Recent comments by PROCYON MUKHERJEE

• The Flawed Origins of Expansionary Austerity

  Let me take an analogy from the micro area, how do firms react in the crest and trough of business cycles?
  
  I have found quite a distinct and consistent strategic intent in Mitsubishi Corporation nurtured and carefully crafted over long decades where the crest of the business cycles have been used for consolidation while the troughs have added fodder to acquire assets at relatively cheap prices; the animal spirits if only they could be tamed to get the maximum when businesses are down (weak quarry) while making them grow when the times are better has been missed out by most enterprises. No wonder Mitsubishi continues to be active in the current times (acquisition of Pratt & Whitney, Port Bonython Fuels, KH Automation, etc), while it was relatively quiet in the period 2004-2007, when it was priming its reserves for the times to follow.
  
  In the Macro area we find just the opposite, when economies do well, animal spirits lead us to believe that we need not sequester part of the gains for any eventual downturn and the risk taking further increases the possibility of such events, when we have very little real 'savings' to bank upon.

• What Use Are Economists?

  When the purpose of belief is to further the cause of advancement in the academia and if that could be done by selective use of data with a mix of bias, we have the current milieu of Economists mired in controversy.
  
  Bartley’s immortal book, “The Retreat to Commitment” holds some glaring examples as to the nature of the question of dilemma of ultimate commitment. The biggest impediment to any free thinking is the ‘belief’ embedded in the mind itself, before any hypothesis is even formed through observation or data gathering. On the contrary some of these beliefs tend to influence the very hypothesis and the gathering of instances or data that would later prove the hypothesis itself.

• The Japanese Experiment

  The Japanese problem cannot be replicated with the problem in U.S., where wealth effects on consumption has not been studied as is the case with U.S.
  
  In the seminal NBER Working paper, WEALTH EFFECTS REVISITED:1975-2012 by Karl E. Case, John M. Quigley & Robert J. Shiller, we have seen a startling conclusion, “The housing wealth elasticity in a falling market is estimated to be about 0.10 and in a rising market about 0.032. the effect of increases in housing market wealth upon consumption is positive and significant; the effect of decreases in housing market wealth upon consumption is negative and is also significantly larger. The statistical models also report a relationship between increases in stock market wealth and increases in consumption, and a larger relationship between decreases in stock market wealth and decreases in consumption. Changes in
  housing values continue to exert a larger and more important impact upon household consumption than do changes in stock market values.”
  
  This is actually an endorsement of Prospect Theory by Kahnemann and Tversky, where they had shown that home sellers behave differently in reaction to declines in home prices, than in reaction to increases and the same is also true in the case of equities.
  
  QE3, while it has helped to inflate financial assets, may not be having the same wealth effects on consumption as before as consumers may be cautious, stemming from their earlier experience on ‘asset bubbles’, to still anchor on a lower wealth elasticity in rising market than 0.032, which means for every rise in $1 wealth the consumption would alter by less than 3.2 cents.
  
  This is precisely the reason that $85 Billion of monetary stimulus per month is translating to less than 200,000 of new job additions per month ($500,000 of marginal cost per job) in U.S.
  
  This issue is less predominant in Japan, both in terms of unemployment as a problem and also the anchoring effect.

• Controlling China’s Currency

  An excellent article with a lot of information and if we are discussing financial deepening then China has surpassed all the developed world quite surprisingly, but all for good reasons. Financial depth, approximated by private credit to GDP, has a strong statistical link to long-term economic growth; it is also closely linked to poverty reduction. China’s size of the economy is growing at close to $900 Billion in PPP terms every year compared to $350 Billion for U.S. This needs a growth in M2, which would be quite disproportionate as China does not enjoy the market based nature of financial markets as in U.S.

• A Fateful Mistake

  A very caustic comment: "Researchers are tempted by persuasive results that can attract the interest of policymakers, who are tempted by a selective reading of the evidence that can provide them with ammunition in domestic and international debate."
  
  R&R's 90% threshold acted like an 'availability heuristic' regardless of conditions of economies across the globe in form of generalizations. How can U.S. economy be at all compared with European conditions, where no country can keep printing money and do any amount of monetary release?