any slowdown in China will not impact the United States’ economy in a significant way – and thereby, given their “reasonable confidence” in inflation and growth projections are met, they would start the normalization of interest rates starting from this year.</span></div>
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<span style="color: #1f497d;">China took a hit. Emerging markets started showing signs of slowdown as a result. But this shouldn’t impact the US economy in any significant way, right – as per the Fed? But no! It does suddenly. Now the slowdown in China is dragging global growth down. And now that weakness in global growth has started to impact the inflation and growth projections for the US economy – and this is as per the Fed. Wow! I would have expected such a sudden shift in fundamentals from an under-grad student, but not from the world’s most powerful central bankers.</span></div>
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<span style="color: #1f497d;">To make matters worse, different FOMC (Federal Open Market Committee) members come on different TV channels on different days and espouse different policy proposals for the near term monetary policy. Such a confusion and non-alignment in what should have rather been a consensus by now begs one to wonder if the world’s economy is safe with these experts. And by the world’s economy, I literally mean each and every world citizen who has any form of monetary wealth - as the decision by these monetary policy makers has a potential to impact everyone.</span></div>
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<span style="color: #1f497d;">The Fed says that they are data dependent, but no amount of data seems to be enough for them to come to a conclusion or a consensus. If they need the data until a day before they make a decision to increase the fed funds rate by 25 basis points (0.25%) to be in sync with their “reasonably confident” projections, then there is something terribly wrong here. Either the data that they are looking at it is not accurate or their communication skills are terrible.</span></div>
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<span style="color: #1f497d;">The point is – the Fed doesn’t know where the full employment is. They cannot understand why the core inflation hasn’t picked up even after the unemployment has fallen significantly. To an extent, they correctly blame the lack of fiscal policy support from the US Congress, but beyond that, their mystifying zigzag communication (and probably understanding) is very much disconcerting for a participant in the economy like me, who is just an ordinary person looking forward for a stable global financial growth. </span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-46365968475278046192015-10-06T20:39:00.000-04:002015-10-06T20:39:33.896-04:00Infrastructure, not interest rates!<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #1f497d; font-family: verdana, sans-serif; font-size: 12.8px;">In the US, currently, inflation is very low (atleast as per the official data) and has remained and is expected to remain low for a considerable amount of time. And so some, like the Federal Reserve Bank of Minneapolis president Narayana Kocherlakota, have called for further easing of monetary stimulus. They even argue for a negative interest rate in the US, meaning, pushing the federal funds rate below the 0% bound (check this </span><span style="background-color: transparent; font-size: 12.8px;"><span style="color: #1f497d; font-family: verdana, sans-serif;"><a href="http://finance.yahoo.com/news/kocherlakota-says-low-inflation-warrants-153000751.html">link</a>). </span></span><span style="color: #1f497d; font-family: verdana, sans-serif; font-size: 12.8px;">And with all due respect, I have to disagree with this proposal.</span></div>
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<span style="color: #1f497d;">First of all, let’s take a look at the global economy today. The United States’ economy, in all parameters, has considerably rebounded from the recession era lows (not just the stock market – which has had a massive bull run for the past 6 years - but the real mainstream economy itself, has rebounded nicely). In the last two years especially, the job market has been relatively healthy and quite resilient. Consumer spending has grown. Consumer confidence in the economy has grown. Services industry has grown. Manufacturing rebounded nicely last year, but has been quite badly hit this year (due to a stronger dollar and weak global growth – and I will get to it in a minute). All this happened at a zero bound interest rate setting. But was that the only factor that spurred growth? Absolutely not! </span></div>
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<span style="color: #1f497d; font-family: verdana, sans-serif;"><span style="font-size: 12.8px;">As much as the monetary stimulus was effective, an equally important factor for the growth in the last 6 years was China. China’s fiscal stimulus was a boon to a large part of the world. Countries from Australia to Brazil, Thailand to South Africa, Japan to Russia, Indonesia to Switzerland and many more profited from the immense investments that took place in China. These investments not only contributed to higher commodity prices – which made nations like Saudi Arabia immensely rich in forex reserves – but also increased the sheer number of Chinese middle class consumers – whose purchasing power was a boon to many - like the Swiss watch makers and German car makers. So the global economy itself largely benefited from these investments in China, and that had a positive effect on the United States as well. Along with all these positives, a lot of mistakes were done (in terms of quality, size and credit) in these investments in China – for which China is paying a price now. And not just China, the world itself is paying a price now – not because China overdid things, but rather because the world under-did things. In other words, the major factor that is holding back global growth today is a lack of capital investments globally. What China overdid, was underdone by the rest of the nations.</span></span></div>
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<span style="color: #1f497d;">Now this gets us back to the negative interest rate. Do we need it? In my opinion, no! – because the root of this problem goes back to a sudden slowdown in the Chinese economy. Naturally, the Chinese economy overheated and is going through a cooling phase. And along with it, all the nations that benefited from the Chinese super-growth story are going through the slowdown as well. During this phase, China is also, rightly, going through a transformation to shift its economy’s over-reliance on manufacturing, export and investment-led model to a decent reliance on consumer-driven, more services and innovation-based model. But this will take time. As a close observer of global finance, I have no doubt in my mind that China will ultimately be successful in this transition. But I have also no doubt in my mind that China will make a lot of mistakes during this transition phase – mainly due to their inexperience, and not necessarily inability, in managing such a heavy transition in such a massive economy.</span></div>
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<span style="color: #1f497d;">A negative interest rate in US will do nothing more than provide a cushion, to a certain extent only, for currency instability in China and other emerging markets. But barring that small advantage, the negative interest rate will only lift up asset prices globally – which again goes to this thinking of monetary strategists that – if asset prices go up, consumers will feel more confident to spend and this in itself will provide a boost to the economy. But what kind of boost is that? A boost given by artificial demand! I call it “artificial” because the consumers will be forced to make use of their money even when they would have preferred to save. Such a strategy severely distorts the global supply & demand, investments, free markets and asset prices. We followed such a strategy at the depth of the global recession – as a temporary and a priority measure to reboot the economy and create sufficient demand. But we are well past that phase now. Repeating that again and again will only set us up for a long term pain through distorted capital flows and more recessions or setbacks.</span></div>
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<span style="color: #1f497d;">Money is still cheap. That is not the problem here. It’s the application of money that is the problem. Where do we apply the cheap money available? Can we start with worker training /skill training programs? Or can we start with more affordable housing for the poor that would reduce their rent burden? Can we start with putting more money in the hands of families with children that will reduce their child care costs? Or can we resolve the immigration problem that will help lift business investments and thereby demand? Can we start with reducing the health care costs of middle-income and poor families by transferring some of the wasteful agricultural subsidies into the health care and medical research sectors? Or at the very least, can we employ the thousands of unemployed without a college degree by repairing and improving the transportation and sanitation infrastructure?</span></div>
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<span style="color: #1f497d;">It all boils down to two words – “capital investments” or "fiscal stimulus" – not just in US, but also in countries like India, Indonesia, nations in Africa etc. (especially by commodity importing countries - now that commodity prices are so cheap). That is the right kind of stimulus needed now, not negative interest rates, to push the global economic growth to a higher and more sustainable trajectory. </span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-6888426047766647892015-08-25T21:08:00.001-04:002015-10-06T20:45:06.937-04:00Donald Trump – the 1980’s man?<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #1f497d; font-size: 12.8000001907349px;">So I have been following Donald Trump a little and honestly, I liked the way he kicked back everyone who made fun of him as a clown, joker etc. Today, those same people in the media are just frightened of his rise and have toned down their commentary on him – and this was clearly fun and exciting to watch. Almost everyone who joked about him, not in the distant past, are now clearly shocked in the way he has gathered momentum.</span></div>
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<span style="color: #1f497d;">And initially, I liked how Donald Trump was able to identify key issues that have affected the growth of the middle class in the US negatively – particularly, the trade deals with different countries. For example, no one can argue that the Chinese currency wasn’t a factor that affected the US manufacturing industry over the past decade (though I have a slightly different take and don’t blame China completely for every manufacturing job lost in the US – more importantly, I believe it was a direct consequence of the global free trade campaign that was kick-started by the US and other western powers to find and open new markets across the globe – a consequence which has been negative for many, but has been very positive for many many more people across the globe – including many in the US middle class).</span></div>
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<span style="color: #1f497d;">But there is no question that trade over the past decade with a country like China, which pegged/manipulated and today manages the currency through heavy government intervention, has severely distorted the flow of capital across the globe. It has also resulted in sudden seismic changes for which the US middle class and frankly, many middle and lower-income groups across the world were not ready. All this created severe stress in the financial growth of the middle class in the US and many other western countries.</span></div>
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<span style="color: #1f497d;">But all this said, is Donald Trump’s plan to charge a tariff on all products imported from China or for that matter from Mexico – a country which by the way has a cost advantage to manufacture products there purely from a standard of living standpoint (and probably less regulations) – the right way to go?</span></div>
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<span style="color: #1f497d;">Mr. Trump says that he would charge 35% import tariff on all products manufactured in Mexico and shipped into the United States. As wonderful that this might seem, the simple fact is that the World Trade Organization, for which both the US and Mexico are party to, will simply rule this tariff as protectionist and probably as against the accepted rules – thereby opening the window for Mexico and other countries that trade with the US to slap countervailing duties and tariffs on all products shipped from the US – and for that matter, WTO, as far as I know, allows a broad range of options to impose countervailing duties and other protectionist measures that can seriously cripple American industries trying to capture a share of the market in these economically important nations.</span></div>
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<span style="color: #1f497d;">It might be true that in any protectionist or trade war, China, Mexico and other such countries might stand to lose more than the US – but I don’t think we are on a war as to who would lose more, but instead on a co-operation as to how much would each make more. Mr. Trump’s policies are like taking the clock back to the past – when all seemed well and good. But that was also a time when China was still a very poor country, India was not open for business at all and the Euro currency did not exist. And so much more has since happened in the last few decades. Who would have expected that American companies can sell millions of phones, clothes, cars, heavy equipment, technology etc. to a country like India, or a country like China? Who would have expected the capitalist American middle class to more than double their investments within half a decade by investing in the communist China? Who would have expected that American shoes and German cars will be exported to Africans when all that was expected at some point in time in the past was an import of an African disease?</span></div>
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<span style="color: #1f497d;">And who would now expect to reverse all this progress by starting a trade war through protectionist measures such as import tariffs? Not me and not the people who understand the basics of free market economics.</span></div>
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<span style="color: #1f497d;">Obviously, there are heavy distortions in the world economy today – the capital controls and currency manipulation in China is a case in point (or) the delay in opening up of some sectors in India is a another example (or) the presence of a cartel that tries to control and manipulate the prices of oil globally..and I can go on and on. But how we address these issues is as important as these issues itself.</span></div>
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<span style="color: #1f497d;">When Adam Smith, the great free-market Scot, repeatedly advised the British government in the 18<sup>th</sup> century that trade with the East Indies (India) would be much preferable and would in fact create more wealth to Britain than the mercantilist policies followed by the Great Britain in East Indies, the British didn’t seem to listen. Ultimately, the British did create a lot of wealth by expanding their colonization and mercantilist policies, but that came at what cost is a question that should be in everyone’s minds – especially when the same (and probably more) could have been achieved through just using the principles of free market theory and trading with all these “colonies”.</span></div>
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<span style="color: #1f497d;">Likewise, though Mr. Trump identifies the issues in hand correctly, his solutions make one ask – “at what cost?”</span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-54286431669199920852015-08-11T20:48:00.000-04:002015-08-11T20:48:03.621-04:00Devaluation of the Renminbi<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: Verdana, sans-serif;"><span style="color: #1f497d; font-size: 10pt; line-height: 15.3333320617676px;">On April 9</span><sup style="color: #1f497d; line-height: 15.3333320617676px;">th</sup><span style="color: #1f497d; font-size: 10pt; line-height: 15.3333320617676px;"> </span><span style="color: #1f497d; font-size: 10pt; line-height: 15.3333320617676px;">of this year, I wrote in this blog that the Chinese stock markets were going crazy by reaching new peaks every day and that it was better to get out of Chinese stocks. In the months that followed, the stock markets in China took a hit and lost more than 50% of its value – in fact, the declining trend was put to a pause only because of the aggressive interference by the Chinese government (there are still thousands of companies whose trading is yet to resume after the Chinese regulators halted them).</span></span></div>
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<span style="color: #1f497d; font-size: 10pt; line-height: 15.3333320617676px;"><span style="font-family: Verdana, sans-serif;">Today, the Chinese government shocked (or should I say annoyed) the global financial markets by devaluing its currency, Renminbi, by 1.9% against the US dollar and other major currencies. I was not shocked. This move by the Chinese made a lot of people in the US and other parts of the world who trade with China angry complaining that this devaluation was giving an unfair advantage to Chinese exports. It did not make me angry, though I felt a little sense of “missed opportunity”.</span></span></div>
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<span style="color: #1f497d; font-size: 10pt; line-height: 15.3333320617676px;"><span style="font-family: Verdana, sans-serif;">The Chinese authorities set a reference rate every day for the renminbi against the US dollar and other major currencies – and allow the currency to trade within a band of 2% from that reference rate (plus or minus 2%). In currency markets, they call this as “managed float” of a currency. It has to be noted that the band was much less than 2% years ago and over the course of the years, China has increased the trading band to 2% with the reference rate as the mid-point.</span></span></div>
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<span style="color: #1f497d; font-size: 10pt; line-height: 15.3333320617676px;"><span style="font-family: Verdana, sans-serif;">I, as most people, would like to see the renminbi to freely float. And I, as most people, would like to see the renminbi appreciate in value rather than depreciate in value (given China’s account surpluses, it is only natural to expect the renminbi to appreciate over the long run to a more stable and fair value). But all that said, today’s devaluation of the renminbi has caused over reaction in the markets and among policy makers, people and politicians.</span></span></div>
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<span style="color: #1f497d; font-size: 10pt; line-height: 15.3333320617676px;"><span style="font-family: Verdana, sans-serif;">In the recent past, I have advocated for a stronger renminbi through interference in the markets – a.k.a currency manipulation. The reason for that is that I am counting on China in the years and decades to come to create a global engine of consumer-driven growth. And in many respects, it is time for China to start taking up that role – given their account surpluses, forex reserves, state investments plateauing and their massive population. But what I am talking about is a significant re-structuring of the economy that would initially slow down the growth by a significant margin before picking up steam. And that requires enormous political will in a communist nation. Today’s action made it clear that the government is not ready yet to go through that tough road of re-structuring. Fine, that’s ok, but I am atleast expecting that they would take the smooth road of re-structuring – which they seem to be. In other words, if I have to wait for the renminbi to depreciate first before it starts appreciating, then I am ready to do that – provided there won’t be any artificial hindrance to its appreciation when the time comes.</span></span></div>
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<span style="color: #1f497d; font-size: 10pt; line-height: 15.3333320617676px;"><span style="font-family: Verdana, sans-serif;">Other than that, all the hue and cry about today’s action by the Chinese monetary authorities to devalue the renminbi is not warranted, in my opinion. Everyone demands China to float their currency freely (and I do too, though I am okay with a managed float during extreme volatility) and if China had indeed freely floated their currency, we would have seen the renminbi to depreciate far more in value this year than the 1.9% that the authorities devalued there. The Chinese economy has been doing terribly this year, there has been an exodus of foreign money from stock markets – and all this should have dented the renminbi to a significant extent (well above the 1.9% devalued today) even if it were left to market forces. Instead the renminbi stayed stronger than the market would have priced it because the renminbi tracked the strengthening US dollar throughout this year.</span></span></div>
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<span style="color: #1f497d; font-size: 10pt; line-height: 15.3333320617676px;"><span style="font-family: Verdana, sans-serif;">One significant change that the Chinese authorities did today is to start taking the previous day’s final value of the renminbi into their calculation rather than the previous day’s reference rate to set the next day’s reference rate. This is akin to dancing with the markets in the direction the markets take the currency’s value. In my mind, this is a significant and a positive change in the way the “managed-float” of the renminbi is carried out on a daily basis. If China had followed this methodology from the start of this year, we would have seen the renminbi depreciate by 1.9% (or even more) by now – albeit that would have been a gradual depreciation rather than today’s sudden devaluation.</span></span></div>
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<span style="color: #1f497d; font-size: 10pt; line-height: 15.3333320617676px;"><span style="font-family: Verdana, sans-serif;">What is important for the US and other trading partners of China is not to complain about their actions today, but rather to welcome it and make sure that China follows the same methodology even during times when the market forces pull the currency in the opposite direction (when the renminbi is supposed to appreciate). And the US and other trading countries should also put pressure on China to gradually increase the trading band to 3% or more instead of the 2% that they currently have (and make sure that China actually allows the value of its currency to reach the upper and lower limits of the band if the supply and demand requires it to).</span></span><span style="background-color: white; font-family: Verdana, sans-serif; font-size: 12.8000001907349px;"><span style="color: #20124d;">The pressure could also be put to eliminate other forms of capital control that China currently has in place.</span></span><span style="background-color: white; color: #20124d; font-family: Verdana, sans-serif; font-size: 12.8000001907349px;"> </span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-40022781372668836762015-07-28T23:10:00.000-04:002015-08-26T22:18:33.132-04:00Hillary’s Capital Gains Tax<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #1f497d; font-size: 12.8000001907349px;">Hillary Clinton wants to increase capital gains on the top 1% income earners. And I am in full agreement with that. But I disagree with the way she wants to do it. She is currently proposing a sliding scale for capital gains tax for the top 1% (joint filers earning approximately more than $450,000) and the scale itself will be based on the number of years a person is invested in an investment. She says that she wants to discourage “short-termism” – where investments like equities are bought and sold within a shorter term (of less than a year) and would instead want to encourage long-term investments (something like a buy and hold strategy that gives more weight to value investing rather than speculative trading; and encourage CEOs and rich folks to invest in a company's long term growth rather than being worried about "quarterly" stock bounces).</span></div>
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<span style="color: #1f497d;">Where I disagree with her is on the word “short-termism” itself. And I would prefer the sliding scale she proposes to be based on the amount of realized capital gain itself rather than the time period of investment. In today’s capital markets, we don’t want the government to direct our investment models. Say for example, I invested in a company ‘X’ in January based on my prediction that the company has a very good future potential. Then sometime in July, another great company ‘Y’ went public and from what I see and analyse, my prediction says that ‘Y’ has even higher future potential than ‘X’. So at this point, why would it be wrong for me to move my capital from ‘X’ to ‘Y’? Why should I be punished by the government for a smart decision I made? Why would the government defy and disrupt the very basics of the free market theory which tells us that capital gets allocated efficiently where needed and where there is potential.</span></div>
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<span style="color: #1f497d;">In this case, it should be noted that my money is still in the markets. I didn’t take it and run away and my capital is still being deployed at places where I deem fit. How could the government behave like I am doing something sinister and hence I need to be taxed at a higher rate? Now before I write further, I have to note that I won’t be impacted by this capital gains tax proposal – because it is meant only to the top 1% income earners. So in reality, it is possible that this proposal might have a net positive effect, but my opinion is that this proposal is flawed and could have addressed the capital gains tax reform in a much better way.</span></div>
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<span style="color: #1f497d;">My proposal would be to get rid of the terms “short-term” and “long-term” altogether. Today’s financial markets are more complex and more globally integrated than the 1990s and as we go into the future, the size, scope, participation and thereby the opportunities itself become wider and more diverse. At this juncture, government encouraging me to stay long on a stock when I see better opportunities elsewhere (at home or abroad) is like a grandmother advising a twenty year old on modern technologies.</span></div>
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<span style="color: #1f497d;">If you want to have a sliding scale, then fine, but in that case, my view is that it is better to have a sliding scale on the amount of realized capital gain itself. If the realized capital gains by an individual in less than $100,000 in that tax year, then tax the gains at 15%; if it is between $100,000 to $300,000, then tax at 20%; if it is between $300,000 to $500,000 then tax at 25% and for gains above $500,000, tax at 30%. These numbers are just arbitrary for now, and the relevant experts can work out these numbers, but the sliding scale in my opinion should be something like this – where it is based on the capital gain itself rather than the time period of investment. I don’t want the government to encourage or discourage me on how to invest or where to invest or how long to invest, but instead the government should just tax based on how much I made – with obviously the tax being more lenient to low income earners than to high income earners.</span></div>
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<span style="color: #1f497d;">When it comes to labor, I don’t hear Hillary saying that she wants to encourage a worker to stay longer in a company as that would provide benefits to the business and reduce training costs, but instead she seems fine with just taxing the total labor-based income at progressive tax rates. In my opinion, investment income should be treated no differently and no “encouragement” of any sort is needed from the government to stay long or short on any investments. </span></div>
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<span style="font-size: 12.8000001907349px;">Now, if Hillary wants to discourage extreme short term trading - like buying and selling in a single day, arbitrage trading across different markets, high frequency speculative trading and such, then that might be better addressed by an extremely small fee (to the order of a few cents to a dollar) on financial transactions rather than through this needlessly bureaucratic tax proposal she has put forward - and that doesn't necessarily reform the capital gains tax structure more broadly and more importantly, in a fair manner.</span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-15740978781769519192015-06-30T23:10:00.001-04:002015-06-30T23:22:37.038-04:00Restructure to Recover<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #1f497d;">I am not an expert on the Greek debt crisis and have very little knowledge on the actual Greek economy itself. But that said, one really doesn’t have to be an expert here and with even a little understanding of the Greek economy and its debt crisis, it is abundantly clear that the Greek economy cannot survive on its own feet without a massive debt restructuring. And that massive debt restructuring definitely has to involve a significant amount of debt write-off.</span></div>
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<span style="color: #1f497d;">I know how annoyed and angry I would be if someone borrowed my money and asks me to write that loan off. So I completely understand the anger amongst many Europeans by the talk of any debt write-off. But there is simply is no other way. Anything short of a debt relief and restructuring is only going to kick the can down the road. Again, a simple look into Greece’s economic data, the reforms implemented, the unemployment numbers, the under-employment numbers, the tax codes, pension promises, exports, imports, demographics etc. will easily make it clear to anyone with an objective mind that there is simply no way here without a massive debt restructuring.</span></div>
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<span style="color: #1f497d;">In the current crisis, I am neither a fan of the EU nor Greece. Both have horrible proposals. Both have clearly different visions of a Greek recovery and both those visions are blinded by ideologies and politics. In all this, it is the people of Greece who are suffering the most.</span></div>
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<span style="color: #1f497d;">Let me give you a simple example of one of the horrible reforms implemented by Greece under pressure from EU: Before the crisis, anyone who earned less than 12,000 euros annually paid $0% in income taxes. After the reforms, that number was reduced to 5000 euros. In an economy that is in deep recession, I don’t know how anyone can come with a plan to increase taxes on the very low-income people, without expecting that economy to plunge into depression. And this is just one example of the austerity madness. Greece’s economy depends 80% on its services industry. Anyone with a little knowledge of economics can point out that all the reforms implemented point to one thing – demand suppression. And so there is no surprise here that from a 9% unemployment in 2011 during the recession, it has now gone up to more than 25%, with the economy plunging from a recession to a depression.</span></div>
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<span style="color: #1f497d;">Now, I understand that to be a member of the Eurozone, there are some rules. And those rules point to a very strict limit on the budget deficit a country can run and the debt path that the country can take. And I understand that the reforms demanded by the IMF, EC and the ECB in return for the bailout money were to steer Greece towards those rules. But one has to also look at how steering towards those rules during a recession would work for an economy. I am sure everyone at the table would have known that the internal demand would be drastically suppressed by those reforms. Fine, let the demand go down internally so as to reduce the debt and deficit. But then, what does one do in this situation to propel growth in the economy? They start to look for demand elsewhere and cater to that external demand, thereby putting the economy on a growth path again. But how can Greece cater to external demand when their currency has the same purchasing power as that of the currency that the extremely efficient Germans use. In effect, to cater to that external demand, Greece has to compete with Germany, France and other top-tier European countries with the same purchasing power and production cost. And how is this even possible for Greece, given their structural situation.</span></div>
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<span style="color: #1f497d;">If there was a way for Greece to have devalued their currency, then all the reforms asked out of them by the IMF, EC and the ECB would have worked. Without devaluation, it should have been pretty clear that Greece would lead to a path of disaster. And that’s exactly what happened.</span></div>
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<span style="color: #1f497d;">Now, currently, on the other side, Mr.Tsipras, the Greek prime minister, has not been very impressive in his proposals too. I never understood why, in a country where pensions consume 16% of the GDP, would he want to reinstate the Christmas bonus to low-income pensioners that was eliminated as part of the reforms that were already implemented (though he later dropped this proposal). And why would he even initially resist to phase out provisions to eliminate early retirement options immediately, rather than over the course of many years, as he had wanted, is a mystery to me (he later dropped this proposal too). One could only hope that these were negotiating tactics and not serious proposals - because these proposals are doomed to fail the economy, rather than propel it to higher trajectory.</span></div>
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<span style="color: #1f497d;">Now, what if Greece leaves the euro and adopts its old national currency, the drachma? In my opinion, it’s too late and Greece is not ready for it. Manufacturing (cement is a main example), construction, shipping and tourism are the major industries in Greece today. There was a time not long ago, in fact, just a few years ago, when China and other major countries went on a public spending binge, which would have helped Greece to cater to these demands, all the while also restructuring its economy. But that time has now passed. In fact, I am afraid that all these industries that Greece is dominant in is about to go through a period of slow growth worldwide.</span></div>
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<span style="color: #1f497d; font-family: verdana, sans-serif;"><span style="font-size: 12.8000001907349px;">Greece also imports a lot more than it exports. 100% of its oil demands are met through imports. By some estimates, 40% of the food Greeks consume is imported. And a lot of medical supplies are imported. Furthermore, barring the shipping industry, Greek exports are mainly to other European countries – from which I wouldn’t expect a lot of demand growth in the coming years. And remember, from a productivity standpoint, Greece is in many respects an aging population - more than 20% of the Greek citizens are 65 years or older and many younger, educated Greeks have already left the country. If Greece returns to drachma, we can be assured that it will be shut out of the global financial system for years to come, with inflation running sky high and capital controls sucking the economic blood out of the most vulnerable people. And in many respects, Greece will still have to depend on European money - this time only classified as a "humanitarian aid". </span></span></div>
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<span style="color: #1f497d;">So the bottom line is that – irrespective of which road is taken – more austerity by staying in the Eurozone or returning to drachma, Greece has a tough road ahead with unimaginable economic pain. Given this painful situation, and considering the larger political and economic benefits of a unified Europe, the best that can be done now is a massive debt restructuring with a significant debt write-off. I hope Europe’s leaders will find the political will to do the right thing. And if Greece gets such a deal, I hope they don’t mess it up again! </span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-6823543368213510345.post-42050220854339658882015-06-24T21:29:00.000-04:002015-08-26T22:18:58.106-04:00Rand Paul's Flat Tax<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="color: #1f497d;">Recently, the republican presidential candidate, Rand Paul, put forward a flat-tax proposal for the American economy. Now, I have nothing against Rand Paul and infact I have liked Rand Paul and his ideas on various topics. But when it comes to his tax policies, I remain skeptical.</span></div>
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<span style="color: #1f497d;">He recently introduced a proposal to tax everyone at 14.5%. His proposal was also to eliminate the payroll tax (that currently funds Social Security, Medicare and Medicaid). There will not be a separate capital gains tax and everything – individual income tax and business tax – will be taxed at 14.5%.</span></div>
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<span style="color: #1f497d;">Now, this looks like a lot of savings for everyone participating in the economy. This is going to put thousands of more dollars each year in the pockets of everyone. I am a big fan of less taxes (who isn’t?), but I am also a big fan of reducing gross inequality in the economy. More importantly, I want to make sure that there is sustainable demand in the economy for decades to come – because if you lose the consumer market, then you lose the economy.</span></div>
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<span style="color: #1f497d;">At first, this tax proposal looks very attractive – leaving a lot of money with the individuals rather than with the government. And I would be willing to spend my money myself rather than allowing the government to spend my money. And above all, this is deemed as a “fair tax” as every individual will contribute the same percentage of their taxable income rather than the government re-distributing it from the rich to the poor through various tax structures. So it does seem fair. But if you take a step back from all these attractions and concentrate on the larger picture – where in the coming years, you will have to sustain demand from the middle-income people - this plan looks a little less attractive to me.</span></div>
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<span style="color: #1f497d; font-family: verdana, sans-serif;">Today, one of the biggest economic malaise in the world is gross income inequality. And the U.S. is not exempted from that. Setting aside for a minute the $15,000 individual exemption (or $50,000 exemption for a family of four) and mortgage-interest deduction that Rand's plan envisages, let’s concentrate on a simple case – a case of two individuals – named John and Mark - (and let’s start from year one), where John earns $100,000 the first year and Mark earns $1,000,000 the first year. To keep things simple, let’s say that both individuals increase their yearly income by 2% and let us also put aside any state and local taxes. </span></div>
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<span style="color: #1f497d;">So at the end of the first year, after paying 14.5% in taxes, John would have a disposable income of $85,500 whereas Mark would have a disposable income of $855,000. So that states that Mark has 10 times more cash left in hand than John at the end of the first year. If you continue this for the next ten years, where every year John and Mark get a 2% increment to their salary/income, at the end of the 10<sup>th</sup> year, John would have had a disposable income of $100,890 for the 10<sup>th</sup> year, whereas Mark would have had a disposable income of $2,394,000 during his 10<sup>th</sup> year. Now that translates into Mark having 23.73 times more cash in hand than John at the end of the 10<sup>th</sup> year.</span></div>
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<span style="color: #1f497d;">Now, let’s not kid ourselves in saying that a person with millions of dollars in income would grow his net-worth at the same rate as that of a person who earns in the low hundreds of thousands. He, for sure, will grow at a faster rate. And let’s not kid ourselves by not taking inflation into account – which would eat up a large part of the additional disposable income obtained by the massive cut in taxes across the board. And when inflation occurs, Mark, who is guaranteed to own assets at that point, will see his assets’ worth going up in value, whereas John would increasingly find it difficult to buy those assets – thereby once again creating a gross inequality in the standard of living.</span></div>
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<span style="color: #1f497d;">Moreover, to balance the budget (which Rand says he will), massive cuts in public services will have to take place. Though I am not much of a fan myself these days on government provided services and the debt they incur, it is no doubt that these massive cuts in the public services will cause a considerable re-structuring in the economy and I am afraid that that re-structuring will occur on the backs of the middle-income and low-income people – thereby once again, giving a smooth ride to the high-income people and a bumpy ride to the middle and low-income people. Now tell me how is that fair?</span></div>
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<span style="color: #1f497d;">Even in today’s tax structure (setting aside all deductions, state and local taxes for simplicity), at the end of the 10<sup>th</sup> year, Mark, who would have paid a federal tax rate of 39.6% vs John’s 28%, would have had 17.66 times more cash in hand than John. And Rand Paul’s flat tax would have increased that 17.66 number to 23.73. So the bottom line is – I am skeptical about Rand’s tax plans being able to address effectively the economic ills in the society – both </span><span style="color: #1f497d; font-size: 12.8000001907349px;">now and in the decades to come.</span></div>
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<span style="color: #1f497d;">If Rand or someone comes up with a multi-tiered flat tax system, I would be willing to consider and study its effects. But this one-tiered flat tax system proposed by Rand doesn’t impress me. Sorry Rand Paul!</span></div>
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Unknownnoreply@blogger.com0