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What We Read Today 13 May 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Modi on course to be India's next leader, exit polls show (Shyamantha Asokan, Reuters) Four different exit polling organizations all predict a solid sweep for Modi to become India's next Prime Minister and his Bharatiya Janata Party (BJP) and allied parties likely to gain the parliamentary majority. However, India has a notorious record of poor results for exit polls and parliamentary election results so little will be certain until official results are announced Friday. If the BJP does not get a majority and form a stable government Modi will have difficulty implementing of of the reforms he campaigned for.

  • World Bank: India Overtakes Japan as World's Third Largest Economy (Ankit Panda, The Diplomat) Hat tip to Sanjeev Kulkarni. Just a week after if was announced that China was on track to surpass the U.S. for the world's argest GDP on a Purchasing Power Parity (PPP) basis, India has passed Japan for the third spot on the same basis. Note: Some are critical of those who place a great deal of significance on PPP adjusted GDP. This is discussed 'behind the wall'.
Oversimplified statements and projections that seem over the top can do damage to an otherwise outstanding body of work - which is beautifully and innovatively presented. Over 300 excellent scientists contributed to this report.

What's good for investors and industrialists need not necessarily be good for Raghuram Rajan. The Reserve Bank of India governor, who battled shrinking foreign exchange reserves when he took on the job last year, may soon face a problem of plenty.

A possible victory for Narendra Modi of the Bharatiya Janata Party in the race for the country's top job has fired up domestic and overseas investors alike. The rush of money that the improved sentiment will bring, should expectations be met, could challenge Rajan's goal of taming inflation and narrowing the current account deficit through better trade.

Today there are 18 articles discussed 'behind the wall'.

Please support all that we do at Global Economic Intersection with a subscription to our premium content 'behind the wall'.

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  • Inflation targeting vs price-level targeting: A new survey of theory and empirics (Michael Hatcher and Patrick Minford, This is a discussion of "rational expectations" modeling and a claim that empirical data supports the model in the case of predicting the effectiveness of price-level targeting vs inflation targeting. Frankly, Econintersect is not impressed. Perhaps our simple minds could have "seen the light" had the authors used some simple examples instead of brief verbal summaries of other research. Okay, we admit we are too lazy to go read all the references right now, so our lack of enthusiasm may be entirely our own fault.


  • Seeking Tough Justice, but Settling for Empty Promises (Jesse Eisinger, ProPublica) The buck once stopped with Harry Truman. But somewhere along the road from 1952 to the 21st century the opacity of the view of crime from the "penthouse" offices was somehow secured. Executives since the Global Crossing , MCI Worldcom, Enron and Tyco scandals have avoided criminal responsibility for their corporations' criminal acts. Underlings, usually far down the chain, walk the plank instead. After all, the top guys must be getting paid the big bucks for not running things and the only bucks that stop there today are the ones in their bank accounts. Eisinger concludes that not pursuing top executives establishes moral hazards:

Such a situation creates an unfortunate set of incentives for top executives. If an executive sees a division making outsize profits or performing unusually well, or hears rumblings of bad behavior, one plausible response is to assiduously ignore everything about it. Develop a powerful case of incuriosity, cancel meetings with the auditors, send the compliance officers on vacation to the Aleutian Islands. Revel in ignorance. And you stand an excellent chance of skating.

  • Investors Are Demanding Companies Do Something That Would Be Really Good News For The Economy (Sam Ro, Business Insider) A new survey conducted by Bank of America Merrill Lynch Global Research indicates that investors want companies to use their income and balance sheet cash for capital expenditures (58%), and that's by a wide margin over returning cash to shareholders via dividend and share buybacks (22%) and balance sheet improvement like debt reduction (13%). And Ro points out that investors are talking with their money as well since over the past two years companies with stock buybacks have under performed the market.


  • Let’s Make the Mortgage Due for Fannie and Freddie (Shah Gilani, Wall Street Insights & Indictments) Shah Gilani contributes to GEI. Gilani says we are overdue to wind down Fannie and Freddie and get mortgage ownership securitization back into the private sector. The way things are he says it is only a matter of time before the mortgage origination private sector will manage to load F&F up with junk again and "steamrolls the economy".
  • Ric Edelman: What’s Wrong With IRAs, 401(k)s, and the Industry That Sells Them (Jane Wollman Rusoff, ThinkAdvisor) Over twenty years ago this Managing Editor learned that things like putting muni bonds and annuities in tax sheltered accounts (IRAs, 401(k)s, 403(b)s, etc.) was a huge no-no if you were looking out for the client's interest (had a fiduciary responsibility) and very unprofessional if you were merely a salesman (registered rep). Such actions were good for the compensation of the commission based individual (large commissions) but were not properly recognizing the negative tax consequences for the client. Edelman gives details about other aspects of poor advice common in the retirement investment industry. Edleman started with a sole proprietor retirement investing office in late 1987 and has built that to a 36 office national retirement investment services company with 425 employees and more than 100 advisors, managing $12 billion in assets. Barron's has named Edelman the one independent financial advisor in the U.S. three times.
Last week saw the volatility benchmark VIX close at 12.92, the first close below 13 since January 22. VXX, the short term volatility based ETN, closed at an all time low at 38.27. The VVIX, which measures the expected volatility of the 30 day forward price of the VIX, also closed at an all-time low of 61.76.


  • Scenario-planning: What may happen to the ACA after 2016 (Gillian Roberts, Employee Benefit Advisor) This discusses and article published in the New England Journal of Medicine (NEJM) by Brookings Institute Senior Fellow Henry J. Aaron. His conclusions are that Obamacare will not be overturned (repealed) because some of its provisions are already popular and widely approved. He admits that the outcome of the start-up is still to be defined but he expects the ACA (Affordable Care Act) "will be implemented successfully". But how it end up will have little to do with its success or lack thereof, but the law's fate will be determined by "brutal political war, not objective measures." He discusses possible outcomes if the Democrats have control of the federal after the 2016 elections and if the GOP prevails to gain control of the White House, and both houses of Congress. Read the NEJM article Here to Stay—Beyond the Rough Launch of the ACA at the Brookings website.

  • Purchasing Power Parity - PPP (Investopedia) PPP is an adjustment of the international exchange rate for a currency to account for the domestic purchasing power of each currency. This adjustment can be calculated for example by taking a CPI (Consumer Price Index) basket in one country (valued in the first countries currency) and buying the same basket in a second country. This has been criticized because it is biased by living custom differences between countries, local prices in one country with little relationship to another country, and variable availability of items in different countries. Thus there is often a significant disconnect between the PPP calculation and the international transactions for major mercantile and commodity exchanges. In fact, PPP is often used as a tool to study currency inflation/deflation characteristics rather than for GDP adjustment. The following two references are seminal discussions from one to three decades back discussing PPP:

1. Purchasing Power Parity (Roger Dornbusch, NBER, March 1985)

2. The Measure of GDP Per Capita in Purchasing Power Standards (PPS): A Statistical Indicator Tricky to Interpret (Word doc) (Francois Magnien, OECD, 2002)

  • What Caused the Great Recession: Household Deleveraging or the Zero Lower Bound? (David Beckwith, Storify) See expanded discussion at Macro and Other Market Musings. Beckwith suggests that the cause of The Great Recession (TGR) was the zero lower bound (ZLB) which kept the real interest rate too high (zero was too high). The deleveraging by the consumer was an effect in his view. It occurred because there was a higher demand (need) for money than was provided by the Fed (or by fiscal policy, but that was not discussed here). This discussion was focused on the narrow issue and did not go toward the question of what difference helicopter drops on Main Street might have made. The money drops on Wall Street never satisfied the Main Street demand for money so the "poor" deleveraged disproportionately to the "rich". Anyway, this was a debate (Beckwith with Amir Sufi, with a couple of Tweets from Edward Harrison at the end) conducted on Twitter which gave it an entirely different flavor compared to what a more verbose interaction would have provided. The following graph is presented by Sufi to support his argument that the housing crash caused TGR. Beckwith says that crash only occurred because of forced deleveraging resulting from too little money on Main Street, a consequence of the ZLB. Read the article that started the discussion: Why the Housing Bubble Tanked the Economy And the Tech Bubble Didn’t (Amir Sufi and Atif Mian, FiveThirtyEight).


  • Piketty’s wealth tax is real, and it works (Rumplestatskin, Macro Business) Here is a brief but rigorous examination of the effect of wealth taxes: They are proven to reduce inequality. But what is proven economically is not necessarily accepted politically.
  • Inflation is becoming a question of when, not if (Alex Rosenberg, CNBC) More inflationistas coming out of the woodwork suggesting dramatically higher inflation by year end. One of these years they will be correct, just not very likely this year. And of course there are almost 20 years of disappointed inflation predictions for Japan,
  • Declining U.S. dynamism: Story, or non-story? (Noah Smith, Noahpinion) The rate of formation of new firms has been nearly cut in half from 1978 (>14%) to 2011 (~8%). Over the same time span the annual job relocation rate has dropped from 35% to 27%. The author suggests this may be a combination of changing workforce demographics, increasing dominance of large corporations, health care "job lock (which should be decreasing now with ACA) and technological progress. See also Declining Business Dynamism in the United States: A Look at States and Metros (Ian Hathaway and Robert E. Litan, Brookings, May 2014) These authors look at the data as representative of slowing economic growth, an interpretation different from the possibilities discussed by Noah Smith. The Economist seems to agree with Hathaway and Litan (in a cryptic note).


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