Aggregate demand, corporate debt and deleveraging

Here are a couple of articles which indicate the consequences of a slack in aggregate demand on corporate debt and the growing need for companies to deleverage debt through asset sales.  We can notice this trend not just in India but also in China.

http://www.livemint.com/Companies/JBn41JpbNPdPBxzOb2FzIO/LT-to-sell-assets-dilute-stake-in-noncore-businesses-AM.html

http://www.thehindubusinessline.com/opinion/editorial/taking-a-haircut/article7678161.ece

Does the government need to step in and increase infrastructure spending?  Can we hold on to "austerity" and worry about fiscal deficit targets?  How do we know that infrastructure projects will not be underutilized (like ghost towns in China)?

These are questions to ponder over.

The pressing need for a new perspective

Today's piece by Prof. Deepak Nayyar in the Livemint (12.06.2015) clearly summarizes the problem with neoliberal economics - although the work neoliberal was never mentioned.  At the core of neoliberalism is inflation targeting and its consequent implications for control of the fiscal deficit. These policies are strangling not just India but even countries like Greece which are unable to come out of depression.  Prof. Nayyar has highlighted the need for "to question and get away from a blind belief in any idea, for ideologies that turn into faith are dangerous."  Who can disagree?  But critiquing economics has always been countered with the question; what is the alternative?  I think here we need to turn to post-Keynesian economics ... and Modern Money Theory in particular.

Here's the link to Prof. Nayyar's article:

http://www.livemint.com/Opinion/DubsmSzgYLBp3Swu8TqPII/The-interest-rate-conundrum.html

My new book - In Search of Stability: Economics of Money, History of the Rupee

In Search of Stability:  Economics of Money, History of the Rupee

Sashi Sivramkrishna

Manohar, New Delhi 2015, 490 pages

ISBN 978-93-5098-100-9

In Search of Stability seeks to understand the economics of money through a narrative on the history of the rupee. The period delineated for study is from the time of introduction of the rupee by Sher Shah Suri in 1542 up to 1971, the year which marked the beginning of the end of the Bretton Woods era and a fixed exchange rate regime.

The underlying thread that runs through the narrative is the positive economics of money and history of the rupee.  This is a book that explains what happened rather than raising normative questions on what ought to have happened or what could have been a more appropriate monetary system for India.

The economics of money also draws us into understanding the evolution of monetary instruments through history and their impact on the economy.  These instruments cannot be separated from the institutions that develop and are developed by them.  A digression into a study of the origins, nature and development of some of the most important monetary institutions in India has therefore been included in this book.

While standards of living have risen enormously, money has struggled to maintain its value across place and time, without definitive success.  This has brought with it crises and severe hardship to entire societies; a lesson which the history of the rupee unequivocally reveals.

The book is available through the publisher, Manohar (New Delhi) or Amazon-India.  Below are the links.

http://www.manoharbooks.com/BookDetails.asp?bookid=140435&Page=1&subjec=%20%20Others%20%20%20%20%20(In%20Search%20of%20Stability:%20Economics%20of%20Money,%20History%20of%20the%20Rupee)

http://www.amazon.in/Search-Stability-Economics-Money-History/dp/9350981009/ref=sr_1_2?ie=UTF8&qid=1433221787&sr=8-2&keywords=sashi+sivramkrishna

The general drift of neoliberalism

Two headlines caught my attention today; from these we get a clear picture of the general drift of neoliberalism.   The Times of India (see link below) declared:

SOCIOECONOMICS: BIG TALK, TIGHT FIST

Funds cuts pinch edu & health schemes

Slashing the education budget and keeping the outlay on health static in Modi government's first Budget was seemingly based on the sound logic of the Finance Commission giving bigger share of taxes to states.

But three months later, harsh reality has sunk in. Mid-Day Meal (MDM) cooks, anganwadi workers and Mahila Samakhya workers have hit the streets and state governments are feeling the heat ….

http://timesofindia.indiatimes.com/india/Modiversary-Socionomics-Big-talk-tight-fist/articleshow/47378636.cms

The other headlines that was an interesting contrast to this was in the Livemint.

Industries call on Modi to spend Rs.1 trillion (Rs.100,000 crore) to boost economy

… At the top of India Inc.’s wish list are investments in infrastructure, simplification of rules for acquiring land and implementation of a proposed national sales tax. Executives say the government should take the lead in financing new roads and public projects to give the maximum boost to Asia’s third- biggest economy.

V.S. Parthasarathy, group chief financial officer at Mahindra and Mahindra Ltd, suggests Modi make a dramatic move by investing as much as Rs.1 trillion ($16 billion) on infrastructure in the next six months. That would provide the country with tangible assets, signal confidence in the future and inject cash that would cascade through the broader economy …

http://www.livemint.com/Politics/hdj6dPF4mtUUilQnHe8ShM/Indian-industry-calls-on-Modi-to-spend-Rs1-trillion-to-boost.html

So is industry really against spending and deficits per se or does it prefer one kind of spending to another?  And the government?  Let’s be clear.

MMT cautions us against reacting to such headlines

Fed said to have emergency plan to intervene if U.S. defaulted on debt

WASHINGTON | BY SARAH N. LYNCH AND JASON LANGE

Reuters, Markets | Mon May 11, 2015 6:59pm EDT

http://www.reuters.com/article/2015/05/11/us-usa-debt-idUSKBN0NW1YS20150511

RICARDIAN EQUIVALENCE: IT SOUNDS SO PROFOUND IT MUST BE TRUE

In a recent piece, Tarun Ramadorai of the Said School of Business, Oxford University, has evoked upon Ricardian Equivalence (RE) to base his argument for optimal debt management.

Does economic theory offer any guidance about the optimal management of government debt?

One of the fundamental concepts in thinking about government debt is Ricardian Equivalence. David Ricardo posited in the 1800s that since debt must eventually be repaid by governments, it is essentially equivalent to future taxation (and will be perceived as such by taxpayers). Essentially all work in economics on public debt management relies on this concept in one way or another.

If debt and future tax policy are two sides of the same coin, the obvious step is to think through the role of debt in the context of sensible tax policy. 

His article can be found at:

http://www.livemint.com/Opinion/RJDJPFZ7X65Kqa4DlbSZPK/Public-debt-management-back-to-school.html


Without examining what he says about this, it is interesting to see how economists evoke RE to build upon their arguments.  RE simply does not hold true in a world of fiat currency.  Ricardo's principle perhaps held true in a world of commodity currency but economists seem indifferent to this changed reality.

The fundamental flaw with RE have been examined in this piece by Auerback and should be read.

https://www.creditwritedowns.com/2010/07/why-ricardian-equivalence-is-nonsense.html

But what interests me is how economic jargon and hi-sounding terms like RE find their way into popular discourse and are swallowed by general readers.

Decentring Fiscal Deficit Target Numbers

You can find my article in the Economic & Political Weekly of 09-05-2015.  Or follow this link:

independent.academia.edu/SashiSivramkrishna

The article questions the obsession with fiscal deficit traget numbers like 3.1% of GDP or 3.6% or 3.9%. Does it really matter?  Should it be the goal of macroeconomic policy??