Archive for the Category India


What sort of monetary experiment did India undertake?

Pat Horan directed me to this FT piece on India’s recent demonetization of “large denomination bills” (worth about $8 and $16 each.)

When Narendra Modi, India’s prime minister, announced in November that Rs1,000 ($16) and Rs500 notes would no longer be legal tender, he suggested that corrupt officials, businessmen and criminals — popularly believed to hoard large amounts of illicit cash — would be stuck with “worthless pieces of paper”.

At the time, government officials had suggested that as much as one-third of India’s outstanding currency would be purged from the economy — as the wealthy abandoned or destroyed it, rather than admit to their hoardings — reducing central bank liabilities and creating a government windfall.

But the Reserve Bank of India’s annual report on Wednesday suggested that most holders of the old currency managed to dispose of it, estimating that banned notes worth Rs15.28tn ($239bn) were returned to the bank. That amounts to 99 per cent of the Rs15.44tn of the old high-value notes that were in circulation when Mr Modi made his announcement, according to the finance ministry.

The bank’s estimate follows media reports that complex money-laundering networks sprang up in the wake of the demonetisation to help wealthy Indians deposit huge volumes of previously undeclared currency without exposing themselves to tax authorities. Such people allegedly sold the old notes, at a discount, to brokers who then dispatched low-income Indians to deposit or exchange them at banks.

Some of my market monetarist colleagues suggest that tight money policies create a “shortage” of the medium of exchange, and that this can cause a recession.  I argue that the real problem with tight money is that it raises the value of money, by reducing equilibrium NGDP.  Each dollar nows buys a larger share of NGDP. Because nominal wages are sticky, falling NGDP leads to more unemployment.  In my view, tight money does not create a true “shortage”, as anyone who wants more cash can always go to the ATM and get some.  On the other hand, people who want a rent controlled apartment in NYC often cannot get one— as rent control creates a true shortage.  Ditto for people who need a kidney transplant.  Those shortages are caused by price controls.

The Indian policy of denationalization of large bills really did create a money shortage.  On that point I don’t think there is any dispute.  And since the vast majority of transactions in India (98% by volume, 63% by value) involve cash, then this really was a policy than might be expected to sharply reduce transactions, and hence NGDP.   Instead, the slowdown was quite mild, and in my view ought to be regarded as more of a real (supply-side) shock.

It appears the cash experiment did lead to a slowdown in GDP, but much milder than what one might have expected from such a dramatic monetary contraction. For people like me, who focus on the role of money as a medium of account, this is no big surprise.  The silver coin shortage of 1964 also failed to significantly slow the US economy.  That’s because these shortages were widely viewed as temporary, and what matters is not the current stance of monetary policy, but rather the expected path of policy over the next few years.  As long as one-year forward NGDP expectations are not greatly affected, the current condition of the economy should hold up pretty well, even if there is a severe shortage of transactions media. The damage to India that did occur ought to be regarded as more of a real (supply-side) shock, sort of like a breakdown of cash registers.

On the other hand, economists who focus on the role of money as a medium of exchange also tend to think that it’s the future path of policy that is crucial, so I’m not sure whether the Indian experiment actually tested any specific model, although I’d be interested in what other people think.

PS.  Here’s a post I did last year, at the beginning of the Indian experiment.

PPS.  This experiment did confirm a point I often make—that data on cash in circulation are highly accurate.  The ratio of global cash to global GDP (and also American cash to American GDP) is very high, which suggests that cash is primarily used as a store of value.

PPPS.  India’s GDP grew at 5.7% over the past 12 months.  That’s modestly lower than in recent years, but experts also attributed the weak second quarter to de-stocking by manufacturers in anticipation of the new GST, which took effect July 1st.


Nationalism is in the air

I see lots of obscure foreign films that most people don’t watch.  I recall one B&W film from the 1960s, which took place in Uzbekistan.  I was struck by the “1960s feel” of the film.  It could have been French.  Then it hit me that the 1960s were everywhere, even places that you might have expected to be closed off from global fads.  It was sort of “in the air”, like a global flu pandemic.  Later I read about young women in Kabul walking around during the 1960s wearing miniskirts:


That made me think that what’s going on today in the “Islamic world” isn’t really about Islam at all.  After all, Afghanistan was an Islamic country in the 1960s. Alternatively, women in Saudi Arabia often covered their faces before the Islamic religion was even founded.  Don’t confuse cultural changes, with the supposed justifications offered by proponents of those cultural changes.

Recently we’ve see nationalism sweep across Europe, Asia and the US (Canada and Latin America have so far avoided the bug.)  One explanation is that it’s a backlash against globalization.  I’m not so sure. I wonder if it’s not just something in the air. Consider this recent story from the Economist, describing India:

In India ethnic nationalism, never far beneath the surface, is worryingly resurgent. Since 2014 the country has been ruled by Narendra Modi of the Hindu-nationalist Bharatiya Janata Party (BJP). The party seeks to distance itself from radical Hindutva (Hindu nationalist) groups, which criticise it as “soft” on Pakistan, Muslims and those who harm cows (which are sacred to Hindus). And Mr Modi is urbane, pro-business and friendly towards the West. But he is also a lifelong member of the RSS (National Volunteer Organisation), a 5m-strong Hindu group founded in 1925 and modelled loosely on the Boy Scouts.

Members of the RSS parade in khaki uniforms, do physical jerks in the morning, help old ladies cross the street, pick up litter—and are occasional recruits for extremist groups that beat up left-wing students. And last year Mr Modi’s minister of culture, Mahesh Sharma, said that a former president was a patriot “despite being a Muslim”. The minister remains in his job.

Hindutva purports to represent all Hindus, who are four-fifths of India’s population. It promises a national rebirth, a return to an idealised past and the retrieval of an “authentic” native identity. Its adherents see themselves as honest folk fighting corrupt cosmopolitans. They have changed India’s political language, deriding “political correctness”, and calling critical journalists “presstitutes” and political opponents “anti-national”. The RSS also exerts huge sway over education and the media. Some states and schools have adopted textbooks written by RSS scholars that play up the role of Hindutva leaders and marginalise more secular ones.

The BJP has made a big push to control the judiciary by changing rules for appointments, but has met strong resistance. It does not control most states in the east and south. Many of the educated elite despise it.

Hmmm; national rebirth, idealized past, anti-Muslim, anti-PC, anti-press, anti-cosmopolitan.  Seems kind of familiar somehow. [Let’s hope there aren’t any nationalists reading this post.  I fear that the same low-IQ alt-righters who think “cuckservative” is a clever putdown will also latch onto presstitute.]

India faces many problems, but this is obviously not about “globalization” or “trade” or the “rust best” or “stagnant incomes”.  Or perhaps I should say if it is about globalization, it’s about the cultural aspects, not the economic aspects.

So my theory is that nationalism is some mysterious force that is sweeping the planet (like the freewheeling 60s did earlier), and it manifests itself in different ways in different countries, depending on local conditions.  Those local conditions don’t cause the nationalism; they shape it in particular ways.  Thus nationalism in the UK is not anti-trade, because the UK is a trading nation.  That’s its heritage.  If someone were to talk about making Great Britain great again, they would be referring to a time when Britain dominated international trade like a colossus.

Even in the US we tend to overstate the importance of trade in the election, as Trump actually lost Mahoning County, Ohio.  That’s the home of Youngstown, and often cited as the perfect example of Trump country.  But perhaps I’ll put that issue off for another post

PS.  I’m no expert on India, but based on what I’ve read, Modi is actually quite similar to Trump.  The Congress party is like the Democrats in America, a coalition of minorities and educated elites.

PPS.  I see that the right wing nationalist candidate in Austria got 46.7% of the vote in yesterday’s presidential election, and lost.  Trump got 46.2% in America and won (vs. Hillary’s 48.2%).  I suspect the Austrian lost because they don’t have an electoral college.  Perhaps someone with more knowledge of Austria (mbka?) can tell me if the nationalist did better in thinly populated rural areas, and might have won with an electoral system that reduced the influence of big cities like Vienna.

PPPS.  I enjoyed this article:

Last week, UBS released a survey of 1,200 of its American clients and their attitudes towards the US election. It revealed some striking insights — after the election, for example, the proportion of investors who were bullish about US stocks jumped from 25 per cent to 53 per cent, while those who were bullish about growth rose from 39 per cent to 48 per cent. There was, however, an even more important detail: 36 per cent of respondents said that they did not tell their friends and family who they voted for, because they wanted to “fend off arguments or avoid judgment”.

Yes, you read that right. Among these wealthy and (presumably) educated UBS clients, more than one-third were apparently too nervous or embarrassed to reveal their election choice. Call it, if you like, a plague of squeamish silence.

. . .

As I criss-crossed the US this past year, I often heard middle-class, professional people tell me — with slightly embarrassed smiles — that they “understood” the appeal of Trump’s promises about change. Yes, their comments were typically laced with distaste for his aggressive persona and words — you only have to look at his outburst against Saturday Night Live to see why his tweets make people wince. But what struck me on my travels was that people voting for Hillary Clinton were rarely embarrassed to admit to it. Instead, they were resigned or dutiful. In political terms, a vote for Clinton seemed akin to eating spinach. A vote for Trump, however, was more like eating ice-cream laced with whisky for breakfast — something that establishment people did not want to admit to. . . .

It is striking, for example, that the one poll that was more accurate than most was conducted by the right-leaning political consultancy the Trafalgar Group. Early on, it decided that people were lying about their voting intentions. So it started asking questions such as how respondents’ neighbours were likely to vote. Not only did this deliver a different result but it enabled Trafalgar to predict the result in both Pennsylvania and Michigan.

The author calls these “shy voters”.  But it’s clear that the emotion being described is shame, not shyness.

Two targets, two tools

An important idea in macroeconomics is that you need at least as many tools as targets.  Over at Econlog, I have a long post discussing Roger Farmer’s views on monetary policy.  Here I’ll do a short post, giving you the Cliff’s Notes version.

In a better world, economists wouldn’t focus on interest rates.  But they do.  So how do we make sure that a change in interest rates has the desired effect?  After, all, higher rates could represent tight money (liquidity effect) or easier money (income and Fisher effects.)  How do we pin it down?

With two tools.  If you want interest rates to rise, you can raise the IOR.  If you want to make sure that this increase reflects the income/Fisher effects, you need to also use one of the following tools:

1.  A huge increase in the quantity of money (old monetarist)

2.  Target a higher commodity price index (1980s supply-side econ)

3.  Target a higher price of foreign exchange–i.e. depreciate your currency.  (Mundellian economics)

4.  Target higher stock prices.  (Roger Farmer)

5.  Target a higher NGDP futures price (market monetarist)

In each case, you use a “whatever it takes” approach to open market operations, to get your second policy tool moving in an unambiguously expansionary direction.

Recently, the Swiss did this in reverse.  In January 2015 they lowered interest rates and simultaneously appreciated the Swiss franc.  This assured that the lower interest rates were contractionary (income/Fisher effect.)  Singapore also uses exchange rates as a policy tool.  The BOJ has dabbled in Farmer’s approach, buying ETFs.  But not enough to make it effective.

PS.  Nick Rowe has a related post on Roger Farmer’s proposal.

Off topic:  In January 2014, I argued that “IndoAsia” would be the next big growth story.  This article says it’s beginning to happen.  And remember that 60 Minutes story about the ghost cities in China?  The ghost neighborhood in Zhengzhou that they highlighted seems to be doing fine:

Home prices in at least one district in Zhengzhou, which became a symbol of China’s property excesses because of rows of empty housing developments, have risen two-thirds this year to 25,000 yuan ($3,747.56) per square metre on average, a sales manager told Reuters on a recent visit to the city.

The average new home price in 70 major cities climbed an annual 9.2 percent in August, up from 7.9 percent in July, according to data from China’s National Bureau of Statistics.

After a period of modestly slower growth, the China boom is picking up speed again.  Looks like the naysayers will have to wait a few more years for the most widely predicted crash in history.

It’s hard not to be super optimistic about the world right now.  Asia is booming, and most people are Asians.

A sad day for India

Although I don’t agree with Mr Modi’s political views, I had hoped that he might reform India’s economy.  Unfortunately, right wing nationalists almost never opt for neoliberal policy reforms, it’s just not in their nature.

Today, the print addition of The Economist came out with an editorial asking the Modi government to reappoint Raghuram Rajan as head of the RBI.  Unfortunately, the government decided to go in a different direction, despite Rajan recently being named central banker of the year.  He brought Indian inflation down to more modest levels, without damaging India’s growth (which was 7.9% in the most recent quarter).  Rajan was also a powerful voice for economic reform, which may have been the problem.  The Economist editorial hinted at the opposition he faced:

Various Rajan devoted pages on Facebook have a combined fandom of over 250,000 people. Janet Yellen and Mario Draghi, his all-powerful counterparts in America and Europe respectively, cannot muster 10,000 thumbs-up between them.

Such adulation makes many suspicious. Mr Rajan has come under sometimes ugly attack from within Mr Modi’s BJP party. One member of parliament has described him as “mentally not fully Indian” on account of his international career.

I guess someone who is not satisfied with the Indian subcontinent being mired in poverty is not truly “Indian”.

An article in Quartz by Harish Menon listed some tweets lamenting the government’s decision:

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Lesson for right wingers—don’t make a pact with the devil.  If a politician is bigoted against unpopular groups like Muslims, don’t believe his promises to make the country great.  The same (non-utilitarian) mentality that leads to bigotry, also leads to the path of crony capitalism, not utilitarian neoliberalism.

A sad day for India.

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No matter how hard I try, I can’t think of anything outrageous

When visiting GMU in 2009, I was asked for my most outrageous belief.  I tried to use my view of the crisis; that tight money, not the financial crisis, caused the Great Recession.  But they wouldn’t accept that example.  Later I tried to satisfy them with a post claiming that India would have the world’s largest economy within 100 years.  I thought that was a fairly outrageous prediction, as most people think of India as a poor country.  Later I learned that it’s not really that outrageous, and moved the date up to 70 years out in order to be more provocative.  Now I’m going to move it to 50 years.  That’s right, in less than 50 years India will have the world’s largest economy.  Maybe 40.

A recent paper by Willem Buiter and Ebrahim Rahbari contains the following table:

By 2050, India’s per capita GDP will be almost 75% of China’s per capita GDP, and India’s will be rising faster.  That’s just 39 years out.

Meanwhile the UN says that by 2050 China will only have 76.5% of India’s population.  That means the total GDP of India will be almost as large as the total GDP of China by 2050, just 39 years from now.  And India will have a much faster growing population (China’s will be shrinking by then), and somewhat faster growth in GDP/capita.  India will become number one sometime in the 2050s, and that means my younger readers will live long enough to see this blessed event.  Alas, I’ll be gone by then.

I’m increasing resentful of the GMU people for rejecting my outrageous claim that tight money by the Fed caused the Great Recession.  No lowly professor at Bentley should be expected to come up with more than one such idea in a lifetime.  I’ll die a happy man if my gravestone reads:

Scott Sumner:  Devoted his life to blogging on Hetzelian ideas.

(Robert Hetzel has a great new book coming out, which may revolutionize how the profession thinks about the crisis of 2008.)