Sunday, September 21, 2008

`Ideas exchange' with Percy Mistry in IE & FE

Indian Express has an `ideas exchange' with Percy Mistry and Financial Express has a front page piece related to this.

6 comments:

  1. I liked his explanation of forgoing 30% accrual growth to avoid a 3% cost disruption every decade or so. That idea needs to out and center of any protectionist and non-liberalization views that gain ground when ever there is financial crisis - Asia, Latin America, and now US/UK.

    Also he gives the credit for MIFC report where it's due!! :)

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  2. An excellent piece. Good to know that we have minds that are alert and able to appreciate perspectives especially macro ones.

    On the subject of 3% cost vs 30% growth, I feel that human beings in general are risk averse/pain averse, and would rather not accept a temporary loss situation, though it will lead to a very concrete positive contribution, more so as it is in the uncertain future.

    Rationality is rarely displayed by crowds.

    With all this I really wish we have MIFC sooner, as a foundation for South Asia if not of the Asia Pacific!

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  3. Dear Percy Mistry and Ajay Shah,

    Uh-uh, I beg to disagree on the 3% dislocation vs 30% growth...

    If Indian banks ever go down that route of “financial innovation”, there will be substantial negative growth which can cancel a huge chunk of the positive growth. The US GDP is a -4% right now, and falling. Let me repeat "it is not positive". Look at shadowstats.com for my figure

    In severe downturns, the growth rate is in the negative for 10's of percent, not a minuscule 4-5. A negative growth rate of 20-30% is conservatively possible.

    If you take INR 1000 and an 8% growth rate, at the end of year 10, it will grow to INR 1625.

    Now, if you have a severe downturn which lasts several years, it will wipe out a huge percentage of the gains from those years. Because the percentage is compounded you will be subtracting from INR 16.25 as a percentage point and not INR 10.00 as a percentage point.

    At the end of year 3, assuming an annual 8% contraction rate, the original amount of INR 1625 will be INR 1265

    Now if you had a Hindu rate of growth of 4%, and no dislocations, the original amount of INR 1000 would be INR 1346 after 10 years of compounding.

    All I am advocating is that we shouldn’t aim for 10% + growth, but between 4-10 %. To those derisive of the Hindu rate of growth, it did not increase the money supply so much that the government had to resort to hide their M3 data as the US Federal Reserve has done since 2006.

    IMHO, China has severely mismanaged its growth till now, and RBI has done very well.
    I salute the bureaucrats of India, wow, I am just stunned at their wisdom. India’s USD reserves are decreasing, while China’s have ballooned! I cannot see the point of holding a enormous amount of reserves of a declining currency which the Chinese have done, and then demanding concessions from the debtor nation, US.

    To the Indian bureaucrats, do not set up sovereign funds to gobble assets in the US, just don’t maintain too much USD. Kicking a dog while the dog is hurt is harmful when the dog is healed completely. People have long memories and they will not forgive certain actions. Do no evil.

    The Chinese are learning their lesson

    Eighteen months ago, U.S. Treasury Secretary Henry Paulson told an audience at the Shanghai Futures Exchange that China risked trillions of dollars in lost economic potential unless it freed up its capital markets.

    "An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention," Paulson said.

    That advice rings hollow in China as Paulson plans a $700 billion rescue for U.S. financial institutions and the Securities and Exchange Commission bans short sales of insurers, banks and securities firms. Regulators in the fastest-growing major economy say they may ditch plans to introduce derivatives, and some company bosses are rethinking U.S. business models.

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  4. Amit,

    The only problem with your analysis is the current financial crisis - nature and extent - occurs once a century. So it's true if US suppressed all financial innovation since their last devastating financial crisis, in the 30s, they would have avoid the current crisis. But is US and its people better off since the 30s even with the current significant financial crisis (which still hasn't hurt the real economy, but it could)?

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  5. chandra,

    With high growth rate, usually you have high money supply. With high money supply, usually you have high inflation. With high inflation, your actual growth rate is usually low.

    What all the economists fail to point out in their studies is: with time all fiat currencies erode in value. So a currently accepted USD $1 daily threshold for determination of poverty level, all can make it with time, their growth rates are immaterial. Why? Because most central banks will not be as reckless as the US central bank has been. So their currencies in the long term will rise in value. The poverty threshold should be revised every year, but it is not. This "lifting out of poverty" is financial jugglery concocted to please and hoodwink the masses.

    The actual buying power of the same amount of money has decreased in proportion to the inflation a country has sustained during those times.

    When you deposit INR 100 and get a interest of 8-10% but yet have inflation of 12%, the buying power of the currency is being eroded before your very eyes.

    The buying power of US has not gone down due to a host of countries being leniently lending to them. The lenders are now cutting off their supply of money. The growth was never there in the first place.

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