Will US Dollar collapse? What will be an alternate currency? What about Gold?

At this point I am not sure Dollar collapse is closer. 

A dollar collapse needs to have three points - 

1. The fundamental weakness in USD (we have this more or less) 
2. a World not reliant on US consumer demand 
3. A strong challenger

Last 2 conditions are not met - at least not yet. Euro has its flaws and needs to iron those out before it can become a challenger. Yuan will not be a challenger. SDR is closest option we have but there are issues there too. I am not confident of the blockchain currencies that exist presently.

IF Dollar is really stressed we may go back to a gold-peg rather than other currencies. In fact, gold peg may be quite a good Fed policy for the short term.

If we correct the SDR structure then eventually even the US would love to have a 2-level currency system. 

Previously I have discussed views on US Dollars here:
Dollar, the International Currency system and the Ghosts of Connally

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Comments on Ray Dalio's post on Monetary Policy 3 and MMT

Ray Dalio's comments are always well researched and interesting. For starters, I think, Principles for navigating Big Debt Crises is must read. (Its free PDF). His recent post on his LinkedIn blog is about Monetary Policy 3.0 and MMT. 

Some fundamental comments about present crisis:

1. QE only creates a space for fiscal response: Central banks and governments alike misunderstood the role of monetary policy in the 2008 financial crisis. The crisis was different than others we have faced since Great Depression. Per my reading of Keynes (which seems to different than Keynesians and neo-Keynesians both), in such crises, the proper response has to be from fiscal side. The monetary policy merely creates space for the fiscal response or accommodates the fiscal response preventing untoward consequences. The response had to be holistic - a coordinated and sustained monetary and fiscal policy response.
2. Fiscal policy amplification mechanism is broken: Broken may be a harsh word, we may choose "has become messy" in its place. The point is, fiscal policy needs an amplification mechanism. When government starts infrastructure spending, it needs some real value-creating sector to take it from there and start driving the economic engine. At present we do not have such "real value-creating sector" that can boost employments and wages generally. In 1980s we had tech, in 2000s we had internet, now we need something. In absence of a big driver, we need many small ones. If such capability is difficult to create in one sector it is quite difficult to create in more than one sectors too. The solution is to let inherent advantages play out.
3. Inherent advantages are muzzled: Inherent advantages have stopped driving international trade since east asian crisis, and at a larger scale with China's entry to WTO. Instead, we have pegged exchange rates (soft/hard/overt/covert), manipulated tariff and non-tariff barriers, and, in general, non-transparent trade policy. Until that is fixed we cannot have trade based on pure competitive advantage.
4. Small business innovations are indefensible: When people talk of China usurping Intellectual property they usually talk about submarine plans etc. But I am talking of something very basic. Check out new funding projects on kickstarter - innovative shoes, innovative bags, innovative pens, anything that takes your fancy. Just search on alibaba or just wait for few months you will see some products like those (invented by kickstarter entrepreneurs) in the market on mass scale. These products are not sold by those companies who invented them on kickstarter or such platforms. This is IP theft that hurts the most. It removes new business competitiveness right at its infancy.
5. Trickle-up always works; trickle down some times: Monetary policy practitioners and academic economists in general prefer trickle down economics. But empirical evidence says reverse is true. Trickle-up works all the time. Thus, when there is a choice of bail out, we must lean to lower strata. (A) It is more fair and just, (B) better optics and (C) right incentives. But MAIN reason it works because it balances the bargaining power of both sides. Bail out the top and they lean on to regulation to prevent or constrict trickle down stifling the economy. Bail out the bottom and lo and behold all the incentives align beautifully.
6. Certainty of employment and wages is the one super-indicator: The best solution to any crisis is to get certainty of employment and wages going, rest follows from that. Today we have almost full employment but it is uncertain. Wage predictability is also uncertain. That's why the lack of demand is so persistent.
7. Interest Rates are like friction: Too much and too little friction are both bad. Sames goes for interest rates too much is bad, too little is ALSO bad.

Some comments about Monetary Policy 3:

1. Debt financed Fiscal spending financed by QE: I don't agree with Ray Dalio that this was pursued after 2008 financial crisis. The fiscal spending was essentially going to the same group who could access the QE funds. Yes, there was fiscal deficit and increased fiscal spending and yes there was QE to finance it. But this is exactly the wrong kind of stimulus as I have written since 2009 itself.
2. Giving $10,000 to one person Vs $100 to 100 persons Vs $1 to 10,000 people: Helicopter money is not easy to design. The behavioral response in each of three cases varies drastically.The range of outcomes possible is mind boggling.
3. Spending conditions interfere political rights: If I am tasked to spend $10,000 can I give it to someone from my family to pay down her loan? Does that amount to spending? Should I buy something? What thing? These questions are difficult to answer, monitor and control. 
4. A little inflation is necessary: People will spend when they can surely afford it (condition above - certainty of employment and wages) and it will get costlier tomorrow. Inflation is important, zero inflation may not be that great.

The examples of Monetary policy 3.0: 

The best part of the analysis is the historical perspective Ray Dalio gives. Sharp readers of this blog will immediately note that there are fundamental differences between the conditions in various situations described and those existing now. That is acceptable difference.

Particularly interesting is the Roosevelt response in 1930s. It still forms the basic template for solution today. However, we are at a slightly different position today than in 1930s. So we have to make more adjustments than Dalio may seem to suggest. [Dalio is NOT suggesting it - it appears simple but it is incredibly complex - politically, fiscally and economically]

In Sum

Do not understand these comments as put down of Ray Dalio (as if he cares what I think!). I admire the man because he is being honest and creating a framework to solve the crisis. Good intentions and honest efforts deserve praise - even if the guy making those efforts is one of the richest.

From my side, I solved this crisis puzzle back in 2009 itself.

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Can only US markets go higher in the face of tariffs and other trade headwinds?

In one word - NO!

One the trade front, the US needs other countries (suppliers) as much  as other countries need US as a consumer No. 1. Yet, the consumption burden falls excessively on the US. That too is not sustainable. In the natural course of things this burden should gradually pare down. This natural process was impeded by interventions in currency and trade policy by (a) East Asian economies following 1997 crises and (b) Japan first then China. 

In the first case, the impact is benign as the comparative sizes of the economies in South East Asia and US/UK etc is too big. 

The second case turned out to be problematic, though bit less, in case of Japan. Absent the computer and technology revolution, US would be in same position as today as in post-Japanese growth phase. At the time when the US jobs were diminishing in the face of Japanese competition and trade, Tech was already cooking in the oven. The massive productivity boom unleashed by tech was supported by job growth in new sectors. These sectors pulled decent quantum of current workforce and modified the training profile of upcoming workforce.

Today, there seems to be no new sector that is vigorously attracting the current workforce into itself. There are two reasons for this. First, the speed of Chinese growth is dramatically higher than Japanese growth. What Japan achieved between 1945-1980, China achieved between 1980-2000. Second, Japan started at the time of man-power constraint. China started gaining traction when manpower was becoming surplus. Therefore, job "protection" in developed world has become important.

The trade fears can be allayed / calmed if there is another sector that can create as many jobs for the profile of workforce that exists today and about 20 years from now. Absent that, growth will require  fighting for a larger share in a diminishing pie - a potent trigger for conflict.  The war can be won by biggest bully if he is alone. But when there are a few contenders it takes time to settle the pecking order. Many skirmishes (I mean trade & currency conflicts) need to happen to settle that order. For strategy suggestions we can look at how pecking order is established in prisons. The strategies will be same the tools will be sophisticated. 

Thus, US cannot do trade wars alone. US needs its own "gang". That gang was NATO, NAFTA and these days the "Quad".  The Stock markets of one gang may rise if the gangs are tighter) and they may decouple from other gang. But only US markets rallying is not possible.

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Interesting Readings 11 June 2018 = Is Debt Jubilee lurking?

I came across an article titled Some ways to introduce a modern debt Jubilee at Vox. The article is in line with the recent discussion about debt. John Mauldin has highlighted this problem generally and more specifically in the last Thoughts from Frontlines. A few months back Christopher DeMaria had written about debt jubilee on Seeking Alpha article titled The American (Debt) Jubilee, And The Current Correction.

Debt Jubilee may be lurking in our future. It is not as bad as it sounds. For some kinds of debt, when prevalent in excess, needs to be written down. I have highlighted the difference between good debt and bad debt earlier - i.e. productive debt and unproductive debt.

Productive debt creates an asset of higher value than the debt itself.

A large part debt currently outstanding is unproductive debt. All consumer credit is unproductive, except educational loans or student loans. It does not create a means to pay the debt back. Thus, debt jubilee may be a proper solution to problem of unproductive debt. Productive debt in trouble can be repaid by extending more productive debt.

The alternative could be to extend and inflate it away. But will there by appetite for that?

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Revenue Deficit vs Fiscal deficit and Fiscal responsibility

"Ballooning Revenue Deficit is far more worrisome than nominal slippage in fiscal deficit" said Mythili Bhusnurmath in ET. Her views are correct. But how to curb Revenue deficit. Let us understand the terms a bit more in detail.

Revenue deficit is amount by which Revenue expenditures exceed Revenues. 

What are revenues or Revenue receipts?

Revenues can be tax or non-tax. Tax component includes share of tax of Union Government in general taxes and "cess" or specialized taxes accruing to Union Government alone. [Refer Note 1]. Non-tax revenues includes interest on loans to various entities (state governments, etc.),  profits and dividends from enterprises, duties and fines received, grants from multilateral agencies or other governments etc.

What are revenue expenditures?

Revenue expenditures includes:

1. Salaries and pension paid to government employees
2. Subsidies
3. defense expenditure (relates to national security)
4. Government procurement from stationery to vehicles to arms and ammunition for police (internal security)
5.  Expense required for running government schemes and programs
6. Interest paid on borrowings - domestic and external.
   

Fiscal Deficit is more like capital account deficit.

Capital Account Receipts side includes recovery of loans to States etc., receipts from disinvestment or privatization and borrowing (external and domestic). Capital expenditures includes investments in Public sector companies, investments in public projects, etc.

Further, accounting 101 will tell you that revenue deficit accumulates in the Fiscal side and it has to be financed through borrowing which sits on the capital account. The servicing of this borrowing is done through revenue expenditures. These twin deficits thus, are quite interlinked. Mathematically, it is true that we can reduce Fiscal deficit (FD) while Revenue Deficit (RD) remains high. But it is true only for small values of RD. But a more ideal situation is when FD is higher (though less than the 3%) and RD is zero or lower. Then, one presumes, your excess FD would be mostly because of high quality capital expenditure. This capital expenditure will yield more Revenues and thus lower RD in the future. [Refer Note 2].

The Problem

For past decade or more, reverse is true. Most of borrowing is used for revenue expenditures - i.e. payment of salaries to bureaucrats. In return, bureaucrats and government employees have stifled any possible revenue growth for citizen or companies thereby reducing the revenues. This widens the revenue deficit and pushes the system into a negative spiral.

It is clear that the present malaise is largely self-inflicted. Imposing FRBM target without first having a RD at zero or lower is a recipe for disaster. At present, government appears to throw disinvestment money after revenue expenses and that is very bad idea. It erodes the structure of the economy.

How to kickstart the positive spiral?

The government is now required to first ensure that RD is reduced to zero but using revenue receipts. That requires expansion of tax base which is impossible without taxing agriculture. Thereafter, using asset sales i.e. disinvestment or privatization route, reduce the lower quality borrowing. Most of the borrowing by the government should be directed towards investments that yield revenues in the future and thus create structural zero- revenue deficits or revenue surpluses. This is the improvement in quality of budget is what prudent observers seek.

Notes:

1. Indian federal structure implies that both center and states have power to tax and they have share in the tax. Most of the taxes are shared and go into "consolidated fund of India" for central share and "consolidated fund of the state" for state taxes.
2. Ideally, the any borrowing or loan or debt should create more revenue than expenses required to service it. To do that, borrowing must be invested in revenue boosting ventures. Companies borrow to buy new machine that can increase production. Similarly nations should invest in those assets that will increase profits for citizens and companies and thus improve tax receipts.

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Tax as a destabilising force - Border Adjustment Tax

John Mauldin, a prolific commentator, is well connected to the Republican establishment. He has recently concluded a three-part series titled Tax Reform: The Good, the Bad, and the Ugly on the coming tax reform in the US. The parts can be found here - first, second and third. It is a must read. 

The US is trying to simplify tax structures. This, by itself, is nothing new. All the countries have been trying since time immemorial to simplify tax codes. Surprisingly, they keep getting more complicated. I do not think "simplify" means what you think it means. But this time, it does seem simpler. Let us not jump the gun, it is still early days. Let the bureaucrats have a go at it and it will come out as complicated as it has ever been. Nevertheless, the intent seems to be right.

The disturbing part is the way BAT or Border Adjustment Tax is supposed to work. John paints a pretty grim picture and rightly so of the adverse consequences of ill-thought out Border adjustment tax. Mauldin and his friend Charles Gave, both seem to suggest that this move will disturb the present equilibrium. Other republicans do not think so. But there is merit in Mauldin-Gave arguments.

And then I read the US intelligence’s ‘Global Trends, Paradox of Progress’ report. That is another bleak report. What is disturbing is that the world seems to be in a precarious balance at present and 5 years out. Some situations in next 5 years as highlighted by the report:

Now the timing of BAT by Trump has become exceptionally crucial. At times in history you get amplified impact because historically small acts happened at unstable times. Here we are faced with a big act at unstable point. In effect, we are beholden to Trump's good sense, pragmatism and sense of leadership.

Interesting times these.

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Why is QE — ZIRP/NIRP not working?

Most people wonder as to why Quantitative Easing (QE) along with low interest rate policy is not making their life easier. John Mauldin and Neil Jensen in their letters are wondering where the road to recovery is? Where is the inflation? Where are the corporate profits? Where is the growth? QE and low interest rate policy were the response of FED to the crisis of 2008. Some central banks have already gone Negative interest rate policy. But as yet, they are not working. Why? Because they are not supposed to work.

The crisis of 2008 was the result of few forces striking together — an over leveraged borrower, inflated prices of collateral and banking system with management’s hand in the cookie jar (lower provisioning and accounting gimmicks to announce record profits), resultant working capital -denied supplier and a proprietary money-desk betting on failure of the main street engineered by bank runs. When the crisis unfolded the prop-bets made a X amount of money, main-streets bets lost a 10X amount of money and banks ended up in trouble. FED’s response — lowering interest rates and priming the pump through QE was designed to recapitalize the banks and not rebalance the economy. When viewed through this lens the action of the FED makes more sense.

With low-yield funds from the FED, banks bet in the markets and earn capital gains to buffer their balance-sheets. With the balance-sheets bolstered with excess capital, the banks may, if they take fancy to it, then start lending to the main street thereby kickstarting the main-street which will hire more, jobs will come back, incomes will rise and debt will be repaid and world will be glorious once again.

This lens also tells us that FED is not going to raise interest rates any time soon. Not yet. The reason is that banking system is ever more skewed. The banks figured out way to make money for the management and shareholders without going through all that trouble. Just bet on the markets — inflate the asset prices (we are at upper end of the PE multiple band for stocks, Housing prices are recovering when quality of jobs is declining) make the bets, earn the money, keep provisioning low but DON’T announce record result as some costs have gone up. If you are wondering which costs are going up when inflation seems to have losts its mojo — don’t ask me. “The math dont add up mate!” Since provisioning is not adequate, if asset prices were to correct, banks will be in ever more trouble. The “Too big to fail” have become “If I fail you really get fucked” big. They need high asset prices and INCREASING asset prices to justify and unwind this shit.

Oh and if you want a way to fix the banking for real — fix the main street and banks will fix themselves.

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Should banks create money?

Bloomberg has a post about centralizing money supply - whole money, as they call it. It is not a very good idea. This is not the first time such suggestions have come up. As mentioned in the article, Irving Fisher first proposed a similar plan in the wake of the great depression. Since then many have proposed this idea but not many understand money creation.

Taxonomy of centralized money creation idea

The money creation ideas are varied:

1. Gold money: This is natural money creation. No one has any control over the money creation. Previously, gold, silver, diamonds, precious stones and other valuables (and sometimes sea shells too) were used. Many serendipitous discoveries of valuables created havoc with the money supply. Discovery of Potosi in South America and thereafter further discoveries of gold and silver had the effect of expanding Spanish money supply. 
1. Not under any control: Neither governments nor banks, no one has any control over the money creation process.
2. But Non-Arbitrary: It depends on the amount of gold you have. If you want more gold, you better import more gold by giving some valuable service to the other countries  who have gold. Over time as the total amount of gold available starts reducing you need to offer more and more to the countries that have gold.
3. Though subject to Nature: If by chance you discover a gold mine, you will be filthy rich, though if you discover too much then it may unleash inflation. Spain is believed to have faced such inflation on the discovery of silver mines in the South American colonies.
4. Deflationary and restrictive: As economic activity grows it becomes too high compared to the total amount of gold available to back it. Thus it tends to slow the economic growth pace. (Don't know if that is good or bad).
5. Favours status quo, old money and advantageous to miserly: Since total value of gold you have increases with time, people tend to postpone purchases and hold on to gold. Spending happens when absolutely necessary.
6. Exploitation and Theft prone: A doctor can charge atrocious fees from a rich person because of bargaining power equations. Gold can also be stolen. Stealing credit cards is less useful.
2. Gold-backed money: Introduced to circumvent the deflationary gold currency, countries peg the value of their currency to the gold they can back it with. When people talk of gold standard they are referring to this type of money creation. 
1. Partly Government controlled: Government issues currency and states the total amount of gold they back it with. So a gold-to-dollar exchange rate is established. The government can improve its reserves and thus improve money creation. 
2. Non-arbitrary: In its pure form it is non-arbitrary and similar to gold-money.
3. Not purely nature driven but subject to shocks: Since the government has control over the amount of money and amount of gold, the money creation is not as whimsical as simply discovering a gold mountain. Governments can reset the exchange rate to compensate for some changes. But arbitrary government intervention results in shocks and disruptions.
4. Mostly deflationary: Governments cannot measure economic activity easily (yes GDP calculations are guess-work and there is no Santa Claus just in case you were wondering). That leaves money creation open to political whims and fancies and invites tampering of measurement of the economic health. Mostly governments are slow to acknowledge the real growth in economy since it is always backward looking. It realises the growth till the growth results in deflationary pressures then increases money supply and causes a spike.
5. Perception of money losing value as government reset gold rate: As total amount of product and services of value in the economy rise more than amount of gold to back it up, the government is forced to alter the gold-dollar exchange rate downward leading to people feeling that each dollar is worth lesser in terms of gold though purchasing power may be higher.
3. Government-created money: This is non-gold standard money. Simply speaking the government issues money and backs it with a promise. This is what people wrongly believe is the current regime. 
1. Full government control: The government has effective control over the process. This is a mixed bag. It depends on the government. 
2. Some central bank control: The exact control depends on how money is created, is it by using government bonds then bought to a certain extent by central banks or some other way (simply printing).
3. Depends on confidence in Government: Prudent governments enjoy advantages but if you are Zimbabwe then you will end up in trouble.
4. Inflation/deflation depends on policy: If a government print too much then it stokes inflation and too little results in deflation. Prudently executed (Milton Friedman's about 3% money supply growth) works fine.
5. Value of money depends on inflation: If the government is able to deal with money creation effectively then a mild inflation - say 2% may result. There is not too much loss in value and it can be notices only over long time frames when quality of life changes are also noticeable.
4. Money created by banks: Mostly commercial banks create money by giving loans. These loans do not exist as money. This is the most misunderstood money creation mechanism. It is distributed money creation, without extreme control. Bankers and regulators forget that its success depends on devising proper incentives. 
1. Less government control:No country uses this method exclusively. Both Government-created and bank-created money is deployed. Thus there is always government control of some sort. Also since government is also a borrower (a big one at that), it has control.
2. Part central bank control: Central bank exercises additional kind of controls in this mechanism. First, it can partner with government in its money creation process by buying government bonds etc. Second, it controls the lending to the banks and thus influences at what levels of risk do banks create money. The key word is influences and not dictates. Thus this process is often likened to "pushing at a string" (which is difficult, you can pull at a string pushing does nothing unless there is pulling at other end by the banks).
3. Control to banks: In this scenario, Banks can ALSO determine whether to create money or not. That decision is based on whether the person demanding the money will be able to repay it or not. If he can, it means he is creating value with this money and thus able to repay it. 
4. Decision at the point of demand of debt: The decision to create money is forward looking. It is made at the point the person makes a demand for the debt. That borrower is expecting to create future value. If by banks assessment that value can be generated ONLY then money is created.
5. Depends on incentives: After reading this if you wonder why banks lend for consumption goods or lend to uncreditworthy borrowers - it is because of incentives. The power to create money is substantial power and with bad incentives, it can cause systemic harm as seen in 2008 crisis.
6. Central bank oversight: Central banks have oversight duty to watch what kind of money is created by the banks. The nature of lending is supposed to be value-focussed. Some consumer lending at the time economy is entering a pro-longed boom phase can be advantageous. But in an economy which cannot sustain a prolonged growth phase, these are risky loans and their proportion needs to be limited.

My suggestion

Out of the options, I prefer the last one - a combination of bank created and government created money. It is quite forward looking and takes place at the point of demand. It needs a lot of oversight and decentralisation. I have argued that IT systems have in fact centralized the loan decision making than allow the front-line managers to make them. This has resulted in an inaccurate assessment of borrowers and partly responsible for the 2008 crises. Amar Bhide also makes a case for intelligent decision making in his book "A call for judgement".

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What should governments spend on when faced with fiscal stimulus?

At the time of financial crisis of 2008-09, we were lucky to have the best monetary policy experts around. They seemingly used their various tools - some conventional and other unconventional. Yet about 8 years after we find we need fiscal stimulus as Mario Draghi put in an ECB statement in early summer. Luckily the US presidential candidates agree with this view. So in all likelihood, we should see some fiscal stimulus coming in.

Yet, the understanding on the fiscal side does not seem to be as well developed as the monetary sides. For one, exactly what Keynes prescribed is still much debated. Second governments don't know what to spend on. Obama famously called for "shovel-ready" projects. Milton Friedman (who died in 2006) would cringe in his grave. There is nothing more dangerous than a government committed to a fiscal stimulus that does not know what to do with it.

Looking at Roosevelt/Eisenhower

It is, however, well-accepted that after the World War II, the Roosevelt/Eisenhower initiative of building inter-state highway was one of the biggest fiscal stimuli to the US economy. The genesis of this project was the cross-country trip Roosevelt took in mid-1920s which may have given him a hint of its potential. Once it was implemented, its fruits accrued at least till late 1990s. Even in the era when the internet made distance irrelevant, these highways continued to contribute by way of lower transportation cost thereby giving firms advantage in making supply available at lower costs than otherwise. 

If fiscal policy is to be deployed today where can we deploy it? What areas would have as much purchase as did the highway program of 1930-40?

To answer this we need to imagine the economy as a network of value chains. Such a network has some common elements which need government support. These are the areas where fiscal policy needs to be directed. This is the efficiency angle. If any government wants to orient its economy in a certain direction then this would be the time to make investments in the missing parts of the value-chain that can be shared in the new era. 

A few I can think of:

1. Going green: Reducing Oil-dependance is an option : The very basic pieces of all value chains do contain energy. So an advantage in green energy may be quite advantageous in the long term. Green energy needs a lot of work but could be a potential candidate. It could do with some sort of Manhattan Project 2.0 (the first was for nukes) for making green energy possible. They could standardize the electrical charging stations for hybrids, developing standards and technology to allow smaller wind mill operators to supply into the grid at a time of their convenience. Tesla is looking at this vision through private means.
2. Going blue: Usable water: Food and water will continue to form part of value chains at a very basic level. While global food production is quite high (we destroy a lot of excess food), same cannot be said of global nourishment.  It is undeniable that whatever food we grow we will need potable water. Many say if we find green energy then we can desalinate the water. But low fresh water has an ecological impact on bio-diversity, food-chain dynamics etc. that cannot be dismissed. In that sense, the bio-diversity advantage may trickle into better nourishment and healthier foods - who knows. So I would focus on water management.
3. Carbon catchment could be more urgent: In his TED talk Bill Gates made a very poignant statement - we need ZERO emissions, not lower emissions. It is clear that we cannot cut emissions fast enough. But can we trap emissions before they cause global warming? Maybe we should! This is more engineering problem rather than technology problem and may be more beneficial. Alas, its effects are very difficult to quantify.

The nature of fiscal stimulus

The exact quantum of fiscal stimulus is immaterial, though it has to substantial. What matters more is how long is that quantum spread and the conviction behind it. That will decide its efficacy. The fiscal needs to be prolonged, substantial and certain. An uncertain prolonged stimulus or variable stimulus without visibility will have no appreciable impact. 

Ideally, it should also be employment intensive. Higher employment intensity will allow the benefits to spread faster through the economy.

The goal of the stimulus is to increase the certainty of jobs and employment while laying down a basic infrastructure for the future. If it achieves this then such a stimulus will work. With a certainty of income will come spending and further downstream positive economic effects.

Note: the suggestions made are simply most promising areas at the moment as per my reading. 

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Is assessment of risk a function of interest rate?

The interest rate that can be charged by the bank has  two limits.

The Lower bound equals what the central bank charges the bank. Any lower and the bank will make a loss on its lending portfolio.

The Upper bound is the ability of the risk taker to bear the burden of return. Thus, if a bank lends to a business that makes 10% return on capital employed - it cannot charge more than 10% else it will be unviable for the borrower to seek the debt at all.

The Actual interest rate charged is determined by a combination of the following factors:

1. An assessment of returns of the business based on the economy and her business 
2. Income of the borrower in total 
3. The value of the collateral pledged against the loan as a security should the borrower be unable to bear that return 
4. The demand for loans AND/OR
5. How well the other loans are doing (health of bank's loan portfolio) AND/OR
6. A combination of these along with global factors

Spread

Bankers think of returns as spread they make on top of the lower bound, i.e. rate set by the central bank. 

Risk V/s Spread

Now, in the mind of the banker risk is correlated with the spread. When the banker perceives higher risk she fattens the spread. This "risk" we talk about is risk resulting to the banker. It does not mean risk of the borrower alone. So if the bankers' portfolio is turning bad, the banker will still increase the spread - partly to compensate for the loss she suffers and partly because she assesses the general economic environment to be more risky. Thus, even if the central bank reduces the benchmark interest rate, the banker is reluctant to pass it on if she can avoid it. This creates tighter conditions putting more stress on the borrower. This is why Scot Sumner argues the monetary conditions were actually tight when we were almost at ZIRP.

In an economy that is weak, it acts as a stronger head wind for borrowers. It reduces their ability to borrow and to service their current borrowing. They want to pay down their debt and reduce their loans. Therefore, the economy contracts further. The banks seem happy at first, but soon realise that other borrowers who are not prudent are pushed to default. The implication of this on the bank depends on the mechanics of the process - the proportion of those who default v/s those who pay back, the chronology in which it happens etc.

In the next phase, the economy recovers, predominantly with equity capital. Equity can absorb the losses since it is built for higher risk. The surviving firms and individuals are left with core strength to  thrive in intense competition and are more prudent with capital allocation. The banks thereafter can lend to these survivors to help them scale up.

What does this mean?

This means, 

1. There is inherent value to competitiveness that signifies its ability to survive and repay the debt and repay the equity at decent returns. This ability reduces with increasing leverage by the borrowers. Thus when Anat Admati suggests investment banks have capped leverage ratios to 20 or 10 it makes sense.
2. Banks' business model seems to encourage the use of debt only to amplify equity returns. It is fine in a way but if that is the objective then banks should reduce/cut lending at lot earlier than they do. Naturally, in times of distress when the return ON capital matters lesser than the return OF capital, banks get into big trouble. It seems they get confused about what is their business model. 
3. Maybe, better than ZIRP, unleashing a new Government-backed Good Bank to pick up assets at distressed prices at lending rates with narrow and fixed spreads can work better. If the size of this bank is large enough in relation to the banking system, it may result in a lesser shock to the economy.

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Of Free drinks and negative interest rate policy...

If soft drinks (Coke/Pepsi/tea/coffee etc.) were freely available would you tend to have more of it? Often I end up having one extra coke. If its tea/coffee I end up having even more. I will have to work it off that day through exercise or it will cause some harm in the long term. 

Zero interest rate policy (ZIRP) is like that - if you already wanted Coke and it was easily available you end up having a little more Coke. Likewise, if you already wanted debt, and it was easily available at almost zero cost, then you will have a little more. But not a lot more - coz you have to work it off.

But what if you don't want them?

Say your doctor told you to not have soft drinks at all - no tea/coffee too. Now will you have that? NO? Even if I give you some money - say 2 cents - to have these soft drinks? Still NO? 

Well, me giving you some money is similar to Negative interest rate policy (NIRP). Or similar to one aspect of NIRP. You get a tiny advantage if you take on debt. Is it that difficult to understand why it doesn't work as central bankers hope?

But may be NIRP could work...

Now some will agree that ZIRP may not work, but, they say, NIRP could work. They point to the second aspect of NIRP which is that if you save you get taxed extra. Now if I have $100 in cash in a bank, next year I will have only $98 so next year I will be able to spend less than I can do today. Isn't that an incentive for spending now rather than next year? I say not always!

There are a few reasons:

1. If the trends are deflationary your $98 next year may be able to buy as much as $100 today - sometimes even more. If the efficient market hypothesis* were working prices would adjust to reflect the new purchasing power. NIRP would create some deflationary force as well. Yes, it is small but it is deflationary never the less. So unless the NIRP was creating an overwhelming inflationary force, it may push a precariously balanced economy into deflation. 
2. The NIRP tax does not affect those paying down an earlier debt. In fact, it encourages people to swap new debt for old debt. Debt repayment helps you avoid the tax. This is even more deflationary.
3. NIRP does not work if I anticipate unpredictable cash requirements - say because I want to keep some money to invest when prices correct, or I think my business loan may need to be repaid if my business does not do well in next quarter, or I expect health care costs etc. In fact, it works reverse - in such cases, I would be encouraged to save $102 or $104 just to keep a buffer.
4. NIRP may push those with huge cash balances to move cash abroad. Do you think Apple and Google will bring that extra cash into a country with NIRP? No way! They might move it to a destination where it will be easier to hold cash. So is this what you want to happen? NO! Who gets affected is the individual who keeps getting taxed extra.
5. I may not want debt or I may not want to spend at all. I have the clothes, I have the phones, computers, TV, house, car, swimming pool etc - all the goodies I can spend on when you nudged me to spend the last time. Now I have mostly everything I need. So why should I spend on something I am not excited about? Beats me!

* I don't think Efficient market hypothesis works on a "point-in-time" basis - though it works on an average basis.

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Yeah! On Brexit!

Yeah Brexit is a reality! Signifies a few things:

1. Politicians have misused / abused the Brexit debate
1. The political and ruling classes are disconnected from the realities faced by the worker class. A sort of marxist dream has come true. Not only can't the politicians talk reasonably with the masses but they also don't seem to care. John Mauldin highlighted Peggy Noonan's protected v/s unprotected rationale - it is playing out now. Necessary corollary - we might be looking at a Trump victory.
2. A sub-set of the worker class problem is the migrant issue. The migrants coming into do have a group of anti-community / anti-EU society that has entered EU creating social tension. While, most of the migrants are male - a statistic that is queer for war-related migration. I would have thought it should be more women and children (as per UN 62% of all migrants out of 800,000 that have traveled to Europe in 2015 are men). 
3. Sadly, this has confused the domestic worker class about rational economic threat to their incomes and political threat to safety and well being. The first is short term set-back but results in long term prosperity. The second is a bit scary. The pro-Brexit vote is more because of second than first.
2. Media hasn't done its bit to inform the average person.
1. Media's lack of responsibility since the crisis has been alarming. But the polarised opinion on Brexit put up by media are disappointing. 
2. The irrational rabble rousing has overwhelmed the thoughtful assessments and complexity of the issues has been trivialised. 
3. Common people in developed countries are going to loose
1. The discrepancy between easy capital mobility and difficult labour mobility affects the working class. If left unresolved, we will end up with capital controls. (Yeah it is a long way away but we are on that road). Alternatively, we can hope that labour mobility will ease up and people will realise their folly. 
4. Our lack of understanding of economics has come to haunt us.
1. Currently, only low income-low skilled people from under-developed countries want to migrate to developed countries because these people are squeezed to be producers in their own country. Similarly, the developed country people are tickled into consuming more than they can afford so that the status quo continues. The developed world citizens do not want to impair their life-style by migrating to developing countries. (That is because developing countries make it difficult to get the same life-style as developed countries - I mean in terms of law and order and quality of education etc.). This one-way traffic had to stop some time.
2. With cheap capital, replacing a low-skill worker by expensive robots is feasible. This pains the working class no end. These people are caught between rock and hard place. They are being forced to go down to low-skill but on-site jobs. (the famous McJobs!)
3. It is this anxiety that has been exploited for Brexit. So part of the blame goes to the economist and finance experts too. These are the very people who look shocked at Brexit vote.

After Brexit what next?

1. In an age of increasing inter-connectedness a Brexit vote is first step trying to reverse the globalisation. There are reasons why anti-globalisation forces have followers - I wrote about this messy intermediate globalised system that is straining the worker class. But advantage really lies in globalisation and not protectionism.
2. Unfortunately, the competitive raising of protectionist barriers will only increase. Marine Le Pen is demanding referendum for France. The northern EU members and Germany will soon be left looking stupid. So instead of PIGS defaulting and exiting - non-PIGS will drop off the union.
3. The war on globalisation had to fought on "sovereignty" issue. It is a political war connected with Swiss bank hidden wealth, Tax havens and other "loop holes". 
4. Once successful politically, these initiatives will turn on economic policy. The good work of integrating the world will be undone by economic and fiscal policies. 

Brexit will be a slow poison

The consequences of Brexit are far more dangerous but they will take time to play out. That means markets and asset prices will remain volatile. Consequently, long term investment in future shall remain the exclusive domain of governments. Add to this the renewed focus on austerity - 1937 looms all over again.

So it is said - may you live in interesting times.

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Lesson from Grexit

Grexit teaches us something fundamental.

Two Approaches to debt

There are two fundamental approaches to debt.

First is the Capitalistic Approach. It says creditors must make investment with eye on risk and should their assessment be wrong, they must take hair-cut. The counter-burden on the debtor is that debtor is forced into austerity so that they make adequate efforts to get the creditors adequate return on their investment. Thus a debtor who made a risky investment is required to pass higher hurdle in the future to prove that his new investment is not as risky. Market adjusts the risk premium to reflect borrowers prudence. A prudent borrower gets lower interest burden while a profligate borrower is required to pay higher.

Second is the Creditor Protection Approach. It protects the creditors to greater extent. The protection afforded comes from various methods. In emergency government could assume private debt (as in EU crisis private debt was assumed by ECB, in 2007-08 crisis even privately owned equity was assumed by the US government). This approach is taken when the creditors are low-risk seeking pension funds or other instrument supporting social benefits. The counter-burden here is not on the debtor, it is on the Government bailing out the creditor. The bailout is only complete if the debt burden is reduced thus, here, the Government takes the hair-cut. This is an approach that promises debt jubilee.

The essentials

We may note that hair-cut is an essential ingredient of both approaches. The question is only as to who takes the hair-cut. When ECB assumed private debt, it assumed the hair-cut as well. Denying that renders the approach useless. This is from the creditor side.

Reducing debtor's burden is also essential feature, with different extent in each model. The Capitalistic Approach favours reducing as against eliminating the debt. Thus, the debtor continues to bear the debt that he can sustainably bear. Conversely, in Creditor Protection Approach the almost the entire debt is waived. So, Greece was right to ask for debt reduction.

The Grexit Model
The EU model fares poorly against either of these approaches. It does not have any essential elements and have worse aspects of both models. It is a sort of mixed model. 

The EU/ECB dilemma is that if Greece is allowed a Debt reduction, other PIIGS will be next in line. The current mixed approach will imply that ECB will be left holding the bag for all the PIIGS. Now in a normal sovereign, the central bank and sovereign are two facets of same entity. But in EU's case it is not so - primarily because the peoples of EU are not politically united. Thus, ECB is "owned" by Germany and other non-PIIGS a different sovereign than debtors. Can peoples of EU be politically mature to forge EU into a political union? If they do it will fructify the original EU dream.

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To RBI: A Case against Rate Cut

The Reserve Bank of India (RBI) is under considerable pressure to reduce its benchmark interest rates in its upcoming monetary policy meeting. However, prudent monetary policy needs to keep rates at the current level rather than a premature easing for various reasons.

First, the present high inflation problem was caused by supply-side constraints combined with demand-side factors induced by rural wage growth. Over the past few months, rural wage growth has moderated and the government is also prudent and is not increasing MSPs. This has eased demand-side pressures and hence the recent inflation strength can be attributed primarily to supply side factors. 

Our strategy to counter supply-side inflation has been to boost supply through increased infrastructure investment coupled with measures to improve ease of doing business. To make it work, we must let supply overtake the latent demand by such a margin that any easing thereafter should unleash a positive demand catch-up spiral. The risk with a premature rate cut is that it creates demand even before supply-side catches up, in turn pushing the inflation trajectory higher. Therefore it is better to err on the side of caution and reduce rates later rather than risk another inflation spurt.

Second, higher interest rates combined with lower inflation augur well for positive real savings return. This has twin benefits. On one hand it redirects household incomes away from consumption into savings; and on the other hand it will creates a corpus of domestic saving that can be re-invested into the economy making Indian investments less dependent and more resilient to external / global shocks. 

Third, high asset prices, particularly real estate prices, are a more substantive burden on economic growth than interest rates. A premature cut can re-invigorate the real estate cycle, adding to the countries financial vulnerability. As the BIS has stated, central banks should focus not just on the business cycle, but also the financial cycle. Higher real interest rate will maintain a pressure on asset prices thereby creating beneficial conditions for sustainable economic growth.

Fourth, higher interest rates (more capital inflows) coupled with exchange rate sterilization measures are helping the RBI create a war chest to counter any external currency shocks. This was indeed the learning from the South East Asian crisis of 1990s – make hay while the sun shines. The RBI, rightly so, expects the near future to be tumultuous in light of US Fed tightening and changes in divergent monetary policies in developed countries. Higher rates will ensure that the RBI has enough dry powder in case of a global economic shock.

In sum, calling for the RBI to cut interest rates – just when the inflation battle is being won- is premature, short-sighted and tantamount to declaring a victory even before the enemy has been defeated. In a world where global central banks are creating conditions for future instability, the RBI should remain a beacon of stability.

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Money Supply and GDP growth

Here is a chart I made showing money supply v/s GDP growth of top 4 developed economies. Tell me what do you think about this.

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Revisiting my assessment of Financial Crisis

Back in 2009, I made an assessment about the financial crisis. In 2013, I agree with most of my assessment. Some of the parts of the situation have changed a bit but the overall picture has not been modified as you can make out.

Introduction - March 9, 2009

I have been amongst the most pessimistic about the prospects of global economy. There has been a lot of harping about what got us into the current mess. Together the blogosphere has painted a picture of gloom. And now that we have painted this dark tunnel it is time to paint the light and the end of it! It is time to decipher the solution to the crisis.

One of the reason great depression lasted as long as it did was because of delay in acknowledging the solution. The solution was always there - no doubt - but it took time for the solution to win over the decision-makers into coordinated action. Thanks to globalisation and internet based coordination, we should be able to do it faster this time. If only we had the solution - or may be we do!

I present my side of solution in next few posts. Let us march towards a light - any light to begin with!

Consumption Centers - March 10, 2009

Who can be consumers?

Citizens, who have savings and income to replenish the savings post buying goods and services, can be consumers. Rest cannot! That implies the developed world - probably with exception of Germany and Japan, cannot be consumers. China, India, Indonesia and other countries with domestic savings will be our consumers. 

Value of consumption

Currently, the exchange rate equations are aligned to repress the consumption behaviour of these populations. In the interest of global recovery these equations will have to be reversed. This will entail a lot of protectionist pressures that are detrimental to consumers. Such measures will wipe out any hint of global recovery. 

Not consuming is always an option

Typically protectionist measures reduce the quality of local goods, increase prices and thereby cheat consumers out of their hard earned money. Today, the globalised consumer, is aware of product benchmarks and price parity across geographies. In current situation, consumers may simply "not consume" inferior products. They will choose to increase their savings. 

How protectionism is detrimental to the world?

This means the advantages of protectionism will accrue only if it continues for prolonged period of time in near future. Till it continues - global depression will continue. It means you will see more enforcement at customs counters in airports, ports and national borders. It means increased smugling of attractive goods establishing a supply chain for drugs, weapons and other illegal trade. All detrimental in socio-economic terms.

Dispersion of Production - March 11, 2009 

Changing producer competitiveness

The question is invariably based on Michael Porter's work on competitive advantage of nation. The only modification is understanding the structural or fundamental advantages. We need to separate out the transient, artificially imposed advantages. A deliberately devalued currency is such a transient man-made advantage. And it will break down. Michael Pettis, makes a fantastic argument how trade policies can influence producer dispersion. 

Who will be new producers?

Producers are located due to various competitive advantages of a region. One of the reason is quality and cost of manpower - let us call this man power profile. Similarly we have a job profile of an economy. Job profile, for simplicity sake, is based on technical knowledge pre-requisites and volume of work. Now ideally in sustainable case the job-profile and man-power profile of an economy should match. Currently there is a mismatch in developed world. US and EU jobs are getting polarized between unmovable low value addition activities on one side and exceptionally high value adding activities on other. 

Man-power profile will stabilize

The volume of low-value addition jobs will have to rise in US - to fit with lowering relative education standards. Now education system in US is way better than other nations. So we are simply comparing US in the future to US in recent past. The problem is in very short-term jobs movements are a zero-sum game (time till entrepreneurship discovers new jobs). So it means US wanting jobs will mean job losses in other part of the world. That, to my mind, is a seed of discord in near future. Hope is migrant workers might go back to home countries and US might actually have a brain drain to ease the pressure a wee-bit. In medium to long term US entrepreneurs will definitely figure out a way to create value in new and innovative ways -creating jobs for the economy. 

Seamless dispersion of production centers

The intersection of man-power and job profiles will mean a more seamless dispersion of production centers across the world. The first demonstration of this will come when some manufacturing jobs moving back to US.

Alternate Credit Channel - March 12, 2009

The global credit channel is a central sysmptoms and collateral damage of current crisis. The core of this is in US and therefore US government agencies are attempting bailout after bailout. The US government is not liable for rescuing an essentially global channel. It's first duty to clean the domestic channel. The two are cross connected to such a degree that they cant tell what they are fixing. 

The solution, to my mind, is simple. Create an alternate credit channel - what I call "the modified good bank solution".  

• Create a good bank - with regulatory charter that allows lower capital norms, higher government guarantees etc. so that it will have liquidity, capital and ability to acquire assets.
• Let it give credit to worthy borrowers who have the ability to repay.
• Create a mass loan transfer drive - where the borrowers to move their loans to this bank - rather than buying loan books from established banks.
• Accelerate the process by establishing uniform common minimum norms for acquiring loans. Start with lowest risk with highest documentary evidence.
• Augment the document checking using other government agencies workforce.
• Repeat the drives till you have covered big chunk of population. Government can take over some homes and convert them into temporary offices - establish geographically wide network - quickly.
• This bank should be broken up into managable units and privatised at a pre-committed date in 5/7 years time.

The global bailouts are more complex. This should be funded with pooled money. Using the IMF or world bank is a good starting point. More on that later.

Addendum: Why Us needs to fix domestic credit channel first?

US is biggest consumer of the world. The world needs able US consumers to continue to spend albeit to their comfort level (and definitely to lesser degree). The able and wanting consumers are currently being denied a chance to consume. This is dtrimental to everyone.

Create Earnings, credit will flow - March 20, 2009 

Current problem won't resolve by just establishing an alternate credit channel. Once the US credit channel is available. Credit flows based on certainity of earnings. Economist's View: Galbraith: No Return to Normal indicates how Galbraith points to this critical point. Let me paraphrase Galbraith:

In other words, Roosevelt employed Americans on a vast scale, bringing the unemployment rates down to levels that were tolerable, even before the war—from 25 percent in 1933 to below 10 percent in 1936, if you count those employed by the government as employed, which they surely were. In 1937, Roosevelt tried to balance the budget, the economy relapsed again, and in 1938 the New Deal was relaunched. This again brought unemployment down to about 10 percent, still before the war. 

The New Deal rebuilt America physically, providing a foundation (the TVA’s power plants, for example) from which the mobilization of World War II could be launched. But it also saved the country politically and morally, providing jobs, hope, and confidence that in the end democracy was worth preserving. There were many, in the 1930s, who did not think so. 

What did not recover, under Roosevelt, was the private banking system. ... If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended. It was the war, and only the war, that restored (or, more accurately, created for the first time) the financial wealth of the American middle class. ... But the relaunching of private finance took twenty years, and the war besides. 

A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.

We have to realised that credit and banking feeds off global real economy. It is actually a cost, however small, for the real economy. So once jobs come back and incomes stabilize (at whatever levels), you will see credit coming back. Without certainity of earnings, the credit channel goes in self-preservation mode - waiting for certainity to return. Being global, the channel can absorb far more bailout/stimulus than any single nation can provide. 

The problem of global income adjustment and therefore credit offtake ability will hit us next. This is the heart of the problem. Next: we will see how we can fix this!

Global Crisis - First Principles Approach - March 26, 2009

Global crisis is a result of three elements freezing together - an overleveraged buyer unable to buy more, a seller without access to credit to create supply and non-existant market where no one trusts anyone. 

We cannot fix all three together as all three elements are vastly globalised and hence too big to fix all at once. So it makes sense to get back to basics. The entire economic system was created with demand at the center. When demand existed - supply emerged and market appeared to match producer and consumer. So we need to fix demand first, help supplier get started and things will start taking care of itself. But! 

First lets get demand straightened out. Demand in recent past was excessive - it will never be that high any time soon. But however small - we need it. Demand comes from wages and employment certainity. This is the basic of Keynesian stimulus - create jobs system will fix itself. So this would have solved our problem this time as well - had it not been for credit starved supplier. 

The supplier, earlier, was driven by equity and debt was but a cash-flow smoothening mechanism. Then we realised the power of leverage to amplify returns, create surplus wealth thereby creating a separate investor class specialising in just providing capital unleashing entrepreneurial energy. This class made the entrepreneurs leverage themselves to the maximum possible limit. This culminates today into credit being necessary mana for the suppliers to produce goods. Without supplier there is no market! 

The market essentially is an infrastructure provided to suppliers to help them address demand - through exchange of goods and services. Market works on marginal cost of exchange. Markets usually take care of themselves so long as demand and supply exists. The maximum fixing markets needs is through ensuring rule of law - enforcement of contracts, protection of aggreived, ensuring people don't cheat or muscle out others etc. Markets are even oblivious of fairness of law - so long as law exists and they get implemented markets will get created. 

Hence the crisis will be resolved if we solve the demand (consumers') problem first. Then we need to fix suppliers' access to credit. It is ok to have latent unsatisfied demand - that often gets channeled into savings. But excess supply translates into inventories and they have costs and lead to supplier anemia. Ensuring law and order will help markets get back in shape soon enough. 

US Solution has been antithetical to first principles

The solution so far has exactly moved in opposite manner. We tried to make market functional by rough-shodding over contracts and ensuring cheater get away with it. We tried to ensure liquidity to help with supplier credit. All this while - the consumer is facing increasing credit card debts, lower job prospects and total loss of confidence in possible return to reality. We haven't really done anything to prevent creditors making predatory moves on consumers. 

The solution to the crisis is essentially a modified Keynes' approach. We need to create jobs while fixing the system in coordinated precision. The kind that won Nadia Comaneci her perfect 10. And the stakes are higher there is not saffety net - no silver medal!

Going Green and Blue - April 21, 2009 

Given that real stimulus will take a form of modified Keynesian approach- we need to know what are the "highways" of today. During the last depression, the building of highway and rail infrastructure got the US out of trouble. This time, to my mind, it has to be Green and Blue infrastructure. 

Going Green

US has been victim of development invention. Most of the infrastructure / engineering of the country is based on older technology thats not green. Few years ago when the green revolution was knocking at the doorstep, it was difficult to see how US and developed world can re-engineer the entire setup to go green in a meaningful way. Luckily the current situation presents us with an opportunity to do just that. In doing so, US will lay the foundation for competitiveness for the coming decade or more while adding to comfort on global warming. 

Going Blue

While green is important, blue is even more so. By blue I mean developing potable water resources. Greening, apart from using lower emission fuels, also means creating tree cover and rebuilding green-ecosystems. Initiating this will require potable water sources. Further water is the most essential commodity for sustaining life. Investing in rain water collection ponds and lakes, water seepage assistance to rebuild ground water resources etc will have to take precedence. India has got an initiative off-ground through India water portal. 

Implications for cities and homesteads

If at homestead level we can create sustainable water and green infrastructure, we will have a much better self-sustaining planet. That imlies our city-oriented development models will have to be modified to make it more sustainable. 

Implications for current economic slowdown

The ability of these initiatives to create jobs is under-rated. If properly deployed these initiatives may create more jobs and more self-satisfaction than most optimistic forecast. These initiatives have unique character. They need huge manpower up front and then possibly the overall manpower requirement for sustaining this effort will be about 3% of original. This means they can create enough jobs to reduce unemployment rates by some percentage points in initial years. And the man-power can be freed in few years as economic activity resumes full steam. 

In Sum

Green and Blue are compulsions. We either take up our share of responsibility or implications are large and life-threatening. As they say, "nature does not do bailouts". The opportunity has presented itself - lets grab it!

 Next I will look at what has changed and what can be our road ahead from this point on.

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