Archive for March, 2010

General government and households

March 23, 2010

One can conceive of pushing back general government, in fact the whole public sector, into their component households.  They would form a vast subset of the set of households.  These would be the households fed by government payrolls.  As opposed to, say, a household which drew its income from employ in the private sector.  So in reality one can in fact reduce the entire task of social accounting to that for a single sector-the household  sector.

So that is the top break for the entire spreadsheet.  One column per household.  Row wise Assets, Liabilities and Net Worth.  This would complete the simulacrum of homo economicus.

Questions about money supply

March 18, 2010

The money supply measures reflect the different degrees of liquidity—or spendability—that different types of money have. The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds.

The M1 component is widely held as a store of value.  Some of it is in use in countries like Ecuador.  Singaporeans import large numbers of dollars.  How much of it is domestically held?

Further, US residents may hold dollar deposits in London banks, Deutsche Marks in Frankfurt, deposits which can be brought to bear on money demand in a moment’s notice.  Money sitting which can become money on the wing in a moment.  This component appears nowhere in the monetary aggregates defined above.

A limerick

March 13, 2010

There once was in NY a dot.

To propose, to propose was his lot

Were woman, which swot

Under right, over wrought

Whom to propose to, and what

From today’s Economic Times

March 7, 2010

Interesting article titled “Which is America’s Best Affordable Suburb?” by Venessa Wong (Bloomberg BusinessWeek).

The question of the “standard of living” is answered glibly by most unthinking people by reference to such schema as the first world, second world and third world.  It is assumed as obvious that the “standard of living” can be generally said to be better in the first world, followed by the second world with the third world having the lowest standard of living.  At the risk of labouring the obvious I wish to point out some deficiencies in this world view.

First some facts. Fishers, Indianapolis emerged as America’s best affordable suburb in Bloomberg BusinessWeek’s 2010 report.  The average family income in Fishers is $108,086 (at todays exchange rate from Oanda Rs 45.5080 per USD) INR 49,18,777.688 rounded off for convenience to INR 50 lakhs per annum.  The average home value is $174,438 (=INR 79,38,324.504 roughly INR 80 lakhs).  The 2008 Census pegged the average US family income at $50,303 (=INR 22,89,188.924 roughly INR 23 lakhs), and the average home value was $173,200 (=INR 78,81,985.6) in february 2010 (NAR). These numbers are taken from the article, I cannot vouch for their accuracy but they should work for a ball park estimate.  The couple from Sri Lanka showcased in the article bought a 3,100 sq ft house (built up? carpet area? what does 3,100 sq ft include?  Did they buy the rights to the land the house was built upon?  How much was the land component of the price and how much for the structure itself?) with 3 bedrooms and 2.5 baths which is now valued at $162,000 (=INR 73,72,296).

What I wanted to point out was that the “standard of living” depends on the each individuals idiosyncratic “preference function”.  I don’t drive.  There was no mention in the above article about a public transport system in this town.  It did say you could drive from one end of the town to the other in 15 minutes.  This affordable suburb would be highly inconvenient for me.  If I lived there, my standard of living would plummet.  Throw in the fact that this is a country where the colour bar was in operation as late as the nineteen sixties, and assorted other unmentionable facts, and you can quite well imagine what my standard of living would be out there.

Thus to reiterate: the standard of living depends on whose standard of living you are talking about.  It also depends on the cost of living of said individual.  No facile generalizations are possible.

From Henry George-for later leisured contemplation

March 7, 2010

The aggregate produce of the labour of a savage tribe is small, but each member is capable of an independent life.  He can build his own habitation, hew out or stitch together his own canoe, make his own clothing, manufacture his own weapons, snares, tools and ornaments.  He has all the knowledge of nature possessed by his tribe-knows what vegetable productions are fit for food, and where they may be found; knows the habits and resorts of beasts, birds, fishes and insects; can pilot himself by the sun or the stars, by the turning of blossoms or the mosses on the trees; is, in short, capable of supplying all his wants.  He may be cut off from his fellows and still live; and thus possesses an independent power which makes him a free contracting party in his relations to the community of which he is a member.

Compare with this savage the labourer in the lowest ranks of civilised society, whose life is spent in producing but one thing, or oftener but the infinitesimal part of one thing, out of the multiplicity of things that constitute the wealth of society and go to supply even the most primitive wants; who not only cannot make even the tools required for his work, but often works with tools that he does not own, and can never hope to own.  Compelled to even closer and more continuous labour than the savage, and gaining by it no more than the savage gets-the mere necessaries of life-he loses the independence of the savage.  He is not only unable to apply his own powers to the direct satisfaction of his own wants, but, without the concurrance of many others, he is unable to apply them indirectly to the satisfaction of his wants.  He is a mere link in an enormous chain of producers and consumers, helpless to separate himself, and helpless to move, except as they move.  The worse his position in society, the more dependent is he on society; the more utterly unable does he become to do anything for himself.  The very power of exerting his labour for the satisfaction of his wants passes from his own control, and may be taken away or restored by the actions of others, or by general causes over which he has no more influence than he has over the motions of the solar system.  The primeval curse comes to be looked upon as a boon, and men think, and talk, and clamour, and legislate as though monotonous, manual labour in itself were a good and not an evil, an end and not a means.  Under such circumstances, the man loses the essential quality of manhood-the godlike power of modifying and controlling conditions.  He becomes a slave, a machine, a commodity-a thing, in some respects, lower than the animal.

I am no sentimental admirer of the savage state.  I do not get my ideas of the untutored children of nature from Rousseau, or Chateaubriand, or Cooper.  I am conscious of its material and mental poverty, and its low and narrow range.  I believe that civilisation is not only the natural destiny of man, but the enfranchisement, elevation, and refinement of all his powers, and think that it is only in such moods as may lead him to envy the cud-chewing cattle, that a man who is free to the advantages of civilisation could look with regret upon the savage state.  But, nevertheless, I think no one who will open his eyes to the facts, can resist the conclusion   that there are in the heart of our civilisation large classes with whom the veriest savage could not afford to exchange.  It is my deliberate opinion that if, standing on the threshold of being, one were given the choice of entering life as a Terra del Fuegan, a black fellow of Australia, an Esquimaux in the Arctic Circle, or among the lowest classes in such a highly civilised country as Great Britain, he would make infinitely the better choice in selecting the lot of the savage.  For those classes who in the midst of wealth are condemned to want, suffer all the privations of the savage, without his sense of personal freedom; they are condemned to more than his narrowness and littleness, without opportunity forthe growth of his rude virtues; if their horizon is wider, it is but to reveal blessings that they cannot enjoy.

From Progress and Poverty (1879)

Facts about English education

March 7, 2010

Oxford University. EDUCATIONAL INSTITUTION. Location: Oxford, Oxfordshire, England. Founding Date: 1096 AD. Motto: Dominus Illuminatio Mea.

“The University of Cambridge was founded in 1209,[…]”

Dulwich College was founded by Edward Alleyn on June 21st 1619, with letters patent from King James I {..}.

Charterhouse SchoolFounding Date: 1611

Magna Carta, also called Magna Carta Libertatum (the Great Charter of Freedoms), is an English legal charter, originally issued in the year 1215.

Optimal control-1.Miseducation

March 7, 2010

I don’t really know the history of education in India (more research required milord) (more time for more research requested milord), but from the smattering I’ve picked up over the years, some tentative conclusions and some questions.

My mothers greatgrandfather was a brahmin, a “toler pundit”, the village schoolteacher.  Not very rich but highly educated.  The education that was dispensed in those days in India was very different from the Jesuitical model.  The guru used to assess each pupil independently, and prescribe a course of learning for him.  This method would take into account the idiosyncratic disposition of the pupil, and recommend a course of learning for him.  He learnt what the guru felt he needed most to know.  This is very different from the standardized syllabi characteristic of modern education.  The Loyola method of instruction ensures that each student is exposed to the same set of facts and books.  This becomes a very effective way of controlling what the student knows.  And what the student does not know.  This translates into a very effective way of mind control.

So: question: is it an accident that the birth of the square matrix schoolroom with students in rows and columns grouped together by age coincided with the end of the feudal age (facts needed here, Oxford and Cambridge were founded 13 something or is that so?).  Question:what passed for education in Europe before the birth of the universities?  How old are the good schools in England:Dulwich College, Charterhouse etc.  Can one date the end of  feudalism proper to the signing of the Magna Carta 10 something?  Apparently, the king who signed the Magna Carta did not know how to write.  Please verify.

Repo rate

March 4, 2010

The RBI, I believe, had a contrary definition of the Repo rate, that is contrary to American, and general, usage.  They used to define a repo as a sale of securities (=absorption of reserves).  The Federal Reserve calls this operation a reverse repo.  To quote: “The Federal Reserve conducts reverse repurchase agreements (reverse repos) by selling Treasury securities and federal agency debt securities to counterparties who agree to sell the securities back to the Federal Reserve on a stated future date. In normal times, the Federal Reserve executes occasional reverse repos with primary dealers; these transactions temporarily reduce the supply of reserve balances and thus help bring the federal funds rate back up to the target set by the FOMC when it has fallen below that target.”

The RBI has since changed over to general usage, and now a repo is for injection of funds, and a reverse repo is for draining reserves.  The quote from RBI Functions and Working in the post “Bank rate, repo rate” below has been struck out accordingly.

“Note : With effect from October 29, 2004, nomenclature of Repo and Reverse Repo has been interchanged as per international usages. Till October 28, 2004, Repo
indicated absorption of liquidity whereas Reverse Repo meant injection of liquidity by the Reserve Bank.”

Discount rate, fed funds rate

March 3, 2010

@Indian Investor:

Apropos your comment, off the top of my head, without doing any research (which needs to be done! point noted your honour), I would say the discount rate sets a ceiling to the tunnel in which the effective interest rate moves, the floor being set by the rate paid on reserves-the bank rate, as noted in the post below.  This is because, the discount rate is punitive.  It is a sign of opprobrium if a bank is “forced into the window”.  You can always get credit at the discount window, but you have to have first class collateral, and you have to pay a higher rate than you would on the fed funds market.

The market for fed funds is an interbank market.  It is the market for overnight lending between banks.  I still haven’t been able to find out if uncollateralised loans are made on the market, but if the main instrument for lending is the repo, these transactions are automatically collateralised.  So what could differentiate the discount rate from the fed funds rate is the list of collateral eligible, as well as the counterparty.  (Here note have to find out these lists of acceptable paper).  The discount rate has to be higher than the fed funds rate, otherwise a bank could borrow at the window and lend the funds on the fed funds market thus locking in an arbitrage profit, or making a “money machine”.  This discount rate spoken of heretofore is for primary credit from the Fed.  There are different rates for secondary credit and seasonal credit.

But as to your point about the fall in central bank purchases of US treasuries, I would like to know the source of your data.  Please provide link.  I am guessing it is either TIC data or  custodial holdings of foreign central banks issued by the Fed.  Even if I take your story as true, I am led to ask (forestalling your anticipation of an imminent collapse in the dollar) what are they going to diversify into, if they are moving out of US treasuries?  USTs remain the only safe haven for the cautious investor, the eurozone paper not looking all that great anymore.  And besides, a precipitous decline in the dollar would reduce the value of existing stocks of USTs held by the Japanese and Chinese central banks.  That would be a huge loss of wealth and it is in the interests of the Japanese and Chinese to see that there is no such collapse.  Thus the dollar looks pretty well poised for the next ten years at least.  Pardon me if I ramble.  And if I have been unfair in attributing to you an apocalyptic vision of the economic future, pardon me as well.