BREXIT

1) Britain is more dependent on EU rather than other way round. The EU takes almost half of Britain's exports, whereas Britain takes less than 10% of EUs. And Britain's trade deficit is mostly with Germans and Spanish, not with the remaining 25 countries that would have to agree with the new deal.

2) The long term costs would go beyond economics. Brexit might well break up the UK itself. Scotland, more europhile than England, is again agitating for divorce. And the Irish government is among the most vocal foreign supporters of the campaign for Britain to stay in.

3) EU leaders know that brexit would weaken a club already mired in migrant and Euro crises. The EU has become increasingly important part of the west's foreign and security policy. Whether it comes to nuclear deal with Iran, threat of Islamic terrorism or sanctions against Russia.  

4) The 'Leave' campaign has proved aggressive and well financed. It has skirted past lack of clarity over alternatives to membership, instead playing up concerns over migration and loss of sovereignty to Brussels. Portraying those doubting if Britain could do better outside the EU as unpatriotic.

Questions

Him: What are you doing these days?

Me: Nothing. Just lounging at home, searching for a job.

Him: You shouldn't have left that teaching assignment.

Me: (Gasping for words)

Him: Didn't you wanted to be a teacher all your life? 

Me: (nodding my head not due to lack of words but because of the weight of thoughts I could barely hold in my head)

Him: Then what made you do something that none of us - not your friends, none is able to come to terms with.

Me: I believed that I will find myself a better teaching position.

Him: Do you remember the last time you taught students? FIVE YEARS have elapsed and you are yet to find someone and something to teach.

FiraaQ

shaam-e-firaaq ab na puuchh aaii aur aake Tal gaii 

dil thaa ke phir bahal gayaa, jaa.N thii ke phir sambhal gaii 

bazm-e-Khayaal me.n tere husn kii shamaa jal gaii 

dard kaa chaa.Nd bujh gayaa, hijr kii raat Dhal gaii 

jab tujhe yaad kar liyaa, subha mahak mahak uThii 

jab teraa Gam jagaa liyaa, raat machal machal gaii 

dil se to har muaamalaa karake chale the saaf ham 

kahane me.n unake saamane baat badal badal gaii 

aaKhir-e-shab ke hamasafar 'Faiz' na jaane kyaa hue 

rah gaii kis jagah sabaa, subha kidhar nikal gaii 

Monetary and Fiscal policy

1) In 2004, both Hungary and Poland, the two fastest growing economies in Eastern Europe were ready to join the EU. Since the 1980s, both the countries had experienced unfavourable political and economic conditions. Both had a history of hyperinflation, high levels of foreign debt and poor institutional and economic framework. 

2) While Poland was largely successful in curbing inflation (1993: 35.3%, 2002:1.9%) with an efficient interest rate policy. Hungary was struggling with high interest rates ( 2003: 12.5% p.a). 

3) In Hungary, period 1990-94 had two important weakness. The first was the loose fiscal policy leading to huge fiscal deficits and high foreign debt. The second was ineffective monetary policy. The liberalisation of forex operations and the continuous appreciation of the currency resulted in significant capital inflows, which narrowed the scope of monetary policy in controlling the money supply. 

4) In the late 1980s, Poland's economy initiated its transition process under less favourable conditions when compared to Hungary. 

5) Fiscal policy is necessarily expansionary in a developing economy. Governments always want to increase their expenditures beyond their resources in the hope that in the subsequent stage, output will catch up with increased expenditures. But the question is whether  monetary policy can achieve anything when the fiscal policy is expansionary?

Heavily indebted poor countries

1) The world's 137 poorest nations owe a total of $ 2.6 tn in international debt, and these countries on average spend 25% of their national budget in repaying the debt depleting the countries resources to invest in infrastructure, education, health care and other social programs.

2) Fearing that debt repayment will rob these countries of their future, a number of policy makers and international activists groups called on the lenders to write off the debt of the poor countries.

3) On the other hand, multilateral lenders like the International Monetary Fund and the World Bank cited that debt cancellation was not beneficial for the financial health of the international creditors and it might affect the poor countries more than helping them. 

4) But several African countries prefer an increase in the flow of other resources from the developed countries rather than cancellation of debt. While the African nations should focus on implementing poverty reduction programs and economic growth strategies. The lenders should increase their aid, encourage free trade by opening up their markets and reducing trade barriers, encourage immigration and link the interest payment on the debt to the nation's growth.

Taxation

With low inflation, stable interest rates and falling unemployment rates, the UK economy in the early 2000 had been the strongest in Europe. 

Britain avoided recession in 2001 when the GDP growth rate was around 1.5%. But much of the growth rate was sustained by domestic consumption rather than exports growth.

Among the industrialised countries, Britain was considered to be among the high tax paying countries. CoE had already imposed more than 60 indirect taxes, which was expected to further reduce disposable income in the hands of consumers who had been propping up the economy. Moreover, these taxes were spent more on welfare programs than capital investment.

Revenue secretary (2002) was of the view that the argument of those batting against taxing dividends received by individual shareholders was flawed. His line: if the company and promoter were treated as two separate entities, then the responsibility of handling the liabilities too should rest with the promoter and the  benefits couldn't be treated as tax exempt. But a powerful lobby managed to keep up the portrayal of the move as amounting to double taxation.

In 2007, Vodafone acquired 67% stake in Hutchison india for $ 11 bn. On February, 2016, the IT Deptt issued Vodafone a reminder over its ₹ 14,200 Cr tax demand and threatened to seize its assets over non-payment.

The British telecom major says that no tax was due as the transaction was done offshore. But the tax deptt contention is that capital gains were made on assets in India.

Gas Tax

By early 2004, with political instability in Iraq and tensions in the Middle East, crude oil prices skyrocketed in the international market. Prices increased by 33% between Dec 2003 and Feb 2004. Historically any sharp increase in crude oil prices hs pushed the U.S. economy into recession.

Analyst warned that any programme to reduce oil consumption must be a long term affair as a drastic or abrupt drop in demand could even be counterproductive. As even small change in capacity or demand 'can bring big swings in prices'. The economic turmoil in Asia in the mid 1990s reduced demand only by about 1.5 mbpd, but it caused oil prices to plunge to nearly $10 a barrel. 

European drug pricing

Due to lower drug prices in EU, per capita spending on drugs had been much less as compared to US. Despite huge savings, economists feared that EU might be losing in terms of investment and innovation destination for big pharma cos. 

1) Germany and Netherlands were the first countries in Europe to adopt a system of Reference pricing. Under this system the government established a reimbursement level for a particular drug and if the price of any drug exceeded that level, that patient had to bear the difference. 

In theory, reference pricing limits reimbursement, not prices. 

2) Traditionally, Europeans had been monopolist price setters ( public health under the government) for drugs, thereby keeping drug prices low. European nations followed two basic models for healthcare syatems. The first was comprehensive social insurance model with public and private funding. SeconD was NHS, which was funded through taxpayers money. 

Drug price distortions

In recent times, the high prices of prescription drugs in the U.S. have contrary to the welfare policy for its elderly citizens who are the intended beneficiaries of the state run public healthcare programs. And with the rising number of US citizens sourcing their personal drug needs from low cost overseas market, the issue of disparity between the drug prices in the U.S. and other countries is gaining potency.

The Americans pay the highest prices in the world for prescription drugs. Patent regulations by FDA means that the consumers pay an exorbitant price for their prescription drugs, than they would if they use its generic counterparts.

The US spends more money on healthcare than any other country in the world. Still 44 mn of its population is denied healthcare insurance. The U.S. healthcare industry is one in which top companies rake in huge profits, spending encor amounts on marketing and advertising. For example, Pfizer's M&A budget is half of its expenses but R&D budget is just a quarter of it.

The WHO has been advocating the concept of 'Differetial Pricing' for quite some time. It advocates that essential drug prices should in some way reflect countries' ability to pay as measured by their level of income. The concept of differential pricing can thus, also provide a mechanism to ensure not only the affordability of a patented drug in a developing country but also advocate incentives for innovation.

Role of Central banks

The Dominican Republic's economic problem was a problem of liquidity rather than solvency. The high volume of short-term CDs had created high rollover risk. Tax hikes and elimination of subsidies were unpopular with the people. The country was to default on yet another coupon payment of $20 mn on September 9, 2004. 

By July 2004, inflation was 55%. The peso had depreciated from 18 to 50 for a dollar. While fiscal deficit was 8% of GDP.

The government made efforts to get the finances under control. To fill the gap created by the bailouts, the government had issued short term CDs with high yields upto 40%. 

Solvency is an enterprise's ability to meet its long-term financial obligations. While liquidity refers to its ability in the short term. An insolvent enterprise must enter bankruptcy. While an enterprise lacking liquidity can be forced into bankruptcy even if it is solvent.

The monetary program envisaged a build up of government deposits at the central bank, as a means of limiting the money supply. To improve liquidity and develop the domestic yield curve, the Central bank planned to lengthen the maturity period of its certificates.

1) There are five functions associated with central bank: power to issue notes, banker's bank, government's bank, lender of last resort and controller of credit.

2) There are three ways to control credit:

Altering bank rate; open market ops and varying reserve requirements.

" If one conservatively assumes that more than 5% of Bank loans to Chinese firms and local governments is non-performing, this would imply $1.15 tn in loan write-offs, dwarfing the amount of the U.S. bank rescue package of $700 bn in 2008. Since Chinese banks cannot absorb such a hit on their capital, the Chinese state will have to step in to recapitalise the banking sector, either by issuing bonds or printing money. The former will reduce the creditworthiness of the Chinese states and the latter will further put pressure on the Chinese currency to depreciate.

The objectives of Monetary Policy have changed with time. Since WWII, the primary objective has been growth & development. As economy grows more money is needed to facilitate the settlement of increased transactions.

Deflation in Japan

Deflation has made world's second largest economy its home for almost 3 years since 1999. According to Keynes, Japan had fallen into the abyss of liquidity trap where conventional monetary and fiscal policy becomes ineffective. 

The CPI had declined for 41 months in a row, and there were no signs that the situation would get better.

The ratio of gross government debt to GDP had risen to 146%, a sign of financial instability.

Cyclically, the Chinese economy has experienced one of the world's largest credit bubbles. The massive creation of credit since 2008 took China's debt-to-GDP ratio from 125% in 2008 to 280% in  mid 2015.

The BoJ had warned the government of possible bankruptcy of top four banking conglomerates.

Japan was trapped in a viscous cycle of deflation backed by a gigantic banking crises. It was believed that the crises was caused by shortfall in demand and consequent decrease in private spending.

During the 1980, BoJ kept interest rate low to boost demand. This was being done to counter the appreciating Yen, which was damaging exports. This artificial lowering of interest rates led to huge monetary expansion, and the resulting inflationary effect led to the increase in the price of the real estate

There is a asymmetry in the operation of the bank rate. The ultimate impact of the change in bank rate depends on a number of intervening factors which may not always hold good.

While a rise in a bank rate may have a restraining effect on the borrowers, the necessary expansionary effect may not be forthcoming because of the fall in the lending rate. A fall in the lending rate may at best offer an inducement to borrow. But whether or not borrowings will increase, will depend on the customer's assessment of the economic situation. If the business conditions are not favourable, the lowering of interest rate may not induce customers to borrow more.

Import commodities & Export inflation

1)In 1970, OPEC gave an unexpected blow to the U.S. economy by hiking oil prices. And in 2004, China was exerting a direct influence on American economic life. Global prices of commodities like oil, copper, steel, coal, cement and aluminium were rising sharply to the extent of 60-100%. 

2) China was pumping inflationary and deflationary price on the U.S. economy.

i.e. China's booming economy appeared to be pushing up prices for the global commodities while at the same time pushing down prices for goods via low cost exports. 

3) China's consumption expenditure was just 45% of GDP, a low proportion when judged by the standards of US, Europe or Japan, where it was 60-70% of GDP. 

4) Chinese economy needed a growth rate  of at least 7% to generate enough jobs to absorb surplus labour rural labour and the workers laid off by state owned enterprises.

5) Chinese were against currency pegging, as it might hamper the country's successful exporters. 

6) Slowing Chinese economy will affect developing and developed countries differently. While fast growth of developing economies was fuelled by demand for commodities from China. The developed economies are at risk of deflation as they were net importers of Chinese products. So if the Chinese firms start dumping their excess output on the global market (like steel), deflation could wreck the global economy.

Chilean pension model

Inherent weakness in the pay-as-you-go system and political expediencies, which contributed to the problems in the pension system, necessitated pension reforms in 1981. Since, then this model has been attracting much interest across the world.

Problems In the existing system, active workers finance the pension of retired or inactive workers through obligatory contributions or premiums. Any shortfall in the payments is made good by the state. The system experienced financial strains due to unfavourable dependency ratio and loopholes in rules and regulations.

New System Workers can open individual accounts with newly created private fund management companies, which is similar to a savings account. The contributions had two components: mandatory (tax free) and voluntary.

Each worker was allowed to have one account with one AFP, and each AFP was allowed to operate only one fund. AFP is allowed to invest only in low risk domestic instruments.

Competition among the AFPs themselves was an integral part of the plan. 

1981:12 AFPs 1994: 21 2003: 07

Caribbean sugar woes

The Caribbean region with ten exporting countries, was among the top 10 exporters in the world till mid 1960s and had peaked annual production of 1.4 million tons in 1965. Thirty years later, in 1995, the region's production dropped to 0.4 million tons. By 2002, only 6 exporting countries were left. 

Cuba shifted its focus from sugar to tourism as a major growth area of economy. In 1990, more than 90% of the foreign exchange earnings of Cuba were from sugar exports to erstwhile Soviet Union. But I. 2001, the major earnings came from tourism, $2 bn as compared to $441 mn from sugar. 

Australian CAD

From 1991 to 2003, the GDP growth rate of Australia had averaged at almost 4% every year. The increase in domestic demand, low level of public debt, low inflation, sound financial system and sound record of structural reforms were the other factors that contributed to its growth.

1980s 

The CAD had increased to about 5% of the GDP. The upswing was because of slow increase in exports. In 1988, the reserve bank tightened the monetary policy and the Australian dollar appreciated against major currencies. Thus in early 1990s CAD narrowed to 3.7% of GDP. 

1990s

The CAD reached a peak of 5.8%. There was a growing domestic demand in the country and increase in imports. The government and private firms had been borrowing funds from abroad to finance their investments.

At the end of 1997, the CAD started decreasing as Australia diversified its exports from Asian to other countries. In the fiscal year 1997-98, Australian exports grew by 8.4%. 

The CAD increased from 5% of GDP in 1998 to 5.7% in 1999. The East Asian countries recovered after the crises in 1999 and their devalued currencies were able to grab major import markets across the world. 

At the end of the year 1999-00, the government recorded a fiscal surplus of 2.1% of GDP. Higher tax revenues and less expenditure contributed to the rise. But most of the improvement was due to the shift in the accounting standards. 

2000s

2000-01:2.7%~increased exports due to tax reforms and weak AUD.

2001-02:3.1%~slow world economic recovery and increased imports.

2002-03:6.7%~decline in exports coupled with growth in consumer spending which inflated household debt.

American Pension Funds

YAmerican Pension Funds performed extremely well during stock market boom of the 1990s prompting both institutional and individual investors to bet their savings in the stock market. The corporates went even a step further and ignored the basic accounting principle of Conservatism and assumed discount rate that suited them best when calculating their pension liabilities. The stock market decline of latter 2000 wiped off all the gains of the previous years. The use of higher interest rates to discount future liabilities may have two opposing effects. On one hand they would reduce sponsor's contribution. Thus improve their financial position and decreases their likelihood of bankruptcy. On the other hand, lower contributions would mean under funding of pension funds. Thus increasing the likelihood that the fund will be bailed out/taken over by a government agency.

The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire corpus after retirement.

Ageing Japan

The ageing population of Japan was making it difficult to finance the pension bill, which in turn was putting pressure on the national fiscal deficit. To combat this problem economist suggested three options.

1) Cut in public expenditure.

2) Broadening of the tax base.

3) Hike in the consumption tax.

In Japan, the public investment was significantly higher at 60% of the GDP. It would generated long term welfare gains but was economically risky.

Broadening the tax base means increasing the retirement age from 62 to 65. Increasing the consumption tax meant hiking it from the present level of 5%(2004), which was relatively low by international standards. But the government was not in its favor, because in 1997 when the taxes were hiked, the economy slid into recession due to cut in consumer's expenditure.

Definition

Notional principal: The principal used to calculate payments in an interest rate swap. The principal is 'notional' because it's neither paid nor received.

Systematic risk: The risk which cannot be diversified away.

Maximum Likelihood Method: A method of choosing the values of the parameters by maximising the probability of a set of observations occurring.

Monetary policy: Monetary Policy is a central bank process of managing money supply to achieve specific goals, such as constraining inflation, maintaining exchange rate, achieving full employment  or economic growth. Monetary policy can involve changing interest rate directly or indirectly through open market operations, setting reserve requirements, or trading in foreign exchange markets.