Rahul Deodhar's Blog, page 27
January 29, 2011
Inflation in terms of income and prices
Inflation has emerged as one of the key challenges of the world at this time. However we tend to reflect on inflation in terms of prices of basket of products and services. I think such a metric serves us to understand only a part of the problem.
Inflation, as we measure it today, does not measure social benefits when job scenario is difficult. The theory behind inflation posits that when the inflation becomes known wages should adjust to reflect the same. If wages are stable and prices start rising, inflation rightly triggers alarm bells. However, if prices are stable and incomes are falling then inflation data tends to mask the underlying decline in living standards.
I think we need to define inflation as difference between wage rise and price rise. Or we may use another metric that measures this difference. I believe it should give a proper indication of the on-the-ground situation of the economy.
Thus, in the developed world, with economies losing jobs, we expect this metric to expand conveying the increasing difficulty in sustaining a lifestyle. This comes over a decade of falling prices with stable incomes which we may parallel with deflation.
How such a variable will influence policy response is a difficult question. However, it should definitely improve our understanding of the realities.
Inflation, as we measure it today, does not measure social benefits when job scenario is difficult. The theory behind inflation posits that when the inflation becomes known wages should adjust to reflect the same. If wages are stable and prices start rising, inflation rightly triggers alarm bells. However, if prices are stable and incomes are falling then inflation data tends to mask the underlying decline in living standards.
I think we need to define inflation as difference between wage rise and price rise. Or we may use another metric that measures this difference. I believe it should give a proper indication of the on-the-ground situation of the economy.
Thus, in the developed world, with economies losing jobs, we expect this metric to expand conveying the increasing difficulty in sustaining a lifestyle. This comes over a decade of falling prices with stable incomes which we may parallel with deflation.
How such a variable will influence policy response is a difficult question. However, it should definitely improve our understanding of the realities.
January 27, 2011
Market Timing Anxiety
During the start of the year I had written about wanting to move to cash. Indian equity markets subsequently crashed and are staring down a possible decline to 5400 levels on the Nifty. I did move into cash but just in nick of time. The result is that my gains are lower than what could have been had I exited without hesitating like I did.
Now I am faced with exactly opposite conundrum. A lot of stocks have started hovering around the "buy" level. But the Nifty is still at 5600 level with still about 200+ point decline a distinct possibility. I am waiting with baited breath. But waiting has it anxious moments. The high volatility implies that market moves in dramatic fashion making it difficult to watch. There is no apparent reason (one that has materialized since beginning of 2011).
At such moments the noise on TV and within research reports is further unnerving. Goldman Sachs recently revised the target price of few stocks down by 20-35% and still rates the stock buy. Some stocks are already above their revised target price. I don't know if research quality has declined to this extent or is it my nerves.
The TV anchors are busy retrofitting explanations to the market movements. I read three on tueday. Half an hour after the RBI policy markets gave it a thumbs up, an hour later markets behaved as if they had already priced-in the rate hike and by end of day RBI rate hikes had caused catastrophic slide in Indian equity markets. I think reporting levels have dropped beyond redemption. It may make sense to free up the bandwidth these channels occupy.
Anyways, are you waiting too? And do you feel as anxious?
My book "Subverting Capitalism & Democracy" is available on Amazon
Now I am faced with exactly opposite conundrum. A lot of stocks have started hovering around the "buy" level. But the Nifty is still at 5600 level with still about 200+ point decline a distinct possibility. I am waiting with baited breath. But waiting has it anxious moments. The high volatility implies that market moves in dramatic fashion making it difficult to watch. There is no apparent reason (one that has materialized since beginning of 2011).
At such moments the noise on TV and within research reports is further unnerving. Goldman Sachs recently revised the target price of few stocks down by 20-35% and still rates the stock buy. Some stocks are already above their revised target price. I don't know if research quality has declined to this extent or is it my nerves.
The TV anchors are busy retrofitting explanations to the market movements. I read three on tueday. Half an hour after the RBI policy markets gave it a thumbs up, an hour later markets behaved as if they had already priced-in the rate hike and by end of day RBI rate hikes had caused catastrophic slide in Indian equity markets. I think reporting levels have dropped beyond redemption. It may make sense to free up the bandwidth these channels occupy.
Anyways, are you waiting too? And do you feel as anxious?
My book "Subverting Capitalism & Democracy" is available on Amazon
January 26, 2011
Why RBI could not raise interest rate more than 25bps?
Yesterday the Reserve Bank of India (RBI) announced hike in Repo and reverse repo rates by 25bps each. Some commentators argued that RBI is behind the curve and should be aggressive in rate hikes. I disagree.
India is not entering the Volcker ageThe question of aggressive RBI puts the Indian economy in some ways (not in magnitude) similar to US when Paul Volcker became the Fed chairman. There is high demand side pull and supply side needs catch up. But there is a key difference in India's position.
India needs investments in supply infrastructureIndia needs more than INR 2 Trillion worth of investments to de-bottleneck the supply side. I am not talking about creating supply but simply reducing wastage and time lags to ensure supply gets to consumer. This investment is required in roads, cold-chains, food processing, storage and markets etc. This infrastructure is government responsibility. Either government create this infrastructure or create conditions in which private player can create it. Without this not much can be achieved on supply side.
Interest rate puts pressure on this investmentBy increasing interest rates in arbitrary manner RBI will create uncertainty that will impact these investments in two ways. First, it will postpone the investments because of uncertain business environment. Secondly, it will increase the cost of capital and thus reduce profitability of these investments.
Hence, I believe, the RBI acted prudently to signal inflation concerns but allow markets to steadily adjust to higher interest environment.
India is not entering the Volcker ageThe question of aggressive RBI puts the Indian economy in some ways (not in magnitude) similar to US when Paul Volcker became the Fed chairman. There is high demand side pull and supply side needs catch up. But there is a key difference in India's position.
India needs investments in supply infrastructureIndia needs more than INR 2 Trillion worth of investments to de-bottleneck the supply side. I am not talking about creating supply but simply reducing wastage and time lags to ensure supply gets to consumer. This investment is required in roads, cold-chains, food processing, storage and markets etc. This infrastructure is government responsibility. Either government create this infrastructure or create conditions in which private player can create it. Without this not much can be achieved on supply side.
Interest rate puts pressure on this investmentBy increasing interest rates in arbitrary manner RBI will create uncertainty that will impact these investments in two ways. First, it will postpone the investments because of uncertain business environment. Secondly, it will increase the cost of capital and thus reduce profitability of these investments.
Hence, I believe, the RBI acted prudently to signal inflation concerns but allow markets to steadily adjust to higher interest environment.
January 24, 2011
Why did the US leverage itself so much?
There has been some discussion in the blogosphere about Peter Thiel's interview Back to the Future with Peter Thiel - Interview - National Review Online. One of the central question in the discussion is Why US leveraged itself to this extent - referring to the excess debt carried by US households.
The question reminds me of an Aesop's fable about donkey and goat. A man is leading a donkey on a leash when a few people decide to play a prank on him. In turns one of them would appear to pass down the road and ask him why he is walking his goat instead of carrying it on his shoulders. After a few passes the person is convinced that his donkey is actually a goat and tries to carry it over his shoulders.
The same is situation with US consumers. Over time people have been telling the US consumer that loans to them are most safe. Over time US consumers were convinced that they can safely borrow more as future growth will take care of the repayment. The situation worked well for a generation and there was no reason to assume it was broken. So they never stopped even when the future growth was no longer certain. In fact US consumer continued borrowing despite evidence that with current policy (marked down exchange rates and export-oriented growth models) US is nearly certain to have de-growth.
As I mention in the book, the blame for the last leg of overextending consumer was the result of big-money. Big money required paper to play with and creating the paper implied creating real assets even when there was no demand. I think that makes Gary Shilling's ideas, particularly the one of selling consumer financiers, make lot of sense.
My book "Subverting Capitalism & Democracy" is available on Amazon
The question reminds me of an Aesop's fable about donkey and goat. A man is leading a donkey on a leash when a few people decide to play a prank on him. In turns one of them would appear to pass down the road and ask him why he is walking his goat instead of carrying it on his shoulders. After a few passes the person is convinced that his donkey is actually a goat and tries to carry it over his shoulders.
The same is situation with US consumers. Over time people have been telling the US consumer that loans to them are most safe. Over time US consumers were convinced that they can safely borrow more as future growth will take care of the repayment. The situation worked well for a generation and there was no reason to assume it was broken. So they never stopped even when the future growth was no longer certain. In fact US consumer continued borrowing despite evidence that with current policy (marked down exchange rates and export-oriented growth models) US is nearly certain to have de-growth.
As I mention in the book, the blame for the last leg of overextending consumer was the result of big-money. Big money required paper to play with and creating the paper implied creating real assets even when there was no demand. I think that makes Gary Shilling's ideas, particularly the one of selling consumer financiers, make lot of sense.
My book "Subverting Capitalism & Democracy" is available on Amazon
January 13, 2011
Adjusting money supply in aftermath of a crisis
The rapid expansion in monetary policy in the aftermath of current crisis was criticized by many. However, I believe it was necessary (combined with other things).
In my book I explained that inflation is a tax against status quo. It is designed to make it costly to simply hoard money. A crisis, often, results in inappropriate(1) accumulation of money. The accumulation often uses mechanism that do not create value. Inflation, in aftermath of such a crisis, may all those with genuine value creation mechanisms to rise above the scamsters.
Thus, increase in money supply seems desirable as it will nudge inflation while allowing money to move to value creators. However, this is contingent on a premise that new mechanisms are genuine and not simply new scams. The US has failed in ensuring this. That is why unemployment is high and rising while money sloshes around without effect.
Note:(1) How we define inappropriate is another question for other time.
My book "Subverting Capitalism & Democracy" is available on Amazon
In my book I explained that inflation is a tax against status quo. It is designed to make it costly to simply hoard money. A crisis, often, results in inappropriate(1) accumulation of money. The accumulation often uses mechanism that do not create value. Inflation, in aftermath of such a crisis, may all those with genuine value creation mechanisms to rise above the scamsters.
Thus, increase in money supply seems desirable as it will nudge inflation while allowing money to move to value creators. However, this is contingent on a premise that new mechanisms are genuine and not simply new scams. The US has failed in ensuring this. That is why unemployment is high and rising while money sloshes around without effect.
Note:(1) How we define inappropriate is another question for other time.
My book "Subverting Capitalism & Democracy" is available on Amazon
January 3, 2011
Welcome to 2011 - Ideas for new year
Welcome to the new year! I wish the new year comes with merry news and prosperity more than your expectations. Let us look at what we should expect in 2011. I will not bore you with ideas like fall of Europe, growth in US etc. Commentators and analysts have already tackled those. I would like to leave you with some other ideas related to the markets.
First, the very short term - we are likely to have at least 2 mini cycles in 2011. By that I mean that, most likely, we will have two bottoms and three tops during 2011. Depending on how you look at the cycles, we had 2 or 3 of them last year. Consequent to the cyclicality, portfolios will have to churn thus leading to healthy performance of the brokerages and investment banks. I would expect asset managers to have a decent year again.
Second, we will see return of genuine Keynesians. By genuine Keynesians I mean focus on jobs rather than income, focus on employment certainty rather than uncertain stimuli, focus on sustainability rather than pump-priming. Like churchill said, we will eventually do the right thing after we exhausted all other options. It means a further crisis in housing markets may be addressed differently than previous ones.
Third, we will start discussing infrastructure in developed world. In India, 2011 promises to be year of infrastructure. After lackluster performance in 2010 and surge in demand, I expect Indian infrastructure companies to be back with a bang. But more important is discussion about infrastructure will happen in the west. In these discussions we will find the seeds of future infrastructure companies and ideas. New cities in context of internet and social connectivity, infrastructure of future in terms of public transportation, lower energy consumption and good old core infrastructure like power, water etc should emerge by end of 2011.
Finally, this year may, in all probability, mark the beginning of the age of the Miser. Depending on how you look at it, we are close to the end or already past the age of consumption. The age of saving and hoarding money is upon us. The age of consumption lasted more than 30 years. So like many investment managers, I have not seen the era where people were scrambling to hoard money. This period is likely to throw up many different surprises for us.Return of the garage: Over the 60s to 80s People spent innumerable man-hours in their garage fixing things extending the usable life of the product. The 80s and 90s changed the products in the garage but the spirit remained. If 60s was about cars, farm and household machines, office appliances then 80s was about computers and cell phones and microprocessors. The importance of the garage has gradually diminished from 60s to 00s. This may change over the next 20 years. I expect the usable life of products will be enhanced.
The return of services: The revenue models of many firms depends on the use-and-throw model. The service aspect of the product is reduced to minimum. If we see a return of the service model, we may see rework of business models. It means more consulting and organizational restructuring.
First, the very short term - we are likely to have at least 2 mini cycles in 2011. By that I mean that, most likely, we will have two bottoms and three tops during 2011. Depending on how you look at the cycles, we had 2 or 3 of them last year. Consequent to the cyclicality, portfolios will have to churn thus leading to healthy performance of the brokerages and investment banks. I would expect asset managers to have a decent year again.
Second, we will see return of genuine Keynesians. By genuine Keynesians I mean focus on jobs rather than income, focus on employment certainty rather than uncertain stimuli, focus on sustainability rather than pump-priming. Like churchill said, we will eventually do the right thing after we exhausted all other options. It means a further crisis in housing markets may be addressed differently than previous ones.
Third, we will start discussing infrastructure in developed world. In India, 2011 promises to be year of infrastructure. After lackluster performance in 2010 and surge in demand, I expect Indian infrastructure companies to be back with a bang. But more important is discussion about infrastructure will happen in the west. In these discussions we will find the seeds of future infrastructure companies and ideas. New cities in context of internet and social connectivity, infrastructure of future in terms of public transportation, lower energy consumption and good old core infrastructure like power, water etc should emerge by end of 2011.
Finally, this year may, in all probability, mark the beginning of the age of the Miser. Depending on how you look at it, we are close to the end or already past the age of consumption. The age of saving and hoarding money is upon us. The age of consumption lasted more than 30 years. So like many investment managers, I have not seen the era where people were scrambling to hoard money. This period is likely to throw up many different surprises for us.Return of the garage: Over the 60s to 80s People spent innumerable man-hours in their garage fixing things extending the usable life of the product. The 80s and 90s changed the products in the garage but the spirit remained. If 60s was about cars, farm and household machines, office appliances then 80s was about computers and cell phones and microprocessors. The importance of the garage has gradually diminished from 60s to 00s. This may change over the next 20 years. I expect the usable life of products will be enhanced.
The return of services: The revenue models of many firms depends on the use-and-throw model. The service aspect of the product is reduced to minimum. If we see a return of the service model, we may see rework of business models. It means more consulting and organizational restructuring.
December 27, 2010
Commodity Prices and Money
We have seen a recent spike in prices of various commodities like Oil, Sugar, Cotton, etc. Paul Krugman in recent blogpost highlights this as indication of finite world. We are scrambling to explain these changes through the lens of demand supply. However, just this time, I think there is another explanation.
Three components of commodity pricesIn current scenario we should think of commodity price as comprising three parameters with demand-supply being one of them. The second parameter is inflation adjustment. Third parameter is wealth retention value.
Inflation adjustment refers to change in prices reflecting change to money supply that feeds only few areas within the economic value chain. Usually, the inflation adjustment is negligible as money moves through designated channels. However, in recent times, the excess money has spilled on to commodities and other asset classes creating a price expansion divergent from fundamentals.
Wealth retention value refers to ability of the commodity to retain purchasing power for the future. When money supply is stable and in line with fundamentals, there is not much need for commodity to carry the wealth, money can do it better. However, in cases of rapid monetary expansion rare commodities are required to carry wealth. Higher the monetary expansion, more commodities comes into this fold. In post-war Germany wheat bread too joined this group.
In Sum
So I think we should look at commodity prices through this three-component lens. I believe the fundamental driver, i.e. demand supply, is more or less along the long term trend. However, in recent times we have seen higher inflation component markups for many asset classes. Commodities are simply exhibiting similar behavior. Further, we might see, depending on how much trust our currencies exhibit, some change to the wealth retention component in coming years.
Three components of commodity pricesIn current scenario we should think of commodity price as comprising three parameters with demand-supply being one of them. The second parameter is inflation adjustment. Third parameter is wealth retention value.
Inflation adjustment refers to change in prices reflecting change to money supply that feeds only few areas within the economic value chain. Usually, the inflation adjustment is negligible as money moves through designated channels. However, in recent times, the excess money has spilled on to commodities and other asset classes creating a price expansion divergent from fundamentals.
Wealth retention value refers to ability of the commodity to retain purchasing power for the future. When money supply is stable and in line with fundamentals, there is not much need for commodity to carry the wealth, money can do it better. However, in cases of rapid monetary expansion rare commodities are required to carry wealth. Higher the monetary expansion, more commodities comes into this fold. In post-war Germany wheat bread too joined this group.
In Sum
So I think we should look at commodity prices through this three-component lens. I believe the fundamental driver, i.e. demand supply, is more or less along the long term trend. However, in recent times we have seen higher inflation component markups for many asset classes. Commodities are simply exhibiting similar behavior. Further, we might see, depending on how much trust our currencies exhibit, some change to the wealth retention component in coming years.
December 21, 2010
Cannot group India with other Emerging market
Over the past years, I spend part of time explaining this fact. India's economic structure is not like other emerging markets and hence we should not club those together. This goes when you are looking at bond yields, currency forecast or simply equity market valuations.
First, India is a consumption economy. Unlike other emerging markets that depend on US consumption, India is driven mostly by domestic consumption. Sectors like IT/ITES do have significant employment here and thus they do contribute indirectly to the consumption. However, the overall impact of IT/ITES is not as substantive as exports are to other emerging markets. Thus we need to look at India through a developed world lens.
Second, India functions despite of its government, again unlike other emerging markets. In other EMs government is a driver or enabler of growth. Not in India. In fact, wherever government interferes you have problems. So in that aspect too India is unlike other EMs.
Third, India has more efficient capital utilization pattern. Overall, the incremental Capital output ratio, ICOR, is higher in India. While a group of economists believe this is reflection of the stage of the economic development rather than character trait of India, I disagree. While the high level of ICOR is misleading, India will have better ICOR than comparable country at similar economic development level. However, this also means India will pay lesser for everything. In other words, if you expect certain demand at a price point in other countries, expect half that demand in India. MNCs found this very challenging at first. But at the right price point, there is ample demand than you can cater to.
Fourth, Indian banks, thanks to RBI's watchfulness, are very conservative. Even in Real estate lending, thanks to the black economy percentage charged by developers, the individual has higher skin in the game than in other markets.
So during the next year when you look at investing in India, bear in mind that India is a consumption economy like the west.
But what does this mean?To me it implies some direct conclusions.
First, India can sustain a higher Debt-GDP ratio than other EMs. Since the payback comes from internal demand generation, the debt is likely to be more robust than other EMs.
Second, it also means that India's economic model is directionally right, i.e. correct in intent, but low on scale, i.e. India is slow - very slow. This may mean higher stress on currency. Popular opinion on this topic is against me. People expect INR to continue to become cheaper vs. USD because of national debt. However, over time, people will realize the difference and try to flock into the INR. I do not expect it to happen in 2011 or 2012 but I have been wrong before. In any case, if it were to happen expect capital controls and regulation to manage the currency.
Third, infrastructure payback is likely to be longer. With India infrastructure story being marketed to death, I expect lot of infra-investment to come in without acknowledging this fact. Please expect payback to take longer than your models indicate.
Fourth, India may become a consumption driver of the world sooner than other EMs. It might take two decades more, but India may be first to contribute to global consumption rather than other EMs.
In sumIndia is unique, it is a culturally in the middle. It is slow, but it is going the right way.
My book "Subverting Capitalism & Democracy" is available on Amazon
First, India is a consumption economy. Unlike other emerging markets that depend on US consumption, India is driven mostly by domestic consumption. Sectors like IT/ITES do have significant employment here and thus they do contribute indirectly to the consumption. However, the overall impact of IT/ITES is not as substantive as exports are to other emerging markets. Thus we need to look at India through a developed world lens.
Second, India functions despite of its government, again unlike other emerging markets. In other EMs government is a driver or enabler of growth. Not in India. In fact, wherever government interferes you have problems. So in that aspect too India is unlike other EMs.
Third, India has more efficient capital utilization pattern. Overall, the incremental Capital output ratio, ICOR, is higher in India. While a group of economists believe this is reflection of the stage of the economic development rather than character trait of India, I disagree. While the high level of ICOR is misleading, India will have better ICOR than comparable country at similar economic development level. However, this also means India will pay lesser for everything. In other words, if you expect certain demand at a price point in other countries, expect half that demand in India. MNCs found this very challenging at first. But at the right price point, there is ample demand than you can cater to.
Fourth, Indian banks, thanks to RBI's watchfulness, are very conservative. Even in Real estate lending, thanks to the black economy percentage charged by developers, the individual has higher skin in the game than in other markets.
So during the next year when you look at investing in India, bear in mind that India is a consumption economy like the west.
But what does this mean?To me it implies some direct conclusions.
First, India can sustain a higher Debt-GDP ratio than other EMs. Since the payback comes from internal demand generation, the debt is likely to be more robust than other EMs.
Second, it also means that India's economic model is directionally right, i.e. correct in intent, but low on scale, i.e. India is slow - very slow. This may mean higher stress on currency. Popular opinion on this topic is against me. People expect INR to continue to become cheaper vs. USD because of national debt. However, over time, people will realize the difference and try to flock into the INR. I do not expect it to happen in 2011 or 2012 but I have been wrong before. In any case, if it were to happen expect capital controls and regulation to manage the currency.
Third, infrastructure payback is likely to be longer. With India infrastructure story being marketed to death, I expect lot of infra-investment to come in without acknowledging this fact. Please expect payback to take longer than your models indicate.
Fourth, India may become a consumption driver of the world sooner than other EMs. It might take two decades more, but India may be first to contribute to global consumption rather than other EMs.
In sumIndia is unique, it is a culturally in the middle. It is slow, but it is going the right way.
My book "Subverting Capitalism & Democracy" is available on Amazon
December 16, 2010
Difference in wealth and money
Krugman raises an interesting question in his blog titled What is money? I believe this is a very crucial question we need to ask to understand the context of the current financial crisis. I have dealt with this question in detail in my book "Subverting Capitalism and Democracy".
There is a difference between wealth and our bank balance. Wealth is our ability to purchase future convenience (in terms of products and services). But there is no way to understand wealth in isolation, just as there is no way to understand temperature in isolation. To measure wealth we need a metric - money provides us with this metric.
Metrics, like those for length, time, temperature etc, are very specific and scientifically determined. For example, the length of 1 meter was previously defined as the distance between two marks on the specific rod, placed in International bureau of weights and measures in Paris, made of platinum and iridium alloy measured at 0 degree Celcius. Later, a more specific measure was developed defining 1 meter as distance travelled by light in specified time in vacuum.
However, metric for wealth is not specific and absolute. Money itself changes value all the time. Money itself is a commodity created to measure other commodities against it. But since it is a human creation, there is no supply constraint other than what we have self-imposed. Thus, money obeys all the laws of supply and demand like other commodities. It also means that money appreciates or depreciates depending on demand supply changes in other commodities.
The value of money refers to its ability to purchase goods and services. In other words, wealth refers to value of money at specific time as the value of money changes with information on demand and supply. Thus if you are on an island where news reaches once a month then value of money. Then most likely the value of money will change monthly. This is one reason why we fund managers want to know information earlier than others.
Let us say the monthly information comes through that instead of usual 100 apples (the only item that can be purchased on the island), this time 1000 apples were produced. Now the purchasing power of your money has gone up 10 times simply because there are more goods than money. On the flip side we can argue that prices have fallen because of bumper harvest. In either case the value of money, or your wealth, has changed.
Similarly, if suddenly the supply of money changes drastically we will have to work out the new price levels. Say if money supply increased by factor of 10, but supply of apples was same, then prices should increase by ten-fold and to retain your wealth you must have 10 times as much money as you had before increase in money supply. The same process is immensely complicated in a multi-product complex economy. Thus an individual may have no clue how her wealth may have changed during the process.
Today, economies are creating and pumping money in large quantities. Naturally, currencies are facing uncertain environment. The purchasing power of ALL the currencies is in flux. To protect our wealth, we need to step back a little understand how the currencies stack up then, once the volatility subsides, return into a currency denominated wealth. This is why people prefer to hide or park in a commodity that has very limited supply, like Gold or rare metals.
My book "Subverting Capitalism & Democracy" is available on Amazon
There is a difference between wealth and our bank balance. Wealth is our ability to purchase future convenience (in terms of products and services). But there is no way to understand wealth in isolation, just as there is no way to understand temperature in isolation. To measure wealth we need a metric - money provides us with this metric.
Metrics, like those for length, time, temperature etc, are very specific and scientifically determined. For example, the length of 1 meter was previously defined as the distance between two marks on the specific rod, placed in International bureau of weights and measures in Paris, made of platinum and iridium alloy measured at 0 degree Celcius. Later, a more specific measure was developed defining 1 meter as distance travelled by light in specified time in vacuum.
However, metric for wealth is not specific and absolute. Money itself changes value all the time. Money itself is a commodity created to measure other commodities against it. But since it is a human creation, there is no supply constraint other than what we have self-imposed. Thus, money obeys all the laws of supply and demand like other commodities. It also means that money appreciates or depreciates depending on demand supply changes in other commodities.
The value of money refers to its ability to purchase goods and services. In other words, wealth refers to value of money at specific time as the value of money changes with information on demand and supply. Thus if you are on an island where news reaches once a month then value of money. Then most likely the value of money will change monthly. This is one reason why we fund managers want to know information earlier than others.
Let us say the monthly information comes through that instead of usual 100 apples (the only item that can be purchased on the island), this time 1000 apples were produced. Now the purchasing power of your money has gone up 10 times simply because there are more goods than money. On the flip side we can argue that prices have fallen because of bumper harvest. In either case the value of money, or your wealth, has changed.
Similarly, if suddenly the supply of money changes drastically we will have to work out the new price levels. Say if money supply increased by factor of 10, but supply of apples was same, then prices should increase by ten-fold and to retain your wealth you must have 10 times as much money as you had before increase in money supply. The same process is immensely complicated in a multi-product complex economy. Thus an individual may have no clue how her wealth may have changed during the process.
Today, economies are creating and pumping money in large quantities. Naturally, currencies are facing uncertain environment. The purchasing power of ALL the currencies is in flux. To protect our wealth, we need to step back a little understand how the currencies stack up then, once the volatility subsides, return into a currency denominated wealth. This is why people prefer to hide or park in a commodity that has very limited supply, like Gold or rare metals.
My book "Subverting Capitalism & Democracy" is available on Amazon
December 15, 2010
Jobs, Skills and development
Noni Mausa, in her blog Tunnel Under Snow: The trace elements of a nation, highlighted a comment she made on a spectacular discussion at Angry Bear about Sir James Goldsmith's views about jobs, skills and development. The original post makes a great reading and the comments, more so by Noni, simply elevate it to a must read discussion.
The arguments are often made against trade related job realignment. Make no mistake, trade does lead to realignment of jobs. Low value add jobs move from higher income countries to lower income countries. Except, of course, those jobs that cannot be moved like Janitors, hair dressers, restaurant operations etc. However, the idea of development means that the rest of the economy must be able to pay higher for these services even though the skills may not be dramatically high value adding. To pay higher and higher for same services we have two options.
First, we can improve productivity of jobs that cannot be moved. That is why floor cleaners at airport use a electric cart with mops rather than do it the old fashioned way like the floor cleaners in poor countries do. Essentially, as income increases, economies tend to throw capital at essential-labour problems to make them cheaper. Capital, naturally, is cheaper in high income countries. This worked fine in times when capital mobility was a constraint. However, the advent of GATT, WTO and later developments have made capital mobility almost frictionless. Thus this difference has been effectively negated and the only differentiation is now in wages.
Second, we can add more value that high-income people will appreciate and hence pay for. Thus, fashion consciousness in high income hair salons is higher than that in low income ones. Low income countries have tailors, while high income ones have clothes designers who have a reputed brand to talk about. The communication revolution has effectively negated this trend as well again reducing the differentiation to wages.
What this means is countries will have the jobs profile similar to the skill profile of the population. In other words, we are looking at a wage-skill rebalancing across the world. Thus we need to look at the skill profile of the economy and match the job profile with it. The skill profile can be managed through immigration i.e. by allowing those with relevant skills to come into the country. So US will do well to export financiers and import engineers. In that sense, the direction of the discussion is correct.
In other words, for arguments sake, a country of doctors will need to import engineers or entice customers to come over for treatment. Enticing customers seems ridiculous but hospitals in India are already offering low cost health care services to wealthy foreigners who fly in get their dental, cardiac treatments done and fly back after recovery. It is called medical tourism.
I have discussed the importance of matching job profile and skill profile within economies in my book "Subverting Capitalism and Democracy".
My book "Subverting Capitalism & Democracy" is available on Amazon
The arguments are often made against trade related job realignment. Make no mistake, trade does lead to realignment of jobs. Low value add jobs move from higher income countries to lower income countries. Except, of course, those jobs that cannot be moved like Janitors, hair dressers, restaurant operations etc. However, the idea of development means that the rest of the economy must be able to pay higher for these services even though the skills may not be dramatically high value adding. To pay higher and higher for same services we have two options.
First, we can improve productivity of jobs that cannot be moved. That is why floor cleaners at airport use a electric cart with mops rather than do it the old fashioned way like the floor cleaners in poor countries do. Essentially, as income increases, economies tend to throw capital at essential-labour problems to make them cheaper. Capital, naturally, is cheaper in high income countries. This worked fine in times when capital mobility was a constraint. However, the advent of GATT, WTO and later developments have made capital mobility almost frictionless. Thus this difference has been effectively negated and the only differentiation is now in wages.
Second, we can add more value that high-income people will appreciate and hence pay for. Thus, fashion consciousness in high income hair salons is higher than that in low income ones. Low income countries have tailors, while high income ones have clothes designers who have a reputed brand to talk about. The communication revolution has effectively negated this trend as well again reducing the differentiation to wages.
What this means is countries will have the jobs profile similar to the skill profile of the population. In other words, we are looking at a wage-skill rebalancing across the world. Thus we need to look at the skill profile of the economy and match the job profile with it. The skill profile can be managed through immigration i.e. by allowing those with relevant skills to come into the country. So US will do well to export financiers and import engineers. In that sense, the direction of the discussion is correct.
In other words, for arguments sake, a country of doctors will need to import engineers or entice customers to come over for treatment. Enticing customers seems ridiculous but hospitals in India are already offering low cost health care services to wealthy foreigners who fly in get their dental, cardiac treatments done and fly back after recovery. It is called medical tourism.
I have discussed the importance of matching job profile and skill profile within economies in my book "Subverting Capitalism and Democracy".
My book "Subverting Capitalism & Democracy" is available on Amazon
